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LIBRARY
N0V9 1977
ROOM 5004
'REASURY DEPARTMEN

PRESS RELEASES^
'*\

WS-887
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WS-1003

LIBRARY
N0V9 w7
-REJSS^
JUNE 1, 1976
THROUGH
JULY 31, 1976

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ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
LAFAYETTE COLLEGE COMMENCEMENT
EASTON, PENNSYLVANIA, JUNE 6, 197 6
President Bergethon, Dr. Gottshall, honored guests, Trustees
of the College, Faculty, Members of the graduating class,
parents and friends:
Twenty-four years ago, almost to the day, I sat in
one of these chairs and waited for my name to be called to receive
my diploma. I don't recall much of what was said that day but
I do remember that my classmates and I were impatient to see
the ceremonies end so that we could move on to the more
important activity of developing our lives in the outside
world.
I suppose the feeling in the air that day was best
described by the distinguished Lafayette alumnus who delivered
the graduation address here in 1973 — Dr. Herbert R. Brown,
Professor Emeritus at Bowdoin College.
"It is a melancholy truth," Dr. Brown said,
"that more commencement addresses have been listened
to more patiently, delivered more solemnly and
forgotten more promptly than any other form of
human discourse. Although I try desperately, I am
unable to recall what was said at my graduation
from Lafayette College. The distinguished speaker
doubtless oozed sage advice, but he was merely
looked upon by my classmates as the last remaining
roadblock separating us from our diplomas."
Nevertheless, duty is duty, and I hope you will bear
with me for a few minutes of talk which may not be very sage
but will be sincere.
In the last few days, each of you has probably thought
about the way your four years here have rushed by. You
have company. That is how I feel about the last twenty-four
years. A trite, but true observation, is that the learning
experience does not stop at the gates of college. You are
about to enter a tough world where you will compete for
opportunities to fulfill your personal aspirations rather
than for grades and social acceptance. This is really the
beginning, not the end, of your personal development.
Perhaps you have chosen me, a fellow alumnus, to be your
sesquicentennial commencement speaker to observe someone
who graduated and stayed afloat for 24 years.
WS-887

-2As you enter this exciting phase of life you will
encounter a universal challenge: How to deal with a rapidly
changing way of life. An ancient philosopher once observed
that "there is nothing permanent except change." This
observation has always been accurate but it is particularly
pertinent today.
As a proper Deke fraternity man I was not
particularly impressed twenty-four years ago to attend
commencement exercises. Our lives change in little
ways as well as the major shifts in public affairs.
Consider the amazing social, political and technical developments that have been taking place during just the last four
years you have been here at Lafayette. Change has occurred
at a rate guaranteed to cause what has popularly become known
as "future shock." It is up to each of us to deal with these
new realities. But the basic point is that regardless of
which path you choose, you all have the ability and obligation
to influence not only the speed but the direction of change.
Each of you is called upon to determine the shape and
character of our world, and that process begins in earnest
as you graduate from college.
It is important that you learn and understand about
the characteristics of our society but it is even more
important that you learn how to cope with change and become
the master of it. Some critics argue that because we are
living in a new age, we must blindly adopt new values and
lifestyles. I would urge that before you make such a choice
that you re-examine the old values.
The progression of Western life has not followed an even,
upward course. It has had more than its share of zigs and
zags. But over the years certain values have endured and
they are ready to serve you in this era of turmoil and
confusion. Beliefs in a higher being and in the dignity
of man, the primacy of the individual over the State, love
of family and of fellow man — these are the foundation blocks
of our civilization. They are values as old as the ages
and as young as each new generation. Many times in the
long course of history, individuals and whole societies have
failed to live up to these values. But the values have never
failed those who have lived up to them.
In our two-hundred years of history as a nation,
individuals have made great sacrifices to ensure that these
values would live on. It would do us all well to remember
that it was eight years ago that Robert F. Kennedy
died in the pursuit of his vision for America. He was running

-3for his political party's nomination for the Presidency of
the United States. Whether we agree with his beliefs or not,
we honor Robert Kennedy's memory because he demonstrated a
remarkable depth of commitment to America's future.
If we would emulate that spirit of commitment, each of
us would serve society in some significant way. Our relations
with family, friends and associates at work and in the
community cast us in the role of influencing their lives.
The choice is whether we will be a positive or negative
force. Are we willing to stretch our horizons to the limit
by serving not only at work, in the home and the church, but
also in the community and the Nation.
Serving the country has become one of the great challenges
of our time. Most government officials work very hard to
improve public affairs but they usually receive more brickbats
than bouquets because it is impossible to please all of the
people all of the time. But even though their work may often
be thankless on a day-to-day basis, the pleasure of knowing
they are helping their fellow countrymen is greater than the
momentary rewards of public recognition.
"Patriotism," as the late Adlai Stevenson described it,
"is not short, frenzied outbursts of emotion, but the tranquil
and steady dedication of a lifetime." Yet in recent years
there has been an unfortunate groundswell of people who
shirk their responsibilities and question their role as a
participating citizen. More understandably, others have lost
much of their faith in government at all levels. Some of
our brightest young people have dropped out altogether.
There is a widespread feeling of frustration, skepticism,
and even despair. As a result the Nation suffers because
leadership at all levels finds it increasingly difficult
to marshall public support for pursuing more responsible
policies committed to longer-term goals.
Even more disheartening, the refusal of people to serve
destroys their commitment to others which is a cornerstone of
America's greatness. This withdrawal from public service
and cynical despair will not destroy the Nation overnight.
But if it continues, this corrosive mood could eventually
erode the strength of our public institutions and our potential
for social, economic, political and spiritual progress.
History demonstrates that nations begin to fail when
their citizens lose interest in the Nation's welfare and
confidence in its future. The late historian, Arnold J. Toynbee,
believed that the decline of the great nations of the past
could be directly attributed to a lack of spiritual faith
during
Thebeen
Roman
Empire
almost
hundred changing
years. times.
If you had
alive
at lasted
its peak,
wouldsix
you

-4have been able to imagine the end of the Roman Empire?
Probably not because power and affluence often breed a mood
of apathetic smugness. People in power and the citizens
they represent avert their eyes from the cracks and fissures
spreading.through their way of life.
America is only two hundred years old, quite young when
compared to the longevity of ancient Rome. Yet in those two
centuries we have significantly changed the world through the
contributions of our scientists and engineers, our managers
and workers, our artists, our political leaders, and all
those who have dedicated their lives to serving the public
good. Can you imagine how much more we can create in the
next 4 00 years? Inventors say, close your eyes and imagine
the world as it might be. I would add: Open your hearts
and your minds and then go forth in the great pioneering
spirit of the past to create a new world as it ought to be.
So many of the troubles we have in this country are of our
own making and for that very reason, they are within reach
of our own solutions — if enough of us commit our time and
energies to public needs.
What has made this a great Nation? What has made people
throughout the world talk about the American Dream?
Has it been the land and our natural resources? We
have certainly been blessed with an abundance of resources.
But in the Soviet Union we see a land mass that is much
larger than our own and one which is equally well-endowed.
Yet, the Soviet system provides much less for the people.
They must turn to the United States for the grain they need
to feed their own people and for our technology and capital.
Does our strength depend only on the qualities of our
people? We are clearly blessed with one of the largest and
most talented populations that the world has ever known.
But in China today we see a population that is four times
as large as our own, whose civilization at one time was
developed far in advance of the rest of the world. Yet
their present material standard of living and personal
freedoms are most disappointing.
So while our land, resources and people have been
essential parts of the American story, there is a third
factor that is too often missing in other countries that
has contributed to America's progress. That crucial factor
has been our national commitment to liberty and individual
dignity.

-5For two hundred years people have streamed to our
shores in search of various freedoms — freedom of religion,
freedom of speech, freedom of the press, freedom of assembly,
and freedom to seek their fortunes without fear or favor of
the government. All of these freedoms are planted firmly
in our Constitution. But they have become such a familiar
part of our lives that I wonder whether we now take them
too much for granted.
There is nothing artificial about freedom, nor is
there any guarantee of its permanency. As Dwight Eisenhower
once said, "Freedom has its life in the hearts, the actions,
and the spirits of men, and so it must be daily earned and
refreshed — else like a flower cut from its life-giving
roots, it will wither and die."
There are many ways this can happen, some of them very
slow and subtle. For example, there has been an accelerating
trend toward collectivist policies in the United States
as people have been persuaded that the problems of our
society have become so large that individuals can no longer
cope with them. Many Americans now expect the Government
to assume responsibility for solving their problems and to
do things for them that they once did for themselves.
Government has been gradually cast into the role of trying
to solve all the difficult challenges of modern life.
That trend accelerated during the 1960's as governments
promised the rapid solution of complex political/ economic and
social problems and the end of economic cycles based on
the clever manipulation of government policies. We failed
to note that resources are always limited, even in a nation
as affluent as ours. Unfortunately, the inflated expectations
and broken promises of the past have left a residue of
disillusionment. Many young people are skeptical about our
basic institutions and I can't say that I blame them.
In my work at the Treasury Department and in the energy
field, I have also found that the decisions of the 1960's
and early 1970's left a legacy of very serious economic
problems, particularly the potentially ruinous inflation
and extremely high levels of unemployment.
International problems, the energy crisis, disappointing
harvests, excessive government regulations, wage and price
controls and thousands of other specific problems have
contributed significantly to the unsatisfactory levels
of inflation and unemployment. But the underlying momentum

c
-6has been basically caused by the excessive economic stimulus
provided by the Federal Government for more than a decade.
For example:
— A quadrupling of the Federal budget in just 15 years;
— A string of 16 budget deficits in 17 years;
— And a doubling of the national debt in just 10 years time.
The greatest irony of these misguided policies is
that they were based on the mistaken notion that they would
specifically help the poor, the elderly, the sick and the
disadvantaged. Yet when these stop-and-go government policies
trigger inflation and unemployment, who gets hurt the most?
The very same people the politicians claimed they were trying
to help — the poor, the elderly, the sick and the disadvantaged.
Even more fundamentally, the last fifteen years have
seen an acceleration of the trend toward Big Government and the
diminishing of economic and personal freedoms in the United
States. The Federal Government has now become the dominant
force in our society. It is the biggest single employer, the
biggest consumer, and the biggest borrower. Fifty years ago,
government spending comprised approximately 10 percent of
the gross national product; in 197 6 that figure will be up to
3 5 percent. If the government spending trends of the last two
decades continue, the total government share of economic
activity in the United States will be approaching 60 percent
by the year 2000 -- when most of you will be in the prime of
life. If the government exercises such a dominating influence
in the economy, it will also control many of the personal
decisions of its citizens. History shows that when economic
freedom disappears personal and political freedoms will also
be eroded. The inextricable relationship between economic
freedom and personal freedom is sometimes overlooked by those
who constantly seek to expand the powers of government, but
it is plain to see in many countries around the world where
these freedoms have been lost. It was also plain to our
forefathers. Let me read to you from letters that Thomas
Jefferson wrote to three of his friends:
— "I ... place economy among the first and most
important of republican virtues, and public debt
as the greatest of the dangers to be feared."
-- "I am not among those who fear the people... To
preserve their independence, we must not let our
rulers load us with perpetual debt. We must make
our election between economy and liberty, or
profusion and servitude."

-7—

"If we can prevent the government from wasting the
labors of the people, under the pretense of taking
care of them, they must become happy."

It must also be remembered that as the premier economy
in the world, the United States has a unique responsibility
to provide leadership. In the final analysis the political
and military goals of seeking stability in the world, so that
economic progress can spread more benefits to other people,
will depend upon the continued creativity and productivity
of our economic system. Other nations are increasingly
recognizing that controlled economies are not responsive
to the interests of their people and that inflation and
unemployment are the inevitable handmaidens of economic
mismanagement. As I travel around the world on official
visits I am impressed by the tremendous admiration other
nations have for our economic capabilities. Even those who
reject our political values still respect our economic
achievements. It is no exaggeration to state that the rest
of the world is closely watching our economic performance
to see if we will adhere to those policies that have served
America so well during its first two-hundred years.
To accomplish our national goals I believe that we
urgently need an infusion of fresh ideas and enthusiasm into
our political and economic systems from young men and women
who understand both the accomplishments and mistakes of the
past, who have a sense of the enduring values of our
civilization, and who share an ardent desire to shape a
better world for themselves and their children.
Some critics claim that today's young people -- made
skeptical by a decade of internal confusion and external
shocks -- simply do not care enough anymore to try to improve
the world. It is true that there is often real anguish
associated with change but the rewards of even partial
success in achieving worthy goals justifies the effort.
As Churchill once said when he was asked why the British
were so dedicated to fighting the Nazi armies: "If we
ever stop, you will soon find out why."
There are also those who claim that the familiar
institutions of family, church, schools, and democratic
political processes are no longer pertinent — "relevant"
is their catchword -- in today's atmosphere of change.
I disagree. I believe they are even more important than
ever and represent our only real hope for overcoming the
confusion and cynicism that pervades our society. A good
society -a individuals.
humane society -- can only be built by good
families
and

-7—

"If we can prevent the government from wasting the
labors of the people, under the pretense of taking
care of them, they must become happy."

It must also be remembered that as the premier economy
in the world, the United States has a unique responsibility
to provide leadership. In the final analysis the political
and military goals of seeking stability in the world, so that
economic progress can spread more benefits to other people,
will depend upon the continued creativity and productivity
of our economic system. Other nations are increasingly
recognizing that controlled economies are not responsive
to the interests of their people and that inflation and
unemployment are the inevitable handmaidens of economic
mismanagement. As I travel around the world on official
visits I am impressed by the tremendous admiration other
nations have for our economic capabilities. Even those who
reject our political values still respect our economic
achievements. It is no exaggeration to state that the rest
of the world is closely watching our economic performance
to see if we will adhere to those policies that have served
America so well during its first two-hundred years.
To accomplish our national goals I believe that we
urgently need an infusion of fresh ideas and enthusiasm into
our political and economic systems from young men and women
who understand both the accomplishments and mistakes of the
past, who have a sense of the enduring values of our
civilization, and who share an ardent desire to shape a
better world for themselves and their children.
Some critics claim that today's young people -- made
skeptical by a decade of internal confusion and external
shocks -- simply do not care enough anymore to try to improve
the world. It is true that there is often real anguish
associated with change but the rewards of even partial
success in achieving worthy goals justifies the effort.
As Churchill once said when he was asked why the British
were so dedicated to fighting the Nazi armies: "If we
ever stop, you will soon find out why."
There are also those who claim that the familiar
institutions of family, church, schools, and democratic
political processes are no longer pertinent -- "relevant"
is their catchword -- in today's atmosphere of change.
I disagree. I believe they are even more important than
ever and represent our only real hope for overcoming the
confusion and cynicism that pervades our society. A good
society — a humane society -- can only be built by good
families and individuals.

-8As the ancient philosopher Mencius said of Rome
2000 years before the founding of our republic:
"The men of old, wanting to clarify and diffuse
throughout the empire that light which comes
from looking straight into the heart and
then acting, first set up good government in their
own states; wanting good government in their own
states they first established order in their
families; wanting order in their families they
first disciplined themselves; desiring discipline
in themselves they first rectified their hearts."
The key point is that each of us must become personally
involved to strengthen the virtues of our society. Families
will not be stronger unless we care enough to make them
better. Churches will not provide moral leadership unless
they can uplift the spirits of their believers. Schools
will not have educated and committed graduates unless
students and teachers give wholeheartedly of themselves.
Finally, our free political institutions will not function
effectively unless there is increased personal involvement.
In the Congressional elections of 1974 only 37 percent of
the Nation's eligible voters participated. The media and
pollsters constantly tell us that respect for public leaders
and institutions has fallen to very low levels and that
people feel that withdrawal is the only proper response.
What a tragic mistake. Corruption and abuse of power thrive
on public apathy and withdrawal. If the American people
turn their backs on public affairs, we will never be able
to correct the mistakes of the past or solve the problems
of the future.
In the years to come, I do not want the last quarter
of this century to be remembered as a time of lost opportunities
in America. I want this period to be recalled as the era
when our energy was equal to the emergency and our commitment
equivalent to the challenge. This is not a call to the complacent
but a challenge for the concerned. If you will accept the
challenge of serving others it will mean at least as much to
you as any of the many personal and material achievements that
lie ahead. The adventure of getting there is half the fun and
that adventure begins for each of you here and now.
I urge you to accept this challenge, to use the skills
and perceptions you have gained here at Lafayette, not only
to make happy, prosperous lives for yourselves, but to build

-9a record of citizenship and service for your generation.
If you do, 24 years from now, when you look back on your
post-college life, you will honestly be able to say that you
left this troubled but wonderful world of ours a better
place than you found it, not only for yourselves but for
the graduating class of the year 2000.
Good luck to you all and Godspeed.
oOo

FOR IMMEDIATE RELEASE

Contact: H.C. Shelley
Extension 2951
May 27, 1976

WITHHOLDING OF APPRAISEMENT ON
PORTLAND HYDRAULIC CEMENT FROM MEXICO
Assistant Secretary of the Treasury David R. Macdonald
announced today a six-month withholding of appraisement on
the subject merchandise from Mexico, pending determination
as to whether the subject merchandise is being sold at less
than fair value within the meaning of the Antidumping Act,
1921, as amended. Two firms were found not to have sales at
less than fair value and therefore were excluded from the
withholding of appraisement.
This decision will appear in the FEDERAL REGISTER of
May 28, 1976.
, 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 decision in this case will be made on or before
August 30, 1976. Appraisement will be withheld for a period
not to exceed six months from the date of publication of the
"Withholding of Appraisement 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 U.S. International Trade 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.
Imports of the subject merchandise from Mexico during
the period July 1 through December 31, 1975 were valued at
$1.7 million.

WS-888

DATE:

MAY 28, 1976

TREASURY BILL RATES
13-WEEK

26-WEEK

LAST WEEK:
TODAY:

rn*

^ # # O o**»-

HIGHEST SINCE

L.l^*f

LOWEST SINCE

The Department of theTREASURY
WASHINGTON, D.C. 20220

TELEPHONE 964-2041

FOR IMMEDIATE RELEASE

May 28, 1976

|

//

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $2,500 million of 13-week Treasury bills and for $3,500 million
of 26-week Treasury bills, both series to be issued on June 3, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing September 2, 1976

High
Low
Average

26-week bills
maturing December 2, 1976

Price

Discount
Rate

Investment
Rate 1/

Price

98.607
98.584
98.590

5.511%
5.602%
5.578%

5.67%
5.76%
5.74%

97.007 a/
96.977
96.991

Discount
Rate
5.920%
5.980%
5.952%

y

Investment
Rate 1/
6.19%
6.25%
6.22%

a/ Excepting 1 tender of $10,000
Tenders at the low price for the 13-week bills were allotted 53%.
Tenders at the low price for the 26-week bills were allotted 18%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS
District

Received

1

Boston
$
33,700,000
New York
3 ,149,715,000
Philadelphia
25,270,000
Cleveland
38,670,000
Richmond
22,715,000
Atlanta
25,570,000
Chicago
181,190,000
St. Louis
54,255,000
Minneapolis
18,565,000
Kansas City
34,775,000
Dallas
22,770,000
San Francisco 303,980,000
TOTALS$3,911,175,000

Accepted
$
32,700,000
2,017,315,000
25,270,000
38,670,000
22,715,000
25,570,000
87,970,000
42,255,000
14,155,000
34,040,000
22,300,000
137,230,000

Received

Accepted

$ 110,505,000 $
12,505,000
5,069,540,000
2,689,630,000
96,155,000
65,155,000
148,930,000
46,930,000
60,030,000
49,530,000
35,005,000
30,505,000
405,265,000
201,765,000
79,750,000
62,750,000
17,965,000
12,505,000
27,400,000
20,510,000
23,885,000
13,885,000
490,335,000
294,695,000

$2, 500,190, 000 b/$6,564, 765, 000

$3,500,365,000 c/

b/ Includes $360,720,000 noncompetitive tenders from the public.
_c/ Includes $173,690,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.

WS-889

FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE
TOWN HALL OF CALIFORNIA
LOS ANGELES, CALIFORNIA
TUESDAY, JUNE 1, 1976 12:00 NOON
Economic Policy: An Approach to Preserve
the Strength of the United States
It is a pleasure for me to be here in California to
address such a distinguished group. I especially welcome the
opportunity to discuss our domestic and international economic
policies and the decisions which we must make today to
preserve our strength as a free nation and a free economy
in the future.
Today, as never before, our country is in the process
of change. Capitalism, the free enterprise system and many
other principles on which our country was built are now being
questioned. To me, these developments underline a basic
policy choice which you and I as individuals, and our nation
as a whole face: it's a choice between more government involvement
in our economy, or less. During an election year, it's often easy
to lose sight of the real issues. Although our economic situation'
is usually the main election year issue, I believe that the
state of our economy is not the crucial issue today. Rather
the direction of our economic policy is the real
WS-890

-2issue.

At home, there are prominent

people calling for

greater government control of price and supply, government
allocation of credit, government economic planning, and
a major expansion of government spending. Internationally,
others are seeking governmental redistribution of wealth,
government cartels for basic commodities, and governmental
intervention into the operations of multinational corporations.
Advocates of such policies are no longer the isolated
few; they are growing in numbers, and I submit to you that
bfi
the economic choices we make will determine whether we will
3D

preserve the strength of the United States. We simply cannot
afford to move blindly down the path of increased government
j-

intervention and control without recognizing that the same path
to

leads us away from the economic freedoms which have made us
/o
strong.
During the past 200 years, we have achieved one of the
world's highest standards of living; our GNP is the largest
of any nation; our research and development help to create
the world's most advanced technologies; our industry contributes
more than any country's to the economies of the world; our farmers
feed millions at home and abroad; and our currency is the most
important in international trade. One way to appreciate the nature
of our involvement in the economies of the world and their
dependence upon our strength at home is to review the
extent of investment here and abroad as well as the growth in
our trade. As of the end of 1974, U.S. investment abroad amounted

-3to about $160 billion and foreign investment in the U.S. was
about $93 billion. At the same time, trade among market
economies expanded from a level of $55 billion in 1950 to over
$800 billion in 1975. Although foreign trade has historically
comprised a relatively small share of total economic activity
in the United States, exports totaled approximately 7 percent
of our gross national product in 1975, and we remain the world'
largest exporter and importer.
We owe all of this to the ability of our private enterpris
industry and agriculture alike -- to respond to the needs of
the marketplace. The efficiency of our production, the
competitiveness of our industries and our farmers, the soundnes
of our economy are truly our lifeblood as a nation. We must
not jeopardize them by excessive, unnecessary, and burdensome
government intervention.
It is ironic that at a time when Americans are enjoying
such great abundance and such great opportunity, too many
of us have lost sight of the principles and institutions that
have made our way of life possible. Too many Americans -especially those born into an affluent society which seemed
to have no beginning or end, no cause and no effect -- take
the fruits of the free enterprise system for granted: the
abundance, the opportunity, the freedom of choice, the
unprecedented opportunities for learning, travel, and general
upward mobility. Not enough people seem to understand the

-4basic economic facts of life that create all these benefits.

I

believe, therefore, that the time is ripe for an economic
heart-to-heart talk with the American people. What is at
stake is not just the future of this or that industry. At
stake is the survival of the private sector, and the individual
liberties which have never long survived the collapse of a
society's free enterprise system.
Let's look first at the decisions we must make at home.
The Domestic Options
Fortunately, our domestic economy is now well into the
second year of economic expansion following the turnaround in
the economy about fifteen months ago.
-- 1975 opened with inflation raging at nearly 13 percent.
That rate has been sharply reduced and the underlying rate of
inflation is now approximately 6 percent. In fact, during
the first quarter of this year the overall rate of inflation,
as measured by the GNP price deflator, increased at an annual
rate of only 3.5 percent.
-- During the spring of 1975, the unemployment rate reached
9 percent. It has now dropped to 7.5 percent and the trend is
clearly downward. Even more important, actual employment
has increased rapidly during the past year and a record 87
million people are now working.
-- And the latest figures on the growth of the real GNP,
that is, total output after adjusting for inflation, increased
at an annual rate of 8.5 percent during the first quarter of

-51976. During the last four quarters the output of real goods
and services has increased 7.1 percent, a pace well above the
underlying capacity of our economy.
Other signs point to an economy that is gaining increasing
momentum: personal income, industrial output, housing starts,
retail sales, imports, business capital investment, and most
other measures of economic activity -- all are registering
solid gains and this reflects rising public confidence about
the economy.
Thus, we have made considerable headway in 1975.
However, we still face serious long-term problems. Unemployment
is still intolerably high, and inflation is by no means under
control. The decisions we make now on where we go from here
are crucial. Already in this election year, we hear calls for
a higher rate of real growth. We are also seeing proposals
in Congress to rapidly and artificially reduce unemployment to
3 percent through increased government spending, new government
programs, and introducing the government as the employer of last
resort -- even though a 3 percent level of unemployment in the
proposed time frame would result in intolerable inflationary
pressures.
Here is the essence of our domestic policy choice: will we
pursue policies which set growth and employment objectives
irrespective of the inflationary risks, the potential for another
boom and recession cycle, and longer-term consequences? Or will
we adopt policies which control spending, reduce government

'7
regulation and intervention and provide incentives for savings
and investment, all of which will result in more productivity,
more jobs and will address the long-term problems we face?
The fact of the matter is that inflation is the greatest
threat to the sustained progress and strength of our economy
and the ultimate survival of all our basic institutions.

If we

are to increase the output of goods and services and reduce
unemployment, we must first make further progress in reducing
inflation.

Our objective must be to establish the foundation

for a sustainable expansion, based on responsible fiscal and
monetary policies, applied in a consistent fashion over time.
We must not sacrifice these policies for manipulated low unemployment rates.

Making the government the employer of last

resort will only increase the burdens on our budget, resulting
in further inflationary pressures.
The point I want to emphasize is that the government is already
too dominant a force in our lives.

It is the nation's biggest

single employer, its biggest consumer, and. its biggest borrower.
It spends at the rate of $1 billion a day.

Government agencies now

exercise direct regulation over 10 percent of everything bought
and sold in the United States and indirect regulation over almost
every other sector of the private economy.

The Federal government

already possesses too much influence over the food we eat, the air

/r

- 7we breathe, the energy we burn.

It costs private industry --

and that means each one of us as consumers -- approximately $20
billion a year just to do the paper work demanded by Federal
agencies. We have to begin to adopt policies that will attack
these causes of our problems; and stop advocating policies that
will only treat the results.
Our International Options
These are the choices we face in our economic policies at
home. The President has clearly made his decision and is seeking
at all levels a policy aimed at strengthening our economy. He
is also calling on us to opt for no less in our international
economic policy.
Internationally, I do not believe that we should defend our
economic system for the sake of defending the system. Rather, I
believe it's important to identify the benefits that have been
derived from such a system and the dangers inherent in altering i
In this process, we must avoid engaging in rhetorical debate.
Instead, we must address the legitimate problems of all the
countries of the world openly and pragmatically. However,
what we say, or suggest, is as important as what we do. As such
the United States must not be without ideological underpinnings.

-8We do have a system -- it is based on private enterprise
and the freedom of the marketplace. We must be flexible
and tolerant of other people's needs. However, if we enter
international forums without an economic ideology, if we are
"systemless," we cannot hope to emerge from those forums with
a system we can live with. We must find the proper balance
between a desire for cooperation and the responsibility for
leadership.
I am not suggesting that we seek to maintain the status quo.
There are shortcomings in the present system and we must be
uc
willing to make appropriate modifications. However, as we
determine the policies that should be pursued in the trade,
monetary, and investment area, it is important to begin to identify
the costs involved in altering our market-oriented, private
enterprise system in terms of the sacrifice to human freedom.
In our bilateral relations we need not feel that success
can only come through a willingness to give away more money.
Bilateral aid is certainly important, and we have the best record
of any country in providing such aid. However, it should not
be seen as an end in itself; but as a bridge to the time when
countries can stand on their own feet. In that regard, our policy
should be to help countries to help themselves -- not to provide
money without a view to the policies necessary to
make these needy countries evenutually self sufficient.
A recent trip we took to Latin America offers a good illustration

-9of the approach we should take. At the President's direction,
Secretary Simon and I went to Chile, Brazil and Mexico.
We didn't go with additional aid; we didn't go to give away
anything. We went to lend support for the kind of economic
policies that would bring these countries to a position of
not needing aid from the U.S. In Chile, the government is
trying to adopt sound economic policies. They have removed
controls on price and exchange and have been striving for more
reliance in the market. We should support such efforts, and
we did. At the same time, however, we made it clear that
our support would be handicapped if misunderstanding continued wit
regard to what the government was doing about human rights. They
said that they were committed to ensuring human rights, and
I believe that they have taken actions to try to demonstrate it.
My point is that we didn't try to confront Chile or to give
away money. Our support for their economic program was of
sufficient importance that we didn't need to do these things;
and in the process, I believe we have helped with a problem that h
concerned everyone. Such an approach should be adopted throughout
the world, whether it be in Latin America, or the Middle East or
Europe. The importance and strength of our economy can be of
great assistance in our effort to achieve peace and prosperity
throughout the world -- without our having to "buy" such peace
and prosperity.
Trade Policy. The same holds true for all the major issues
facing us today. In our trade relations with foreign countries,

-10we are now faced with crucial decisions which will
determine the future direction of the international economy.
We can move forward in our efforts to promote an open trade
environment -- reducing tariff and non tariff barriers,
agreeing upon more equitable trading rules, improving access
to world markets for developing and developed countries alike.
Or we can opt for greater distortions in the market, increased
government intervention, and higher barriers to trade.
Our desire for a free and more open world trading system
n
is now being challenged by the demands of some countries for an
qinternational system that would significantly decrease the
berole of the market. Specifically, some countries seek a
series of simultaneously negotiated commodity agreements to
stabilize raw material prices by keeping them constant in
real terms or gradually increasing relative to the price of
b *
manufactured goods. Stocks of the proposed commodities would
serve as a buffer and would be bought or sold to maintain the
desired price range.
Although we can support the objectives of these countries -namely to reduce excessive fluctuations in prices and supplies
of raw materials, to improve access to markets, and to increase
productive capacity --we cannot endorse the means that
many countries have put forward to achieve those objectives.
We are willing to sit down with producers and consumers
of specific commodities to develop reasonable solutions.
But we cannot support any trading system that requires a prior

-11commitment to commodity agreements based on a system of
government administered prices which would never work in
today's world of rapid technological change and changing
consumer and investor preferences.

The market system is

the most efficient means of balancing the supply and demand
for commodities and for rewarding economic efficiency -- we
need not be afraid to defend that system.
During the past year the President has been determined to
put forward constructive, realistic proposals, and we have
done so at the United Nations Seventh Special Session last
September and recently at the United Nations Committee on Trade
and Development.
commodities.

We offered a comprehensive approach to

Our proposals included measures to assist

countries suffering from fluctuating export earnings, to
provide better access to developed country markets for
semi-processed and manufactured products using raw materials,
and to encourage investment in the development of natural
resources by private interests and international financial
institutions.

Our proposals are aimed at strengthening the

functioning of the market, not hampering it.

Unfortunately,

at the recent meeting in Nairobi other countries rejected elements
of our approach to commodities and our proposal for the
establishment of an International Resources Bank.

We continue

to believe that such a Bank would be beneficial to all countries.
In this regard, it is important to understand what it would be

J2J

12 and what it would not be.

We see it as a means of increasing

private investor participation in other countries by reducing
the non-commerical, or political, risks related to investment
in developing countries.
will remain.

The price risk inherent in any investment

We do not see it as a financing vehical which will

be a substitute for investment from the private sector.

We will

continue to advocate adoption of such a means to increase investment in the developing world.

At the same time, we will resist,

as we did in Nairobi, proposals that are contrary to our interests
and the interests of the world as a whole.
Although still challenged by some countries, we need not
be defensive about the proposals we have put forward.

Too often

today, we hear that the United States is "isolated' from the
rest of the developed world -- that we are not "forthcoming"
enough.

I suggest that we have been most "forthcoming," short

of abandoning a market-oriented economic system which we favor
and which we believe will benefit all countries.

It takes firmness

and resolve to maintain that system, it is essential that we
demonstrate to the world that we are committed to it.
Monetary Arrangements. The inherent dangers and shortcomings
of excessive governmental interference in markets are also
clearly reflected in our international monetary arrangements.
Under the Bretton Woods system of fixed exchange rates, countries
sought to impose stability by mandating a price for their
currencies.

To maintain a price that could no longer be

supported by market conditions, recourse had to be made to
further governmental controls and restrictions.

Instead of

achieving the common objective of stability and international
cooperation, the system ultimately led to instability, crisis
and conflict.

oC

-13-

The need for greater freedom in'our monetary arrangements
is reflected prominently in the recent agreements we reached
on fundamental monetary reforms that have now been submitted
to members of the International Monetary Fund for their approval
in the form of amendments to the IMF Articles of Agreement.
A central tenet of this agreement is that future efforts must
focus not on governmental action to peg or manage exchange
rates but on achievement of the underlying economic stability
that is a prerequisite for sustainable exchange rate stability.
•r

To this end, countries will be given wide latitude to adopt
specific exchange arrangements of their own choosing, including
floating, so long as they fulfill certain general obligations
directed to achievement of orderly underlying economic
conditions and avoidance of manipulation of exchange rates
to gain unfair competitive advantage.
I believe that these new arrangements, combining
greater freedom and greater responsibility for sound
policy, provide the essential foundation for achieving a
more stable and open world economy. I urge Congress to act
promptly on legislation that will authorize U.S. acceptance
of the amendments to the IMF Articles.

-14Investment Policy

As with trade and monetary policy,

in the area of investment, the United States has put forward
a market-oriented approach.

We remain committed to the free

flow of capital across international boundaries as the
most efficient means of determining its international
allocation and use.

If this flow is to work to the maximum

benefit of all countries, it must remain free of artificial
impediments.

We have pursued an "open door" policy both

towards foreign investment in this country and towards
investment by our corporations overseas.
The growing attitude toward the activities of our
corporations abroad, offers another illustration of the
policy choice we have been greater governmental involvement
or less.

Multinational corporations have become a highly

important factor in the world economy.

I do not want to bore
•t 'i

you with the statistics, but I would point out that American
multinationals account for the bulk of U.S. direct investment
abroad.

Further, the gross sales of many individual concerns

exceed the gross national products of many countries.

Several

years ago, the sales of General Motors, for example, were
greater than the GNPs of such countries as Switzerland, South Africa
Denmark, and Austria.
Recently, the multinational has come under increasing
attack.

Some are charging that the multinational exports

American jobs; others say that recent disclosures of payments
abroad demonstrate that the multinational is a corruptive

-15force in the world; still others say that multinationals
are just too big. The answer, these people argue, is to
have the government step in and "regulate" or even dismantle
the multinational.
I have seen no sound evidence that can substantiate the
claim that U.S. investment abroad results in the export of
jobs. It may sound politically attractive to claim that
U.S. corporations are exporting 150,000 jobs annually by
investing abroad, but there is no economic evidence for
such a claim.
It is easy enough to look at an overseas production facility
and say that the workers employed there could have been
employed in the U.S. if the facilities had been located here.
However, I believe that it is misleading to assert that the U.S.
investment would have occured if the foreign investment had
TO

°

-

not been made. The firm involved probably faced the choice
of investing in the foreign market or losing it to his
competitors. Is that a reason for the government to step in?
I don't believe so.
Similarly, recent disclosures of payments to foreign
officials has led some to condemn most of the business community
as corrupt and to call for immediate legislation. I think
we would all agree that bribery should be condemned as ethically
abhorrent and subversive to the functioning of a free
enterprise system, both here and abroad. Further, I think we
would all agree that the whole matter of bribes paid to foreign

^ ;

-16officials by U.S. corporations needs a complete review. However,
our position has been to proceed with caution and fully
understand the problem before rushing to enact arbitrary
legislation.

The SEC and the IRS have investigations

underway; the Justice Department has extensive antitrust
powers; and we have proposed an international agreement
covering this subject.

Further, a number of multinationals

have undertaken their own internal programs and are adopting
codes of business practices.

These are important developments.

I believe that the vast majority of American business is conducted
ethically and honestly, and we should not allow the conduct1*
of the few to cloud the behavior of the many.

Let us

approach this problem sensibly and recommend legislation
only if it is addressed to the problem.
The interests of all countries are
best served by maintaining an international environment in
which capital and goods can flow freely across national boundaries
Moreover,

the private investor is best equipped to recognize

investment opportunities that will contribute to the economic
growth and development and will use his freedom to turn such
opportunities into reality wherever they exist.
Thus, multinational corporations should be seen as beneficial
to both home and host countries.

They can mobilize on

an unprecedented scale and channel often critically needed
capital, technology, and management know-how to increase
production and growth to the countries where they operate.

-17the time has come for us to stop political condemnation
of the corporation per se and start recognizing the economic
benefits that flow from the private sector.
Conclusion
What I have tried to emphasize today is that in both
domestic and international policy we must not give in to what
may be politically appealing.

We need not distort our

economic system in order to satisfy one or two interests at
home or to appease a few abroad.

Instead, we must avail ourselves

of;fa rare opportunity to fight for policy which is both
principled and in the economic interest of this country and the
world.
This is how we as a country will retain our economic
strength.

M u c h o f w h a t w e do in

^

^

^

^ ^

^

^ ^ . ^

strength of our own economy for years to come. The decisions
we make now on domestic regulatory reform and spending, our
ability to cooperate with our countries meaningfully and in
a way that preserves our market system, and our efforts to
secure a free and open environment for international trade and
investment will determine the direction we will go.

It is

crucial to avoid what may be politically expedient today,
but disastrous for the U.S. and world economy tomorrow.
Our economic strength and as important, our freedom depend
on it.

^

-18-

If there is one message I can leave with you today, I
hope it is that the effort that we, you and I, make now
is critical -- it is a test of our ability to maintain man's
freedom.

And that freedom can only be preserved if we can

minimize governmental control.

Each intrusion of

government takes economic freedom away from the individual.
We must strive for a new level of political wisdom that will
permit, in fact require, that economic principles be supported
for the good of all -- and I urge all of you to contribute
now, for you can make a difference.

o 0o

Js
FOR RELEASE ON DELIVERY
STATEMENT BY THE HONORABLE ROBERT A. GERARD
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
TUESDAY, JUNE 1, 1976, 11:00 A.M.,EDT
Mr. Chairman and Members of this distinguished Committee:
As the Committee is aware, the temporary increase in
the public debt limit enacted in March will expire on June 30.
We are here this morning, therefore, to provide the Committee
with our views as to provisions for meeting the financing
needs of the Federal Government during the Transition Quarter
and fiscal year 1977.
There are two essential aspects to this process. First,
a new dollar limit must be established at a level consistent
with the expected imbalance between receipts and outlays and
with the level of debt above the $400 billion limit already
outstanding. Second, we must have adequate flexibility in
our available debt management techniques to insure that
the substantial deficits anticipated over the 15 month
period are financed with the least possible disruption of
financial markets. Specifically, we believe an increase
in the amount of bonds which may be issued without regard
for the 4-1/4 percent ceiling and a grant of authority to
change the rate of return on Savings Bonds to reflect changing
financial conditions are required.
The Debt Limit
The first concurrent budget resolution, adopted in May,
established the unified budget deficit for the Transition
Quarter at $16.2 billion and provided for an increase in the
temporary statutory debt limit of $20.2 billion: an overall
limitation of $647.2 billion. The resolution also called for
WS-891

- 2 -

3/

a budget resulting in a unified budget deficit of $50.8 billion
in fiscal year 1977 and an increase in the temporary
statutory debt limit of $65.9 billion over the amount
specified for the Transition Quarter: a $713 billion limit
through September 30, 1977.
Consistent with the Committee's procedures, we have
provided the Committee with an array of tables relating to
the debt limit and the management of the public debt. The
tables showing the debt subject to limit by month through
the end of fiscal year 1977 are based on the President's
proposals as amended by subsequent legislation. Based on
this premise, we believe our debt requirements -- with a
$6 billion cash balance and a $3 billion contingency allowance -will be $711 billion at September 30, 1977. Our peak need,
however, is $716 billion at June 15, 1977.
Since the permanent limit is now $400 billion,
implementation of the concurrent resolution would require
a temporary limitation of $247 billion for the period from
July 1, 1976 through September 30, 1976, and a temporary
limitation of $313 billion for the period from October 1, 1976
through September 30, 1977. Based on our figures, and assuming
a cash balance of $6 billion and a $3 billion contingency
allowance, these limits would be slightly below our estimated
peak need on June 15. Assuming we can clarify this point,
we would have no difficulty in accepting the limits in the resolution.
I would like to turn now to the question of the debt
management tools I mentioned earlier: flexibility with respect
to the rate of interest payable on Savings Bonds and the
additional bond authority.
Savings Bonds
We have, as the Committee knows, several times recommended
that the Secretary, with the approval of the President, be
given full discretion to vary the terms and conditions applying
to Savings Bonds, including the rate of return. I want to repeat
that recommendation, because I feel that flexibility in
altering the terms of Savings Bonds may, at times, be important,
not only for the continued success of the Savings Bonds
program, but for Treasury debt management in the broad sense.

- 3 I will not take the time now to reiterate all of the
arguments that have been brought forward in the past to
support this recommendation. Previous hearings before this
Committee have gone into the matter in some detail. I would be
pleased, however, to respond to any questions the Committee may
have with respect to the Savings Bonds program. I should emphasize,
however, that if the Savings Bonds program is to remain viable,
and this is important for Treasury debt management, the
purchasers and holders of Savings Bonds must continue to believe
that it is a fair program that provides them with a reasonable
rate of return. That is the basic purpose of our recommendation:
to give that continuing assurance.
Bond Authority
At the time of its last consideration of the debt limit,
the Congress provided an additional $2 billion exception
to the 4-1/4 percent ceiling. Although the 4-1/4 percent
ceiling is an anomaly, the exception provided by the
Congress has prevented the ceiling from seriously affecting
the financing of the Government. However, as recently
as the February 15 quarterly refunding, it was necessary
to restrict the amount of new long bonds to $400 million
at a time when a larger amount could have been sold without
adverse effects on the market for agency, corporate, or
municipal securities.
We presently have $1.25 billion of the $2 billion
exemption remaining. In the period ahead, it would
seem reasonable that we may have the opportunity to
issue additional long-term debt, without adverse
consequences for other borrowers and with great benefit
to the maturity structure of the public debt.
I am sure I need not reiterate in detail the
position expressed to this Committee by Secretary Simon
last February. We believe it is in the long-term best
interests of our economy to have a well balanced national
debt structure.
For this reason, we need the flexibility to seize all
opportunities to achieve greater balance in our debt as they
arise. If the Committee agrees, we would urge you to raise
the exception to the 4-1/4 percent limit to a total of
$22 billion.

- 4 Mr. Chairman, the Treasury Department has s f ^ £ ? * J ^ g ^ t o
in great detail discussed the importance which 1 1 c ^? u u . n c l u d i n 2
the8ability to finance in all sectors of ^ J ~ ^ e ^ P p S r t of the
the longest-term sector. In this we have had ^ V ^ r k e t s
I
vast majority of the participants in our financial markets.
am glad to say that we now also have the support or cne
Comptroller General.
In his letter of transmittal of his report on the 4-1/4
percent ceiling, Mr. Staats said:
"The inability to at least partially finance
these deficits with long-term debt means that tne
Federal Government will become an increasingly
active participant, and a potentially
disruptive influence, in private capital
markets and in the short segment
of the capital market."
I commend the report in its entirety to you. Indeed,
I feel it is of such great importance that I would like to
read here the four interrelated conclusions reached by the
General Accounting Office along with the recommendations
suggested for consideration by the Congress:
"1. Considering the apparent rationale for the original
legislation -- that is, to minimize the costs of Treasury
borrowing operations, given market conditions, in a national
emergency -- one cannot argue for either the current level or
the continued existence of the 4-1/4-percent interest limitation. It no longer serves to reduce the cost of borrowing; instead, it simply keeps the Treasury from any further
borrowing in the long-term securities market."
"2. The limitation (and the exhaustion of the $10
billion exclusion) encourages a shortening of the maturity
of the national debt. This shortening tendency may, in
turn, place the Treasury in a more vulnerable position with
respect to the interest rate terms that it accepts on borrowings. That is, the Treasury may find itself in the
unfavorable position (1) of having to refinance massive
amounts of short-term debt at very high interest rates and
(2) of being a potentially destabilizing influence on money
and capital markets."

- 5 "3. Aside from an overriding concern with lengthening
the maturity of the public debt, there are three differing
philosophies regarding the objectives of debt management:
avoiding disruption through more systematized securities
flotations, stabilizing economic activity, and minimizing
interest costs. Given contemporary and foreseeable levels
of interest rates, achieving any of these objectives will
not be possible as long as the 4-1/4-percent interest
limitation on long-term Treasury debt remains in effect."
"4. A theoretical basis and some supporting practical
experience indicate that the limitation has at times distorted the term structure of interest rates, thus causing
a reallocation of credit among various sectors of the
economy and increased costs of servicing the Government
debt. On the other hand, the relevant empirical evidence
suggests that neither the current existence nor the repeal
of the limitation causes, or would cause, much distortion
in the term structure of interest rates and, hence, would
not affect the relative costs of borrowing in various
maturity sectors. Weighing theory and the experience of
Treasury officials and market practitioners against the
available empirical evidence (and its shortcomings), we can
reasonably conclude that (1) at worst, the ceiling should
be repealed because it may disrupt credit markets and raise
the costs of Government borrowing, (2) at best, it is
neither harmful nor beneficial to credit market stability
and borrowing costs and is therefore unnecessary , and
(3) it does not reduce the costs of Government borrowing
and may in fact raise those costs."
"MATTERS FOR CONSIDERATION BY THE CONGRESS
In view of our conclusions, the Congress should consider immediately repealing the 4-1/4 percent interest
limitation. Alternatives which would have essentially the
same long-term effects are systematically phasing out the
limitation through
annual redefinition of the maximum maturity of
securities whose flotation is subject to the
ceiling and/or
annual increases in the dollar volume of longterm securities which may be floated without
regard to the ceiling."

- 6SUMMARY
In conclusion, Mr. Chairman, we would urge the
Committee to adopt the debt limit figures for the
Transition Quarter and fiscal year 1977 we h a v e . P r o p ° £ ? ^ L Mion
today. On the other hand, we would have no serious oDjecui
if the Committee chooses to adopt different figures. j-n
either case, there will be appropriate opportunities in cne
sequence of events to amend the limits if such action snouia
appear desirable or necessary.
Second, we believe it desirable, Mr. Chairman, that the
Secretary of the Treasury have flexibility over the setting or
rates and other terms in the Savings Bonds program. We are
aware of the relationship of rates in the Savings Bonds program
with rates paid by depositary institutions. Indeed, the
Secretary of the Treasury is an actively participating member
of the Coordinating Committee when changes in Regulation Q
ceilings are under consideration. Moreover, changes in Savings
Bonds rates have always been undertaken with due regard to the
consequences for depositary institutions as well as fairness
to savers.
Third, Mr. Chairman, it is essential that the Treasury
have adequate authority to issue long-term securities when
the opportunity affords. The redevelopment of the long-term
Treasury market has been constructive, not only for Treasury
financing but for other debt markets for which outstanding
long-term Treasury obligations have served as a benchmark.
From the viewpoint of Treasury debt management, however, the
development of a long-term market offers the possibility of
reversing the steady decline in the average length of outstanding
Treasury debt and reducing the build-up in very short-term,
highly liquid securities that has resulted from the necessity of
financing the immense deficits of recent years. We are as
much^ concerned by the threat to future economic and financial
stability, posed by this immense liquidity build-up, as you
are. We need, therefore, to have the tools that will allow
us to do the most responsible job possible of debt management,
one that will contribute to economic and financial stability.
An increase in the exception to the 4-1/4 percent ceiling by
an additional $10 billion will
# # # go far in that direction.

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1976
Based on: Budget Receipts of $298 Billion,
Budget Outlays of $372 Billion,
Off-Budget Outlays of $9 Billion
($ Billions)
Operating
Cash
Balance
1975

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-Actual-

June 30

7.6

534.2

July 31

4.2

539.2

August 31

3.6

548.7

September 30

10.5

554.3

October 31

10.3

563.1

November 30

6.5

567.9

December 31

8.5

577.8

January 31

12.0

585.5

February 29

12.1

595.0

March 15

5.9

597.0

March 31

8.0

601.6

April 15

2.7

604.9

April 30

11.5

603.1

8.8

608.9

1976

May 27

-EstimatedJune 15 (peak)

6

617

620

June 30

6

616

619

May 28; 1976

PUBLIC DEBT
SUBJECT TO LIMITATION
TRANSITION QUARTER
JULY-SEPTEMBER 1976
Based on: Budget Receipts of $84 Billion,
Budget Outlays of $99 Billion,
Off-Budget Outlays of $5 Billion
($ Billions)
Operating Public Debt With $3 Bill
Cash
Subject to
1976
Balance
Limit

Margin for
Contingenci

-EstimatedJune 30

6

July 31

6 627

630

August 31

6 637

640

September 30

6 636

639

May 28, 1976

616

619

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1977
Based on: Budget Receipts of $352 Billion,
Budget Outlays of $397 Billion,
Off-Budget Outlays of $11 Billion
($ Billions)
Operating
Cash
Balance
1976

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Cont;ingencies

-Estimated-

September 30

6

636

639

October 31

6

646

649

November 30

6

656

659

December 31

6

660

663

January 31

6

663

666

February 28

6

678

681

March 31

6

693

696

April 15

6

701

704

April 30

6

690

693

May 31

6

706

709

June 15 (peak)

6

713

716

June 30

6

696

699

July 31

6

701

704

August 31

6

706

709

September 30

6

708

711

1977

May 28, 1976

BUDGET RECEIPTS AND
OUTLAYS BY FUND GROUP
($ Billions)
Transition
-. ,, n„ar4-pr Fiscal Year
Fiscal Year
1976 Estimated

Quarter
__Actual_

Receipts:
Federal Funds $199.3 $56.4 $230.9
Trust Funds 134.2 33.8 157.8
Interfund Transactions -35.6 -6.6 -37.2
Unified Budget 297.9 83.6 351.5

Outlays:
Federal Funds 275.7 71.0 288.6
Trust Funds 132.2 35.1. 145.8
Interfund Transactions -35.6 -6.6 -37.2
Unified Budget 372.2 99.5 397.2

Surplus or Deficit (-):
Federal Funds -76.4 -14.6 - 57.7
Trust Funds 2.0 - 1.3 12.0
Unified Budget -74.3 -^5

m

9 _ 45.7

Detail may not add to total due to rounding.

^!ay 28, 1976

F«?ti mated
19,77 Estimated

s/d
UNIFIED BUDGET MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Receipts Outlays

Surplus or
Deficit (-)

1975 -ActualJuly $ 20.2 $ 31.2

$-11.1

August 23.6 30.6

- 7.0

September, 28.6 29.0

- .4

October, 19.3 32.4

-13.1

November 21.7 29.4

- 7.7

December, 26.0 31.8

- 5.8

1976
January 25.6 30.7

- 5.1

February 20.8 29.8

- 9.0

March 20.4 29.1

- 8.6

April 33.3 32.5

.9

-Estimated1976
May 22.9 31.0

- 8.1

June 35.3 34.6

.3

Fiscal Year 1976 297.9 372.2

-74.3

July 22.8 34.9

-12.1

August 26.8 32.5

- 5.7

September 34.0 32.1

2.0

Transition Quarter. 83.6 99. b

-15.9

Detail may not add to total due to rounding.
May 28, 1976

fc

UNIFIED BUDGET MONTHLY
FISCAL YEAR 1977
($ Billions)

Surplus or
Deficit• (-)

Receipts Outlays
1976
<s 22 2 $ 35.7
October
25 2 33.7
November
9ft 1 33.8
December
1977
30.5 35.2
January
February 23.2 34*7

$-13. 5
$ zz.*

- 8.5

*J

- 5.7

*o. J.

- 4.,7
JU.J

-13..3

March 20.9 34.2

5.8

April 39.6 33.8
25.6 31.8
May
June 41.0 30.3

-11..5

- 6.2
^.o

July 26.6 33.7

10-.7
- 7..1

August 31.4 30.2

1,.2

September 37.2 30.1

7 .1

Fiscal Year 1977 351.5 397.2
Detail may not add to total due to rounding.

May 28, 1976

-45.7

FEDERAL FUNDS MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Receipts Outlays

Surplus or
Deficit (-

1975 -ActualJuly $ 13.4 $ 27.5

$-14.0

August 13.0 21.0

- 8.0

September 22.3 20.2

2.1

October. 13.6 21.6

- 8.1

November 13.4 20.0

- 6.6

December. 19.8 27 .* 2

- 7.4

1976
January 18.6 20.5

- 1.9

February 10.8 21.0

-10,2

March 13.3 19.5

- 6.3

April 23.5 22.3

1.2

-Estimated1976
May 10.1 22.9

-12.8

June 27.5 31.9

- 4.4

Fiscal Year 1976 199.3 275.7

-76 .4

July 15-2 27.0

-11. 8

August 14.7 22.0

- 7. 3

September 26.5 22.0
Transition Quarter 56.4 71.0
Detail may not add to total due to rounding.
May 28, 1976

4..5
-14.6

l^

FEDERAL FUNDS MONTHLY
FISCAL YEAR 1977
($ Billions)
Receipts Outlays

Surplus or
Deficit (-)

1976 -EstimatedOctober $ 15.6 $ 23.0
November 15-3 23.0
December 21.4 27.0

$- 7. 4
- 7.7
- 5.6

1977
January 22.4 22.0

•,4

February 11.2 22.0

-10..8

March 12-6 22.0

- 9.,4

April 27.9 25.0

2..9

May 9.8 23.1

-13 .3

June 32.0 29.1

2 .9

July 17.5 28.1

-10 .6

August 16.6 22.1

- 5 .5

September 28.5 22.1
Fiscal Year 1977 230.9 288.6
Detail may not add to total due to rounding.

May 28, 1976

6 .4
-57.7

OFF-BUDGET AGENCY OUTLAYS MONTHLY
FISCAL YEAR 1976 AND
THE TRANSITION QUARTER
Federal
Financing
Bank 1/
1975

Other 2/

Total

-Actual-

July $ .6 * $ .6
August .7 $-1.0 - .3
September .1 .5 .5
October .5 .5 1.0
November .6 .3 .9
December .2 .6 .7
1976
January 1.3 .3 1.5
February .8 .2 1.0
March 1-2 * 1.2
April .2 .1 .3
1976 -EstimatedMay .2 .3 .6
June .2 1.2 1.0
Fiscal Year 1976 6.2 3.0 9.3
July 1.8 - .2 1.6
August 1.1 .4 1.5
September .8 .7 1.5
Transition Quarter 3.7 .9 4.6

1/ The outlays of the Federal Financing Bank, in order to prevent double co
reflect only its purchase of Government-guaranteed obligations, not its purchases
of agency debt. Virtually all of the other off-budget activity is financed
through debt issued to the Federal Financing Bank.

2/ Export-Import Bank, Postal Service and Rural Electrification Administrat
Detail may not add to total due to rounding. May 28, 1976

^

OFF-BUDGET AGENCY OUTLAYS MONTHLY
FISCAL YEAR 1977
($ Billions)
Federal
Financing
Bank 1/

,
Other_2/

Total

1976 -Actual$-1 2
October
November

$ •

.3

1-0

-3

1

• '
p

December
1977

$"" • ^

4

•

-1

B

7 -3 1'°
January
February
March -8 *3 1#1
April 7 .4 1.1

• '
ft .3
•°

1-1

May 7 .4 1.1
June -7 *4 1-1
July .7 .4 1.1
August .7 .4 1.1
September .6 .5 1-1
Fiscal Year 1977 872 2.8 11.1
1/ The outlays of the Federal Financing Banl^ in order to prevent
double counting, reflect only its purchase of Government-guaranteed obligations, not its purchase of agericy debt. Virtually
all of the other off-budget activity is financed through debt
issued to the Federal Financing Bank.
2/ Postal Service, Energy Independence Authority and Rural
Electrification Administration.
Detail may not add to total due to rounding.

May 28, 1976

-House- -Senate-

CONGRESSIONAL AND
EXECUTIVE ESTIMATES
TRANSITION QUARTER AND FISCAL YEAR 1977
-Executive-Concurrent ResolutionT.Q.
FY77
Total
FY77- Total
T.Q. - ' FY77 > • -Total
T.Q.- -FY77Total T-.Q-.

Receiots 86.0 363.0 449.0 86.0 362.4 448.4

86.0 362.5 448.5

83.6 351.5 435.1

Outlays 101.2 413.6 514.8 102.2 412.6 514.8

102.2 413.3 515.5

99.5 397.2 496.7

Deficit -15.2-50.6 -65.8 -16.2-50.2 -66.4

-16.2 -50.8 -67.0

-15.9 -45.7 -61.6

Debt level 646.2 711.9 646.2 711.5
19.2 65.7
84.9
change

647.2 713.1
20.2
65.9

639 711
13
72

19.2

65.3

84.5

Off-Budget 4.0 11.0 15.0 n.a. n.a. n.a.
Trust Surplus
or Deficit (-)..

2.5

4.0

6.5

n.a.

n.a.

n.a.

86.1

n.a. n.a. n.a.

4.6 11.1 15.7)

n.a. n.a. n.a.

- 1.3 12.0 10.7

85

May 28, 1976

-K
^

W

Use of Bond Issuing Authority 1/
(dollars in millions)

Issue
Date

: Maturity : Issuing
: Coupon : yrs.- : Yield
:
%
% •
: mos.' :

: Total
: Amount
: Issued
$ 807

7

10-0

7.11

11/15/71

6-1/8

15-0

6.15

1,216

2/15/72

6-3/8

10-0

PAR

2,197)

5/15/72

6-3/8*

8A5/72

8/15/71

Estimated Holdings
Mav 20, 1976
: Private
' FRB & G\

7

399

408

332

884

1,652

1,050

505)

9-9

6.29

6-3/8

12-0

6.45

2,353

975

1,378

1/10/73

6-3/4

20-1

6.79

627

418

209

5/15/73

7

25-0

7.11

692

371

321

8/15/73

7-1/2

20-0

8.00

925)

11A5/73

7-1/2*

19-9

7.35

438 >

701

1,213

2A5/74

7-1/2*

19-6

7.46

551 /

5/15/74

8-1/2

25-0

8.23

587)

8A5/74

8-1/2*

24-9

8.63

886 V

900

1,514

11A5/74

8-1/2*

24-6

8.21

941 )

2/18/75

7-7/8

25-0

7.95

902 |
1,366

405

5/17/76

7-7/8*

23-9

8.19

869 )

4/07/75

8-1/4

15-0

8.31

1,247

1,046

201

5A5/75

8-1/4

30-0

8.30

1,604|
981

1,240

2/11/16

8-1/4*

29-3

8.09

617)

8A5/75

8-3/8

25-0

8.44

1,114 |
1,478

787

UA7/75
8-3/8*
24-9
TOTALS
Office of the Secretary of the Treasury

8.23

1,151 )
20,229

10,619
97610
May 24 7T57F" "

Office of Government Financing
with interest rates exceed^
1/ The face amcunt of Treasury bonds held by the public
4-1/4% is limited to $12 billion according to 31 U.S. C. 752. At the end of Mav
1976 there was $1.4 billion of remaining authority.
*
Reopened issue.

FRB Market Purchases of Bonds Issued Under $10 Billion Authority
July 1974 t° <iate
($ .millions')

Month

Total 1/

7%

6 3/8%

6 3/8S

6 1/8%

7 1/23

6 3/4%

Aug 81

Feb 82

Aug 84

Nov 86

Aug 88-93

Feb 93

-May 93-93

8 1/2%

8 1/4%

7 7/8<i

May 94-99

May 90

Feb 95-00

23
12
107
64

52

49
44
15

10

45

4

13

3

8 1/4%
May 00-05

8 3/8%
Aug 95-00

1974
July

Aug
Seo
Oct
Nov
Dec

+ 36

7

3

4

16

+ 35

2

3

3

24

+ 25
+ 22

8
3

2

7
2

8
9

+ 27
+ 82
+201
+165
1 3
+109

15
18
15

1
10
2

5
21
14

1975

Jan
Feb
\ '-• V

7\or

May
June
July

Aug
Se?t

Oct
Nov
Dec

+ 47
+124

1

X

...244

+

+ 73

1

+
+
+
+

2

12
10

17
10

17

3
45
5
24

23
60

3
8

191
34

8
18
11
3

32
19
5
11

1976

Jan
Feb
Mar
Apr.

73
59
24
38

Office o f the S e c r e t * ™ of th<=> Trfiasiirv
Office of Government Financing

1
10

Note:

Figures may not add to totals due to rounding.

21
5
3
19

May 24, 1976

Net Change in Federal Reserve•Holdings
of Treasury Securities
($ millions)

Net Change
in
Hoi diners

Net Purchases
of Bonds
Over 4-1/4%

844

28

1975
Jan.

Net Change:
in
Other Securities

816

Feb.

-258

82

-340

Mar.

332

201

131

Apr.

6,428

165

6,263

May *

-2,224

3

-2,227

Jun.

-873

109

-982

Jul.

-2,866

Aug.

663

47

616

Sep.

4,452

124

4,328

Oct.

186

Nov.

-2,047

244

-2,291

Dec.

2,797

73

2,724

3976
Jan.

1,848

73

1,775

Feb.

-729

259

-988

Mar.

763

24

739

Aor.

2,061

38

2,023

Office of the Secretary of the Treasury
Office of Government Financing

-2,866

186

•lay 24, 1976

New Offerings of Coupon Securitie
January 1 - June 10, 1976 1/
($ Billions)

Securities Offensd :
and Announced 2/ :

Issue
Date

:

Length of
IS!sue

Total Offerings

:
:
: Total
$38.3

Two Years and Under:
6-3/8% Note
6-5/8% Note
6-3/4% Note
6-1/2% Note
7-1/8% Note

2/02/76
3/03/76
3/31/76
5/17/76
6/01/76

2
1
2
2
2

yrs.
yr.
vrs.
yrs.
yrs.

-

Over 2 - 7 Years:
7-1/2% Note
7-3/8% Note
7% Note
8% Note
7-1/2% Note
7-3/8% Note
n.a. Note

1/06/76
1/26/76
2/17/76
2/17/76
3/17/76
4/05/76
6/10/76

4
5
3
7
4
4
4

yrs.
yrs.
yrs.
yrs.
yrs.
yrs.
yrs.

- 0 mos.
- 4 mos.
- 0 mos.
- 0 mos.
- 0 mos.
-10--1/2 mos.
- 1 mo.

Cver 7 - 2 0 Years:
7-7/8% Note

5/17/76

0 mos.
9 mos.
0 mos.
0 mos.
0 mos.

10 yrs. - 0 mos.

12.4
2.3
2.6
3.0
2.2
2.5
19.8
2.0
2.0
3.1
6.1
2.0
2.6
2.0
4.7
4.7

Amount Offered
:

Refunding

: New Cash

$12.1

$26.2

4.8
—
—

7.6
2.3
2.6

2.1
1.2
1.5

1.0

4.2
—
—

1.1 v
15.6
2.0
2

1.4
2.8
—
—
—

'° 4/

1

-7 7/
3.3
2.0 1/
2.6
2.0

2.5
2.5

H3/
2.2 -'

Over 20 Years:
8-1/4% Bond
7-7/8% Bond

2/17/76
5/17/76

29 yrs, - 3 mos.
23 yrs. - 9 mos.

Office of the Secretary of the Treasury
Office of Government Financing
1/ Excludes Federal Reserve and Government Accounts' transactions.
2/ Issued and announced through May 18, 1976.
3/ Pro rata share in May refunding.
4/ Pro rata share in February refunding.
n.a.: not available.

1.2
.4
.8

.6
.2
.4
May 24, 1976

•6

1 '

2 i/

Treasury Bill Offerings January 1976 to Date
($ Billions)
Date

:

1976

Jan.

:

2

8
13
15
22
29
31
Total J3n.
Feb.

5

10
13
19
26
Total Feb.
Mar.

6.2
6.5
3.1
6.4
6.4
6.6

32.1

3.1

—

6.9
2.9
7.0
6.4
6.6
26.9
6.5

11
.18
25

6.1
5.6
5.5
23.7

1
6
8
15
22
29
Tota-T. Ps>r.

'

Cash
13 &
26 wk. : 52 wk. : Mgmt.

4
9

Total Mar.
Apr.

Issues
i-iegular Bills
:

2.9

—

3.1

3.1 .

3.2

5.7
6.0

35.2

29.4

6.9
2.9
7.0
6.4
6.6

6.2

29.8

25.3

6.5
3.1

6.4

6.1
5.6
5.5

6.1
5.6
5.5

1.6

33.0

2.7

6.2
2.1
6.3
6.4
6.4

0.7

6.3
6.4
6.4

6.0

2.5

8.7

2.5

6.1
5.9
6.1
36-0

6.2
6.1
6.1

1.1
0.5
0.5
0.7

—

6.1
5.6

—

2.2

4.5

0.8.

——

0.1
1.0

1.0

0.1

6.0
2.2

4.5

0.7
0.8
0.7
0.2
2.4

0.1

z. 1

0.5
0.5
1.1
0.5
0.5
0.7
-1.6
2.2

—

6.4
2.1

5.5
25 7

Total

0.2
1.6

2.1

—.

-1.6
-1.6

0.7

27.4

O 1

1.1
0.8

2.1

2.2

6.3
30.7

:
:

1.6

2.1

6.0
3.2

: Total

New Money
Regular Bills
:
Cash
13 &
26 wk. : 52 wk.
: Mgmt.

0.5
0.5

2.0

2.0

:

5.7
6.0
2.0
5.9
5.9
5.9
1.6

5.9
5.9
5.9

23 .6

3.2

6.1
30.3

6.2
6.5
3.1
6.4
6.4
6.6

26.8

6.0
6.2
6.1
5.9

:
: Total

Maturities
Regular" Bills
:
13 &
: Cash
: 26 wk. : 52 wk.
: Mgmt.

——
—
1i

1.0
1.0

6.2

—

2.5

6.1
10.6
6.3
37.4

-0.2
-0.2
-0.4

-4..5

1.0

-2. 0

1.0
2.5
-4.7
-0.2
-1.4

Treasury Bill Offerings January 1976 to Date
($ Billions)
Date
1976

May

4
6
13
20
27

Total May
Total Jan.May 1976

Issues
Regular Bills
13 &
52 wk.
26 wk.

Cash
Mgmt.

3.2
6.2
6.2
6.0
6.1
24.5

3.2

137.5

15.5

June

2.5

2.9
6.0

Total Jan. 1976to date 143.5

18.4

2.5

Office of the Secretary of the Treasury
Office of Government Financing

Total

Maturities
Regular Bills
13 &
Cash
52 wk.
26 wk.
Mgmt.

3.2
6.2
6.2
6.0
6.1
27.7

6.4
6.4
6.2
6.3
25.3

2.4

155.5

134.3

10.8

2.9
6.0

6.3

164.4

140.6

2.4

6.1

2.4

13.2

6.1

Total

New Money
Regular Bills
13 &
Cash
26 wk.: 52 wk.
Mgmt.

2.4
6.4
6.4
6.2
6.3
'27.7

-.8

.8

151.2

3.2

4.7

.8

.8
-.2
-.2
-.2
-.2

-.2
-.2
-.2
-.2

2.4
6.3

-.3

159.9

2.9

-3.6

.5

5.2

Total

4.3
.5
-.3

-3.6

4.5

May 24, 1976

Attached charts were presented at the Advisory Committee
Briefings on April 27, 1976 and do not reflect the effect
of subsequent events.

SHORT TERM INTEREST RATES
Weekly Averages
%

%

15
14
13
12
11
10
9
8
7
6

5
4
3

15
14
Federal Funds

13
12

Prime Rate

Commercial
Paper Rate

Aft
Week Ending
April 21, 1976

V^;7

i i

i i

i

1973

Ollice of the Secretary ol the Treasury
Oflice ol Debt Analysis

J_L

I 1 I I I I I I 1 I

1974
Calendar Years

I I I I I

1975

I I I I 1 I

1976

April 27, 1976 18

11
10
9
8
7
6

5
4
3

INTERMEDIATE AND LONG MARKET RATES
Monthly Averages

4

V

M M V S' N 'j' M M J S N J M M J S N J M M
1973
1974
1975
1976

Ottice of the Secretary ol the Treasury
Oflice ol Debt Analysis

I April 27,1976-23

TREASURY FINANCING REQUIREMENTS
January-June 1976y
$Bil

Uses

60 h
50

Increase in
Operating Cash'

D

Sources

-e&Vr

\

Gov't Acc't
Investment

B

7

^Special Issues
^Savings Bonds, etc
21/2

H

^ Refundings'

40
Maturities
30
20

Done
Cash Deficit

Net New Cash 33

10

To Be
Done

0
1" Net of exchanges for maturing marketable securities.
* Includes $4l/2 billion CMB's and $1.5 billion 1/31/76 bills in 2-year cycle slot.
-i/Assumes $12 billion June 30 cash balance.
Office of the Secretary of the Treasury
Office of Debt Analysis

April 27,1976-16

TREASURY FINANCING REQUIREMENTS
May-June 1976 v
$Bil

Uses

Sources

30
28K

*-Decrease in Operating Cash

Gov't Acc't
Investment

""Special Issues7

20
^Savings Bonds, etc
Maturities

VA

Refundings ^
10
ll3/4

Cash Deficit

Net Cash
Financing

0
t Net of exchanges for maturing marketable securities.
1/Assumes $12 billion June 30 cash balance.
Ollice ol the Secretary ol the Treasury
Oltice ol Debt Analysis

I April 27,1976-19

TREASURY OPERATING CASH BALANCE

July

Aug Sept. Oct.
1975

Nov. Dec. Jan. Feb. Mar. Apr.
1976

May

June

* Daily
Office ol the Secretary of the Treasury
Olfice of Debt Analysis

April 27,1976-15

TREASURY NET NEW MONEY BORROWING
Calendar Year Halves

$BN
50
Over 15 yrs.

40

J 7-15 yrs.
d 2-7 yrs.
2 yrs. & under

30

33

£55^
9 l*Tobe
1
done

Bills

20
10

0

Eggggfl

1.3
-10

1974
Office ol the Secretary of the Treasury
Olfice of Debt Analysis

1975

1976
April 27, 1976-14

GROSS MARKET BORROWING 1974 - TO DATE1/
Calendar Year Halves
$Bil.

70
60
50

HiijOver 15 yrs.
7-15 yrs.
2-7 yrs.
2 yrs. & under
Bills

40
30
20
10

0
1974
Office of the Secretary of the Treasury
Office of Debt Analysis

1975

-UGross public offerings of coupon issues; net offerings of regular bills. Excludes Federal
Reserve and Government Account transactions.
v
Issued or announced through April 21,1976.

April 27, 1976-9

$Bil.

PRIVATE HOLDINGS OF TREASURY MARKETABLE
DEBT BY MATURITY
276.4

250

200
170.7

255.9

Over 15 yrs.
7-15 yrs.
^2-7 yrs.
^ ^ 2 yrs. & under
181.0
164.9

210.4

Jun.

Jun.

150

100-

50

o

Dec.
1974

Otltce of the Secretary of the Treasury
OHice ol Debt Analysis

Dec.
1975

Mar.
1976
April 27. 1976-10

AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held
Years
June 1966
5 years
4 months

5Vz
5
41/2r-

3Vz

March 1976
2 years
5 months

2Vz

1966

1967

Office of the Secretary ol the Treasury
Office of Debt Analysis

1968

1969

1970

1971

1972

1973

1974

1975

1976
April 27, 197612

COVERAGE OF 13 WEEK BILLS
Bas s Points
7.5
5.0
2.5
0
$Bil.
Total Tenders

4
3
2

Accepted Tenders

1

0

Olfice of the Secretary of the Treasury
Office of Debt Analysis

S

0
1975

N

D

M

A
1976

M
April 27,1976-2

COVERAGE OF 26 WEEK BILLS
Basis Points

Auction Tails

7.5
5.0
2.5
0

''

ll|fr

i i Ti ;i i i i i i i i i i i i i M - r i i i Ii i i i

i i i i

3
2
Accepted Tenders

1
0

S

0
1975

Office ol the Secretary ol the Treasury
Office ol Debt Analysis

N

D

M

A
1976

M
April 27, 1976-3

COVERAGE OF OUTSTANDING 52 WEEK BILLS

$Bil. -

May 6 June 3 July 1 July 29 Aug 26 Sept. 25 Oct. 21 Nov. 18 Dec. 16 Jan. 13 Feb. 10 Mar. 9 April 6
1975

1976

Office of the Secretary ol the Treasury
Office of Debt Analysis
April 27,1976-4

6\

COVERAGE OF TREASURY COUPON ISSUES
July 1975 Through April 1976

Basis Points

Auction Tails

o
$Bil.
8
7
6

Total
Tenders
_Accepted
~ Tenders
N

OO

(N

'N
rv r-« rv oo
as as os l> l^ l> CD U
OsOsOsosOOsasOsOsos
os as as as
6 5 6 5 6 5 6 5 6 5 6 5 & 5 & 5 & 5 6 5 6 5 6 5 & 5 6 5
- ~ ~ 00 -^° --P"
\ -^<»
JF-" ~^
> >:
00
Office ol the Secretary of the Treasury
Ollice ol Debt Analysis

CO

OO

00

CO

00

'^

S

»

'^

6?

6?

5?

6$

>
vO

m

o
o

os

as as os

65

65

65

65

c\j

00

10

April 27, 1976-8

NUMBER OF TENDERS FOR 7-YEAR 8% NOTES
(Thousands)*
Commercial Banks
Individuals
Dealers & Brokers
Mutual Savings
Banks
Corporations

Number of Tenders:
1 1 Over $500,000
^ $201,000 to $500,000

Private Pensions

• $1,000 to $200,000

State and Local
Governments
Insurance
Companies
All Other

10

15

20

25^ ^ 0

75

* Data estimated from partial results. Sample data suggest significant misclassification
of smaller tenders from commercial banks.
Office of the Secretary ol the Treasury
Office of Debt Analysis

April 27, 1976-21

COVERAGE OF 7-YEAR 8% NOTES
(Billions of Dollars)*

i /Commercial Banks
Individuals
Dealers & Brokers
Mutual Savings
Banks

1 :

Corporations

H

Private Pensions

•J
I 1

State and Local
Governments
Insurance
Companies
All Other

Tenders:
• Over $500,000
^ $201,000 to $500,000
• $1,000 to $200,000

[
1
8

0

16

17

* Data estimated from partial results. Sample data suggest significant misclassification
of smaller tenders from commercial banks.
Office of the Secretary of the Treasury
Office of Debt Analysis

April 27,1976-20

MARKETABLE MATURITIES THROUGH APRIL 30,1977
Privately Held, Excluding Bills & Exchange Notes

$Bi

4.6
2.6

4.1

7»/2%

1.9
6Vz%
Nt

Nt

2-

1.7

5#% mw*y>
Nt | N t
6V2%
Nt

0

A

S
1976

Office of the Secretary ol the Treasury
Ollice ot Debt Analysis

0

N

D

J

F

M

A

1977
April 27, 19761

OWNERSHIP OF THE MATURING ISSUES
THROUGH APRIL 1977*
Maturing Issues

Total
Privately
Held

5%%Nt. May 1976
6% Nt. May 1976
67 2 % Nt. May 1976
8 % % Nt. June 1976
5%%Nt. Aug. 1976
67 2 % Nt. Aug. 1976
77 2 % Nt. Aug. 1976
87 4 % Nt. Sept. 1976
67 2 % Nt. Oct. 1976
67A% Nt. Nov. 1976
7%% Nt. Nov. 1976
774% Nt. Dec. 1976
6% Nt. Feb. 1977
8% Nt. Feb. 1977
67 2 % Nt. Mar. 1977
73/8%Nt. Apr. 1977

2,203
1,482
1,868
1,999
1,594
2,006
2,546
1,662
1,510
4,015
1,346
2,023
1,544
2,085
2,120
1,519

Total

31,522

(In millions of dollars)
Savings Institutions
State &
Commercial
LongIntermediate- Local Corpora- Foreign
tions
Banks
term
term
, General
2/
Funds
Investors^
Investors-'
145
5
1,220
190
165
135
80
870
125
80
115
120
10
830
165
175
20
60
5
960
85
350
75
5
155
760
110
105
240
40
1,100
120
135
110
15
225
1,155
165
170
15
100
65
1,025
100
35
15
680
190
75
210
115
50
1,750
240
340
885
375
5
940
130
80
40
90
1,105
220
190
215
90
15
720
150
190
160
220
10
865
125
175
20
95
1,140
5
215
140
340
250
15
945
210
95
80
90
16,065

155

2,540

2,735

1,960

2,780

Other
Private
Holders
343
212
548
464
219
501
801
337
225
375
61
203
89
795
30
84
5,287

* Based on February 1976 survey of ownership.
1/ Includes State and local pension funds and life insurance companies.
If Includes fire, casualty, and marine ins., mutual savings banks, savings and loan, and corporate pension funds.
Office of the Secretary of the Treasury
Office of Debt Analysis April 27,1976-24

MARKET YIELDS ON GOVERNMENTS
(Bid Yields)
%

9

8

January 26,1976^*
1^-

/?
^

i"—|

*-

^

%

.4

/s
/

1 8 110

7
6

/

0

-

8

3

'< 24 26 28
12 ]4 16 18 20 >2

4

Years to Maturity
Office of the Secretary of the Treasury
Office of Debt Analysis

April 27.1976-22

TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
l$Bil.i
1976
1980
4
4
4.1
|
4.0
2
1.6
£
1.7
1.6
2
11.5 f I tf J 3 I
1
0
5.4

$Bil
6
420
6
4
2
0
6
4
2
0
6
4
2
0

1977
-

• " If \*
6.0

)£ 1 Ji-8

•""

1978

5.0
23I2.I

'' 3 ^ . 4 2 6 2 3

4.6

4.5
3.0

I

1979
3.1

2.8

1.7

1.7

I 3

1

1.9
1.9

23
"

i I

J F M A M J J A S O N D

2.4

2.O

1981

4
2
0

2.7

2.0

• 1982

2
0

1.7

1.4

1

0

6
4
2
0

6.0

4
2
0

1.1

.4

I

1.9

23

1983

1.1

1984
1.0

J F M A M J J A S O N D

K New issues calendar year 1975.
H I New Issues calendar year 1976.
Office of the Secretary of the Treasury
Office of Debt Analysis

April 27, 1976-27

TREASURY MARKETABLE MATURITIES
$Bil.
2
0
2

1.3

Privately Held, Excluding Bills and Exchange Notes
$Bi
1995
1985
2
0
2

1986

1996

0

0
2

1987

0
2
0
2

1988
1989

0
4

1990
2.4

2
0
2

I

1.1

1991

0
42-

1992
2.0

ol-

1993

2-

ol-

I

1994

20

J F M A M J

1997

2V

J A S O N D

0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0

1998

1.8

1999
2000 1.5

.6

2001
2002
2003
2004
1.0

2005

m
J F M A M J J A S O N D

EB New issues calendar year 197S.
Ill New issues calendar year 1976.
of the Secretary of the Treasury
of Debt Analysis

April 27,

TREASURY FINANCING REQUIREMENTS
May - June 1975

Uses

Sources
Adjustment
to Cash v
- 30*74VA

Gov't Acct.
Investment

^H

Vi

^

Agency & Other

%

Maturities

Decrease in Operating
f Cash

^H^ Special Issues
Savings Bonds
f & Other

VA^
Off Budget Deficit

Refund ings S"

«N

Q

Budget Deficit
Net N e w Cash / *

Olfice ol the Secretary of the Treasury
OMice ol Debt Analysis

April 27, 1976-26

TREASURY OPERATING CASH BAUNCE*
$Bil.

Actual—

Without New
Borrowing

10 w-

•10
Jul.

Aug

Office of the Secretary of the Treasury
Office of Debt Anilyiii

Sept. Oct
1974

Nov.
*n-i

1
Dec. Jan. Feb. Mar. Apr.

May June

1975

* Daily

April 27, 1976-25

^

7£

*_iv

IT)
10

0- LU

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£

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in

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O

heDepartmentoftheJREASURY

For information on submitting tenders in the Washington, D. C. area:
FOR RELEASE AT 4:00 P.M.

PHONE WO4-2604

February 27, 1976

TREASURY TO AUCTION $2.0 BILLION OF NOTES
The Department of the Treasury will auction $2.0 billion of 4-year notes to
raise new cash. Additional amounts of the notes may be issued to Federal Reserve
Banks as agents of foreign and international monetary authorities.
The notes
March 17,
September
issued in
$100,000,

now being offered will be Treasury Notes of Series C-1980 dated
1976, due March 31, 1980 (CUSIP No. 912827 FK 3), with interest payable on
30, 1976, and thereafter on March 31 and September 30. They will be
registered and bearer form in denominations of $1,000, $5,000, $10,000,
and $1,000,000, and they will be available for issue in book-entry form.

Payment for the notes must be made on March 17, 1976. Payment may not be
made through tax and loan accounts.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Friday,
March 5, 1976', 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 Thursday, March 4.
Each tender must be in the amount of
$1,000 or a multiple thereof, and all tenders must state the yield desired, if a
competitive tender, or the term "noncompetitive", if a noncompetitive tender.
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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 1/8 of 1 percent necessary to make the
average accepted price 100.000 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 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 99.001 will not be accepted.
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 $500,000 or less
will be accepted in full at the average price of accepted competitive tenders, which
price will be 100.000 or less.

WS-681

(OVER)

Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and dealers who make primary markets in Government securities and
report daily to the Federal Reserve Bank of New York their positions with respect
to Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally-insured savings and loan associations, States,
political subdivisions or instrumentalities thereof, public pension and retirement
and other public funds, international organizations in which the United States holds
membership, foreign central banks and foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank of
New York their positions with respect to Government securities and borrowings
thereon, Federal Reserve Banks, and Government accounts. Tenders from others must
be accompanied by payment of 5 percent of the face amount of notes applied for.
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 notes with their tenders in order to meet the time limits pertaining to
chicks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Wednesday,
March 17, 1976, at the Federal Reserve Bank or Branch or at the Bureau of the
Public Debt in cash, in other funds immediately available to the Treasury by
March 17, 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) Thursday,
March 11, 1976, 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
the case of the Treasury, or (2) Tuesday, March 9, 1976,
if the check is drawn
on a bank in another district. Checks received after the dates set forth in 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 will be canceled
and the deposit with the tender up to 5 percent of the amount of notes allotted will
be subject to forfeiture to the United States.

OOO

FOR IMMEDIATE RELEASE

March 5, 1976

RESULTS OF AUCTION OF 4-YEAR TREASURY NOTES
The Treasury has accepted $2.0 billion of the $5.4 billion of
tenders received from the public for the 4-year notes, Series C-1980,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 7.50% 1/
Highest yield
Average yield

7.55%
7.54%

The interest rate on the notes will be 7-1/2%. At the 7-1/2% rate,
the above yields result in the following prices:
Low-yield price 99.990
High-yield price
Average-yield price

99.818
99.853

The $2.0 billion of accepted tenders includes 34% of the amount of
notes bid for at the highest yield and $0.7 billion of noncompetitive
tenders accepted at the average yield.
In addition, $15 million of tenders were accepted at the averageyield price from foreign and international monetary authorities.
1/ Excepting 9 tenders totaling $891,000.

WS-698

TELEPHONE 964-2041

WASHINGTON, D.C. 20220
.

For information on submitting tenders in the Washington, D. C. area:

PHONE WO4-2604

FOR IMMEDIATE RELEASE March 11, 1976 jy
TREASURY TO AUCTION $3.0 BILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $3.0 billion of 2-year notes to
refund $2.3 billion of notes maturing March 31, 1976, and to raise $0.7 billion
of new cash. The public holds $2,143 million of the maturing notes and $ 145 million
is held by Government accounts and the Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities. Additional amounts of
the notes may be issued to Federal Reserve Banks as agents of foreign and international monetary authorities for new cash.
The notes now being offered will be Treasury Notes of Series K-1978 dated
March 31, 1976, due March 31, 1978 (CUSIP No. 912827 FL 1) with interest payable
semiannually on September 30, 1976, March 31, 1977, September 30, 1977, and
March 31, 1978. The coupon rate will be determined after tenders are allotted.
The notes will be issued in registered and bearer form in denominations of $5,000,
$10,000, $100,000 and $1,000,000, and they will be available for issue in bookentry form to designated bidders. Payment for the notes may not be made through
tax and loan accounts.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Thursday,
March 18, 1976, 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 March 17. Tenders must, be in the amount of $5,000 or a
multiple thereof, and all tenders must state the yield desired, if a competitive
tender, or the term "noncompetitive", if a noncompetitive tender. 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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, and not in terms of a price. Tenders at the lowest yields, I
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 1/8 of 1 percent necessary to make
the average accepted price 100.000 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 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
sha 1 be final. Tenders at a yield that will produce a price less than 99.501
will not be accepted. Noncompetitive bidders will be required to pay the average
price of accepted competitive tenders; the price will be 100.000 or less.
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 tinal. Subject to these reservations, noncompetitive tenders for $500,000 or

WS-711
(OVER)

fits
less, and all tenders from Government accounts and the Federal Reserve Banks
for themselves and as agents of foreign and international monetary authorities,
will be accepted in full at the average price of accepted 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 Government securities and borrowings thereon, may submit tenders
for the account of customers, provided the names of the customers are set forth
therein. 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, foreign central banks and foreign States, dealers who make
primary markets in Government securities and report daily to the Federal Reserve
Bank of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts. Tenders from
others must be accompanied by payment of 5 percent of the face amount of notes
applied for. 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 with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Wednesday,
March 31, 1976. Payment must be in cash, 8% Treasury Notes of Series H-1976,
which will be accepted at par, in other funds immediately available to the
Treasury by the payment date 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) Thursday, March 25, 1976, 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) Tuesday, March 23, 1976, if the check is drawn on a bank in another district.
Checks received after the dates set forth in 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 will be canceled and the deposit with the
tender up to 5 percent of the amount of notes allotted will be subject to
forfeiture to the United States.

oOo

TheDepartmentoftheJREASURY
ASHINGT0N,D.C. 20220
WASH

TELEPHONE 964-2041

£3
M a r c h 18

FOR IMMEDIATE RELEASE

'

1976

RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted $3.0 billion, including $0.1 billion
from Government accounts and Federal Reserve Banks for their own
account, of the $4.9 billion of tenders received for the 2-year
notes, Series K-1978, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield

6.71%
6.80%
6.76%

1/

The interest rate on the notes will be 6-3/4%
the above yields result in the following prices:
Low-yield price 100.074
High-yield price
Average-yield price

At the 6-3/4% rate,

99.908
99.982

The $3.0 billion of accepted tenders includes 10% of the amount
of notes bid for at the highest yield and $0.7 billion of noncompetitive
tenders from the public accepted at the average yield.
In addition, $0.1 billion of tenders were accepted at the averageyield price from foreign and international monetary authorities.
1/Excepting 3 tenders totaling $290,000

WS-7 29

For information on submitting tenders in the Washington, D. C. area: PHONE WO4-2604
FOR IMMEDIATE RELEASE March 16, 1976
TREASURY TO AUCTION $2.5 BILLION OF NOTES
The Department of the Treasury will auction $2.5 billion of 4-year 10-1/2-month
notes to raise new cash. Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities at the
average price of accepted tenders.
The notes now being offered will be Treasury Notes of Series E-1981 dated
April 5, 1976, due February 15, 1981 (CUSIP No. 912827 FM 9), with interest payable
on August 15, 1976, and thereafter on February 15 and August 15. The coupon rate
will be determined after tenders are allotted. 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, and they will be available for issue in book-entry form to designated
bidders.
Payment for the notes must be made on April 5, 1976. Payment may not be
made through tax and loan accounts.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Wednesday,
March 24, 1976, 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 Tuesday, March 23. Each tender must be in the
amount of $1,000 or a multiple thereof, and all tenders must state the yield
desired, if a competitive tender, or the term "noncompetitive", if a noncompetitive
tender. 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.
Competitive tenders must be expressed in terras of annual yield in two decimal
places, e.g., 7.11, 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 1/8 of 1 percent necessary to make the
average accepted price 100.000 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 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 99.001 will not be accepted.
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 $500,000 or
less, will be accepted in full at the average price of accepted competitive tenders,
which price will be 100.000 or less.

WS-724

-2Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and dealers who make primary markets in Government securities and
report daily to the Federal Reserve Bank of New York their positions with respect
to Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally-insured savings and loan associations, States,
political subdivisions or instrumentalities thereof, public pension and retirement
and other public funds, international organizations in which the United States holds
membership, foreign central banks and foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank of
New York their positions with respect to Government securities and borrowings
thereon, Federal Reserve Banks, and Government accounts. Tenders from others must
be accompanied by payment of 5 percent of the face amount of notes applied for.
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 notes with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Monday, April 5,
1976, at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt
in cash, in other funds immediately available to the Treasury by April 5, 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) Wednesday,
March 31, 1976, 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 the
case of the Treasury, or (2) Monday, March 29, 1976, if the check is drawn on a
bank in another district. Checks received after the dates set forth in 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 will be canceled
and the deposit with the tender up to 5 percent of the amount of notes allotted will
be subject to forfeiture to the United States.

oOo

FOR IMMEDIATE RELEASE

March 24, 1976

RESULT. OF AUCTION OF 4-YEAR 10-1/2 MONTH TREASURY NOTES
The Treasury has accepted $2.5 billion of the $5.1 billion of
tenders received from the public for the 4-year 10-1/2 month notes, Series
E-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 7.35% 1/
Highest yield
Average yield

7.39%
7.38%

The interest rate on the notes will be 7-3/8% . At the 7-3/8% rate,
the above yields result in the following prices:
Low-yield price 100.101
High-yield price
Average-yield price

99.940
99.980

The $2.5 billion of accepted tenders includes 100% of the amount of notes
bid for at the highest yield and $0.5 billion of noncompetitive tenders accepted
at the average yield.
In addition, $150 million of tenders were accepted at the average-yiela
price from foreign and international monetary authorities.
Attention is directed to the fact that the coupon rate of 7-3/8% on the
new notes (Series E-1981) is the same as that on previously issued Treasury
Notes (Series C-1981) and that both notes will mature on February 15, 1981.
However, interest to be paid on August 15, 1976, will be $26.74451 per thousand
for the new Series E-1981 notes and $36.87500 per thousand for the existing
Series C-1981 notes. After August 15, 1976, both Series C-1981 and E-1981 will
have the same semi-annual interest payments, $36.87500 per thousand. Three
factors will distinguish the two notes; the series designation, the issue date,
and the CUSIP number. Series C-1981 was issued on February 18, 1975 (CUSIP
No. 912827 ED 0 ) , and Series E-1981 will be issued on April 5, 1976 (CUSIP
No. 912827 FM 9 ) .
1_/ Excepting 5 tenders totaling $6,530,000

WS-739

TheDepartmentoftheJREASURY
ASHINGTON, D.C. 20220
WASHING"

TELEPHONE 964-2041

F7
April 5, 1976

FOR RELEASE AT 11:45 A.M.

TREASURY OFFERS $2.5 BILLION OF TREASURY BILLS
The Department of the Treasury, by this public notice, invites tenders for
$2,500,000,000, or thereabouts, of 14- day Treasury bills to be issued
April 8, 1976, representing an additional amount of bills dated October 23, 1975,
maturing April 22, 1976 (CUSIP No. 912793 ZD 1).
The bills will be issued on a discount basis under 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 all Federal Reserve Banks and Branches up to
1:30 p.m., Eastern Standard time, Wednesday, April 7, 1976. Tenders will not be
received at the Department of the Treasury, Washington. Wire and telephone
tenders may be received at the discretion of each Federal Reserve Bank or
Branch. Tenders must be for a minimum of $10,000,000. Tenders over $10,000,000
must be in multiples of $1,000,000. The price on tenders 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 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

ex^r/ 01 ^ ^

SUCh tenders

'

0thers wil1 n

°t be permitted to submit tenders

except for their own account. Tenders will be received without deposit from
incorporated banks and trust companies and from responsible and recognized
dealers in investment securities. Tenders from others must be accompanied by
a?raccomPaniedrbvnan°' the **" an°Unt °f bU1S aPPlied for> -less the tenders
! " « ! ™
guaranty of payment by an incorporated bank or
amount^nd^rTc™ XoT*^ *' ^ T~™ °f * • ,
tenders wil1 be
of the acceptance oAejection thereof
The
^ " ^
^
reserves the right to a
r
'
Secretary of the Treasury expressly
J
and his actio
7
u
' 3 n y ° r a 1 1 ten<*ers, in whole or in part,
dtia n i s
action in any such resoprt Qhaii K« C • i
S ttlement for
tenders in accordance with the bids must ll !?
*
accepted
e m a d e at the
or Branch on Anr-n » ioil
?. ,
Federal Reserve Bank
or
I'.S Branch
~65 on April 8,1976, in immediately available funds.

rr
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.

WASHINGTON, D.C. 20220

TELEPHONE 964-2041

For information on submitting tenders in the Washington, D. C. area:

PHONE WO4-2604

FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE April 28, 1976
TREASURY TO OFFER $3.5 BILLION OF 10-YEAR NOTES
The Department of the Treasury will offer to sell $3.5 billion of 10-year notes
as one of three securities to be issued for the purpose of refunding debt maturing
May 15 and raising new cash. The amount of the offering may be increased by a
reasonable amount to the extent that the total amount of subscriptions for $500,000
or less accompanied by 20% deposit so warrants. Details of the other two securities
are contained in separate announcements. Additional amounts of the notes may be
issued to Government accounts and Federal Reserve Banks for their own account.
The notes now being offered will be 7-7/8% Treasury Notes of Series A-1986
dated May 17, 1976, due May 15, 1986 (CUSIP No. 912827 FP 2). They will be sold
at par. Interest will be payable on a semiannual basis on November 15, 1976,
and thereafter 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
and they will be available for issue in book-entry form to designated subscribers.
Subscriptions will be received through Wednesday, May 5, 1976, at any Federal
Reserve Bank or Branch and at the Bureau of the Public Debt, Washington, D. C. 20226;
provided, however, that subscriptions up to $500,000 accompanied by a 20% deposit
will be considered timely received if they are mailed to any such agency under a
postmark no later than Tuesday, May 4, 1976. Subscriptions must be in the amount
of $1,000 or a multiple thereof. The notation "SUBSCRIPTION FOR TREASURY NOTES"
should be printed at the bottom of envelopes in which subscriptions are submitted.
Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report
dally to the Federal Reserve Bank of New York their positions with respect to
Government securities and borrowings thereon, may submit subscriptions for the account
of customers, PROVIDED THE NAMES OF THE CUSTOMERS ARE SET FORTH THEREIN. Others
will not be permitted to submit tenders except for their own account.
The Secretary of the Treasury expressly reserves the right to accept or reject
any or all subscriptions, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, subscriptions for $500,000, or less,
will be allotted in full provided that 20% of the face value of the securities fdr
each subscriber is submitted as a deposit. Such deposits must be submitted to the
Federal Reserve Bank or Branch, or to the Bureau of the Public Debt, with the
subscription; this will apply even if the subscription is for the account of a
commercial bank or securities dealer, or for one of their customers. Guarantees
in lieu of deposits will not be accepted. Allotment notices will not be sent
to subscribers making the 20% deposit.
Subscriptions not accompanied by the 20% deposit will be received subject to
a percentage allotment irrespective of the size of the subscription. No allotment
will be made of these subscriptions until and unless the subscriptions accompanied
by 20Z deposit pursuant to the preceding paragraph have been allotted in full. On
such subscriptions a 5Z deposit will be required from all subscribers except
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,

WS-820
(OVER)

-2-

7*

International organizations in which the United States holds membership, foreign
central banks and foreign States, dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon, Federal Reserve Banks,
and Government accounts. Commercial banks and securities dealers authorised to
enter subscriptions for customers will be required to certify that they have
received the 5% deposit from their customers or guarantee payment *f the deposits.

Subscribers may submit subscriptions under each of the provisions of the
two foregoing paragraphs, i.e., up to $500,000 with a 20Z cash deposit and in
any amount with a 5% deposit, Each of the two types of subscriptions will be
treated as separate subscriptions.
Payment for accepted subscriptions must be completed on or before Monday,
May 17, 1976. Payment must be in cash, 6-1/2% Treasury Notes of Series B-1976
or 5-3/4X Treasury Notes of Series E-1976, which will be accepted at par, In other
funds immediately available to the Treasury by the payment date or by check
drawn to the order of the Federal Reserve Bank to which the subscription is
submitted, or the United States Treasury if the subscription is submitted to it,
which must be received at such Bank or at the Treasury no later than: (1) Wednesday,
May 12, 1976, 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) Monday, May 10, 1976, if the check is drawn on a
bank in another district. Checks received after the dates set forth in 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 will be
canceled and the deposit with the subscription up to 5 percent of the amount of
notes allotted will be subject to forfeiture to the United States.
Bearer notes will be delivered on May 17, 1976, except that if adequate
stocks of the notes are not available on that date, the Department of the
Treasury reserves the right to issue interim certificates on that date. The
certificates would be bearer securities exchangeable at face value for 7-7/8%
Treasury Notes of Series A-1986 when available.

oOo

WASHINGTON, D.C. 20220
.

TELEPHONE 964-2041.
/78P

9/
For information on submitting tenders in the Washington, D. C. area:

PHONE WO4--2604

FOR RELE/.SE WHEN AUTHORIZED AT PRESS CONFERENCE April 28, 1976
TREASURY TO AUCTION $2.0 BILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2.0 billion of 2-year notes
as one of three securities to be issued for the purpose of refunding debt maturing
May 15 and raising new cash. Details of the other two securities are contained in
separate announcements. Additional amounts of the notes may be issued to Government accounts and Federal Reserve Banks for their own account in exchange for notes
maturing May 15, 1976, and to Federal Reserve Banks as agents for foreign and
international monetary authorities for new cash only.
Th« notes now being offered will be Treasury Notes of Series L-1978 dated
May 17, 1976, due April 30, 1978(CUSIP No. 912827 FN 7) with interest payable
on a semiannual basis on October 31, 1976, and thereafter on April 30 and October 31.
The coupon rate will be determined after tenders are allotted. The notes will be
issued in registered and bearer form in denominations of $5,000, $10,000, $100,000
and $1,000,000 and they will be available for issue in book-entry form to designated
bidders.
Tenders will be received up to 1:30 p.m., Eastern Daylight Saving time,
Tuesday, May 4, 1976, a t 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 Monday, May 3. Tenders must be in the amount of $5,000 or a
multiple thereof, and all tenders must state the yield desired, if a competitive
tender, or the term "noncompetitive", if a noncompetitive tender. 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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 rate will be determined at a 1/8 of one percent increment that translates
into an average accepted price close to 100.000 and a lowest accepted price above
99.750. That rate of interest 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 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. Noncompetitive bidders will be required to pay
the average price of accepted competitive tenders. /BIDDERS SUBMITTING NONCOMPETITIVE
I v N ? ^ L S H 0 U L D R E A L I Z E T H A T " I S P 0 S S I B L E THAT THE AVERAGE PRICE MAY BE ABOVE PAR,
IN U-HICH CASE THEY WOULD HAVE TO PAY MORE THAN THE FACE VALUE FOR THE NOTES.
WS-S19

(OVER)

-2-

?£>

The Secretary of the Treasury expressly reserves the right to accept .
,. ..
,
or
rv\.^
^ny or all tenders, in whole or in part, and his action in any such respect s m l i
' final. Subject to these reservations, noncompetitive tenders for $500,000 or
,5s,
nd a 1 1
.
tenders from Government accounts and the Federal Reserve Banks
1
i"
•'•r themselves and as agents of foreign and international monotarv author! r -•"•' oe accepted in full at the r.ven,;fc rrice ot accepted competitive render-.
Commercial banks, which for this purpose are defined as banks accepting
• icoand deposits, and dealers who make primary markets in Government securities
c,c, report daily to the Federal Reserve Bank of New York their positions wi t r.
r-^pec, to Government securities and borrowings thereon, may submit tenders
"*r Li- account of customers, provided the names of the customers arc set for.r,
U..M. i. . Others will not be permitted to submit tenders except for their own
3v.'")0 1 .

lenders will be received without deposit from commercial and other barks
l..r their own account, Federally-insured savings and loan associations, Sr.tr-.
political subdivisions or instrumentalities thereof, public pension and ret ire'ri.e r t
ami other public funds, international organizations in which the United Star.holds membership, foreign central banks and foreign States, dealers who mak>
primary markets in Government securities and report daily to the Federal RescV-vBonk of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts, Tenders i-on
others must be accompanied by payment of 5 percent of the face amount of n e t applied for. However, bidders who submit checks in payment on tenders subnitt.V
d n ictly to a Federal Reserve Bank or the Treasury may find it necessary to submit
full payment with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Monday, May 17 J >7^
Payment must be in cash, 6-1/2% Treasury Notes of Series B-1976 or 5-3/4% T r e a s V /
Notes of Series E-1976, which will be accepted at par, in other funds immediacy'
available to the Treasury by the payment date or by check drawn to the order r- the
Federal Reserve Bank to which the tender is submitted, or the United State* Treacry
if the tender is submitted to it, which must be received at such Bank or at rne
Treasury no later than: (1) Wednesday, May 12, 1976, if the check is drawn on ;
bank m the Federal Reserve District of the Bank to which the check is submit-1.-'
or the Fifth Federal Reserve District in case of the Treasury, or (2) Mondav.
May 10, 1976, if the check is drawn on a bank in another district. Checks rec-ivf-d
after the dates set forth in the preceding sentence will not be accepted u n l ^ .
they are payable at a Federal Reserve Bank. Where full payment is not complex,'
on time, the allotment will be canceled and the deposit with the tender up to 5
percent of the amount of notes allotted will be subject to forfeiture to the
United States.

oOo

FOR IMMEDIATE RELEASE

May 7, 1976

RESULTS OF OFFERING OF 7-7/8 PERCENT, 10-YEAR TREASURY NOTES
Preliminary figures indicate that approximately
41,000 subscriptions totalling $8.9 billion were
received from the public for the offering of $3.5 billion
of 7-7/8 percent, 10-year Treasury Motes of Series A-1986.
Due to the substantial response to the offering,
the Secretary of the Treasury has exercised his authority
to increase the size of the amount of the offering to
accommodate all subscriptions accompanied by a 20 percent
deposit and a 15 percent allotment on those subscriptions
not accompanied by a 20 percent deposit.
Subscriptions for $500,000 or less accompanied by a
deposit of 20 percent of the face value of the notes
applied for totalled $3.9 billion and will be allotted
in full. Subscriptions not accompanied by the 20 percent
deposit totalled $5 billion and will be allotted 15 percent.
Approximately $4.7 billion of the notes will be issued
to the public. In addition, $0.5 billion of the notes will
be allotted to Government accounts and Federal Reserve
Banks for their own account.

WS-841

TheDeparimentoftheTREASURY I f l l M T M
WASHINGTON, OX. 20220

TELEPHONE 964-2041

U U Lb U U

\-J

^

FOR IMMEDIATE RELEASE

May 7, 1976

RESULTS OF AUCTION OF 23-3/4 YEAR TREASURY BONDS
AND SUMMARY RESULTS OF MAY REFINANCING
The Treasury has accepted $0.8 billion of the $1.5 billion of
tenders received from the public for the 23-3/4 year 7-7/8% bonds
auctioned today. The range of accepted competitive bids was as follows:
Approximate Yield
To First Callable
Price
High
Low
Average

Date

97.50 1/
96.36
96.73

8.13%
8.26%
8.22%

To Maturity
8.11%
8.22%
8.19%

The $0.8 billion of accepted tenders includes 19% of the amount
of bonds bid for at the low price, and $20 million of noncompetitive
tenders accepted at the average price.
In addition, $0.1 billion of tenders were accepted at the average
price for Government accounts and Federal Reserve Banks.
1/ Excepting 8 tenders totaling $1,001,000
SUMMARY RESULTS OF MAY REFINANCING
Through the sale of the three issues offered in the May refinancing the
Treasury raised approximately $3.6 billion of new money and refunded $5.5
billion of securities maturing May 15, 1976. The following table
summarizes the results:
New Issues
6-1/2% 7-7/8% 7-7/8% Nonmar- Total Maturing
Net New
Notes
Notes
Bonds
ketable
Securities Money
4/30/78 5/15/86 2/15/95-Special
Held
Raised
2000
Issues
Public
$2.0
$4.7
$0.8
$$7.5
$4.1
$3.4
Government Accounts
and Federal Reserve
Banks
0.3
Foreign Accounts
for Cash

0.2

0.5

0.1

0.5

1.4

1.4

-

-

-

0.2

-

TOTAL $2.5 $5.2 $0.9 $0.5 $9.1 $5.5 $37o~

WS-845

0.2

TREASURY ANNOUNCES SALE OF 2-YEAR NOTES AND 52-WEEK BILLS
The Department of the Treasury announced today that
it will sell to the public $2.25 billion of two-year notes
to mature May 31, 1978. The notes will be sold at a yield
auction on Wednesday, May 19, for settlement Tuesday, June 1.
Monday, May 31, is a Federal holiday. The proceeds will be
used to retire $1.5 billion of maturing notes held by the
public and to raise $750 million new cash.
The Treasury indicated that it expects to offer, on or
about May 18, $2.9 billion of 52-week bills maturing May 31,
1977. The proceeds will be used to retire $2.4 billion of
52-week bills maturing June 1, 1976, and to raise $500 million
new cash.
The Treasury also said that it would announce its plans
with respect to a possible note issue in the four-year
intermediate maturity area sufficiently prior to the two-year
note auction on May 19, so that the market would be fully
informed of these plans prior to the auction.

WS-857

9£

For information on submitting tenders in the Washington, D. C. area: PHONE W04-2604
FOR RELEASE AT 4:00 P.M. May 13, 1976
TREASURY TO AUCTION $2.25 BILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2..25 billion of 2-year notes to
refund $1.5 billion of notes held by the public maturing May 31, 1976, and to raise
$750 million of new cash. Additional amounts of the notes may be issued to
Government Accounts and Federal Reserve Banks for their own account in exchange for
$0.1 billion of maturing notes held by them, and to Federal Reserve Banks as agents
of foreign and international monetary authorities for new cash only.
The notes now being offered will be Treasury Notes of Series M-1978 dated
June 1, 1976, due May 31, 1978 (CUSIP No. 912827 FQ 0) with interest payable on a
semiannual basis on November 30, 1976, May 31, 1977, November 30, 1977, and May 31,
1978. The coupon rate will be determined after tenders are allotted. The notes
will be issued in registered and bearer form in denominations of $5,000, $10,000,
$100,000 and $1,000,000, and they will be available for issue in book-entry form
to designated bidders. Payment for the notes may not be made through tax and loan
accounts.
Tenders will be received up to 1:30 p.m., Eastern Daylight Saving time, Wednesday,
May 19, 1976, 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 May 18. Tenders must be in the amount of $5,000 or a
multiple thereof, and all tenders must state the yield desired, if a competitive
tender, or the term "noncompetitive", if a noncompetitive tender. Fractions may
not be used in tenders. The notation "TENDER FOR TREASURY NOTES" should be p-inted
at the bottom of envelopes in which tenders are submitted.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 rate will be determined at a 1/8 of one percent increment that translates
into an average accepted price close to 100.000 and a lowest accepted price above
99.750. That rate of interest 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 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. Noncompetitive bidders will be required to pay the average
price of accepted tenders. BIDDERS SUBMITTING NONCOMPETITIVE TENDERS SHOULD REALIZE
THAT IT IS POSSIBLE THAT THE AVERAGE PRICE MAY BE ABOVE PAR, IN WHICH CASE THEY
WOULD HAVE TO PAY MORE THAN THE FACE VALUE FOR THE NOTES.
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
3e final. Subject to these reservations, noncompetitive tenders for $500,000 or
(OVER)

-2less, and all tenders from Government accounts and the Federal Reserve Banks
for themselves and as agents of foreign and international monetary authorities,
will be accepted in full at the average price of accepted 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 daiJy to the Federal Reserve Bank of New York their positions with
respect to Government securities and borrowings thereon, may submit tenders
for the account of customers, provided the names of the customers are set forth
therein. 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, foreign central banks and foreign States, dealers who make
primary markets in Government securities and report daily to the Federal Reserve
Bank of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts. Tenders from
others must be accompanied by payment of 5 percent of the face amount of notes
applied for. 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 with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Tuesday, June 1,
1976. Payment must be in cash, 6% Treasury Notes of Series M-1976, which will be
accepted at par, in other funds immediately available to the Treasury by the payment date 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) Wednesday. Mav 26 ; 1976, if the check is drawn on a bank in the Federal Reserve District
or the Bank to which the check is submitted, or the Fifth Federal Reserve District
in case of the Treasury, or (2) Monday, May 24, 1976, if the check is drawn on a
bank in another district. Checks received after the dates set forth in 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 will be canceled
and the deposit with the tender up to 5 percent of the amount of notes allotted will
be subject to forfeiture to the United States.

oOo

For information on submitting tenders in the Washington, D. C. area:
FOR RELEASE AT 3:45p.M.

PHONE W04-2604

May 18, 1976

TREASURY TO AUCTION $2.0 BILLION OF 4-YEAR 1-MONTH NOTES
The Department of the Treasury will auction $2.0 billion of 4-year 1-month
notes to raise new cash. Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities at the
average price of accepted tenders.
The notes now being offered will be Treasury Notes of Series D-1980 dated
June 10, 1976, due June 30, 1980 (CUSIP No. 912827 FR 8) with interest payable
on December 31, 1976, and thereafter on June 30 and December 31. The coupon rate
will be determined after tenders are allotted. They will be issued in registered
and bearer form in denominations of $1,000, $5,000, $10,000, $100,000 and $1,000,000,
and they will be available for issue in book-entry form to designated bidders.
Payment for the notes must be made on June 10, 1976. Payment may not be made
through tax and loan accounts. Definitive notes in bearer form will not be available on
June 10, but will be delivered on or about June 16, 1976. Purchasers of bearer notes
may elect to receive interim certificates on June 10, 1976, which shall be bearer
securities exchangeable at face value for Treasury Notes of Series D-1980 when available.
Tenders will be received up to 1:30 p.m., Eastern Daylight Saving time,
Thursday, June 3, 1976, 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 June 2. Each tender must be in the amount of $1,000
or a multiple thereof, and all tenders must state the yield desired, if a
competitive tender, or the term "noncompetitive", if a noncompetitive tender.
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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 rate will be determined at a 1/8 of one percent increment that translates
into an average accepted price close to 100.000 and a lowest accepted price above
99.000. That rate of interest 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
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. Noncompetitive bidders will be required to pay the average
price of accepted tenders. BIDDERS SUBMITTING NONCOMPETITIVE TENDERS SHOULD
REALIZE THAT IT IS POSSIBLE THAT THE AVERAGE PRICE MAY BE ABOVE PAR, IN WHICH
CASE THEY WOULD HAVE TO PAY MORE THAN THE FACE VALUE FOR THE NOTES.

WS-867

(OVER)

-2The 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 $500,000 or
less, will be accepted in full at the average price of accepted 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
Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally-insured savings and loan associations, States,
political subdivisions or instrumentalities thereof, public pension and retirement
and other public funds, international organizations in which the United States
holds membership, foreign central banks and foreign States, dealers who make
primary markets in Government securities and report daily to the Federal Reserve
Bank of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts. Tenders from
others must be accompanied by payment of 5 percent of the face amount of notes
applied for. 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 notes with their tenders in order to meet the time limits
pertaining to checks as hereinafter set forth. Allotment notices will not be
sent to bidders who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Thursday, June 10,
1976. Payment must be in cash, in other funds immediately available to the Treasury
by the payment date 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) Monday, June 7, 1976, 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) Thursday, June 3, 1976, if the check
is drawn on a bank in another district. Checks received after the dates set forth
in 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 will be
canceled and the deposit with the tender up to 5 percent of the amount of notes
allotted will be subject to forfeiture to the United States.

The Department of theJREASURY
WASHWSTqN, D.C 20220

TELEPHQW6 96f204!

FOR IMMEDIATE RELEASE

May 19, 1976

PRELIMINARY RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted approximately $2,250 million
of $4,717 million of tenders received from the public for
the 2-year notes, Series M-1978, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield

7.08% 1/
7.19%
7.16%

The interest rate on the notes will be 7-1/8%. At the
7-1/8% rate, the above yields result in the following prices:
Low-yield price 100.082
High-yield price
Average-yield price

99.881
99.936

The $2,250 million of accepted tenders includes 56% of
the amount of notes bid for at the highest yield and $369
million of noncompetitive tenders accepted at the average
yield.
In addition, $302 million of tenders were accepted at
the average-yield price from Government Accounts and Federal
Reserve Banks for their own account in exchange for notes
maturing May 31, 1976 ($82 million), and from Federal Reserve
Banks as agents for foreign and international monetary authorities for new cash (S220 million).
1/ Excepting 6 tenders totaling $7,260,000

WS-870

Transcript tf Proceedings

UNITED STATES DEPARTMENT OF THE TREASURY

Washington, D.C.

Press Conference

Room 4121
Treasury Building
15th & Penn., N.W.
Washington, D.C.
April 28, 1976

Acme Reporting Company
Official Reporters
1411 K Street, N.W.
Washioj oft, D.C. 20005
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mi. YEO: Thank you vary rauch for b^ing here. We

2

v/ould like to announce?, today three new securities to refund

3

$4 billion of notes maturing on May 15 and to raise

4

approximately $2-1/4' billion of the new Money.

5

X would ii:'->2 to begin by describing the three new

6

issues. Then X trill have some comments on how they fit in

7

with our authorised financing strategy.

8

The first new issue is $2 billion of a one-year

9

11-1/2 month note which will sell on a yield auction basis

10 next Tuesday, May 4th„ This in effect picks up the two year
11 lot. It fits in with our two year note cycle.
12 The second new issue is a 10 year 7-7/8 percent
13 note priced at par, with the books opon through next V7ednesday#
U

Kay 5. The amount no are offering is $3-1/2 billion. This

15 is cur fir^t use of the 10-year note authority.
16 We are trying to build on a successful use of the
17 pricing technique we experimented with in the February
18 financing. You recall seven year S percent note. v?e are making
19 a slight modification in our tender requirements. We are
20 offering the opportunity to m^ike tenders in amounts of up
21 to 500,000 acco&pan.tcd by a 20 percent cash down payment.
22 Thsse tenders will be honored in full before any other tenders
23 are accept-id. In addition to this, 500,000 tendsrs subsci'ibsrs
24 '?ill have the option cf waking tenders in any erccunt subject
25

to the USU.TI! dotvn payment rule. Commercial banks and reporting

/0</

dealers may submit for the account o f others b u t must provide
the individual naiae and anratnts. Customer tenders cannot
be coisbined under one nasa*
The third issue is an additional $75ji million of
the outstanding 7-7/3 of 1SS5 to 20GG. There is about
$600 million privately hold in this issue now* and this
ought to make a bsfeter trading issua* Current quotas ht:ve
been around 9D-2S/33,
When we last discussed in this context our debt
managerasnt ob;; active ia January I related that osae objective
was to :rjLr»iiti3s reliance on tlx& bill : crochet, .and in zs!u
co.ansct.v^A ua haia reduced, recent weekly bill auctions as wellas recant additions to our annual bills„
ftih&t v:-^ are attempting to construct is ~ baXiinccd
dobt structure, or,:-D that T.?ill not. proviso a legacy for thu
future iii terics of •.•r.aosive amounts of Fjhort-tera fin^nc;^
suiting from ths ^rsasury bsing in the niarJcst coi23t«.;itiy and
on tv very sic.iiifiT;a:5t Koala.
A dobi; structure that ivi-rc-lvcs a considerable
•r-io"Mt of -jhosrc-•::.,:?:•:=« ys-T-turifci&a results :u> irr::rc:;:i.'2ad

vc?-ct:'.J.:itvf r.vr:>-_.-:-;.d ef ficr'.Gr.cy a-:-.d cv^-r ti;.o v;or-:.:r-^. of event

.«. •«-.:;: -. - lyvr *\;..:r\ ov'-r-: th~- •;,--'• -V-T--.•.--,•* .-«„-.?•

/o'T \
4
1

I would like tv> r.alk a little bit about the context in

2 which we are operating. Up to the present our requirements
3 for this half-year have been less than anticipated in
4 January. This has relieved pressures on markets, especially
5 the bill market.
6 We still have material borrowing to do throughout
7 the end 0f the fiscal year. Our first tentative look at
8 the transition quota indicates more heavy acquirements then.
9 Our immediate needs, I vrould say, are additional heavy
10 requirements rather than more heavy requirements•
11 Additional heavy requirements,- then, our iiarnediate
12 needs are first to handle the low point in our cash balance
13 in mid-June &.&&., second, to end June with ~t sufficient
financing
14
balance to keep the July-September/job in readily manageable
15

f-rra.

15 Our requirement from now until mid-June, including
17 the 2-1/4 billion of nev? money we are announcing today is
18 in the range of 9 to 12 billion. That means after we have
19 completed this financing, we will still have some 7 to $10
20 billion of net ns'.-j money to raise by about Juno .15.
2i This could include additions to the May 31, 2-year note cycle,
22 the l'-year bill cn Juno 1, cash management bills, and
23 perhaps <?. 4-year, June 30r 1980, not*?..
2/j QUESTION? Bo you want to go bash over all that

gc ! again, Kr. Yso? .Start i?ith the requir = :r«GiYcr; from now r.r.t
!

/6fi
1

mid-June, please.

2

MR. YEO: Sure. Our requirement from now until

3

mid-Jur.e, including the 2-1/4 billion of new money we are

4

announcing today is in the range of 9 to 12 billion. This

5

means after we have completed our financing we will still

e

have some 7 to 10 billion of net new money to raise by about

7

June 15. This could include additions to the May 31

8

two-year nets cycle. This is a list in effect of the various

9

•options we would have.

10

it is in no sense a forecast. This could include

11

additions to the May 31 two-year note cycle, one-year bill

12

on June 1, cash management bills, and perhaps a four-year

13

June 30, 1980 note for payment sometime in early.June.

14

Given our July-September requirements our.present

15

objective would bs to finish the fiscal year with a cash

16

balance in the area of 12 billion. There is a two-year

17

note at the end of June, as well as another one-year bill.

18

We can consider adding to both end of June securities which

19

would give us a fairly substantial amount of cash management

20

bills to cover our June low noinj-

21
22

I would like to emphasize that what we are trying
outline
to do is to give you ;-n/
of the various ways in which

23

the raining fxr^^g job baleen now and the end of

24

Jun*, the z-:\ of the- fiscal y^,;,

25

Finally, os. the basis of cur tsrtimates of the

c&1,

r* handled.

/61\
*

transition quarter we will apparently need to borrow an

2

additional $15 to $20 billion in the market.

3

QUESTION: That is new cash, July to September?

4 MR. YEO: Yes, sir. That is our financing. That
S is the context within which wo are operating.
6 I would be happy to try and answer any questions.
7 Yes, sir?
8 QUESTION: For the benefit of those who were not
9 here for your January crystal ball session, could you put
10 the anticipation — ths present anticipation of needing
11 $9 to $12 million into some sort of perspective in relation.
12 to what you ware looking for in January?
13 MR. YEOs Yes, One way of looking at it was we
14 anticipated then market borrowing of $35 to $40.billion for
15 the half year? the second half of the current fiscal year.
16 On the basis of cur present estimates our market borrowing
17 is likely to bs 31 to 35 billion. That redu.ct5.on is largely
16 explained by lower expenditures than had been anticipated.
19 That is one way of looking at it.
20 1* will give you more detail. i?e said then that

21 v;e anticipated rear.';s.:t borrowing as X said as 31 to 35 billion,
22 In part, the p&ttorn of our borrowing was influenced by what
23 we think was a cht'.!nc-'i in the receipts patc?5?.'n. So X thins
that
24
that the way to get a fisc on this is
we had indicated
market borrowing of Z5 to 40 ar.d our prs-^ent estimate? are

/

31 to 35, i:». that area*

—

QVE35TIGEJ: 7vro those niv7 cns-i figures r 35 to '10
31 to 352KR. YEO: Y3S.
Q«BST3!0H: I'lhsn yos say roquirs-uaiitc you am
actually borrowing substantially as»ro thaa.you need. Xn *^
cense, oxe these figurfcs using parallel —
ilR'. YKOs So, wo srr.: not Lcrroi/iivv r.or--j tL-v=.r: wo

QU£STI0I-7: But rou ar,s anticipating borrowing. I
January v"£o you a:.v.:icj.;;-aiii:7 a cash 2:-aItriC3 in the ra^o o
12 billion?
MP.. Y;20: EO. 3to v.^;i:7i-uVuc£ vi can'h bat«:i-i;i, as
you recall, in the raiiC-fi of 9 billion.
QU5UT"./:Oi2: :.'*t t'.ve ciad. of Clin-?.?

QhlTstTm-. So does 3 billies of that represent a
>. f. jhor cash balp.nr.irj Xr-thzr th?.n a hi-"h:-)r o'c^-iii^-itare?
.•:iR. 'r^G: ;;o. In effect it ir: :.•.••;• j usted co that 2
h?d a constant.
•^JEGl'lG-3: So in othar f/evd.-j --.-cit ymi ara ss-.yiiv;
9 billion
r.i-~.- y 0 7. arc -O.^-iir.;; or* r.n
. ^ a ba:.-n-o, a n 3 Jus..'i
•JJ ..c ..;.•.•.•7v^^ li^:;: ;v.;\-.-2 v.v c.-'-just t:.ut 3::

32:
>zt iri c o r r e c t s

QUESTxCSi: £n other words, you are taking 3 billion
by the end of June that you vrould rathsr take now because you
can get it now rather than take it later?
MR. YEO; No. They are going to borrow^ We
present!?/ plan to ond June with a $12 billion cash balance.
That is because of the significant borrowing requirements
that we have even given that in the transitional quarter.
Cur cash balance will drop very sharply at the -snd of July.
so we are in no way in no sense borrowing money that we don't
need. What we are trying to do is to even out the pattern
of borrowing so tr.-'t we don't have a bulge in borrowing.
QUESTION: I was not suggesting that. I was merely
trying to pursue S'-'.o's question. Maybe 1 should pursue it
by asking why the Treasury has revised the 9 billion to 12
billion as the de&ired . Ju&£ 30 cash balance?
MR. YEO: vie revised it because as we move into
the transition quarter a priority that we have put on trying '
to maintain a more even, a deliberate pace of borrowing.
QUESTION:. S'Then you talk .-about receipt shift are
we to assuivs that you are going to be borrowing "heavier in
the transition quarter than you originally estimated?
MR. YEOs •;o. This was within the context of the
second half of the fi&cal ye?.r. The principal explanation
for the reduction is: cur Kiark'rit borrowing requirement, having

nothing to do with the. prt;-.c.rir. of receipts, is that it ap^ars

!!•

t

that expenditures are running lower than *?-« had anticipated.

2

QUESTION: Is that bcoausn of the improversents in

3

the economy? I near* lower unemployment compensation payments?

4

MP..

5

analyzing it, and Z can't give you a satisfactory

TJSO:

Xt is quite widespread. Wo are still

generalisation. It is not amenable to that kind of quick

7

answer.

0

QDBSTSiCL'I: tJhat happened to receipts estimate? i\rs

9

t&sy running about on target?

10

MR. YEOs Tfcray are running about on target.

11

QlXI3STXC3is including the £i-.ia2>cing announced today

12

how much have you borrowed in this sis-month period?

13

MR. YSO; Let's see. To ths 2toril Xowf 25 billion.

14

Paid down 4-1/2 billion in cash management bills. 4/10 in

15

weekly bills. In other words, 4/10 of 01 million. That

16

gives you 24.1 billion. You take the 9 billion, that would

17

give you 33.1, but that is not the range. 1 gave you a range

18

that we are operating in. £nd so that — we have borrowed

19

in the beginning cf the -current half year 24.1 billion.

20

QUESTSOSfs Including —

21

I1H. YEOc plus th-j si:: and a q?:iart:~r,

22

MR. S«YDT.JR: Plur; a 2-1/4 ;i-w aoney.

23

M3. Y120;

24

s 26.3 c,ft.:r you included this borrowing?

CO

Y=.S.

Plus tli3 2-1/4 now

Z.O.'.XGY,

.-,tiC>:r>-

!

li

:JR. Y::0:

-After irlr, bor.vuwiag.

26. S.

10

f

1 QUI3STIOI3: I am a little confused about something.
2

This 34.1 figure, tajC8 that 24.1 figure and add it to the

3

high market range for the end of the half year. You get

4

12 billion. Comes to 36.1. Is that right? You talked about

9 to 12 billion. Then the 36.1 is above your range I think
said you were
6
on what you/
borrowing for the first half. Why
5

7

don't the figures reconcile with each other?

MR. Y30: Phillr can you answer that?
confused -- we need
9
Phill*. I think he is
a certain amount of money,
)V the low point in June which
10 \tax -receipts have to be paid out cf that. June 30 is not —
8

11 QUSSTIOIT: Nfew tax. The question originally was
12 $9 to $12 billion still has to be raised by June 30, You
13 mentioned earlier you are now aiming at a :.Tic.::imuia 35 billion.

•14MR. I'lTZP&TRICK: That is a range.
15 QUESTION: Cmi I try? So the figures should be
16 more like 9 to II — 1G-1/2.
17 You said earlier at one point the requirements from
10 now until mid-Juno including 2-1/4 billion in new money
19 would mean that you have S* to 12 billion. l-aft for the
20 requirement from now until mid-June? That moans you still
>1 have 7 to 10 billicn ir? net now money to raise by Juns 15.
>2 And at another point you said the maximum range-,' the range

,53will be 31 to 35 for ths first half yea:.:. laid we have 26.3

including this borrowing today.
5

So if we taks the ranc.-e of 7 to 10, If you add

n
10 to the 25.2 *ou got 36.3 billion, *hich is higher

II*

—

IIR. YEOs It is a range of 7 to 10.
HR. SNY3ER: This is & point Phil is trying co
make bade here. Zhz? end up the fiscal year with a 12
billion cash balance. We can actually retire ft and get
from the low point in June until the end of June. So this
7 to 10 left after this financing —
QCESTMOHs Tlx'it is each then?
ISR. Y230: It is not not for the fiscal year. It
is r.'it through O'iiv:.^ J.h.
You s-r.o K gc down to Juno 15, thavi we have a slip
of about one to two billion and up. Jm& I think that is the
confusion.

ilR. Y'^Oi £.'e L^ve «v. June low. Thsn we havis 0*'.iz.,..ri
30.
^»'> i<nTIC'.".'.r n Yc-u hr-.Vv: two weel-irj thorf.V
•.2:?.. YJ-iOs That in ric-"it.
G"i:--£TI*.\7: 0<. Cfin you j.take an apivroy-::'.::"at::
:; .i.)::-il:i.r';:.;!;; •.:.v_ r^n t;..:.\:5 r :•':•.. lucc'i •::•.?. si • "iV^^'i tind v.L-._:
.-;U(U;r:t •:':;;rU::.t'v Is it li••;••.iiv to "...J D.?J ::n;u:h ••;;:•; fo'.'.r or fivo

..!::: below

•.•..•.•.-!

f

7i?

assuming our estimates are on target.

12
1

anticipated.

2

QUESTION: That means that that would be smaller?

3

MR. YEO: Yen,

4
5

QUESTION:

/ ' *

Do .you have any idea what the range

will be?

6

The second half year borrowing will be around the*

7

a sane or slightly loss than the first half borrowing.

8

HP.. YiiO: I7e are not prepared to talk about the

9

s&cs-nd half of the calendar year. T7e gave you our estimates

10

fcr the transit isr.al quarter. That is as far as we are

11

prepared -to go r/c ths ntc^snt in terms of giving you an

12

©stiEiato.

13

QU333TXC2C: You said ruc&ipts are running about in

U

linc-i with January expectations. Do the ecoiv.ov.'ic• performance

15

figures for th.3 Is.st couple of months suggest that you might

16

start to get so^ie improvement in those values above the

17

e:qx-:Cted lev-sir? of receipts botw&sn now and 3nr:~ 30 say?

18

i-IR. Y:;Cs I dc;n;t raally want to talk -r.bout the

19
ZO

:-r.(lg-it, but I will sav hue thirigr.

...^i v.o
.-,,
0.vi<-i is that vr; tsi

jnen^ure our: ccoi-xr.-.y':3 perforin;? rLCO :LM r s a l t^rrf;:.' I:i o t h s i :

21
22
23

c-.
Cr.:\ wo colleiij: V.C-.:;.C;J i:<:= money v/•.:•:':"•::. #0 th

.:<•'. i:\-2

of inflotion o:i:.i have ?. n •".:'":•<*. t'ive :..ff act Cvi I:.-.;-: collectica.

24 !}
25 il

i.;:.. •'.--ic:.--.'.

•-

r:; -. vi

v.-•.-.-'..;

f..;.

IlOt

«'.'/•;' ;•>

o..ii

»"•

<

/'</

13
iznprovsd economy "unci t h e e c o n o m y i s d o i n g v o r y w a l l I think
tiv^re is a n^ed to fc-s cautious moving frora th::t fact to

o-

certain assunptioiis on receipts. because it is really n

4 ;j

combination of what is happciiitng ~co TJJ.O econoiiiy xvx real t^r/M."
asd what is happening to our: inflation .Vcitc:.

e n

QUESTION: You don't want to offer an estimate on
ths deficit then?
MR. YEOs Ko. I am not offering an estimate on
the deficit. I have answered ths question.

10

QU3STI0I«: It sounded like a reason but an unstated

17

no. Is that what you want uc to. undorctiuid?

12

MR. Y3i:o: ilo. I Wiint you to understandi the deficit
for th:i current fiscc.I yec.r i:it::;::;.?ol^ting frc-vi our curr^Lt

14 jj '"'.3tiL"..'vi;-oo. 'iv^ deficit for tho curr-r^t fir;*";-:-?.! year lc';!:rj L
15 I; ic will "j."i louor thr-ii w:^ h.T/L .?.:'iti'".:i';x':t'-;:d*
/"."»•"-•

13 !1
ii

it
1.

CCOnCLj.C

-.- • <•! v*: ">•'

T~?,'Z'.LCiT.'\.'..-.'.'..Zl'?; Cf'.i.'v .?.*•} V ~ U

::"/_'•::? vc.'ij

v.-...-..-.- -.->••-/-O

.o t

•" "1

'!

2: ;!

Orf. ••.: (...-./

.•••-.•V.-t.-'r

or

-.''.-i-.i;
-if -.•
c...:*.";."'.£•:-:.o*"'

<:/..•;.•.•• :=.-cv r.n:.'., -cuoiicT.";; >;o

i'.~:. j':.r:.i£-; o r c:::?x!:-;;"

.J-r;^:

o t <:\--.".v.-j-.: r-vvr.-ov.^arilv

;i
"'-"'?

.'- t.. •...

>

1

:'i''ji":.'

14

1

throw off significantly wore in terras of tax receipts, than

2

wa have ostirnated the rate of inflation is unfortunately

3

a significant variable . The better we do on. inflation that

4

has an impact in torins of tax receipts-

5

QUESTION: V7hut is the tax balance for the end of

6

tho transition quarter?

r

J.iR. YEO: Excuse me. Do you want to have an embargo

o

for the wire services?

9

QcOSSTIO?!: Yes, please.

10

J!R. YZG: 0?\. I'^cus-i ~.e. There is a copy of

11

viiisiv-e talking points. hs a rssult of o^:; of ycur colleague's

12

sugga^tiona, hhsse talking poinds -— the points I talk frorri,

13
help in what i:3 an int3.rGr:ting cu:.^ at tiisr.'iS r. co^ipllcstsd
Question: Will the talking points
subject.
include details of the third security?
Mr. Yeo: Yes
QIW£TI0:-T: I-Ir. Yeo, what is the rcinirum

14
15
16

denomination
cn ths.';^ 23 3/4 notes?17
;.IR.
To i

Y;:;0J

Ths lo^o- bones? $1000 denominations.

i

§1000
dsnonination on fh~ tr-n~y-"-ar note to $5,000 ckmoiTiinatioiv
19
20 j' on thi short note.
21

QUHSTIcns

I risked -.'•.bcv.'.t c:ish b a l a n c e s f o r t h e

22

tr £•.;-*. si ti.\,n qu.^::t-?.r. T7hat is tha thirJcii?.c:?

23 !

1VR. Y20:: I will c.-y'-r. 'v-'-u -n c.r::.";. "c-r.

>-.*i*
:5 II

::ii. .'••;.•; v;.\s.,.'

j. C O M * t -::;<.•.;:>;! u:'.:'si';.r:-jr.an:.!. 'vr.-ii o-u-.)r.;t.\.o:i

:i".'-i ~\;;..\"„1 i".C< •- " U C - ; l i \ O W

t;.*r: C\"ii^

015
he wants to be-able to do, I can easily understand it, is
when we cone back he wants to kr.ow the cash balance which is
a variable. .
MR. SHYDERs We get down to a laininraia level about
September 15 which is not a tax date. iJhen we talk about
lniniraums we talk in the range of $1 to $3 billion,- something
like that.
The second half of September is like I say the
second half of rsost tax s?.o:.iths- we get a big plus. I don't
hr^va exactly in mind what the riwing might bo. But I suppose
yen would be thinking of sorasthing like S3 to $10 billies
of
at the or.d of S^ptcaber, simply bacauss/thss tax payyneuts
that cone in thsru.
nL-ESTION: M?.y I trouble you for a couple of pic-css
of background? v-hen did Congress stretch notes after 10
years?
tZR. YSOr Thoy cave ut tho authority last saosath.
GU^TIOI-T: ^.nd what had it bsen?
HR. YIJOs Sevan years.
QU:-->-:::w:v:'-lf: rr. tl-.^sr; wi~ X h- th~ first 10 y^cir notes

-*;i

».-

16
1

of Treasury bills or notes for our government?

Hi

There was a

2

Saudi Arabian official that has been around very recently,

3

like yesterdayf

4

MR. YEO: We are not negotiating any spz-cial sales

5

at ihe moment. Ifhs reason I said it that way is that froiii

6
7

tine to tir.va we have interest from other countries in
in
Treasury securities. But/the sense of your question, the

8

answer is no, fts we;II as the very preoiee wa^ you worded it

9

and I answered it.

10

QCJ'JSTIO-S: Might you have: to answer that question

11

differently 24 hosrs frcivi now?

12

JiR, YEO: I don't expect to. I don't expect to,

13

that is what I meant by the sense.

14

* v T T* <2 rrt "J* /-"V-T . f\ >"
v t J LJ i> X .1. \Ji.x t

15

MR. YEO; I just don't w'^nt to promise to answer

16

U;e sa.n«e wey 24 hours frcu now, but I c'or.».:*: s::pset to.

17

ourJSTICIsi: 3k: your list of options, ycur point of

16

clarification- yci? s:--.i'i it could a*'/.-;.-- to the twrr-yoe.r no':?^

19

of ?:ay 31. I tlii-;!-: Hey 31, 1977. is thet right?

viA .

20
21

^rjESTIOI'i:

22

an aitixual rollover?

23

MR. YftOi

Thi O::o

Vivi he.v

»v? -vi.!"'

IV.

A-*-.*.

,

.*.«

ui.

1 '.-

24

I r;-iid it :::ight be confusing.

.-.'•?.ah yec.r w? sell a one--yec:.r

25

bill. That iy per?; of ',v.,i regular monthly cycle of cric-yee:

17
\

Z

ut

bills.
QiuESTIOSf:

The amount is variable?

3

MR. YROs Yas. It can be variable.

4

QUESTIG/T: In other words, you say —

5

MR. ,.Y3KO: We can acid to it.

6

QUESTION: Based on cash and refinancing?

7

MR. YEO: Right.

8

QUESTION: Can you talk about lengthening

9

securities and the general structure? iLre you envisioning

10

a tiir.3 when it comes less frequently end would figure

15

amounts for long term use?

12

ISR. YEO: I am looking hopefully ahead to the time

13

when the Treasury con-er; less frequently, and 1 hope it is

14

nee because we ere siwply offering much, much bigger amounts.

15

I ara looking forward to the tii^e when we don't have a deficit

16

to finance.

17

QUSSTIOITs I was thinking budget considerations

13

apart in your gcuaral structure?

''19

!!R. YEO: The development of tha pricing technique,

20

the redevelopment of it affords us the opportunity to cone

21 !

with bigger amounts. Put it this way. If we bed enncunced
the $5 billion in seven-y-ar notes at the e-id of January

23

for auction on a yield ba:;i^ as you recall we euetic-ed
sn.c:c2rwufuily.- or sold successfully a pric- ieeue in that

25

e-.-:>-.v.;t. I throb r;^

l7^l€.

h:.ve i-.,7d :•; tV-i:.::: that the-cos

.,, f'9
would probably hr:<T=3 been higher.

I clon't think that v;e can

really c;et that ki::.d of y.siso on a yield, ehiotion basis.
I don't knew if yc-vi cr« i^ter^ted :Li this, but
wh^t yea cu:o really doing is changing thf* elasticity of the
d-a-tiarid for a give* Tre^rjnry iarnia.by pricing iff.' In oth-or
wx-rds, yov?. get

interest por pricing incr^rsssrh by pricing
And in
it in •:> highly viribia fc^bicn.
making it an open sale to
JV.C>:»;«S

the public, ire: attr;:.c5t buyers that -cs h:-ve not .-.ttrcictad

of
to I

t2x:ov.gh v:he yield suction tocln-iquo.
~y ohfmwijfig tke slci^ticity of that eoe.-eehl cvorva
;;-»

1i li

---,>:-•:>

f? ~ •".-' *>

:•':•: t h a :i>:^2., fJo t h a t 3 r.: eK.v:ctly

12 i| " vih-at w s i'.rs tryiA.r- t o 6 0 , d e v e l o p thi:*- p a r t i c u l a r
13 !•
14 !J

ch?i':..c-:-.7: t h e cl"'e:rhio::.!:v r-f the. ^cn7.?':''-:). c u r v e ".r,.e. i n o f f e e t w i t
o.i.rjUin'-.'.'iit^.c-j-'»

ee v;

II
15 l!

technique

._;.r:^-.i^.a

J. -i.r. c -tr^.c.bla.*3 v.:3 t o ? j c l l
ir-^vi c!:bXes

c i <..-..

I^r^er

CQ

I
c i i i C i c l s i ' t i e l l y , -D-l^e v.o ccn-'.'.iiiV.^ t o v:;;:e
>.••..' e.i-'.-.

.'..•.iv;,

1-'.-.

v..:-.-. .'J.-Ci",.. .-:•<.:

i-. ...•'—'

:/s,.i, ra .y.r«

:

is :|

go.:.:••;a e o u.v*.- e h - : y x•*,-v"3
o i '-iJ .:\iv::\:.\os c n e e r i e t-";C'*-.yo':-.r n o t e •»
.- •

"I

ii

•->•;- •:

:- .~ -.

1 .^

v :

s 1 -„•:

cij.ii X ;'.-.•.e':-e.u_v;iM _•.•»:.

C-:e e>f t h e r.irobl.„-.v:- w e l:r :*• e:ve c h i l l b-?.vv:.
e.:e;..c ri ,:e a::<e c:* .'..•:

!-i".:

..:

• . i O ; 4..

«...-..y

•-»..<

;_i •«:

i!
.".•i

cru-:.'4;-i:.v:>'.-!. o r •:•-•

r

^:.

•if

;>

10 ':

V.' v

:!>^77

C'">;.'iJ. '.'.

X9 fi°
QUSSTICK: You referred to the pricing techniques
we experimented with in February. It is not clear to mo what.
pricing technique that is?
MR. YEO: There are — the way wo havo sold xaost
of the coupons, securities issued in recent years has been
unier what is called the yield auction technique where we
say we are going to offer "Xn amounts of a security, of

!,

Y'*

-•aturity. ive are going to accept bids up to 130, and it is
bid off. The coupon is set after the fact then by the
market. That is one technique.
Toother teehrique, the one that we have been working
with, we call the rxcLoing technique ~- is to set the price
C":a:elve3. he ear. the coupon dollar price prior —• WK. price
the issue. The difference is that we can ^eil a larger is si* 2
by the second tiolmiquo than we could under the first
tae-liniqne and without disturbing the market.
Now tee2:a is a third way. You can sell a coupon
and bid off the cer.per.. Uhich is in effect what we are
doing ia the long -one. Toe could do that for a new piecs
of fiaaachag.
QU^ThOl! •: v'he.;; taero ar^ three techniques?

ijv'j.H.. I*. ..*jy.\ .-;•:.•,. aa _ v.a.rae t*,*e^,!",*h'"ii. •'•••*'•*

20
t

QUESTICtI: Thank you very much. '

2

MR. YEO: Thank you.

3

(Whereupon at 4:45 p.ia. tha

4

press conference was concluded.)

y

'

5
6
7

3[
9
10
11
12
13
14
15
IS
17
13
19
* i
20

2?

ii
22 |j
23

£4 jj

i

\%

TABLES ON ESTIMATED GROSS AND NET GOVERNMENT AND PRIVATE DEBT
Table

Subject

Estimated
Gross Government and Private Debt, by
1)
Major Categories
Estimated
Per Capita Gross Government and Private
2)
Debt
Estimated
Gross Government and Private Debt related
3)
to Gross National Product
Estimated
Net Government and Private Debt, by
4)
Major categories
Estimated
Per Capita Net Government and Private Debt
5)
Estimated
Net Government and Private D-ebt related
6)
to Gross National Product
Estimated
Federal Debt related to Population and
7)
Prices
Privately
held Federal Debt related to Gross National
8)
Product
Changes
9)
in Per Capita Real Gross National Product

See footnotes at end of tables.
Office of the Secretary of the Treasury
Office of Debt Analysis

March 8 1976
'

I $,2

TABLE ONL
ESTIMATED GROSS GOVERNMENT AND PRIVATE DECT. OY MAJOR CATEGORIES
DOLLAR AMOUNTS IK BII.LICNS)

PRIVATE(I)

STATE

FEDERAL(2)

TOTAL

PERCENT

AND GROSS FEDERAL
YEAR IN-DIVIDUAL CORPORATE TOTAL LOCAL PUBLIC AGENCY TOTAL DEBT OF TOTAL
1929
1930
1931
1932
1933
193-*
1935
1936
1937
1936
1939
1940
1941
19*2
19<*3
1944
1945
1946
1947
1946
1949
1950
1951
1952
1953
1954
1955
1956
1957
1956
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975

$ 72.9
71.6
64.9
57.1
51 .0
49.6
49.7
50.6
51.1
50.0
50.6
53.0
55.6
49.9
46.6
50.7
54.7
59.9
69.4
6C.6
50.4
104.3
114.3
129.4
143.2
157.2
160.1
195.5
207.6
222.9
245.0
263.3
264.6
311.9
345.6
360.1
415.7
444.2
476.3
513.6
546.6
566.2
647.6
734.3
621 .9
860.1

$ 107.0
107.4
100.3
96.1
92.4
90.6
69.6
90.9
90.2
66.8
66. 5
69.0
97.5
106.3
110.3
109.0
99.5
109.3
126.9
139.4
HO.3
167.7
191 .9
202.9
212.9
217.6
253.9
277.3
295.6
312.0
341.4
365.1
391.5
421.5
457.1
497.3
551.9
617.3
672.9
779.1
912.7
997.7
1064.7
1230.6
1413.6
1564.2

S

179.5
179.2
165.2
153.2
143.4
140.4
139.5
141 .5
141.3
136.6
137.6
142.0
153.1
156.2
159.1
159.7
154.2
169.2
196.3
220.0
230.7
272.0
3C6.2
332.3
356.1
374.6
434.0
472.6
503.4
534.9
566.4
628.4
676.3
733.4
602.9
677.4
967.6
1061.5
1149.2
1292.9
1461.3
1563.9
1732.3
1965.1
2235.7
2464.3

$ 17.6
16.9
19.5
19.7
19.5
19.2
19.6
19.6
19.6
19.6
20.1
20.2
20.0
19.2
16.1
17.1
16.0
16.1
17.5
19.6
22.2
25.3
26.0
31.0
35.0
40.2
46.3
50.1
54.7
60.4
66.6
72.0
77.6
63.4
69.5
95.5
103.1
109.4
117.3
127.2
137.9
149.2
167.0
161.2
193.5
209.3

$

lc.3
16.0
17.6
20.6
23.6
26.5
30.6
34.4
37.3
39.4
41.9
45.0
5 7.9
106.2
165.9
230.6
276. 1
259.1
256.9
252.6
257.1
25b.7
255.4
2b7.4
275.2
276.6
260.6
276.6
274.9
269.9
250.6
250.2
256.2
3C3.5
309.3
317.9
320.9
329.3
344.7
356.0
366.2
365.2
424.1
449.3
469.9
452.7
576.6

$ 1.2
1.3
1.3
1.2
1.5
4.6
5.6
5.9
5.8
6.2
6.9
7.2
7.7
5.5
5.1
3.0
1.5
1.6
0.7
1.0
0.6
1. 1
O.o
0.5
0.6
0.7
1.4
1.7
3.2
2.4
5.7
6.4
6.8
7.6
6.1
9.1
9.6
14.0
20.1
15.1
13.6
12.5
11.0
11.6
11.6
11.4
11.9

$

1 7.5
17.3
19.1
22.0
25.3
33.3
36.2
40.3
43.1
45.6
46.6
52.2
65.6
113.7
171 .0
233.6
275.6
260.7
257.6
253.6
257.9
257.6
260.2
2tc .3
276.0
275.5
262.2
276.3
276.1
292.3
256.5
256.6
303.0
311.3
31 7-4
327.0
330.7
343.3
364.6
373.1
362.0
4C1.7
435.1
461.1
461 .5
504.1
567.6

$

215.2
215.4
203. o
154.5
1 66.2
192.9
195.3
201 .4
204.0
202.2
206.5
214.4
236.7
265. 1
346.2
410.4
445.6
446.0
473.4
453.4
510.6
5 55. 1
554.4
631.6
667-1
654.5
762.5
601.2
636.2
667.6
949.5
557.0
1056.-5
1126.1
1205.8
1255.9
1401.4
1514.2
1631.3
1753.2
1561.2
2134.6
2334.4
2607.4
2910.7
31 77-7

c. 1
6.0
9.4
11.3
13.4
17.3
16.5
20.0
21.1
22.6
23.6
24.3
27.5
35.3
45. 1
56.5
62.2
56.5
54.4
51 .4
50.5
46.4
4 3.6
42.5
41.4
40.2
37.0
34.7
33.3
32.9
31 .2
29.7
26.7
27.6
26.2
25.2
23.6
22.1
22.4
20.6
15.3
16.6
16.6
17.7
16.5
15.5

TAoLi: TWO

\M

ESTIMATED PER CAPITA GROSS GOVERNMENT AND PRIVATE DEbT(3)
(AMOUNTS IN COLLARS)

STATE

PRIVATEO )

FEDERAL(2)

TOTAL

AND
EMR

1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1946
1949
1950
1951
1952
1953
1954
1955
1956
1957
1956
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975

INDIVIDUAL CORPORATE

$ 596
563
523
457
406
394
390
395
396
365
366
359
415
366
355
364
369
422
479
547
603
664
736
821
693
964
1065
1157
1207
12 74
1377
1457
1550
1672
1627
1560
2139
2259
2396
2559
2706
2661
3127
3516
3506
4153

$ 676
672
606
769
735
716
705
709
700
666
663
671
726
765
603
764
706
770
690
946
936
1101
1239
1267
1329
1334
1530
1641
1719
1764
1919
2020
2131
2255
2415
2551
2540
3140
3366
3661
4503
4669
5236
5693
6719
7475

TOTAL

$ 1477
1455
1331
1227
1141
1 110
1056
1105
1096
1053
1051
1070
1143
1153
1159
1 149
1057
1 152
1370
1494
1540
1766
1577
2109
2223
2299
2615
2755
2527
3056
3297
3476
3661
3931
4242
4572
4979
5400
5763
6441
7209
7731
6366
54 09
10626
11629

LOCAL

$

146
153
157
157
155
15i
154
153
152
152
153
152
149
141
131
123
113
113
120
133
146
166
160
156
216
246
279
256
316
345
374
356
422
447
472
497
530
556
550
633
660
726
606
667
919
967

GROSS
PUBLIC

$

133
125
143
166
169
225
240
266
289
303
320
339
432
795
1206
1655
1575
1625
1775
1717
1716
1665
1674
1697
1716
1 710
1692
1637
1556
1657
1635
1606
1612
1627
1634
1656
1651
1675
1734
1763
1616
1699
2046
2151
2233
2325
2662

AGENCY

$ i
10
10
9
1 1
37
44
46
45
47
52
54
57
40
37
21
10
1 1
4
6
5
7
5
5
4
4
6
10
16
13
32
35
37
41
42
47
50
71
101
75
66
61
53
56
55
53
55

TOTAL

$

143
140
153
176
201
263
264
314
334
351
312
3b3
465
635
1245
1661
JV50
1636
1 7oC
1724
1722
1653
1660
1702
1723
1 714
1700
1647
161 7
1671
1 667
1641
1649
1 666
1677
1 704
1 701
1 746
1635
1656
1 664
I960
2101
2207
2266
2376
2131

DEBT

$

17c7
1750
1643
1561
1456
1526
1534
1572
1563
1557
1577
1616
1762
2135
2536
2v54
32C2
3142
32/1
3351
3410
3645
3637
4006
4164
4260
4555
4743
4662
5075
533';
5516
5753
6047
6352
6774
7212
77C3
i>209
6534
5775
104 ;o
1l?7<.
I24t5
13634
14 9^5

TAbLL InRLL
GROSS GOVERNMENT AND PRIVATE DEBT RELATED TL GROSS NATIONAL PRODUCT

GROSS

PRlVAiE(l)

S1ATL

FLLLKAL(2)

TOTAL

NATIONAL - -- A.\D GRCbS
YEAR PRODUCT INDIVIDUAL CGRPORATE TOTAL LOCAL PUBLIC AGENCY TOTAL i,E6T

(BILLIONS $ ) :
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
I960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975

$

96.7
63.1
66.9
56.6
60.3
66.6
77.4
66.5
67.6
67.6
94.6
107.6
138.6
179.0
202.4
217.4
196.0
209.6
232.6
255.1
256.0
266.2
330.2
347.2
366.1
366.3
399.3
420.7
442.6
446.9
466.5
506.0
523.3
563.6
5,54.7
635.7
666.1
753.0
756.3
666.5
935.5
962.4
1063.4
1171.1
1306.3
1406.9
1459.0

(RATIOS Cf LLLT 1L bKGSS NATIONAL PRODUCT)
75.4 %
66.4
97.0
100.5
64.6
72.6
64.2
56.5
56.3
57.1
53.6
49.3
40.1
27.9
24.1
23.3
27.9
26.6
29.6
31.1
35.0
36.4
34.6
37.3
39.1
42.9
45.1
46.5
46.9
4 9.7
50.4
52.0
54.4
55.3
56.1
59.6
60.4
59.0
59.6
59.2
56.6
59.7
60.9
62.7
62.9
62.6

1 10.7
129.2
149.9
169.2
153.2
132.1
116.0
105.1
103.0
99.1
51 .6
62.7
70.2
59.4
54.5
50.1
50.6
52.1
55.4
53.6
54.4
56.6
56.1
58.4
56.2
59.4
63.6
65.9
66.6
69.5
70.2
72.2
74.6
74.6
76.9
76.2
60.2
62.0
64.5
69.7
57.6

101 .6
102.0
105.1
105.2
112.6

166.U%
215.6
24 6.9
265.7
237.6
204.7
160.2
163.6
161.3
156.2
145.1
132.0
110.3
67^3
76.6
73.5
76.7
60.7
65.2
64.5
65.4
55.0
92.7
95.7
57.3
102.3
106.7
112.4
113.7
119.2
120.5
124.2
125.2
130. 1
135.0
136.0
140.6
141.0
144.3
146.9
156.2
161.2
162.9
167.6
171.1
175.2

i c. 4 ..
22.1 '
2b. 1
34.7
32.3
26.0
25.3
22.7
22.4
22.6
21.2
16.6
14.4
10.7

6.5
7.5
6.2
7-7
7.5
7.6
£.6
6.6
6.5
6.5
5.6
1 1.0
11.6
11.5
12.4
13.5
1 3i 7
14.2
14.6
14.6
15.0
15.0
15.0
14.5
14.7
14.6
14.7
15.2
15.7
15.5
14.6
14.5

16.5 %
15.3
26.6
36.6
35.5
41.5
35.5
35.6
42.6
45.0
44.2
41.6
41.7
60.4
62.0
106.1
141.5
123.o
1 10.4
57.6
55.7
65.7
76.6
77.0
75.2
76.1
70.3
65.7
62. 1
64.6
55.6
57.4
56.6
53.6
52.0
50.0
4o. 6
43.7
43.3
41.2
35.4
35.6
35.5
36^4
36.0
35.0
36.5

l.2<~
1 .6
1 .5

2.1
2.5
7.0
7.2
6.6
6.6
7-1
7.3
6.7
5.5
3.1
2.5
1 .4

0.6
0.6
0.3
0.4
0.3
0.4
0.2
0.3
0.2
0.2
0.4
0.4
0.7
0.5
1.2
1.3
1.3
1 .4
1 .4

1.4
1.4
1.9
2.5
1.7
1.5
1.3
1.0
1.0
0.9
0.6
0.6

16. 1 \
20.6
26.6
36.7
42.0
46.5
46.6
46.6
45.2
52.1
51.5
46.5
47.3
63.5
64.5
107.5
142.7
124.4
110./
56. C
1 CX.O
50. 1
76.6
11.3
75.4
76.3
70.7
60.2
62.6
65.1
60.9
56.6
57.9
55.2
53.4
51.4
46.1
45.6
45.6
43 0
40 6
40.5
40. 5
3S.4
36.5
35.6
35.2

222.5
259.2
3C4.6
343.1
312. 1
2el .2
2S2.3
232.6
232.9

23C6
217.6
155.3
1 72.C
1 u1 .5
1 72.0

US.6
225.5
212.6
2C3. 4
1VC.4
1 \- z . C
154.0
160.0
161.5
1 62.2
169.6
151.0
150.4
186.6
157.7
155.2
197.0
202.0
200. 1
2C3.4
2C4.5
203.7
2C1 . 1
2C4.5
2C6.5

21 1 .6
217.3
21 5.5
222.6
22 2.6
215.5

TABLE SIX
NET GOVERNMENT AND PRIVATE JE3T RELATED TO GROSS NATIONAL PRODUCT

GROSS

PRIVATE(I)

STATE

(5)

1GTAL

NATIONAL 'AND NtT
YEAR PRODUCT INDIVIDUAL CGr.PORATc TOTAL LOCAL FEbERAL DEBT

(BILLION $)
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1946
1949
1950
1951
1952
1953
1954
1955
1956
1957
1956
1959
I960
1961
1962
1963
1964
1965
1966
1967
1966
1969
1970
1971
1972
1973
1974
1975

$

96.7
63.1
66.9
56.6
60.3
66.6
77.4
66.5
87.6
67.6
94.6
107.6
136.6
179.0
202.4
217.4
196.0
209.c
232.6
259.1
256.0
266.2
330.2
347.2
366.1
366.3
359.3
420.7
442.6
446.9
466.5
506.0
523.3
563.6
554.7
635.7
666.1
753.0
756.3
666.5
935.5
962.4
1063.4
1171.1
1306.3
1406.9
14 59.0

(RATIOS OF
75.4 ft
66.4
97.0
100.5
64.6
72.6
64.2
56.5
56.3
57.1
53.6
49.3
40.1
27.9
24.1
23.3
27.9
26.6
25.6
31.1
35.0
36.4
34.6
37.3
39.1
42.9
45.1
46.5
46.9
49.7
50.4
52.0
54.4
55.3
56.1
59.6
60.4
59.0
55.6
59.2
56.6
59.7
60.9
62.7
62.9
62.6

51.9 %
107.5
124.6
140.6
127.5
110.1
56.6
66.0
66.5
63.7
77.5
70.3
60.1
51.2
47.2
43.3
43.5
44.6
47.1
45.7
46.0
49.9
45.6
49.6
49.4
50.3
53.6
55.6
56.3
56.4
55.0
60.5
62.7
62.7
64.5
65.6
67.3
66.6
70.7
75.2
61.6
65.1
65.5
66.0
50.6
54.6

LE3T

TO LRG3S

167.3 %
153.9
221.6
241.4
212.1
162.7
160.5
146.5
144.5
140.6
131.1
115.5
100. 1
75.1
71.3
66.6
71.4
73.2
76.5
76.6
61.0
66.3
64.2
66.9
66.5
53.2
96.9
102. 1
103.1
106.C
109.4
112.6
117.2
116.0
122.7
125.4
127.7
127.6
130.5
134.3
140.4
144.6
146.4
150.7
153.7
157. 1

NATIUNAL

14.1
17-7
23.5
25.2
27.0
23.2
20.6
16.7
16.4
16.4
17.3
15.2
1 1.6

6.6
7.2
6.4
6.6
6.5
6.4
6.6
7.4
7.6
7.3
7.6
6.4
9.7
10.3
10.6
1 1.0
12-.0
12.3
12.6
13.5
13.7
14.1
14.2
14.3
13.9
14.2
14.1
14.2
14.7
15.3
15.1
14.5
14.6

%

PRODUCT )

17.1
15.5
21.7
37. 5
40.3
44.3
44.4
43. 6
44.7
46.2
44.9
41.6
40.6
56.6
76.3
97.5
1 26.6
1C5.5
55.2
63. 1
64.3
76.0
65.7
63.6
62.0
62.5
57.5
53.3
50.4
5-1 .5
49.6
47.4
47-1
45.0
43.3
41.5
36.7
36.1
36.0
33.6
30.5
30.6
30.6
29.1
26.7
25.6
31.1

%

156.4
231 .4
273.4
306.1
275.4
250.1
226.J
206.c
206.C
205.4
193.4
176.4
152.3
144.5
154.7
1 70.5
20 7.:
1 c 5 ..
1 7c.
166.-;
172.c
169.5
157.1
156.5
156.5
165.4
166. 7
166.0
164.5
1 71 .4
1 71 . 2
172.c
177.c
176.7
160.1
161 .2
160.7
177.o
160.6
162.1
165.6
150.2
152.3
155.0
154.9
197.4

TABLE SEVEN
ESTIMATED FEDERAL DEBT RELATED TO POPULATION AND PRICES

OUTSTANDING FF.LLKAl DEBT

PER CAPITA fULtvAL uEbT(3)

PRIVATELY

Rt-AL PER CAPITA kuLr/.L

PRIVATELY

LLUT(6

PRIVATELY

YEAR GR0SS(2) NET(5) HELD NET(6) GRG3S(2) NET(5) "ELu ,\ET(6) bR0i>S(2) NLT(5) 11ELJ NE T (3)
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1945
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
1975

$

17.5
17.3
15.1
22.0
25.3
33.3
36.2
40.3
43.1
45.6
46.6
52.2
65.6
113.7
1 71 .0
233.6
275.6
260.7
257.6
253.6
257.5
257.6
260.2
266.3
276.0
279.5
262.2
276.3
276.1
252.3
296.5
256.6
303.0
311.3
317.4
327.0
330.7
343.3
364.6
373.1
362.0
401.7
435.1
461.1
461 .5
504.1
56 7.6

$

16.5
16.5
16.5
21.3
24.3
30.4
34.4
37.7
39.2
40.5
42.6
44.3
56.3
101 .7
154.4
211.5
252.5
229.5
221 .7
215.3
21 7.6
21 7.4
216.9
221.5
226.5
225.1
229.6
224.3
223.0
231.0
241.4
239.5
246.7
253.6
257.5
264.0
266.4
271.6
266.4
291.5
269.3
301.1
325.9
341.2
349.1
360.6
466.3

$

16.0
15.6
17.7
19.4
21.9
26.0
32.0
35.3
36.6
37.9
40. 1
42.6
54.0
55.5
142.9
153.1
225.2
2C6.1
155.1
152.0
157.7
1 56.6
153.1
156.6
200.9
204.2
204.6
159.4
196.6
204.7
214.6
212.4
217.6
222.6
223.9
22 7.0
225.6
22 7.5
237.3
235.9
232.1
239.0
255.1
269.9
266.6
260.1
361.3

$

143.7
140.6
154.0
176.2
201.5
263.5
264.5
314.7
334.6
351.2
372.9
353.7
465.9
640.0
1245.9
1661.6
1550.5
1636.7
1780.3
1724.1
1722.0
1653.0
1660.0
1702.5
1723.0
1714.5
1700.7
1647.7
1617.0
1671 .4
1667.3
1641.7
1645.5
1666.6
16 7.7.2
1704.1
1702.0
1746.5
1635.5
1556.5
1664.6
1960.7
2101.5
2207.9
2265.5
2376.9
2737.5

$

135.5
134.1
145. 1
170.6
153.5
240.6
270.3
254.4
3C4.3
312.0
325.5
337.5
420.5
751.3
1125.0
1525.4
175 7.6
1616.5
1532.2
14c2.6
1452.5
1427.7
1400.5
1405.5
1415.9
1405.3
1363.7
1326.0
1256.6
1320.5
1357.5
1327.3
1343.0
1355.5
1360.7
1375.6
1371.1
1362.6
1441.3
1454.4
1427.4
1465.7
1574.1
1633.6
1655.3
170 2.6
2166.6

$

131.4
126.4
142.7
155.4
174.4
221.6
251.5
275.7
264.1
251.5
30o.4
321.3
403.3
7C5.5
1041.2
1350.0
1624.6
1452.1
137o.O
1304.3
1320.1
12 51.1
1246.6
1249.1
1254.2
1252.6
1234.2
1160.6
1155.5
1170.5
1207.9
1175.6
1165.7
1154.4
1163.1
1163.0
1161.1
1157-4
1154.2
1150.3
1145.2
1166.6
1232.1
1292.4
1276.6
1321.6
1660.4

$

4o5.0
464.0
566.C
747-6
650.4
1G50.1
1142.7
1245.1
1267.5
1350.6
1463.4
1551 .4
1755.6
27o0.6
3565.2
5246.7
60/3.7
4726.3
4217.3
3562.2
4050.5
3 762.5
3524.1
3540.6
3555.0
3 55 7.2
3515.1
3310.1
3153.6
3203.7
3146.7
3055.6
3051.0
3C45.7
3015.4
3027.7
2566.6
2546.0
3005.2
2505.6
2776.0
2737.7
2639.0
2664.6
2747.5
2545.7
2737.5

$

436.4
4c 1 .0

567.0
723.6
516.7
555.1
1065.5
1 It; 0 . 5
1171.4
1235.2
1294.5
1331.5
1510.3
2465.3
35o3.5
4 755.3
5465.0
4162.5
3t25.6
3376.1
34 17.6
3172.5
2537.6
2523.2
2524.6
2515.6
2655.9
2667.6
2526.6
2531.5
2563.6
2470.6
2464.1
2464.5
2446.3
2444.4
2365.6
2332.5
2359.3
2273.4
2102.3
2052.1
2126.4
2134.5
1952.3
1622.0
2166.6

3 4T5.1
442.C
543.0
655.3
736.1
516.6
1L1 0- 1
1654.1
1GS-3.7
1155.5
1215.0
1266.1
1446.6
2316.7
3317.0
4337.1
4 55 7.2
3736. 1
32 5 5.6
3C12.5
J1C5.C
2 c c 5" . 1
2ol5.3
2557.2
2550.6
25S5.5
2551.0
2371.7
225 4.4
2243. 6
2261 . 1
2166.3
2193.1
2162.7
2127. 1
2101.5
2023.6
1552.3
1554.9
1660.6
1666.7
16 26.9
1664.5
1666.5
1532.9
1414.5
1660.4

TABLE LIGHT
PRIVATELY HELD FEDERAL DEBT RELATED TO GNP
(DOLLAR AKUUNTS IN GULICNS oF DOLLARS)

GROSS

PRIVATELY

RATIO OF

YEAR TO YEAR

NATIONAL HELD DEBT TO PRICE
YEAR PRODUCT DEBT(6) GNP ChANGES(7)
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1946
1949
1950
1951
1952
1953
1954
1955
1956
1957
1956
1959
1960
1961
1962
1963
1964
1965
1966
1967
1966
1969
1970
1971
1972
1973
1974
1975

56.7
83.1
66.5
56.6
60.3
66.6
77.4
66.5
87.6
67.6
94.6
107.6
136.6
179.0
202.4
217.4
156.0
205.6
232.6
255.1
256.0
266.2
330.2
347.2
366.1
366.3
355.3
420.7
442.6
446.9
466.5
506.0
523.3
563.6
594.7
635.7
666.1
753.0
756.3
666.5
935.5
962.4
1063.4
1171.1
130G.3
14Cu.5
1459.0

16.0
15.6
17.7
19.4
21.9
26.0
32.0
35.3
36.6
37.9
40.1
42.6
54.0
55.5
142.5
153.1
226.2
2C6.1
1 55. 1

152.0
157.7
156.6
153.1
156.6
200.9
204.2
204.6
155.4
156.6
204.7
214.6
212.4
217.6
222.6
223.5
227.0
225.6
227.5
237.3
236.9
232.1
235.0
255.1
269.9
2C'z.G
2oO. 1
361.3

16.5
19.0
26.5
34.2
36.3
40.6
41.3
40.6
41 .6
43.3
42.3
39.6
36.9
53.4
70.6
66.6
1 16.4
^8.3
65.5
74.1
76.6
66.7
56.5
56.7
54.9
55.7
51 .3
47.4
44.9
45.6
44.2
42.0
41 .6
39.5
37.6
35.7
32.6
30.2
29.6
27.5
24.6
24.3
24.0
23.0
20.6
19.5
24.1

-6.0
-5.5
-10.3
0.5
2.0
3.0
1.2
3.1
-2.6
-0.5
1.0
5.7
5.3
3.2
2. 1
2.3
16.5
6.7
2.6
-1 .6
5.8
5.90.9
0.7
-0.4
0.4
2.9
3.0
•/ • v/
1.7
1.5
1.5
0 6
1
2
1 • d1 • VJ
1
6

1.2
1.5
3.3
3.0
4.7
6.1
5.5
3.4
6.6
3 4
12.2
7.0

Cf'/VNC* S I .\ r'tr. CAPIh»* f.L»«L sui-u^l* . • /< I 1 L,.»r,0 f.v.w^cl

REAL GNP PEP. CAPITA

(4)

CHANCE FROM YEAR AGO

REAL REAL GNP
YEAR GNP

DOLLARS

PEK CAPHA

P

PERCENT

(3)

(CONST;.NT 1972 COLLARS)
1529
1930
1931
1932
1933
1934
1935
1936
1937
1936
1939
1940
1941
1942
1943
1944
1945
1946
1947
1946
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960

1961
1962
1963
1964
1965
1966
1967
1966
1969
1970
1971
1972
1973
1974
1975

$

2C3.6 $ 1672.5
1491.4 $ -161.1
163.5
1365.4
-126.1
165.3
-209.6
144.2
1155.6
1127.3
-26.3
141.5
54.2
1221.5
154.3
111.0
1332.5.
165.5
175.2
153.0
1507.7
203.2
1577.6
70.1
-51,5
1466.3
152.5
205.4
1600.4
114.1
227.2
1714.0
113.6
1970.0
256.0
263.7
230.6
257.6
2200.5
2456.6
256. 1
337.1
2601.4
144.6
361 .3
2529.2
-72.2
355.2
(CONSTANT 1958 DOLLARS)
622.6
3352.0
475.7
-115.1
3236.5
466.3
76.6
3313.5
467. 7
-36.6
3276.9
450.7
3504.1
227.2
533.5
3722.6
216.7
576.5
3799.2
76.4
556.5
621 .6
3662.3
63.1
-117.4
3764.5
613.7
161 .8
654.6
3546.7
3960.2
666.6
13.5
3959.6
-0.6
660.5
3 86"6.0
-73.6
679.5
720.4
165.6
4051.6
736.6
4076.6
27.1
33.7
4112.3
755.3
172.0
4284.3
759.1
4390.1
105.6
630.7
674.4
167.2
4557.3
206.4
4765-7
925.9
961.0
225.6
4 991.3
5071.7
1007.7
60.3
5241.0
1051.6
169.3
1076.6
5323.3
62.3
-74.2
1075.3
5249.1
5349.6
1107.5
100.5
5606.1
25oh5
1171.1
1233.4
5662.8
254.7
5713.0
-14 9.0
1210.7
1166.4
5516.6
-155.2

-10.6
-6.5
-15-4
-2.4

6.4
9.1
13.1

4.7
-5.5

7.7
7.1
14.5
1 1.7
11.6

5.5
-2.6
32.5
-3.4

2.4
-1.1

6.9
6.2
2.1
2.2
-3.0

4.6
0.3
-0.0
-1.9

4.3
0.7
0.6
4.2
2.5
3.8
4.6
4.7
1.6
3.3
1.6
-1.4

1.9
4.6
4.5
-2.5
-3.4

FOOTNOTES
(1) Private corporate debt includes the debt of certain
federally sponsored agencies in which there is no
longer any Federal proprietary interest. The debt
of the following agencies are included beginning
these years: FLBs in 1949; FHLBs in 1951; FNMASecondary market operations, FICBs and BCOOPs in
1968. The total debt for these agencies amount to
$0.7 billion on 12/31/47, $3.5 billion on 12/31/60,
$38.8 billion on 12/31/70, $59.8 billion on 12/31/73,
and $76.4 billion on 12/31/74.
(2) Total Federal securities includes public debt
securities and budget agency securities.
(3) Per capita debt is calculated by dividing debt
figures by population of conterminous U.S.
Beginning 1949, population includes armed forces
overseas, Hawaii and Alaska.
(4) Real GNP is in constant 1972 dollars from 1946
to 1975. Real GNP prior to 1946 is in constant
1958 dollars. Changes from 1945 to 1946 are not
comparable.
(5) Borrowing from the public equals gross Federal debt
less securities held in Government accounts,
(a unified budget concept).
(6) Borrowing from the public less Federal Reserve
holdings.
(7) Measured by all item consumer price index, December
to December basis.
(8) Per capita debt expressed in December 1975 prices
(consumer price index for all items).
Source: Federal debt, Treasury Department; other data,
Bureau of Economic Analysis, Commerce Department.

Note:

Detail may not add to totals because of roundi
G P O 905-951

Statement of the Honorable William E 8 Simon
Secretary of the Treasury
Before the Subcommittee on International
Trade, Investment and Monetary Policy
of the Committee on Banking Currency and Housing
House of Representatives
on IMF Amendment and Quota Increase
June 1, 1976, 10:00 AM
Mr0 Chairman and Members of the Subcommittee:
Agreement has now been reached on the main elements
of a new international monetary system. Since the breakdown
of the Bretton Woods par value system five years ago,
international exchange arrangements have of necessity been
operating outside the rule of law* Lengthy international
debate, negotiation, and experimentation have brought
consensus on a new flexible and resilient system, replacing
the exchange rate rigidity and gold emphasis of Bretton Woods.
Throughout the period when the new system was being
formed, the Congress -- and in particular this Subcommittee -have played an active and highly constructive role. My
colleagues and I have had profitable and productive
discussions with Subcommittee members on themes, concepts,
and directions the new system should take. Your counsel
has been of enormous value in the formation of U.S„ policies,,
I want to acknowledge your contribution and express my thanks.
The foundations of the new system are embodied in the
legislation before you. Specifically, that legislation
would authorize two related actions: United States acceptance
of an extensive amendment of the Articles of Agreement of the
International Monetary Fund, and United States consent to a
proposed increase in its quota in the Fund, My purpose today
is to discuss the concepts of the new system and the thinking
on which it is based; to tell you why I regard its introduction as essential to the interests of the United States;
and to urge that you give your strong support to the
legislation authorizing its adoption, in order that we
WS-892

- 2 can move promptly to restore an effective legal framework that
will reduce the risk that nations will be tempted to follow
selfish policies which pay too little regard to the effects
on others.
Reaffirmation of IMF Role and Bretton Woods Objectives
The new monetary system -- the main lines of which
were formulated in Jamaica last January -- differs
fundamentally, in philosophy and in operation, from the
Bretton Woods system it-replaces. But the new system will
retain and build on two important basic features of the
Bretton Woods framework:
-- First, the central pivotal role of the International
Monetary Fund as the institutional heart and monitor of the
system will be continued, and indeed strengthened,
-- Second, the essential aims of Bretton Woods, which
give cohesion and direction to the monetary system, will be
reaffirmed. Those aims, identified in Article I of the
present IMF charter, include: fostering international
monetary cooperation and the balanced growth of trade;
promoting exchange stability and the elimination of
exchange restrictions; and providing temporary balance-ofpayments financing to allow members an opportunity to correct
maladjustments without resorting to measures destructive of
national or international prosperity.
Taken as a whole, these purposes represent a solemn
commitment to the philosophy of a liberal world monetary
order. The decision by the international community in 1944
to dedicate itself to these aims marked a turning point -from the selfishness and destructiveness of the 1930's, when
each nation sought to lift itself from the morass of world
depression at the expense of its neighbors, to the cooperative
approach to international monetary problems which has since
prevailed.
That is the guiding spirit of Bretton Woods and a part
we must not lose: The commitment to international cooperation
and responsible international behavior. The continued
validity of, and need for, the Bretton Woods objectives are
not questioned, and IMF Article I is accordingly being
reaffirmed.

-3 -

/«£f~

Conceptual Framework of the New System
But while the new system provides the same aims as the
Bretton Woods system and continues to rely primarily on the
IMF as the institution for achieving its purposes, it differs
in other critical respects„
The Bretton Woods system was created against the
backdrop of a different world — the world of the 1930's and
40's, in which levels of international trade were very low;
in which capital flows had virtually dried up and the value
of international investment to international prosperity was
not recognized; in which reliance on direct controls was
widespread; in which interest rate and monetary policy
instruments had fallen into relative disuse; in which the
attention of policy officials was directed single-mindedly
toward jobs and employment goals. Structurally the world of
Bretton Woods was very different because the number of
sovereign nations participating in the international system
was perhaps one-third the present number; and because there
was a single strong currency -- the dollar -- and a dominant
economy -- the United States -- which could absorb the
combined impact of adjustment policies and reserve changes
of the rest of the world.
It is understandable that features of a monetary system
designed to meet the problems of that world could become
obsolete and anachronistic in the conditions of today, where
the structure of the world economy has changed and the
problems have changed -- where nations are struggling to
get below double digit inflation, and are living with levels
of unemployment far in excess of those prevailing in the
early postwar years.
The proposed new system differs most importantly on
how best to bring stability to the international monetary
system, Bretton Woods sought to impose stability on countries
from without, through the operation of international monetary
mechanisms; the new system seeks to develop stability from
within, through attention to responsible management of
underlying economic and financial policies in individual
member countries.

- 4-

j3<r

Bretton Woods was based on the idea that stability could
be imposed on a heterogeneous world by a structure of par
values, supported by financing from the Fund. That system,
developed at a time when the competitive depreciations of
the 1930's were fresh in mind, recognized as legitimate only
one exchange rate practice -- par values. It assumed that
if countries were required to adhere to fixed exchange
rates, to be altered only after fundamental economic
changes had occurred, and were supplied with moderate
amounts of Fund credit, that arrangement would provide
adequate leverage -- at least on deficit members --to
encourage stable economic policies. But as this Subcommittee
well knows, it proved incapable of dealing with the changed
world of the 1960fs and 1970's, when external shocks of
unprecedented magnitude, widely diverging inflation rates,
extreme variations among nations1 economic policies, and
the capacity for massive capital flows relative to limited
und resources led ultimately to breakdown of the par value
system.
The new system takes a different approach. It does
not rely on the system to force stability on member countries,
but looks to the policies of member countries to bring stability
to the system. In the exchange markets, the new system does
not seek to forestall change by imposing rate rigidity, but
recognizes that countries' competitive positions do and
will change, and that it is far less destabilizing to
permit rates to move in response to market forces than to hold
out until the abandonment of costly large financing efforts
brings abrupt jumps. It recognizes that the only valid path
to international monetary stability is the pursuit of policies
in the member countries that converge toward stability rather
than diverge into instability. It acknowledges that we can
never assure lasting stability in exchange rates between
the dollar and yen, or mark, for example, if the underlying
trends in the economies of the U.S. and Japan or Germany,
are sharply different in pace or direction.
This is much truer today than 30 years ago, because
of the progress we have made in liberalizing the world
economy and the growth of economic interdependence.
The move to a liberal and integrated world economy has
brought greater prosperity and major benefits to all nations.

fit
But allowing wider scope for international commerce also
means greater potential for disruption from that commerce.
With freedom for expanded trade and capital flows, market
responses to changing conditions can be swift and massive.
In today's integrated world economy, action to manage or
fix exchange rates in contradiction to basic market forces
will fail. In recent years, nations have learned this lesson
time and again, and those who challenge it do so at their
peril.
The new monetary system is therefore a more flexible,
pragmatic, market-oriented system, better suited to the
highly integrated world economy of the present. It
recognizes that countries cannot define their obligations
in terms of measures to be adopted only after the strains
occur. It looks to prevention whereas the old system
applied only cures, often too late and with ineffective
doses0 It concentrates on the real determinants of monetary
stability -- stability in underlying economic and financial
conditions -- rather than on the exchange rate consequences
which were the focus of Bretton Woods.
Obligations Regarding Exchange Arrangements
That philosophy underlies the new Article IV, "Obligations
Regarding Exchange Arrangements„" This critical part of
the Articles provides the legal framework and nucleus of
a new system. The new Article IV contains five major
provisions:
One, the Article provides for specific obligations of
each member to promote underlying stability"! In the words
of the Article, each member must, with due regard to its
circumstances, "endeavor to direct its economic and financial
policies toward the objective of fostering orderly economic
growth with reasonable price stability," and "seek to
promote stability by fostering orderly underlying economic
and financial conditions."
Two, the Article provides wide latitude for a member
country to adopt specific exchange arrangements of its
choice. Each member must collaborate with the Fund and
with other members to assure orderly exchange arrangements,

&

but the Article does not insist on par values or any particular
exchange rate regime. It permits a range of exchange rate
practices -- including floating: EC snake-type arrangements;
and pegging to another currency, to a basket of currencies,
or to the SDR.
Three, the Article requires that members avoid manipulating
exchange rates or, more generally, the international monetary
system, to prevent effective balance-of-payments adjustment
or to gain an unfair competitive advantage. This requirement
is aimed at promoting responsible exchange rate behavior,
the avoidance of competitive undervaluation and "beggar thy
neighbor" policies. It can moreover yield a major
improvement over Bretton Woods, in providing for symmetrical
Fund examination of
surplus as well as deficit countries -since a surplus country which refused to allow its currency
to appreciate and accumulated excessive reserves would be
"preventing effective balance-of-payments adjustment."
Four, the Article provides authority for the IMF to
oversee the compliance of each member with its obligations —
the undertakings to promote stability, to avoid manipulation
that prevents adjustment or gives an unfair advantage and
to collaborate with the Fund and with other members to
assure orderly exchange arrangements. This authority for
Fund surveillance gives the Fund the task of applying a
global perspective to actions of those members that cause
adjustment or other problems for other members.
Five, the Article provides fche means with high
majority yotejfoF future evolution of the system, if*
modification is called for to meet future needs.
In summary, the new Article IV contains the essential
elements of a balanced, realistic and workable system,
monitored by the IMF. Member countries have freedom to
pursue exchange practices of their choice -- individual
floating, or joint floating, or tied to a currency, or
otherwise -- but undertake important commitments for
responsible international behavior --to follow stable
economic and financial policies; and to avoid actions that
distort world production, trade and investment to the harm
of others. The IMF for its part wil pay less attention to
such procedural questions as
whether a currency is floating
or fixed, but will have broad new authority to oversee the

system to promote its effective operation and to oversee
the compliance of members with their obligations. These
obligations are designed to minimize international tensions
in exchange matters, while at the same time giving member
countries greater freedom to choose the exchange procedure
they wish to utilize.
The IMF is in a very real sense the focal point, the
core of the system. Members are obliged to provide the
Fund with the information necessary for intelligent surveillance
of their exchange rate policies. In addition, the Fund is
called upon to adopt "specific principles" for the guidance
of members with respect to those exchange rate policies to
assure that manipulative practices are avoided. In the
Bretton Woods system the Fund's attention was more likely
to be directed toward a member in times of crisis, and
more narrowly focused toward exchange markets. By contrast,
under the new system, Fund consultations with members are
likely to be more continuous, more broadly based, more
concerned with the real international impact of a country's
actions, and directed to all countries, not just those in
deficit.
Fund surveillance and oversight of members' exchange
rate policies does not mean that the Fund can determine
the policies of sovereign countries. This would be totally
impractical, and unacceptable to the United States and all
Fund members. But one member's behavior should not be at
the expense of other members' well being. Within that
context, the Fund can develop general principles interacting
with a type of common law based on application of these
principles to individual cases, aimed at assuring that
members' exchange policies promote stability and adjustment
and are not designed to gain an unfair competitive advantage.
In developing specific principles, the Fund will need
to proceed cautiously. Such principles must have very
broad acceptance by Fund members. Their development cannot
be forced, but they can be expected to emerge over time in the
light of general and specific consultations with members.
In this way, the general principles of acceptable behaviour will
evolve, grounded on the agreed objectives and obligations
of Article IV.

- 8 Fund surveillance of members' policies should not be
aimed at trying to calculate a zone, or target, or "right
rate" for individual currencies toward which exchange rate
policies should be directed. Such an approach is, in my
view, inconsistent with the new Article IV, and is neither
conceptually sound nor technically feasible. It suffers
from the same basic flaw as the par value system --it
assumes that we know, or can determine, what should be
at least approximately the equilibrium rate for each
currency. It is, in attenuated form, a throwback to
Bretton Woods, a fixed rate psychology, a search for
"fundamental equilibrium." Even in theory there is no
single "right rate" in a world of laree canital flows
in which inflation rates, domestic objectives,
monetary and fiscal policies, to name but a few influences,
not only differ among countries but can change rather
rapidly.
The technical difficulties of calculating a proper
exchange rate zone or "right rate" are so formidable as
to render this approach impractical as a guide to policy.
The approach assumes that we can compare one country's
inflation rate against other countries', and thereby
determine what its exchange rate should be. There are
problems of obtaining the right indices -- knowing what
weights and base periods to use; problems of obtaining
proper data -- which are inadequate in most countries;
and problems of measuring price and income elasticities.
Perhaps more importantly, these calculations look only
at the impact of merchandise trade on exchange rates, and
pay no account to capital movements, which loom so large
in determining the exchange rates of so many currencies.
With the present state of the art, such attempts on
the part of monetary authorities to calculate the "right
rate ' and then use the results as the basis for exchange
rate policy are tantamount to a daily renegotiation of a
par value system on the basis of limited and inadequate data
underpinned by flawed concepts. Moreover, the data used
all relate to past periods, and are entirely backwardlooking, whereas exchange rates are partly forward and
partly backward looking, anticipating future economic
and financial trends as well as recording past developments.

- 9-

/¥/

The reaction to the exchange arrangements in the new
Article IV by the general public, industry, and the academic
community, has been favorable. Some who may feel that
amendment is of little urgency because present de facto
exchange arrangements have worked satisfactorily should
perhaps reflect on the dangerous consequences for all
nations if, in present extra-legal circumstances, there
should be substantial moves toward exchange rate manipulation.
And those who have expressed concern that the new arrangement
lacks the elements of a "system" have perhaps paid inadequate
attention to the obligations of Article IV, and the importance
of those obligations to the structure of the new system.
Certainly the new arrangements are less of a grand design
than Bretton Woods -- and appropriately so. The Bretton
Woods system was created when war had destroyed all vestiges
of an international monetary order, and a universal, complete
new structure had to be developed. But much of the Bretton
Woods system remains valid -- I stressed earlier that the
objectives would be reaffirmed -- and those parts have been
retained as a foundation.
The allowance for possible future evolution of the
exchange system is a noteworthy provision. The experience
of Bretton Woods shows the difficulty of trying to foresee
just what exchange arrangements may be required to meet
the needs of a world fifteen or twenty years ahead. The
new Article IV provides that with broad consensus the system
can be adapted. The Fund can decide, by 85 percent majority,
to establish general exchange arrangements which might be
appropriate to evolving circumstances, or to introduce
a system based on "stable but adjustable" par values.
But any introduction of a general par value system under
the amended Articles would require a determination that
certain specified conditions existed to assure that such
a system would be workable -- conditions related to the
existence of stability in the world economy, effective
balance-of-payments adjustment arrangements, sources of
liquidity, and other factors. It is further provided that if
a new par value system were established it would be more
flexible than the Bretton Woods arrangements in certain
important respects: individual countries would not be
required to. establish par values but could adopt other
exchange arrangements; a country having adopted a par value
could terminate it and re-establish it under certain
conditions; par values could be changed more readily; and
provision
to change would
margins,
be made for wider margins and for decisions

/¥£
Since future adaptation of the system, either to
general exchange arrangements or to general par values, requires an 85 percent majority vote, the United States,
with nearly 20 percent, will have a controlling vote.
In any event, the United States cannot be required to
establish or maintain a par value for the dollar.
The amended Articles will terminate for IMF purposes
existing par values of all IMF members. The legislation
before you would repeal the par value of the dollar.
Prior Congressional approval would be required to authorize
any future establishment of a par value for the dollar in
the Fund, and to authorize any change in the par value if
one were established.
The legal standard for the dollar of $42.22 per fine
troy ounce of gold would be retained solely with respect
to gold certificates held by the Federal Reserve System —
the only domestic purpose for which a. value of the dollar
in terms of gold is needed. Approximately $11-1/2 billion
of these certificates are now outstanding, and are being
retired by the Treasury as its gold holdings are sold.
This Subcommittee knows well the importance to the
United States of safeguards with respect to future
modification of the international monetary system. You
are well aware of the difficulties which arose under the
Bretton Woods arrangements when the dollar was pinned
down at the center of the system and could not adequately
move in response to underlying market forces. The results,
in the late 1960's and early 1970's, were severely adverse
for the United States economy -- not just in increased debts,
but in the loss of jobs, productive capacity, and the
transfer of our industry abroad. We must be able to avoid
any such situation in the future. It is not just a matter
of academic theory, it is a matter critical to the strength
of our economy and prosperity of our citizens.
Rambouillet and Recent Market Developments
Let me comment for a moment on recent market developments,
in the light of the proposals for the new monetary system,
and the related understandings reached by the United States
and other major industrial nations at the Rambouillet summit
meeting last November.

- 11 -

/

^

At Rambouillet broad understandings were reached on
structural reform -- these understandings were reflected in
the proposed new Article IV which I have just described.
Understandings were also reached on more immediate operational
issues to further and to implement the concept that stability
of underlying economic conditions is a prerequisite to
exchange stability. As a product of the understanding,
the United States and others agreed to improved consultations -deepened, broadened, more frequent consultations -- among
Treasuries and among central banks. These consultations
are an indispensable element of the understandings, It
is only through such consultations, by the responsible senior
policy officers in Treasuries and central banks, that we can
gain the comprehensive knowledge needed for a valid assessment
of trends and policy moves, and for a better understanding
of both the underlying causes of instability and the
exchange market manifestations of that instability.
Since Rambouillet there have indeed been large
movements in the exchange rates of some of the participants.
The mark and the French franc have diverged, and the pound
and the lira have from time to time been subject to sharp
downward pressures. Some have asked whether that meant
we had failed, and that the "spirit of Rambouillet" was
dead.
No one should be misled -- Rambouillet never promised
that
stability in exchange rates would come instantly or
easily. Quite the contrary. The premise of Rambouillet,
fully reflected in the proposed Article IV is that exchange
stability depends not on market intervention but on
stability of underlying conditions. The market experience
of the past months is confirmation of that premise -intervention, sometimes very heavy, has failed to assure
rate stability in the absence of stability in underlying
economic and financial conditions, and plainly that required
underlying stability has not yet been achieved.
I can report that in an institutional as well as substantive sense,
the sjairitcf Rambouillet is not only alive but thriving.
Consultations have become far more frequent, more comprehensive
and certainly more candid, than before. Analysis has become
more thorough„ I am convinced that the resulting increased
knowledge and improved understanding we have of each other's
problems have already proved helpful, in that the instabilities
which have appeared in recenl: months would have been far more
dangerous. Such consultations undoubtedly facilitate our

7W
- 12 dealing with these problems in the future. This is one
of the most encouraging results of Rambouillet, and the
framework on which we must build.
Reducing the Role of Gold and Expanding the Role of the SDR
Complementing the move to new exchange arrangements,
and the shift away from par values, is a shift away from
gold, which was intended to serve as the link for holding
together the par value system. In theory, gold was the
base of the Bretton Woods monetary system, the ultimate
reserve asset, the creator and regulator of international
liquidity, the basic unit of account, the linchpin supporting
convertibility and enforcing discipline. But, in fact,
gold never fully performed these international monetary
functions, and over time it became increasingly apparent
that gold was unsuitable for them -- just as it had
earlier proved unsuitable as a base for U.S. and other
domestic monetary systems. With new gold production
strictly limited, and industrial demand growing rapidly,
residual supplies available for monetary use were both
inadequate for and unrelated to the liquidity needs of
an expanding world economy. Pressures and price differences
inevitably emerged between the controlled official market
and the highly volatile private market, leading to concerted
official efforts to alleviate or suppress the pressures by
sales of gold on private markets -- further reducing monetary
stocks -- and to widespread speculation and pressures for
change in the official price which would have had a
capricious and destabilizing effect on the monetary system.
With monetary gold stocks so limited, the world became
dependent on and promoted U.S. balance-of-payments deficits
to meet increasing liquidity needs. The result was that
gold convertibility of the dollar grew less and less
credible and in 1971 was suspended.
In recognition of these inadequacies, the new system
promotes a reduction in gold's monetary role in three
ways:
First, gold's legal position is changed. Under the
amended Articles, gold will no longer have an official
price. It will no longer be the unit of account for
expressing the value of currencies, for determining the
value of the SDR, and for calculating rights and obligations
in the Fund.

-13 -

/ ^ r

Second, the required use of gold in IMF transactions
will be eliminated, for example, in quota subscriptions
and in payment of charges. In fact, the Fund will be
prohibited from accepting gold except by specific
decision, by an 85 percent vote.
Third, the Fund will be empowered to dispose of its
remaining gold holdings, in a variety of ways and by an
85 percent vote in each case.
Agreement has already been reached -- prior to the
amendment, under the authority of the existing Articles -for the disposal of one-third of the Fund's gold, or
50 million ounces. Of that amount, 25 million ounces will
be "restituted" or sold back to IMF members in proportion
to IMF quotas and at the official price of 35 SDR or
approximately $42 per ounce. The other 25 million ounces
is to be used for the benefit of developing countries,
through gold auctions with the profits accruing to a
new Trust Fund.
This Trust Fund, recently established at U.S. initiative,
meets two objectives: helping to phase gold out of the
system, and using some of the profits on gold sales to
help finance the severe balance-of-payments problems
currently facing some of the poorest developing country
members of the IMF, This is an appropriate use by the
IMF of its gold. The technique used -- whereby the IMF
exchanges gold to replenish its holdings of usable
currencies -- is familiar and well precedented in IMF
experience. Just how much the Trust Fund will receive
from these gold sales cannot be forecast -- that's one
of the problems of using gold as a monetary asset. The
purpose of the Trust Fund's gold sales is not to obtain
a predetermined sum, or to affect the price of gold one way
or another, but rather to dispose of the gold, to convert
it into usable currencies for the benefit of developing
countries.
Establishment of the Trust Fund does not mean the
IMF is becoming an "aid agency". The Trust Fund will
be an entirely separate entity, in no way subjecting the
IMF to liability, but controlled and managed by the IMF, thus
taking advantage of the technical expertise and sound
practices of the institution. The Trust Fund will provide
the same kind of financing as the IMF -- balance-of-payments

loans — though the Trust Fund's credit terms will be
more concessional than those of the IMF, as appropriate
to the present needs of the Trust Fund recipients. Loans
will be subject to standard IMF requirements that the
recipient has a legitimate need, based on assessment of
its balance of payments and reserve position. To qualify,
a borrower must also meet conditionality requirements of a
first credit tranche drawing in the IMF regular facilities —
that is, it must have a program by which the Fund deems the
member is making a reasonable effort to resolve its
payments difficulties. Thus, there is much that is similar
to regular IMF procedures. The Trust Fund provides an
appropriate and sensible way to mobilize what essentially
has become a sterile asset of the IMF, It does not represent
a subversion of the IMF's monetary character. It represents
instead an important and innovative way to meet a critical
need on the part of a particular segment of the IMF's
membership.
Apart from the 50 million ounces of gold for which
disposal has already been agreed, under the amended Articles,
the Fund will be able by 85 percent vote, to dispose of any
part of its remaining 100 million ounces in any of three ways:
-- sales at market related prices;
-- sales at the book value of approximately $42 per
ounce to present Fund members in relation to quotas;
-- sales at the book value to developing country
members.
The profits from any sales at market-related prices can
be used in any of four ways:
-- They may be transferred back to the Fund's
gsneral resources and "capitalized" with
members' Fund quotas being increased commensurately;
-- They may be placed in the IMF's investment account;
-- They may be used for operations not expressly
authorized by the Articles but consistent with
the Fund's purposes, such as the Trust Fund;
-- They may be distributed to developing country
members.

- 15 -

w?

All but the first of these four uses -- transferring
the proceeds back to the IMF's general resources -- require
an 85 percent vote. In all its gold dealings, the Fund is
required to avoid the management of the price or establishment
of a fixed price for gold.
Views have been expressed in the Congress that the
Congress should participate in any U,S, decision to support
further disposal of IMF gold. I recognize the Congress'
interest in this matter. I agree that these
should be full and close consultations with the Congress in
this sphere. While it would seem unnecessary and inappropriate
to consult if the Fund were merely exchanging its gold at
market price for currency to be used in its regular operations,
it would seem not only appropriate but desirable to consult
about proposals to use the IMF's gold or gold profits in
such ways as the Trust Fund which benefit a particular
group of countries, I am certainly prepared to consult
in this way, in a complete and timely manner, in order that
the Congress has an opportunity to make known its views.
With dismantling of many IMF rules and restraints
on official gold transactions, important side arrangements
have been agreed among the Group of Ten -- the major gold
holding nations -- to assure that gold does not re-emerge
as a major international monetary asset. This understanding
which is not part of the amended Articles, but is consistent
with and supportive of the policies of the amended Articles,
provides that participating nations:
-- will not act to peg the price of gold;
-- will agree not to increase the total stock of
monetary gold;
-- will respect any further conditions governing gold
trading to which their central banks may agree; and
-- will report regularly on gold sales and purchases.
The arrangement took effect February 1, 1976, and will
be reviewed after two years, and then continued,modified,
or terminated. It is in our view an important and necessary
safeguard during this transitional period, although I am
firmly convinced that in any case gold's role in the monetary
system will continue progressively to decline.

- 16 In parallel with phasing down gold's monetary role,
the new system provides an expanded role for the Special
Drawing Right, and modifies certain of the rules governing
that new asset.
When the SDR was originally created in 1968, its
value was established in terms of gold, and linked to
currencies through their par values, essentially through
the par value of the dollar. With the suspension of gold
convertibility of the dollar, and the widespread move
away from par values to floating, it became unrealistic
to value the SDR in terms of par values, and difficult
to determine the rates to be used in IMF transactions.
To overcome this problem, agreement was reached on an
interim basis to value the SDR in terms of a weighted m
basket of the market exchange rates of 16 major currencies, with
the dollar representing approximately one-third of the
basket. Such a basket valuation technique is particularly
well-suited to a world of widespread floating of exchange rates,
and the Fund has subsequently operated without difficulty.
Under the amended Articles, the link between the SDR
and gold is severed. The SDR replaces gold as the common
denominator of the system, and is the unit for measuring
IMF rights and obligationsu The SDR's value will continue
to be determined by the present basket technique. The
possibility is provided for future modification in the
valuation technique in the event there is a widespread view
that a different technique is needed, A majority of 85 percent is required for a change in the valuation principle or a
fundamental change in the application of the valuation principle.
Other, non-fundamental or technical changes, require a 70 percent vote. Such an ability to modify the SDR valuation technique
is needed, because the present basket was introduced on an
interim, somewhat experimental basis, and because an evolution
in exchange arrangements could make it appropriate to shift
to a different valuation technique.
The SDR is expected to take on an increasingly important
role, not only as a unit of account used in measurements,
but also as an asset used in transactions. With respect
to its asset use, there is an obligation on members to
collaborate with the Fund toward the objective of making
the SDR the principal reserve asset of the international
monetary system. Also the SDR takes over from gold the
preferred status as asset to be received by the Fund in
payment of charges, in meeting repurchase obligations,
and to be accepted
by members in exchange for currencies
replenished
by the Fund.

- 17 -

/¥?

A number of technical steps have been taken to
improve the SDR's quality and usability so that it may
better fulfill its purposes. Thus countries will have
greater freedom to enter into SDR transactions with each
other on a voluntary basis; the possible uses have been
expanded; and the Fund may broaden the categories of
holders -- though not beyond official entities -- and
the operations in which they engage. Also, the decisions
for altering certain policies governing SDRs are made
easier -- such as the terms and conditions governing
approved transactions, and the rules that require countries
to "reconstitute" or buy back after a certain period
some of the SDRs they have spent.
At the same time these rules governing use of the
SDRs are being eased, important safeguards have been
retained which help assure that the SDR will remain a
widely accepted and valued asset. Thus, the limit on
members' obligation to accept SDR is retained, and IMF
quotas remain the basis for new SDR allocations.
The reduction in the monetary role of gold in these
agreements represents real progress toward an objective
held for many years by the United States and many other
countries. Gold is a valued commodity, but clearly not a
sound basis for an international monetary system. The
provisions in the new system reducing gold's role and
expanding that of the SDR represent a move toward realism
and stability,
IMF Quotas and the Provision of Fund Credit
The legislation before the Subcommittee would
authorize United States consent to an increase equal to
SDR 1,705 million in the U.S. quota in the Fund. A
member's quota determines its obligation to provide resources
to the Fund, its ability to draw resources from the Fund,
its share of SDR allocations, and its voting rights. The
quota increase proposed for the United States represents
our negotiated portion of the general quota increase agreed
to in a regular periodic review required under the Articles.
The quota increase would take effect after the amended
Articles take effect. It will have no effect on the budget:
in keeping with the recommendation of the Commission on Budget
Concepts, the transaction will be effected through an exchange
of assets, and the U,S, will receive a reserve position in

the Fund -- an automatic drawing right akin to a bank deposit -for dollars drawn down by the Fund to lend to other members.
Congressional approval is required for consent to this change
in the U.S. quota — and in fact for any change in the U.S.
quota, other than that which might result from a capitalized
increase in quotas which could result from and be financed
by a future sale of IMF gold at market prices, and for which
no payment would be required from the United States.
When Bretton Woods was established in the mid 1940's
and international banking was at a rudimentary stage of
development, the ratio of potential IMF credit to the levels
of international trade and investment may have seemed
impressive. Today it is far, far less so. As the monetary
system has developed, it has become increasingly clear that
while IMF resources can finance deficits and help bring about
orderly economic adjustment, the Fund cannot be the only device.
There has been a much more rapid increase in use of private
credit for financing payments deficits, and also a move
toward more flexible exchange rates and other means of
adjusting for imbalances.
While member countries will and should continue to
rely mainly on credit from private capital markets for
financing needs, the IMF has a unique and indispensable
function. It provides balance-of-payments credit under
clearly specified conditions, whereby borrowing countries
undertake sound economic programs of corrective measures -fiscal, monetary and exchange measures -- designed to
bring about the necessary adjustments, eliminate the problems
which caused the need for borrowing, and enable the debts
incurred to be serviced.
IMF credit expands the availability of private credit
very significantly. Markets are more willing to lend in
the knowledge that in the event of difficulty in a borrowing
country the IMF can be counted on, not just to provide
supplementary resources, but more importantly, to provide
those resources in association with soundly based corrective
programs.
The disciplines of the private market can be harsh and
abrupt. A country that gets into difficulty, whose credit
worthiness becomes suspect, can find that private financing
dries up overnight. Such a country will adjust --it must
adjust. But the choice may be between an adjustment that

- 19 -

If)

is internationally harmful and one that is internationallyconstructive -- that is, an adjustment involving restrictions
on others' exports, or exchange and capital controls, versus
an adjustment based on Fund financing and an associated Fund
program keyed to corrective fiscal and monetary measures.
The Fund can encourage those forces in deficit countries
which favor adjustment via internationally responsible means,
and it can provide a forum where those affected by a
country's actions can be heard. In dealing with these cases
the Fund can perform a crucial role that no other institution
can carry out. It can help to prevent a gradual erosion of
the entire payments system through the distortions to world
trade and investment that result from restrictions on trade
and payments imposed by these deficit countries. Action
by the Fund to isolate and assist such countries can help
to secure the entire system, by halting the contagion of
restrictionism. This aspect of the Fund's responsibilities
for the monetary system is a crucial one. The Fund's record
in helping to bring about adjustments through its conditional
financing is good, and its repayment record is unblemished.
The U.S. quota increase would be part of a proposed
increase in overall IMF quotas of 33.6 percent. In assessing
this overall increase in quotas of about one-third it is
worth noting that since 1970, when IMF quotas were last
increased, world trade has approximately trebled, inflation
has eroded the real value of Fund resources, and the
imbalance in world payments has multiplied as a result of
oil price increases and other problems, I think the increase
proposed for the United States and for the general IMF
membership is fully justified.
Reaching agreement on sharing the quota increase among
countries was difficult. It was generally acknowledged
that the oil exporting countries should have a larger share,
reflecting their increased role in the world economy, and
their combined share was doubled, from almost 5 percent to
almost 10 percent. It was also agreed that the non-oil
developing members should not suffer a reduction of their f
combined share. Thus, the full impact of the oil exporters
increase had to be shared by the developed countries. The
U.S. quota share will decline from 22.93 to 21.53 percent of
total, and our voting share will drop from 20.75 to 19,96
percent of total. Since the U.S. vote is dropping below 20
percent, the United States accepted this reduction within the
framework of an increase from 80 to 85 percent in the
vote needed for major Ftmd decisions.

- 20 -

]f£

Updating IMF Operations and Organization
The negotiation of a comprehensive amendment of the
IMF Articles provided an opportunity for introducing
needed operational changes. The original Articles were
heavily focused on the mechanics of the monetary system -on the trappings of convertibility and par values. The
Articles were more like a contract than a constitution.
They contained detailed rules and regulations — many of
which became obsolete with the passage of time -- and did
not contain either scope for flexibility in day-to-day
operations or scope for adaption over time.
In light of these problems, a large number of changes
are proposed affecting IMF operations. These modifications
are described in the Special Report of the National Advisory
Council and the Report of the IMF Executive Directors
submitted to the Congress in April. The purpose is to
modify obsolete provisions, to simplify operations and
introduce needed flexibility to remedy past anomalies,
and to adopt structural changes. Among the modifications
are the following:
-- Usability of currencies is assured. The United States
has consistently argued that all member countries should
permit the IMF to use its holdings of their currencies to
provide balance-of-payments financing to other members,
which is a basic purpose of quota subscriptions. But under
the present Articles, regardless of the strength of their
external positions, countries can effectively prevent the
Fund's use of their currencies for loans to others.
Agreement to the usability of IMF currency holdings was
considered essential, in part because quota subscriptions
can be paid in full in national currencies under the amended
Articles -- and there is no reason for the IMF to accumulate
more of a country's currency if it is not permitted to use
that currency. Under the amended Articles, there are
provisions to ensure that the Fund's holdings of all
currencies will be usable by the Fund in accordance with
its policies. Similarly, members will be required to provide
their currency to other members when that currency has been
specified by the Fund for repurchase. This agreement will
add substantially to the Fund's usable resources at present
and in the future and will strengthen its ability to provide
balance-of-payments assistance to members.

- 21 -

/f$

-- The Fund's authority to invest is made explicit.
Currencies, not in excess of the Fund's reserves (presently
about $800 million), can be invested in income-producing
and marketable obligations of international financial
organizations or of the members whose currencies are used
for investment. Investment can be made only if authorized by
70 percent majority and only with the concurrence of the
members whose currency is used for the investment. No
maintenance of value obligations would apply to invested
funds.
-- The Fund's policy on repurchases is modified.
The provisions in the present Articles were obsolete and
cumbersome, based on a detailed formula and on a calculation
of "monetary reserves" more appropriate to a par value
system than to present arrangements. The amendment provides
that tne Fund be given authority to establish policies on
repurchases appropriate to the needs of the system.
In addition to such operational changes, organizational
changes are also proposed. Most importantly, there is an
enabling provision which would permit by 85 percent majority
vote the establishment of a Council, with decision-making
power, to replace the present Interim Committee, which is
an advisory body. As in the Interim Committee, the U.S.
Governor to the IMF would serve as the U.S. representative,,
The Council would be charged with supervising the management
and adaptation of the international monetary system,
including the continuing operation of the adjustment process,
and development in global liquidity. These provisions are
also described in the special report of the National Advisory
Council,
Summary Comment
Mr. Chairman, the Subcommittee has before it the single
most important piece of legislation in the international
monetary sphere since the Bretton Woods legislation itself.
The world monetary system has been without legal form since
the Bretton Woods system fell apart five years ago. To many people,
international finance has been regarded as an arcane and abstract
subject, but with the experience of the past decade, the relevance of a smoothly functioning international monetary system
to American jobs, production, and growth is plainly seen. This
Subcommittee knows the necessity of having an effective legal
structure, and knows the importance of having our international

- 22 -

rules attuned to the realities of the day. Without agreed
rules, the temptations are strong for governments, deluged
daily by the demands of interest groups, to follow narrow
national interests at the expense of others and to pay
inadequate regard, or even to abandon, the broad view
of international interdependence which has so successfully
guided the world community since World War II. As the world's
main trading nation and a prime architect of a liberal world
trade and monetary order, we should move promptly to
show to the world that we remain committed to the rule of law
and reason among nations.
The new international monetary system is sound in
structure, and right in approach -- with firmness in the
commitment to policies which promote underlying stability,
flexibility in procedures and exchange practices; and careful
surveillance by the IMF to assure that obligations are fulfilled.
We have sought to retain the good features of Bretton Woods,
and to replace the obsolete. Members of this Subcommittee have
long endorsed two of the main themes in the new arrangements -a reduction in the monetary role of gold, and exchange arrangements that respond to market forces rather than trying to counter
those forces. The U.S. approach to the negotiations has been
strongly influenced by your views.
I urge, on behalf of the Administration, prompt and
affirmative action by the Subcommittee and by the Congress.
It is important, for the United States and for all IMF member
countries, that we end the present extra-legal character of
our international monetary system and restore the structure
of a workable, lawful system. The arrangements before us will
accomplish that, in a way which is balanced and fair, and which
safeguards the interests of the United States and all countries.
The United States has played a leading role in bringing about
the acceptance of the new arrangements. Prompt action by the
Congress will encourage similar actions by other IMF members,
and enable the implementation
oo 00 oo of these measures to being with
a minimum of delay.

FOR IMMEDIATE

PRT:EASE

June 1, 1976

Secretary of the Treasury William E. Simon today presented awards
and offered congratulations to the 48 national winners of the Bicentennial
Youth Debates in a ceremony on the South Plaza of the Treasury Department
building.
The BYD is the largest national Bicentennial program involving
American youth. The 48 winners emerged from 150,000 high school and college
contestants, all under 25 years of age, who began cortpeting in public speaking events in September 1975.
Each winner today received a set Of America's First Medals in a blue
case and a personal letter of congratulations from Secretary Simon. The
awards ceremony at the historic Treasury building is a highlight of the
June 1-4, 1976, National Conference of the BYD held in Washington, D.C.
Also attending were the parents of the winners, coaches, special guests and
distinguished members of the Congress who serve as hosts of the Joint Congressional Conmittee on Arrangements for Commemoration of the Bicentennial.
In his remarks at the awards ceremony,Secretary Simon said: "In
participating in these debates, each of you has not only made a creative
contribution to our Bicentennial celebration, but has also helped to
sharpen a talent that will serve you throughout your life — whether you
enter public service or choose any other career."
"Debate is dialogue," Secretary Simon said, "a sifting of ideas, and
we need more of it. Debate helps define problems and point to their solution
and, most important in a democracy such as ours, it ensures participation
and helps rally the people to understanding of our national challenges."
Indicating the bronze statue of the Nation's first Secretary of the
Treasury which dominates the South Plaza entrance to the Treasury building,
Secretary Simon said, "Alexander Hamilton, in whose shadow we gather here
today, was one of history's great debaters. He put his considerable powers
of persuasion; first, to the cause of the American Revolution, then to the
cause of the new Constitution, and finally — recognizing that economic
health is the underpinning of our strength — to the cause of a fiscally
sound nation."
Noting the early patriots' determination never to surrender their
freedom to any future government, even one of their own making, Secretary
Simon concluded, "Many people across the country want a government that
reflects more of the ideals of the Founding Fathers — a government, for
WS-893

- 2 -

/

exanple, that ^ ^ ^ ^ ^ . ^ ^ ^ J ^ ^ ^ f ^ ^ ^ r s ,
capable of working out their own destinies - in other words, a government
thay can be proud of."
Ac^istina Secretary Simon in making the awards were the Honorable
K M J S F S S Z S Z *
of the United Stat~ and * . Ronald S. Berrnan,
Chairman of the National Endowment for the Humanities.
The Bicentennial Youth Debates program ^f^^J^^^^
the Natioanl Endowment for the Humanities, a Federal Agency created by
toncffeS^d^as
a project of the Speech (Communication Association, a
^ S I o r ^ o r ^ a n L a t i o n devoted to the principles of speech convocation.
The Treasury Department has encouraged and supported BYD from jts
incepSon T r S ^ r y S e s
and Savings Bonds volunteers P ^ e n ^ 8,742
Washington bronze medallions to district level winners, and 561 bronze
Hamilton medals with a congratulatory letter frem ^ s . N ^ ^ * J f ^ f
engraving of the Declaration of Independence printed on hundred-year oic|
hand operated press, to sectional winners.
Today's national winners, who survived competitive public speaking
contests at local, district, sectional and regional events, represent
every section of the country and every sector of American society. A list
of the winners and their locations is attached.

oOo

BYD WINNERS BY EVENT
LINCOIN-DOUGEAS EEBATE
Mr. Michael Ray Buchanan - Oviedo High School, Oviedo, FL
Mr. Richard Dale - Hoover Hicfri School, Fresno, CA
Mr. Thomas A. Doyle - Baylor University, Homewcod, IL
Mr. Mitch Dupler - Harvard University, Canbridge, MA
Mr. Robert A. Enright, III - Davidson College, Davidson, NC
Mr. William J. Holloran, Jr. - Old Dominion University, Norfolk, VA
Mr. Steven Meagher - Pennsbury High School, Marrisville, PA
Mr. James Montee - Kansas City Center High School, Kansas City, MO
Mr. Dan Mulhern - University of Detroit High School, Lathrop Village, MI
Mr. David Ooley - Putnam City High School, Oklahoma City, OK
Mr. David Ray - University of Washington, Seattle, WA
Mr. Rudy Serra - Central Michigan university, Mt.. Pleasant, MI
Mr. Ed Schiappa - Kansas State University, Manhattan, KS
Ms. Michele Schiavoni - university of Delaware, Drexel Hill, PA
Mr. Mark Smith - Mt. Vernon High School, Alexandria, VA
Ms. Kristin Stred - Winthrop High School, East Winthrop, ME
PERSUASIVE SPEAKING
Ms. Rene Buchanan - Mt. Miguel High School, Spring Valley, CA
Mr. Desmond Connall - Princeton university, Princeton, NJ
Ms. Katina Cummings - Marshall university, Huntington, WV
Ms. Patricia Falese - Sacred Heart Academy, West Hempstead, NY
Ms. Ann Marie Goltz - Augustana College, Beresford, SD
Mr. Paul Goslin - university of Massachusetts, North Quincy, MA
Ms. Rhonda Mallis - Catalina High School, Tucson, AZ
Ms. Kathy Morgan - Billings West High School, Billings, MT

- 2 -

PERSUASIVE SPEAKING
Ms. Shari D. Olenick - Glenbrook South High School, Glenview, IL
Mr. Rolando William Pasquali - City College of San Francisco, San Francisco,
Ms. Panela E. Paugh - Parkersburg High School, Parkersburg, WV
Ms. Ayne Kinberly Popovich - Bethel Park Senior High School, Bethel Park, PA
Mr. Robert S. Sinquefield - Southaven Hi#i School, Southaven, MS
Mr. Joel Steiner - Arizona State university, Tenpe, AZ
Ms. Debby Trivett - East Tennessee State university, Kingspart, TN
Mr. Scot Wrighton - Sterling College, Ft. Collins, CO
EXTEMPORANEOUS SPEAKING
Mr. William W. Barrington - university of Toledo, Toledo, OH
Ms. Bobbi Rowe Baugh - Stetson university, Belleair Beach, FL
Mr. Chris Fairman - Lanier High School, Austin, TX
Mr. Steve Gools - Portage Northern High School, Portage, ML
Mr. Michael King - Harvard university, Cambridge, MA
Mr. Dan Lewis - Riverview High School, Sarasota, FL
Mr. Dwight Maltby - Wheaton College, Wheaton, IL
Ms. Bobbi Miller - Oklahoma Christian College, Oklahoma City, OK
Ms. Vicki Nelson - Crystal Lake High School, Crystal Lake, IL
Mr. David Piercefield - Lawrence Central High School, Indianapolis, IN
Mr. James M. Poterba - Pennsbury High School, Yardley, PA
Mr. Dwight Rabuse - Macalester College, Sun Fish Lake, MN
Ms. C. Jane Stradley - San Diego State university, Oceanside, CA
Mr. Steve J. Thomas - Mt. Miguel High School, La Mesa, CA
Mr. Stephen Weiner - Bronx High School of Science, Bronx, NY
Ms. Patricia Whitman - West Chester State College, Springfield, PA
# # #

Presentation of
Oreasuru 'Department Tlviarbs
to the {Regional Winners of the
Bicentennial }jouth Debates
South Plaza
U.S. Treasury
Washington, D.C.

June 1,1976

Debate is present where laws are m a d e by a free and thinking people.
It is central to our American heritage. Our national ideals and values—the
Declaration of Independence, the Constitution, and our State Constitutions,
were created through the debate process. Throughout our history, debate
has continued to be the w a y in which ideas are examined, laws are
evolved, and decisions reached.
The Bicentennial Youth Debates continues this tradition with the
involvement of high school and college age people in a serious study of
America's past and current problems through public speaking events.
The Bicentennial Youth Debates is sponsored by the National Endowment
for the Humanities and the Speech Communication Association. The
debates provide an especially fitting commemoration of our nation's two
hundredth anniversary. With students from 10,000 high schools and
colleges across the country participating in the program, B Y D provides the
largest national forum for this national self-examination. The involvement
of our young people in the study of our history is especially vital since
they will be a m o n g the leaders of our society as w e enter our third century.
At an individual level, the student participant benefits from improved
critical thinking and enhanced verbal facility.
As part of our Bicentennial Program, Treasury employees and
Savings Bonds Volunteers have presented awards to winners at the district,
sectional and regional levels of the contest.
The awards were:

District Level:

Sectional Level:

specially packaged
medallions

miniature Washington bronze

bronze Alexander Hamilton medals accompanied
by a congratulatory letter from Francine I. Neff,
Treasurer of the United States

a special engraving of the Declaration of Independence produced on a one-hundred year
old hand press by the Bureau of Engraving and
Printing
Regional Level: sets of the pewter reissues of America's First
Medals accompanied by a congratulatory letter
from William E. Simon, Secretary of the
Treasury

This Ceremony is a
Bicentennial Program
of the United States
Treasury Department

^Presentation of
Oreasury department Tlrtards
to the Regional Winners
of the
"Bicentennial
youth Debates
June 1, 1976
3 p.m.

The National Anthem
Welcome to the Treasury Francine I. Neff
and Introduction of Treasurer of the United States
Special Guests and
Bureau Heads
Introduction of
BYD Guests

Remarks

Dr. Richard C. Huseman
National Director
Bicentennial Youth Debates
Dr. Ronald Berman
Chairman, National Endowment
for the Humanities
Francine I. Neff
William E. Simon
Secretary of the Treasury

Presentation of
Awards to LincolnDouglas Debate Winners
Presentation of
Awards to Persuasive
Speaking Winners

William E. Simon
and
Francine I. Neff
William E. Simon
and
Francine I. Neff

Presentation of William E. Simon
Awards to Extemporaneous
and
Speaking Winners Francine I. Neff
Closing

William E. Simon

The United States Treasury is one of the
nation's most historic buildings and one of the
finest examples of Greek revival architecture in
America. Older than the Declaration of
Independence, the first Treasury w a s created in
late 1775. The present Treasury building, the third
oldest continuously occupied office building in the
nation's capital, is the second building erected on
the site personally selected by George Washington.
Designed by Robert Mills, the famous architect
w h o later designed the Washington Monument, it
is distinguished by 72 beautiful Ionic columns of
granite, each 36 feet high and weighing 3 0 tons.
The most impressive part of the edifice is the
imposing 466-foot south wing with its portico
modeled on the Parthenon. The graceful tiers of
stone steps, forming an esplanade bordered by
massive granite balustrades, lead to two broad
rectangular lawns. The pediments of the lofty
portico are supported by eight Ionic columns. It
was completed in early 1859.
The view from the portico is one of great beauty
and unlimited distance, past the statue of
Alexander Hamilton and across the wide stretch
of verdure and half mile of park leading to the
Washington M o n u m e n t and the Potomac River.
The south portico w a s originally planned to be the
front entrance. However, as the city's commerce
grew, the more convenient north and east wings
became the "front entrances." Thus the south
wing retained the dignity, tranquility, and beauty
of another age. The south portico has been the
scene of m a n y ceremonial occasions, as on
October 18, 1972, when the building w a s
designated a national landmark.

/13
Contact: R. Self
FOR IMMEDIATE RELEASE

Extension 8 256
May 28, 1976

TREASURY DEPARTMENT ANNOUNCES INITIATION OF
TWO COUNTERVAILING DUTY INVESTIGATIONS
Assistant Secretary of the Treasury David R. Macdonald
announced today the initiation of countervailing duty investigations on bicycles from Taiwan and cotton yarn from Brazil.
A "Notice of Receipt of Countervailing Duty Petition and
Initiation of Investigation" will be published for both cases
in the Federal Register of June 1, 1976.
Under the U.S. Countervailing Duty Law (19 U.S.C. 13 03)
the Secretary of the Treasury is required to assess an additional
customs duty which is equal to the amount of the "bounty or
grant" that has been found to be paid or bestowed on imported
merchandise. The Law requires that a final decision as to the
existence or non-existence of a bounty or grant be issued by
no later than twelve months after the date of receipt of the
countervailing duty petition. A preliminary determination to
this effect is required under the Law by no later than six months
after the date of receipt of the petition.
The investigation of imports of bicycles stems from a
petition received on April 19, 197 6, on behalf of the Bicycle
Manufacturers Association of America, Inc., alleging that
bicycles imported from Taiwan are benefitting from possible
bounties or grants within the meaning of the Countervailing
Duty Law. The investigation of imports of cotton yarn stems
from a petition received on March 9, 1976, from the American
Yarn Spinners Association alleging that this merchandise receives bounties or grants within the meaning of the Countervailing Duty Law.
Imports of bicycles from Taiwan in 1975 were valued at
approximately $10.9 million. Cotton yarn imports from Brazil
were valued at approximately $2.5 million in 1975.
o 0 o
WS-894

1*9
TREASURY SECRETARY SIMON ESTABLISHES
DEPARTMENT ANTI-DRUG ENFORCEMENT COMMITTEE
FOR IMMEDIATE RELEASE May 28, 19 76
Secretary of the Treasury William Simon today announced
the establishment of a Treasury Department Anti-Drug Enforcement Committee to oversee Treasury implementation of President
Gerald Ford's recently announced anti-narcotics initiatives.
The Committee, which will be headed by Under Secretary
Jerry Thomas will also include Assistant Secretary David R.
Macdonald, Commissioner of Internal Revenue Donald C. Alexander
and Commissioner of Customs Vernon D. Acree, with General
Counsel Richard R. Albrecht as Committee counsel.
One of the Committee's major responsibilities will be to
promptly develop recommendations as to the most effective
method of complying with the goals enunciated in the Domestic
Council's White Paper on Drug Abuse pertaining to enforcement
by the Treasury Department which include:
(1) the revitalization of an income tax enforcement
program focusing on the illegal profits of highlevel drug dealers, and
(2) the strengthening and expansion of tax treaties
with foreign countries to facilitate the investigation of international traffickers.
The Committee's findings for executing these objects will
be presented to Secretary Simon on or before July 1, 1976.

oOo

WS-895

Remarks by
The Honorable William E. Simon
Secretary of the Treasury
Before the
Foreign Exchange Traders
International Congress
May 29, 1976
INTERNATIONAL ECONOMIC AND MONETARY PROBLEMS AND CHALLENGES
Thank you, Mr. Leclerc, Mr. Estourgie, distinguished
members of the Head Table, and Ladies and Gentlemen:
It is a great privilege for me to address this impressive
gathering of leaders in the foreign exchange markets. It is
also a privilege to welcome so many of you to Washington.
You are visiting our Nation's capital during one of the
most interesting times in recent memory. As the newspapers
remind you every day, we are caught up in the excitement and
significance of both a Presidential election and our Bicentennial
celebration.
But there is something more in the Wasinghton air this
spring that you will also perceive. It's a renewed sense of
confidence by Americans in themselves and in their future.
We have recovered from the severest economic recession in a
generation, we have healed many of the divisions stemming
from other problems here at home, and we are looking ahead
with that sense of optimism that has always been so character^
istic of the United States. I do not mean to pretend that
we have solved all of all our problems such as inflation
and its byproduct, unemployment; under President Ford's
leadership, we must and will persist in attacking them;
but it is fair to say that you have come to a happier Washington
than you might have found a year or two ago.
One of the reasons for my own increased sense of confidence — and a subject that I want to address today — is the
success we have experienced as an international community in
building a new system to govern international monetary
relations. An additional factor is the growing evidence that
the
WS-896
people, as distinct from politicians, have perceived the true

- 2 implications of inflation and are ready to respond with their
support for policies to combat it.
Some might not share this confidence. Recent years have
been marked by a succession of crises. It has been, looking
back, an incredible period and looking ahead, we still have
difficult substantive problems. Perhaps that is why some of
you, the world's market makers, are undoubtedly nostalgic for
the good old days and may translate this nostalgia into a
desire to return to the par value system, thinking that fixed
rates would bring stability. I would suggest to you that
such beliefs are an illusion. Think again if the chaos and
disorder of the closing years of the Bretton Woods system.
Think back to those days of market closures which disrupted
trade and commerce. Remember, too, the hurried international
conferences to try to patch together some solution so that
markets might open again. Think back to the duration and
difficulty of the Smithsonian negotiations and the tensions
associated with those negotiations. Those were the days when
our political cohesion was threatened by monetary difficulties.
Then think back over the last five years of unparalleled flows
of money, massive increases in oil prices, inflation, recession,
balance of payments problems. Just imagine the old par value
system trying to accomodate those strains. It is clear to me
that the old system would have choked to death, and all of us
here would have been the victims.
The basic logic of the par value system implied a world
which does not now exist -- a world in which investment and
capital flows were very low and subject to widespread restrictions, in which international finance was at a rudimentary
stage of development, and a world in which changes in current
accounts proceeded with glacial speed. It was a smaller world
in 1950 and even in 1960, when world trade totaled $110 billion;
this year the figure will be close to $900 billion. Our new
system is appropriate for the world as it is today, not as it
once was or as some might like it to be.
Today we have a system that is flexible and resilient.
It has enabled exchange markets to remain open and viable in
the face of pressures that would have previously been overwhelming. It has been possible to relax or eliminate many of
the extensive restrictions of capital movements and to find
viable alternatives to restrictive current account measures.
Even the large payments deficits of today have provoked fewer
import restrictions by major countries than did the comparatively
minor payments difficulties of earlier years. Although rates
of inflation have varied enormously, from 6 percent in some
countries to 25 percent in others, the flexibility of our system

- 3 has allowed exchange rates to move so as to absorb such
differences- Attempts to maintain fixed exchange rates
under these circumstances would have led quickly and inevitably to collapse under the strain.
In short, I believe that the evolution of the new
monetary system has been one of most significant and beneficial international developments of this decade. It is a
milestone in international finance, I believe, that years
from now we shall look back upon this achievement with as much
pride as'we remember Bretton Woods today.
Before discussing my view of the new monetary system let
me comment for a moment on developments in the exchange markets
since the time of the Jamaica meeting and the Rambouillet
summit conference when the major Western nations reached broad
understandings on structural monetary reforms.
Since Rambouillet, there have been large movements
in the exchange rates of some of the participating nations. The
German mark and the French franc have diverged, and the pound
and the lira have been subject to intermittent but sharp
downward pressures. some have asked whether that means we
failed, and that the "spirit of Rambouillet" is dead.
No one should be misled: Rambouillet promised neither
instant nor easy stability of exchange rates. To the contrary,
the premise of Rambouillet was that exchange stability depends
not on market intervention but on the stability of underlying
conditions.
In today's world economy, action to manage or fix exchange
rates in contradiction to basic market forces will fail. In
recent years, nations have learned this lesson time and time
again, and those who challenge it do so at their own peril.
The market experience of the past months only serves to confirm
the premise of Rambouillet. It has shown that when there
is an absence of underlying stability — as there has been —
then intervention, even when very heavy, fails to assure
exchange rate stability. The meaning is clear: we can have
exchange rate stability only when domestic policies produce
an underlying stability in the economies of our nations.
Let me assure you that the sprit of Rambouillet is not
only alive but thriving. Consultations between our nations
have become more frequent, more comprehensive, and certainly
more candid than before. There have been regular day-to-day
contacts and communications between finance ministries across
the world. If there is a single group whose friendship I have

- 4found truly warm and inspiring, it has been the fraternity of
finance ministers to which I have been privileged to belong.
I am convinced that the increased knowledge and understanding
we have of each other's problems, have already proved helpful;
without them, the instabilities that have appeared in recent
months would have been far more dangerous. In order to deal
effectively with our problems in the future, we must and shall
continue these close consultations.
The summit at Rambouillet removed major impediments to
monetary reform and paved the way for the final agreement on a
new international monetary system which was reached at Jamaica.
It is important to understand that the new monetary system
will build upon the foundations of Bretton Woods in two vital
respects:
— First, the central, pivotal role of the International
Monetary Fund as the institutional heart and monitor of the
monetary system will be continued and, indeed, strengthened.
— Secondly, the essential aims of Bretton Woods, which
give cohesion and direction to the monetary system, will also
be reaffirmed. In terms of the IMF charter, we will continue
to foster international monetary cooperation and the balanced
growth of trade, to promote exchange stability and the elimination of restrictions, and to provide temporary balance-ofpayments financing to give members an opportunity to correct
maladjustments without resorting to measures destructive of
national or international prosperity.
Taken as a whole, these purposes represent a solemn
commitment to the philosophy of a liberal world order. That
philosophy was clearly enunciated in 1944 when the men of
Bretton Woods declared that the world must turn away from
the selfishness and destructiveness of the 1930s to the
cooperative approach that has prevailed since. This commitment to a liberal, cooperative world order — the heart and
spirit of Bretton Woods — must live on.
But the new monetary system departs from Bretton Woods in
important respects.
The men of Bretton Woods felt that the imposition of a
quite rigid system would produce stability. Lord Keynes and
Harry Dexter White had observed the chaos of the '30s and were
determined to minimize the prospects of a return to those conditions. In their view, a country whose costs got out of line with
others would have to support its currency in order to keep
it within the prescibed par value. For a country in balance
of payments deficit, this meant the liquidation of reserves
which, supplemented by the ability to borrow from the IMF,

- 5 would provide time for the country to adjust its policies,
modify its rate of economic expansion and let the resulting
economic slack slowly bring about a reduction in costs
relative to those of other countries. For surplus countries,
with strong currencies, the reverse process was supposed to
take place.
As the years passed, however, the attempt to impose a
stable exchange rate system did not produce stability. Countries were slow to respond to the signals of disequilibrium
designed into the Bretton Woods system. In the narrowly
pragmatic world of politics, there was a strong tendency to
finance deficits rather than to introduce measures to eliminate them. Deficit countries understandably chose to borrow and draw down reserves rather than increase unemployment.
We have learned that particular exchange arrangements
cannot superimpose stability — that the semblance of order
that results is a phantom. Rather, it is now universally
recognized that underlying economic and financial conditions,
are the stuff of which true stability is made. This means
that the exchange rate system can encourage stability but
the basic support for economic stability has to come from
the pursuit of sound, stable economic and financial policies
at home.
Bretton Woods, then, sought to impose stability on
countries from without, through the operation of international
monetary mechanisms; the new system seeks to develop -stability from within, through attention to responsible management in individual member countries.
In the exchange markets, the new system does not seek
to forestall changes by imposed rate rigidity, but recognizes
that it is far less destabilizing to permit rates to move in
response to market forces than to hold out until large, abrupt
changes result after costly financing efforts have been abandoned. It recognizes that the only valid path to a viable
international system is the pursuit of national policies that
converge toward stability rather than diverge into instability.
Neither system, the present flexible system nor the old
rigid par value system, can grant individual country's
immunity from inflationary policies. In either case, domestically generated inflation will ultimately depress a country's
exchange rate. This, in turn, will make imports more expensive and in the absence of change in domestic policies will
feed back into the country's price structure. This is not
a unique facet of the present system, as is suggested by the
phrase, vicious circle. All that it means is that there can
be no Chinese wall between action of domestic prices and the
action of a country's currency in the exchange markets.

- 6 The effects of our most recent economic problems have
been especially damaging to the less developed countries.
The massive inventory contraction in the developed world, one
of the principal engines of the recession, produced an
abrupt and sharp fall in the physical volume of exports of
commodity producing countries. The same process also resulted
in a 25% decline in commodity prices, which in turn meant
that commodity producing countries' terms of trade deteriorated sharply. At the same time the price of oil was rising
for the less developed nations, the price of their own
exports was falling. The net result was a $31 billion deficit in the current account of the Third World in 1975.
In order to help deal with the balance of payments
difficulties faced by a number of developing countries, problems brought about by the oil price increase, the sharp
recession, and other factors, a number of special measures
have been adopted. In the IMF alone, three major steps
have been taken:
,
— First, the Compensatory Financing Facility has been
greatly expanded and liberalized. This Facility is of major
value to commodity producers, including many developing
nations, in financing shortfalls in export receipts. The
expanded Facility provided more than a half billion dollars
in its first three months. It will probably provide more
financing in 19 76 alone that its predecessor Facility provided in the 12 years of its existence.
— Second, a new Trust Fund has been created. This
Fund, separate from but operated by the IMF, will use the
profits of IMF gold sales to provide needed balance of
payments financing to the poorest of the developing nations.
The Trust Fund is an innovative and imaginative way of meetina
two important objectives — we dispose of IMF gold and help
to reduce gold's role in the monetary system, and we help
meet a particular financing need faced by the poorest of' the
world's nations.
— Third, IMF quotas are being increased, and as part
of that decision, the share in total quotas held by non-oil
developing countries is being protected, so that reductions
in shares have to be absorbed by the group of developed
countries. Moreover, until the new quotas come into effect,
present quotas will be stretched, by allowing a 45 percent
increase in IMF credit tranches.
These initiatives have assisted developing countries to
deal with their financing problems. In developing and implementing them, we devoted an immeasurable quantity of human
resources and a considerable amount of money. Characteristically,

- 7however, the really substantive results are coming out of
the interaction of markets and economic recovery in the
developed world where inventory contraction has stopped
and been displaced by expanding production and some stock
rebuilding.
This has resulted in a significant increase
in the volume of LDC exports. Added to this is the firming
in commodity prices, with most broad indices of commodity
prices up about 20% from the recession low. This has
reversed the erosion in the LDC terms of trade. The combination of rising physical volume of exports and improving
terms of trade are bringing a strong revival in LDC export
earning capacity. The other side of this process can be
seen in the U.S.'s own current account, which has swung, in
annual rate terms, about $15 billion in three quarters.
Our large surplus of last year was a product of one phase of
the inventory cycle. The $15 billion swing represents an
appropriate adjustment to the expansion currently under way
in the United States. It is a desirable shift and represents one major aspect of a more tenable world payments
pattern that is emerging.
Looking back over the past several years, there is
reason for encouragement. I remember that in 1974, as
inflation rates soared into double digits and we headed into
the worst worldwide economic recession in more than 40 years,
many observers were predicting that the world was approaching catastrophe. There were expectations that our countries
would begin dealing with each other in the beggar-thy-neighbor
manner of the 19 30s. There were predictions of another
great depression. There were predictions that in seeking
to alleviate the pain of unemployment, we would so overstimulate our economies that a new wave of inflation would
engulf us.
Fortunately, we have largely managed to avoid those
tendencies and those pressures. Just as the doomsayers'
predictions of disaster reached a crescendo, the corrective
processes of the markets, supported by responsible economic
policies, began what has proved to be a remarkably strong
recovery.

- 8As you know, the pace of recovery has far exceeded
expectations here in the United States. We are now undertaking a revision of our economic .forecasts, and when the
analysis is complete, it will likely indicate that real output will be substantially higher than the 6 percent originally
projected, that the inflation rate for 1976 will be somewhat
lower than the 6 percent originally envisioned, and that the
unemployment rate may be down to 7 percent or slightly below
by year-end.
It should also be noted that during this period of
serious economic strain, the major nations of the western
world worked together in a spirit of cooperation and mutual
interest that has rarely, if ever, been equalled. The summit
conference at Rambouillet last year, the more recent international monetary meetings in Jamaica,and our proposals to
assist the Third World nations are only the most obvious
examples of strong, productive cooperation.
While much has been accomplished, we must also be realists
and even as we recognize and appreciate economic progress in
the institutional reforms that I have described, we must also
be acutely aware that many economic problems still remain.
Output is still sluggish in many parts of the world.
Unemployment is too high almost everywhere. Capital formation
required for meaningful development is unduly restricted by
economic and political uncertainties. Some protectionist
pressures continue despite the acknowledged advantages of free
trade. And most importantly, our number one public enemy,
the single greatest source of our economic difficulties -inflation — has not yet been fully conquered.
The United States has a special responsibility to provide
positive leadership. We will not fail in that responsibility.
— We will follow responsible fiscal and monetary policies
required for a strong and stable domestic economy. The strength
of the American economic system is a basic factor in the continued progress of the world economy. Unfortunately, our policies have not provided the necessary stability over the last
decade. Stop-and-go decisions have contributed to recurring
booms and recessions marked by excessive inflation and unemployment. We are in the second year of a healthy and balanced
economic expansion, but we are entering a period of new tests
of responsibility in our fiscal and monetary policies.

- 9 Let us recognize that in both our domestic and international policies, the basic objective of improving living
standards and employment opportunities will be frustrated
unless we better control the insidious inflation which has
destroyed economic stability. The tragic policy errors of
the past and our hopes for the future force us to recognize
a basic reality: Inflation is the greatest threat to sustained economic development and the ultimate survival of all
of our basic institutions.
The lessons of history clearly indicate that when inflation
distorts the economic system and destroys incentives, the
people will no longer support that system and society disintegrates. I am convinced that our uniquely creative and productive society will also collapse if inflation dominates
economic affairs. Contrary to a once popular view, there is
no tradeoff between the goal of price stability and low unemployment. The achievement of both goals is interdependent.
If we are to sustain the output of goods and services and reduce
unemployment, we must first control inflation.
Inflation is not now, nor has it ever been, the grease
that enables the economic machine to move forward. Instead,
it is the monkey wrench which disrupts the efficient functioning
of the entire system. Inflation restricts the housing industry
by increasing the prices of homes and interest costs on mortgage loans. It is inflation which destroys the purchasing
power of our people as they strive — too often in a losing
struggle — to provide the basic necessities of food, housing,
clothing, education, and medical attention. Finally, inflation
erodes the pace of new business investment in plants and
equipment needed to create additional jobs. We must always
remember that it is inflation which causes the recessions that
so cruelly waste human and material resources and the tragic
unemployment that leaves serious economic and psychological
scars long after economic recovery occurs.
When inflation takes over an economy, the people suffer
and it is time that this basic point be emphasized by every
responsible citizen and the full brunt of this reality is
brought to bear on their elected officials.
The policy decisions now being made will shape our domestic
*nfl world economies far into the future. As the potential
beneficiaries -- or victims - of these decisions, you have a
special interest in the results. You should be particularly
Interested in promoting economic stability which is the only
meaningful approach to maintaining healthy foreign exchange
Ztrlets
Empty rhetoric and dogmatic rules will never achieve
the stability we all desire; only responsible economic policies
and realistic international cooperation will achieve that goal.
That is the course we must pursue together.
Thank you.
oOo

u DepartmenttheJREASURY f
SHINGTON, D.C. 20220

TELEPHONE 964-2041

FOR RELEASE AT 4:00 P.M.

June 1, 1976

/?</

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 $5,700 million , or
thereabouts, to be issued

June 10, 1976,

as follows:

91-day bills (to maturity date) in the amount of $2,300 million, or
thereabouts, representing an additional amount of bills dated March 11, 1976,
and to mature September 9, 1976

(CUSIP No. 912793 A8 9), originally issued in

the amount of $3,409 million, the additional and original bills to be freely
Interchangeable.
182-day bills, for $3,400 million, or thereabouts, to be dated June 10, 1976,
and to mature December 9, 1976
(CUSIP No. 912793 C5 3).
The bills will be issued for cash and in exchange for Treasury bills maturing
June 10, 1976,

outstanding in the amount of $6,000 million, of which

Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,661 million.
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 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 Daylight Saving time, Monday, June 7, 1976.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in
multiples of $5,000.

In the case of competitive tenders the price offered must

be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
>
Banking institutions and dealers who make primary markets in Government
WS-897

(OVER)

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 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 $500,000 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

June 10, 1976,

in cash or

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

June 10, 1976.

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 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

June 1, 1976
JOINT STATEMENT OF THE SECRETARIES OF
STATE AND TREASURY
The United States went to UNCTAD IV at Nairobi in a
serious and cooperative spirit. In preparation for the
Conference, we conducted a thorough review of U.S. international economic policies in which all agencies of the
Government participated. There was agreement on a series
of proposals of special relevance to the developing
countries, which we presented at UNCTAD. We were represented by the most senior delegation in the history of
UNCTAD meetings, and, for the first time, the United States
position was set forth in an opening statement by the
Secretary of State. In that statement, the United States
put forward its proposals to deal with the problems of the
developing world, including proposals directly related to
commodities, and at the same time indicated that there
were certain proposals that we could not accept. Throughout
the four week meeting, the United States cooperated with
other nations and important progress was made on a number
of matters before the Conference.
In our review of international commodity policies in
preparation for the UNCTAD meeting, and otherwise, we have
tried, to find ways of meeting the concerns of the developing countries, within the framework of an efficient
international market system. As we have made clear at
the UN Conference, we are prepared to participate in a
case-by-case examination of arrangements to improve the
functioning of the international commodity markets through
a broad range of measures appropriate to specific commodities,
but we have opposed mechanisms to fix prices or limit
production by inter-governmental action.
One of the most significant of the U.S. proposals
addressed the problem of increasing investment in mineral
development. For that reason, the United States, in an
WS-898

)1
NOTE TO EDITORS:
The reservations and explanations of the United States
Delegation, made at the final plenary meeting of the Conference
with respect to the resolution on commodities, is quoted
below:
"With regard to Section IV of this resolution, our understanding of the request to the Secretary-General to convene
preparatory meetings is that the purpose of such meetings
is to determine the nature of the problems affecting particular commodities and to determine, without commitment, the
measures which might be appropriate to each product. Such
meetings will show us the cases where we could enter into
negotiation of agreements or other arrangements which could
encompass a broad range of measures to improve trade in
commodities.
"It is our further understanding that the SecretaryGeneral in convening preparatory meetings will utilize existing
commodity bodies. Where there are no such bodies, Ad Hoc
groups will be convened. We interpret this section to mean
that preparatory meetings will be convened on individual
products and that the preparatory meetings are consultations
prior to a decision whether to enter negotiations.
"A decision on a financial relationship among buffer
stocks will need to be considered in the light of developments on individual funds. However, since there may be advantages in linking the financial resources of individual
buffer stocks we will participate without any commitment in
preparatory meetings to examine whether further arrangements
for financing of buffer stocks including common funding are
desirable. After these preparatory discussions we will
decide on participation in any negotiating conference.
''We have accepted this resolution on the understanding
that its various positions, including those on commodity
arrangements and compensatory financing, do not alter our
reservations on the concept of indexation.
"We should just add two final points. First, we are not
indicating in this or other resolutions of this conference
any change in our known views on the new international
economic order and its basic documents.
"Second, we would emphasize the difficulties related to
the concept that production of synthetics and substitutes
should be harmonized with supplies of natural resources.

- 2-

"We regret that this resolution which is supposed to
deal with commodity problems in an overall sense, does
not address the problem of supporting development of resources
in developing countries. Failure to adopt the proposed
resolutions regarding the International Resource Bank represents a similar lack of attention to this task. We accept
this resolution with these reservations and explanations."
#

FOR IMMEDIATE RELEASE

Contact: L.F. Potts
Extension 2951
June 3, 1976

TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT LESS THAN FAIR VALUE
WITH RESPECT TO ALPINE
SKI BINDINGS AND PARTS THEREOF
FROM AUSTRIA, SWITZERLAND
AND WEST GERMANY
Assistant Secretary of the Treasury David R. Macdonald
announced today that Alpine ski bindings and parts thereof
from Austria, Switzerland and West Germany are being or
are likely to be sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended. Notice
of these determinations will be published in the Federal
Register of June 4, 1976.
The case will now be referred to the U.S. International
Trade Commission for a determination as to whether an
American industry is being, or is likely to be, injured.
In the event of an affirmative determination, dumping duties
will be assessed on all entries of the subject merchandise
from those countries with respect to which such affirmative
determination is made, which have not been appraised and on
which dumping margins exist.
"Withholding of Appraisement Notices", published in
the Federal Register of February 27, 1976, stated that
there was reasonable cause to believe or suspect that there
were sales from Austria, Switzerland, and West Germany at
less than fair value. Pursuant to those notices, interested
persons were afforded the opportunity to present oral and
written views prior to the final determinations in these cases.

WS-899

/?$
For the purpose of this determination, ski bindings and
parts thereof other than Alpine ski bindings and parts
thereof are excluded. Cross-country ski bindings and bindings for ski jumping are thus excluded.
Imports of the subject merchandise from Austria during
the period January through August 1975 were valued at
roughly $387,889; from Switzerland during the period January
through August 1975, at roughly $115,000; and from West
Germany during the period June 1974 through July 1975, at
roughly $1,560,000.
*

*

*

//3
FOR IMMEDIATE RELEASE

June 3, 1976

RESULTS OF AUCTION OF 4-YEAR l-MONTH TREASURY NOTES
The Treasury has accepted $2,000 million of $5,062 million of
tenders received from the public for the 4-year 1-month notes, Series
D-1980, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 7.68% 1/
Highest yield
Average yield

7.73%
7.71%

The interest rate on the notes will be 7-5/8%. At the 7-5/8% rate,
the above yields result in the following prices:
Low-yield price 99.796
High-yield price
Average-yield price

99.625
99.693

The $2,000 million of accepted tenders includes 2% of the amount of
notes bid for at the highest yield and $ 388 million of noncompetitive
tenders accepted at the average yield.
In addition, $160 million of tenders were accepted at the averageyield price from Federal Reserve Banks as agents for foreign and international monetary authorities.
1/ Excepting 10 tenders totaling $1,166,000

WS-900

jw
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE COMMITTEE ON BANKING, HOUSING
AND URBAN AFFAIRS
UNITED STATES SENATE
REGARDING U.S. PARTICIPATION IN THE
FINANCIAL SUPPORT FUND OF THE OECD
JUNE 4, 1976, 10:00,
Mr. Chairman

V
and Members

of the Committee

I am pleased to testify in
pport of .S. participation
in the proposed OECD
upport
Func — or "financial
anc
safety net." I hop
pedite action
ngs will
on this proposal, f
ve that prompt^ atification
by the U.S., and pr
lishment of the Support Fund,
are becoming increasi
rgent.
The proposed Finan&fe/l Support Fund is
mtual
insurance mechanism, designed to provide a c mpVeia^jis-rve
framework for coqpe\:ative\ action by the
industrial
th the real and
1 implications
It will promo
al closely
ives:
assure that neede
ancing is available to
cipants to support
policies ;
ill enable countries \£/D avoid Recourse to damaging
and ultimately self-defeating ac-ryions to protect
their own financial pp^rtions;
it will requlre\a
energy and economic
for participation;

c commitzment to cooperation in
>olicy a/ a pre-condition
id

it will require\spe!cific Actions in energy and
economic policy by prospective borrowers.

WS-901

- 2 In essence, the Support Fund will provide the financial
underpinning for cooperation among the major oil importing
countries across the broad range of economic policy issues —
and the financial independence and self-confidence essential
for national commitment to that cooperation.
I will focus my remarks today on two main areas that
I know are of concern to the Congress: first, whether a
need for the Support Fund still exists, almost a year after
it was first proposed to the Congress, and the nature of
that need; and second, whether the Support Fund is designed
adequately to safeguard U.S. financial and economic interests —
including our interest in assuring that any financing provided
by the United States is used properly and effectively.
In my judgment, a need for the Support Fund not only
exists but is more critical now than when it was first
proposed. And I am convinced that it contains every possible
safeguard of U.S. interests. Moreover, other participants
are now moving to ratify the Support Fund Agreement. In
fact, enough countries have ratified or are in a position to
ratify that U-S. action could permit the Support Fund to
come into being at an early date. But the prospects for
its establishment are clouded by doubts abroad about our
own interest and commitment. The Support Fund bill deserves
the strong and unified support of the United States Government.
I strongly urge that the Committee take prompt favorable
action on this legislation.
Need for the Financial Support Fund
The agreement to establish the Financial Support Fund
originated in parallel proposals developed by the United
States and by the Secretary-General of the OECD. Those
proposals, first advanced in late 1974 and approved by OECD
Finance Ministers in April 1975, were developed against the
background of major shifts in world payments patterns and
financing needs following the oil price increases. The
financial problems caused by the increase in oil prices
created a serious threat to individual oil importing nations
and to the world economic and political order; and the Support
Fund was designed to provide a solid financial basis for
the cooperative effort needed to meet that challenge. It
reflected a real concern with the need for the major nations
of the world to avoid destructive reactions to unprecedented
changes in their balance of payments positions; and the
need not only to maintain but to strengthen cooperation
among the major countries in economic and energy policy at

- 3 a time of exceptional difficulty. Countries have succeeded
thus far in avoiding resort to beggar-thy-neighbor and
protectionist practices. But the challenge remains.
The Support Fund is a mutual insurance mechanism. The
term "safety net" is apt. The proposal derived from intense
worldwide concern that oil importing nations, acting independently, would not be able to manage the financial and
economic consequences of the oil price increases — that
countries, unable to obtain financing on reasonable terms,
could move to protect themselves through the adoption of
competitive exchange rate practices, trade restrictions or
other internationally destructive policies — and that
other countries would respond in kind to protect their own
positions. Once started, such actions could quickly spread,
with disastrous consequences for the world economy. The
risk is shared by all. The Support Fund is designed to
protect against this common risk, and, as in any insurance
program, it is financed by all. It will provide assurance
to an individual participant that if it cannot obtain needed
funds elsewhere on reasonable terms — and on the condition
that it accept energy and economic policy conditions designed
to correct its problems — the needed financing will be
available.
We are fortunate that widespread resort to restrictive
and aggressive economic policies has been avoided so far.
With very few exceptions, oil importing countries have
managed their affairs in a way that has not shifted great
burdens onto others. This favorable experience has lead
some to conclude that the effects of the oil crisis have
come and gone and that the Support Fund today is an anachronism;
or that the Support Fund proposal never had a serious
substantive rationale but simply represented a political ploy
to generate support in negotiations with the oil exporting
nations.
To the contrary. The Support Fund represents the essential
international framework we must have to come to grips with
our problems in a comprehensive and purposeful way. The view
that the financial and economic problems caused by the five-fold
oil price increase are behind us reflects a serious misreading
of events and of the situation we face today and in the future.
The private capital markets and existing official financial
arrangements have indeed worked well; and the more flexible
exchange rate arrangements now in place have helped to
begin the difficult adjustment to changing international
circumstances. The market has done its job — and the total
financing need within the OECD area was greatly, though
temporarily, reduced last year by the world recession.

/F7
But adjustment has not proceeded rapidly enough or at
an even pace within the OECD area. Some countries have been
very slow in implementing needed adjustments. Huge debts have
been and are still being accumulated, and this has radically
changed the balance sheet structures of both borrowers and
lenders. Extensive recourse has been made to the IMF and
to other official financing arrangements, and many countries
have drawn their readily available reserve holdings down
by substantial amounts. Major imbalances within the OECD
area remain and, with the recovery of economic activity
now underway, may become more serious. Given the heavy
use of existing financing arrangements that has already
taken place, the need for a potential supplement has become
more, not less, urgent.
I know there is some concern that the Support Fund
proposal represents a "bail out" of some sort. I would
like to address this concern, because it represents a
serious misconception of the nature of the problems we
face and of the concepts underlying the Support Fund.
The "bail out" concern appears in two forms.
There is one view that the existence of the Support
Fund would be a bail out for the oil producers — that it
would both relieve them of the risk of providing financing
to countries in difficult situations and facilitate the
payment of exorbitant oil prices by the OECD countries.
The design of the Support Fund is precisely the opposite.
The most effective strategy for moderating oil prices is
to promote economic security on the part of the major oil
importing nations, as a basis for cooperative action
in the energy and economic areas. The Support Fund would
provide financing for overall payments problems — not for
making oil payments — and would make financing available
only on the basis of cooperative policies in the energy
area to reduce dependence on over-priced imported oil.
The strains in the present situation derive largely
from the massive increase in the price of oil since ]973.
They will not be mitigated by a decision by the oil exporters
against a further increase of 5 or 10 percent or even by
a decision to reduce prices by an equivalent amount. The
situation demands the comprehensive response represented
by the Support Fund, not a hesitant or timid approach that
leaves an assessment of the breaking point to the oil ministers.
The Support Fund does reduce risk — but not risk
borne by the oil exporters on their investments. They
will still have to invest. Rather, it reduces the risk
to the oil importers that they might be forced to accept

- 5 onernous economic or political conditions as a price for
needed financing. It frees them from a dependency that
could weaken their resolve to participate in a cooperative
response to the energy situation, a basic objective of the
Support Fund. It would be anomolous to invite the exporters
to help shape that response.
It is important to note that there is no way to
compel the oil producing nations to accept the risk of
lending to particular countries. The oil producing nations
have — and should have — the freedom to invest where they
wish, accepting the normal risk associated with investment.
And they have been making a number of investments in the form
of loans to OECD member countries. On these loans they
take the normal risk. We welcome such arrangements. But
the Support Fund will give the borrowing countries an
alternative to dependence on OPEC loans and thus put them
in a position to resist demands on the part of OPEC lenders
which would give them excessive influence over the policies
of the borrowers. For my part, I am persuaded that the OECD
group, whose members share a fundamental harmony of interests,
is the preferable forum for development of a cooperative and
effective response to the energy and economic problems of
the oil importing nations.
Finally, it must be realized that the consequences of
a failure to provide needed financing would not be a sharp
cutback in essential oil imports — there simply isn't scope
for major reduction overnight. The consequences would much
more likely take the form of harmful trade and capital
restrictions and manipulation of exchange rates, any of
which could stimulate successive rounds of retaliation —
or of inappropriately restrictive domestic policies. This
is the shared risk to the oil importing nations, and it
requires the shared response of the Support Fund.
A second view is that the Support Fund is really a
device for bailing out banks that have become overextended.
The financial position of the banking system was not a
factor in the development of our proposals for the Support
Fund. The objective of the Support Fund is to assure that
needed balance of payments financing will be available on
reasonable terms — not to refinance the private banking
system.

- 6 Even more to the point, the likelihood that any OECD
country would default on government or government-guaranteed
credits from foreign lenders is remote, with or without
the Support Fund. Any such default would so badly damage
a country's ability to obtain new credits that default is a
truly last ditch resort. Long before a country would consider
defaulting on external debt, it would cut its foreign
exchange payments through trade restrictions, capital
restrictions, manipulation of the exchange rate and excessive
restraint on its domestic economy. The Support Fund is
designed to reduce the risk that such steps will be taken.
The point is not that the banks will benefit. It is
that the entire world economy will benefit from the existence
of the Support Fund. To the extent it helps assure the
integrity of countries' external positions and that needed
adjustment will be undertaken, it will strengthen the
operations of the markets and bring greater stability
to the system as a whole. As the system is strengthened,
the positions of American exporters, workers and consumers
are correspondingly strengthened.
The Support Fund will benefit all segments of the
world economy by helping countries to avoid destructive
policies — and by requiring appropriate adjustment as a
condition of financing.
It is not a special interest scheme
for particular countries or institutions.
The essential response to the massive imbalances
caused by the oil price increases is a judicious combination
of external adjustment, internal adjustment and transitional
financing — financing to provide an opportunity for
adjustments to be made, but to be made in a way that
does not involve change so abrupt and so violent as to
be unacceptable. The obvious corollary is that such
financing must be accompanied by policy conditions to
assure that adjustment is, in fact, made.
The oil importing industrial countries have been
helped greatly by the move to greater exchange rate
flexibility. Greater flexibility has both promoted needed
adjustment and provided an effective alternative to damaging
restrictive action. Flexible exchange rates will assist
greatly in the further adjustments that must be made. But
they cannot be left to handle all of the adjustments at
once. The oil price increases have brought enormous strain.
Exchange rate movements, if all were left to the rates,
could be extremely abrupt and violent, with serious adverse

- 7 consequences on the export and more general economic
interests of other countries. Once again, the prospect of
inappropriate and damaging defensive action is the threat
that must be dealt with. A transitional period for appropriate
adjustments to be undertaken is required.
The job of the Support Fund — as a vehicle for decisions
by Finance Ministers in participating countries on the
extension of credit to other members and on the policies
that must accompany that credit — is to bring the proper
balance between adjustment and financing.
Acceptance
of stringent, effective internal and external policy conditions
is an integral part of the Support Fund approach. Adjustment
policies, and financing to help those policies along, are
essential in proper doses. Responsible adjustment cannot
be achieved overnight. Without a proper balance, the dangers
are serious: competitive manipulation of exchange rates;
resort to controls over imports and capital; restrictive
domestic policies that threaten world economic recovery.
Such moves — resort to beggar-thy-neighbor policies —
cannot be in the interest of the United States or any other
country.
The Support Fund has an important role to play in
sustaining the system and in inducing countries to follow
adjustment policies which are both effective and internationally
responsible. It is urgent that we put it in place promptly.
Principal Features of the Financial Support Fund
The Financial Support Fund is designed to meet a special
complex of problems. Its features are unique. It is singularly
suited to the situation we face, and it is tightly constructed,
incorporating strong and effective safeguards to U.S. economic
and financial interests.
First, the Support Fund is not an automatically available
lending facility. It is an insurance mechanism. Countries
must demonstrate that they have made the fullest appropriate
use of alternative sources of financing. They must accept
energy and economic policy conditions — fiscal, monetary,
exchange rate policy conditions — designed to correct their
internal and external problems. These conditions will be
set by Finance Ministers in the other participating countries
and are essential to dealing with the adjustment problems
that we face.

- 8 Second, the U.S. will have a major voice, in many cases
a decisive voice, in all operations of the Support Fund. All
decisions on loans, policy conditions and financing techniques
will require a two-thirds majority vote at a minimum. With a
quota and voting share of 27.8 percent, the U.S., along
with one or two other countries, will be able to prevent
loan proposals it does not favor. In addition, loans above
a country's quota and less than twice its quota will require
a ninety percent vote, and loans of larger amounts will
require a unanimous vote. Thus the U.S. acting alone could
block any credit in excess of a country's quota. I believe
these voting provisions give the U.S. ample safeguards
over the Support Fund's operations, and ample opportunity
to guide those operations in directions we think appropriate.
The proposed U.S. quota is SDR 5,560 million, or
approximately $6.3 billion at current dollar rates for
the SDR. Quotas in the Support Fund are intended to reflect
a rough measure of countries' relative weight in the GNP and
trade of the OECD area, and I consider the U.S. quota to be
a reasonable share for us to accept and exercise.
Third, the Support Fund is inherently a shared response
and it rests fundamentally on the sharing of risk. Its
provisions are expressly designed to assure widespread
participation in financing by members, and to assure an
equitable distribution of risk regardless of financing techniq
The burdens of financing and risk will thus not fall to the
one or two countries that may be in a relatively strong
position at the time financing is needed, as has been the
case in the past. As you are well aware, the United States
has found itself in this position in earlier years. I have
no doubt that we would respond again to an urgent need. But
I consider it far better to have an appropriately designed
and equitable multilateral structure in place if the need
arises, than to rely on ad hoc efforts to deal with a sudden
crisis. The Support Fund spreads the risk, and its rules
for decisions on loans afford the United States an appropriate
degree of control over its operations.
Fourth, the Support Fund is not a foreign aid gimmick,
or a soft loan facility. It is not an automatic line of
credit. Maturities will be medium-term, not beyond seven
years. Interest charges will be based on market rates.
The aim is to assure that financing will be available to
countries that need it — not that it will be available on
concessional terms and, most importantly, not that it will
be available without strict policy conditions.

19
- 9 Fifth, the Support Fund is designed to meet a transitional
problem, and it is temporary in character. Its lending
operations will expire after two years — and if a need for
extension were to arise, we would seek new Congressional
authorization.
Finally, countries' financial commitments will be made
available on a standby and not a paid-in basis, and those
commitments will be activated only if and when a need arises.
Furthermore, it is likely that the Support Fund will operate
by borrowing in world financial markets on the strength of
guarantees issued by its members, although countries will have
an option under some circumstances of providing direct loans
to the Support Fund. We intend to meet U.S. obligations to
the Support Fund through the issuance of guarantees. The
proposed legislation thus provides authority for the issuance
of guarantees and for appropriations to be sought in the
highly unlikely event of default by a borrower from the
Support Fund. In no event will U.S. obligations to the
Support Fund exceed our quotas.
Conclusions
Mr. Chairman, I view the Financial Support Fund as an
important and well-designed element of our international
economic policy. The signing by OECD countries of the
agreement to establish the Support Fund represented a political
commitment to cooperation across the broad scope of
international economic and financial issues. As such, I
am convinced that the prospect of the Support Fund has,
m itself, contributed greatly to an atmosphere of intensified
economic and financial cooperation. That atmosphere of
cooperation has not only prompted countries to avoid damaging
restrictive action in the face of unprecedented difficulties,
but it has also, in my judgment, contributed to the satisfactory
resolution of complex and difficult issues involved in
amendment of the IMF Articles of Agreement, amendments which
are the subject of legislation now before the Congress.
Action to establish the Financial Support Fund has
become urgent in two respects. Far from having dealt in
a meaningful way with the economic and financial implications
of the oil crisis, we are seeing evidence of financing
difficulties on the part of some countries. We can no
longer afford to defer action on the basis of a hope that

/*3
the need has passed. That hope is false. Second, action
55 percent of the total, have already either ratified the
Agreement or have completed their legislative procedures
and are expected to ratify shortly. Most others are in
advanced stages of their legislative processes. But all
are now looking to the United States to provide concrete
evidence of the leadership and concern which underlay its
original proposals for the Support Fund 18 months ago —
and positive U.S. action could provide the stimulus for
early establishment of the Support Fund.
I have met frequently with other Finance Ministers during
the past year, in the OECD, in the IMF Interim Committee, and
various smaller groups. We are attempting to build a stronger
structure of cooperation, and extensive cooperation has been
required to deal both with the changes that have been agreed
in the rules of the monetary system and with market developments
that have arisen. I know from these contacts that all regard
the Support Fund as an important part of the structure we
are building: important for its own sake, important for the
impetus it can give to broader cooperation.
Action to approve U.S. participation will provide firm
evidence of the continuing U.S. commitment to cooperation and
will help to ensure the preservation of a liberal, open and
prosperous world economic order. I urge your strong support
in this effort.
0O0

I9(/
MEMORANDUM FOR CORRESPONDENTS:

June 3, 1976

On May 3, 1976, Senators Edward M. Kennedy and Floyd K.
Haskell released a Library of Congress study on the DISC provisions of the Internal Revenue Code. On May 7, 1976,
Assistant Secretary of the Treasury Charles M. Walker transmitted a letter and a Treasury Department memorandum to
Senator Russell B. Long, Chairman of the Senate Finance
Committee, contrasting the approaches used by the Congressional
Research Service and the Treasury.
The Congressional Research Service issued a second statement
on the impact of the DISC provisions, which Senator Kennedy
introduced into the Congressional Record on May 17, 1976. That
statement took issue with Treasury Department criticisms of the
earlier CRS statement on DISC.
Attached, for your information, is a letter from Acting
Assistant Secretary of the Treasury David F. Bradford to Senator
Long, stating that the Treasury stands firmly behind its
estimates on the impact of DISC as presented in the 1974 Annual
Report, and transmitting a Treasury staff memorandum which discusses the CRS response in detail.

oOo

WS-902

DEPARTMENT OF THE TREASURY
jX£/

WASHINGTON, D.C. 20220

//Q (^

ASSISTANT SECRETARY

Dear Mr. Chairman:
The Congressional Research Service has issued a second
statement on the impact of the Domestic International Sales
Corporation (DISC) provisions, introduced in the Congressional Record on May 17, 1976 by Senator Kennedy. That
statement seeks to refute Treasury Department criticisms
of the earlier CRS statement on DISC which were set forth
in the memorandum accompanying Mr. Walker's letter to you
of May 7, 1976. Having studied the most recent CRS statement, the Treasury Department stands firmly behind its
estimates on the impact of DISC as presented in the
1974 Annual Report. The CRS statements only strengthen our
position on this issue.
As you know, the controversy concerns the Treasury
estimates of the effect of DISC on exports. While in these
matters there is no way of assuring the right answer, we
continue to believe that there are several defects in the
estimating method used by CRS. Their response to the
Treasury critique in effect concedes the weakness of their
original "best case" - "worst case" procedure. The new
analysis is in our view equally subject to criticism, and
involves as well some unfortunately careless handling of
Siacerely
yours,
sources. I am enclosing a
staff memorandum
which discusses
the CRS response in detail.

Acting Assistant Secretary
The Honorable
Russell B. Long
Chairman,
United States Senate
Washington, D.C. 20510
Enclosure

U.S. Treasury Department
Office of International Tax Affairs
June 2, 1976
COMMENTS ON THE REVISED LIBRARY OF CONGRESS ANALYSIS OF DISC
On April 13, 1976 Treasury released its Third Annual
Report on the effect of the DISC legislation. The Report
included estimates of the effect of DISC on exports. On
May 3, 1976 a Congressional Research Service Study of
DISC was released. The Study estimated export effects of
DISC using a different approach from that taken by the
Treasury. It was also ctitical of Treasury's analysis.
On May 7, 1976 Treasury issued a Memorandum defending
Treasury's earlier analysis and criticizing that of the
CRS. On May 17, 1976 Senator Kennedy inserted in the
Congressional Record, at S7338, a paper by the Congressional
Research Service entitled "Response to Treasury Department
Critique of CRS Analysis of DISC." The Response includes
revisions of DISC export effect estimates arising from the
Treasury critique.
Careful reading of the CRS Response casts further
doubt on the validity of the price elasticity approach
used by the CRS for analyzing the effect of DISC on
exports and confirms that their "best case" estimates do
not reflect "assumptions most favorable to DISC". Treasury
continues to believe that its $4.6 billion estimate of the
effect of DISC on exports in DISC year 1974 rests on a much
sounder approach than the price elasticity approach used by
the CRS.

- 2 Background
1. Treasury's 1974 Annual Report on DISC
On April 13, 1976, Treasury released its third annual
1
report on the operation and effect of the DISC legislation.
Most of the Report presents statistical tables and background explanation. Chapter 5 of the Report sets forth
a detailed statement of the assumptions and methodology
underlying Treasury's estimate that DISC* increased exports
$4.6 billion in DISC year 1974 (basically, calendar year
1973). Treasury's methodology rests on a careful
comparison of the actual export performance of firms with
DISCs and firms without DISCs. Chapter 5 of the Report
emphasizes that other assumptions and methods might
produce a different estimate, and contains a clear
statement that the $4.6 billion estimate must be viewed
with extreme caution.
2. The Congressional Research Service Study on DISC
On May 3, 1976, Senators Kennedy and Haskell released

II
a CRS study on DISC.
This Study relied on the statistics,
the analysis, and the qualifications of the Treasury Report.

1/ Department of the Treasury, The Operation and Effect of
the Domestic International Sales Corporation Legislation:
1974 Annual Report, April 1976.
2/ Library of Congress, Congressional Research Service,
The Domestic International Sales Corporation (DISC)
Provision and Its Effect on Exports and Unemployment:
A Background Report, May 3, 19/6.

- 3However, the CRS used a different approach, the price
elasticity approach, in estimating the effect of DISC on
exports.

Price elasticity approach estimates require

values for three key economic parameters:

the price

elasticity, the price "passthrough", and the export base.
Using values of these key parameters which are labled
"worst case" and "best case", the CRS estimated that DISC
had increased exports by between zero ("worst case") and
$1.35 billion ("best case") in DISC year 1974.

On the

basis of these estimates, the CRS concluded that "...repeal
of DISC would probably not cause major reduction (sic) in
either export (sic) or employment."
3.

The Treasury Memorandum in Reply to the CRS Study
Enclosed with a May 7, 1976 letter from Charles Walker,

Treasury Assistant Secretary for Tax Policy, to Senator

2/
Long was a Treasury staff memorandum of the same date
which contrasts the approaches used in Treasury's Report
and the CRS Study for estimating the effect of DISC on
exports.

The May 7 Treasury Memorandum suggests that,

for a variety of reasons, the price elasticity approach
used by the CRS is of questionable validity for analyzing
DISC; that the downward biases in the "best case" parameters used by CRS dramatically reduce the "best case"
export estimate; and that it is doubtful whether an

3/ Department of the Treasury, Office of International Tax
Affairs, The Treasury Report and the Library of Congress
Study of DISC, May 7, 1976.

- 4 approach which suggests a range of estimates between zero
and $8.5 billion significantly contributes to the public
debate on DISC.
The Memorandum also explains in detail Treasury's
treatment of product groups in which non-DISC exports
apparently grew faster than DISC exports.

The CRS Study

was particularly critical of this treatment.
The Memorandum concludes by noting that repeal or
reduction of DISC benefits would adversely affect exports,
and would magnify tax-induced distortions in our trading
relations with foreign countries.
4.

The CRS Response to the Treasury Memorandum
On May 17, 1976, Senator Kennedy released a second

report by CRS in response to the Treasury Memorandum
of May 7.

The Response concedes several points raised

by the Treasury Memorandum, and raises the CRS "best case"
estimate from $1.35 billion to $1.9 billion of additional
exports due to DISC.

Basically, however, it argues that

the Treasury estimate of $4.6 billion is still too high,
and that Treasury's suggestion that the "best case"
estimate which results from correct application of the
CRS method ($8.5 billion) is due to Treasury's misunderstanding of the research in this field.

- 5Treasury Comments on the CRS Study and Response
1.

The price elasticity approach
As noted in the May 7 Treasury Memorandum, the

price elasticity approach used by the CRS does not
attempt to capture effects (listed in the Memorandum)
which Treasury believes explain the impact of DISC on
exports; assumes, in the absence of any quantitative
evidence, that DISC has caused a change in export prices;
and requires many assumptions about the functioning of
the international economy and knowledge of key economic
parameters, the value of which, in the Service's own words,
are "extremely uncertain."
In the Response, no attempt is made to account for the
effects Treasury believes explain the impact of DISC on
exports; no quantitative evidence is presented to the
effect that DISC has caused a change in export prices;
and no additional research is reported which would reduce
the uncertainty surrounding the value of the key economic
parameters used in the price elasticity approach.
2.

"Best Case" Parameter Values
The Treasury Memorandum of May 7 also noted that if

reasonable "best case" parameter values had been used
by the CRS, the "best case" estimate of the effect of
DISC on exports would be $8.5 billion, not the $1.35 billion
estimate presented in the Study.

The revised estimate

of $1.9 billion presented in the Response is still far
below the $8.5 billion figure the CRS should reach. A
summary of the Treasury and CRS exchange on "best case"
parameter values will clarify this point.
a. Price elasticities. The estimated DISC export
effect increases more than proportionately with the size
of the price elasticity. In the CRS Study, a "best case"
price elasticity of 2.85 was used on the grounds that it
is "widely quoted." In Treasury's May 7 Memorandum, it
is pointed out that elasticity estimates as high as 5
are also "widely quoted", and cited two sources to support
the statement. In their Response, CRS states:
A check of the sources cited by the
Treasury to establish that elasticity
estimates as high as 5 are widely quoted
does not lead to the conclusion that 5 is
a reasonable estimate, but that perhaps
2.8 is too high.
One source cited by Treasury is a well known textbook
on international economics by Professors Caves and Jones.
This textbook contains the following passage on page 47:

4/ Richard E. Caves and Ronald W. Jones, World Trade and
Payments: An Introduction, 1973.

a

P^
- 7A study undertaken at the International
Monetary Fund suggests that substitution
elasticities are quite high for the
manufactured exports of any of the
industrial countries to the rest of the
industrialized world. If we allow about
two years for the response of a country's
export share to a change in its relative
price, the elasticity is approximately 3;
if we observe the adjustment for four years,
it rises to 5. 7/
7/ H.B. Junz and R.R. Rhomberg, "Prices
and Export Performance of Industrial
Countries, 1955-63," IMF Staff Papers,
12 (July 1965): 224-BT:
The Junz and Rhomberg study, referred to by Professors
Caves and Jones, summarizes the findings as follows:
The statistical results presented in
this paper lead to the conclusion that the
price elasticities of demand for export of
manufactures of individual supplying countries
may be rather higher than was previously
supposed. An elasticity of -2 is often
used as a rule of thumb when it is necessary
to make quantitative assumptions about the
effect of relative price changes on individual
countries' exports. With regard to exports of
manufactures by industrial countries to
industrial markets, the findings of this study
suggest that, in a longer-run context, a value
for the price elasticity in the range of -3
to -5 may be a more appropriate assumption. 5/
5/ Page 259. Often, economists drop the negative sign in
referring to price elasticities of demand since these
elasticities are virtually always negative. Junz and
Rhomberg retain the negative sign in the above passage.

- 8The other source cited by Treasury was a study by
6/
Norman Ture.
In that study, Dr. Ture states:
For most types of U.S. merchandise exports,
the amount of these exports is only a small
fraction of total world production and
purchases. An increase in U.S. exports,
even in substantial amounts relative to
preceding levels of these exports, will have
only a minor effect on the world market prices
of these goods. In other words, the rest-ofthe-world elasticity of demand for most U.S.
exports is very high. To err on the conservative
side, an elasticity of 5 is assumed in this
analysis, except in the case of agricultural
exports for which an elasticity of 10 is used.
In all likelihood, these elasticity estimates
result in substantial under-estimates of the
effects of the DISC provisions.
It is difficult to see how CRS concluded from these
statements that their "best case" price elasticity of 2.8
"is perhaps too high."
b. Price "passthrough". In their Study, the CRS
used a "best case" price "passthrough" of 1.7 percent.
Their calculation of the "passthrough" was based on the
assumption that in the absence of DISC, export profits
would be taxed at the statutory 48 percent corporate tax
rate. In Treasury's May 7 Memorandum, it was pointed out
that, although there is no quantitative evidence that DISC
has reduced export prices, under the CRS assumptions the

6/ "Economic Effects of DISC", in: United States Senate,
Committee on the Budget, DISC: An Evaluation of the
Costs and Benefits, November 1975, page 210.

^9
- 9 correctly calculated "best case" price "passthrough" is
3.3 percent.

In their Response, CRS concedes the fact

that the "best case" price "passthrough" correctly
calculated under their original assumptions is, in fact,
3.3 percent.

They continue by arguing, however, that

the calculation should be based, not on the 48 percent
corporate tax rate they originally used, but on an
"effective" tax rate of 30 percent, which pertains to
manufacturers

only.

But, effective tax rates are average

tax rates, and do not indicate the applicable rate at the
margin.

The statutory 48 percent rate is in fact the

appropriate marginal rate for calculating a "best case"
price "passthrough" figure.
c.

Export base.

In their Study, CRS used the sales

of DISCs with net income as the export base for computing
both their "best case" and "worst case" estimates.

In

Treasury's May 7 Memorandum, it is noted that this
treatment implicitly assumes that the price "passthrough"
will only affect foreign demand for exports of DISCs with
net income.

This is not an appropriate assumption in

arriving at a "best case" estimate using the price
elasticity approach.
In making a "best case" estimate the CRS should use
total U.S. exports as the base if the price elasticity
pertains to foreign demand for total U.S. exports.

- 10 Alternatively, if the CRS really believes that the price
"passthrough" only affects DISC exports, they should use
an "adjusted best case" price elasticity which pertains
only to foreign demand for exports of DISCs with net income if
exports of DISCs with net income are the base. This
7/
"adjusted best case" price elasticity would be 8.3.
The arguments presented in the CRS Response for using exports
of DISCs with net income as the base and a price elasticity
calculated for foreign demand for total U.S. exports seem to
reflect "worst case" assumptions; they certainly are not
"best case" assumptions.
In sum, the CRS Response does not alter the fact that
a correctly computed "best case" estimate of the effect of
DISC on exports in DISC year 1974 using reasonable "best
case" values for the key parameters under the price
elasticity approach is $8.5 billion.

7/ The "adjusted best case" price elasticity for DISC Year
1974 is calculated as follows:
Adjusted Total U.S. exports best case
"best case"
=
Exports of DISCs
price elasticity
with net income

X

price elasticity for total
U.S. exports

a Q
$73 billion
,.
b J
' " $44 billion X 5
If an "adjusted best case" price elasticity is used to
calculate the impact of DISC on total U.S. exports, an
allowance must be made for the effect of DISC on non-DISC
exports.

- 11 CRS Comments on the Treasury Report and Memorandum
1. DISC and non-DISC growth rates
Treasury's approach to estimating the effect of DISC
on exports is based on a comparison of the actual export
experience of firms with DISCs and firms without DISCs.
The methodology and assumptions underlying Treasury's
approach are explained in Chapter 5 of the Report.
The CRS Study and Response challenge the Treasury
approach on the grounds that the difference in growth
rates between firms with DISC and firms without DISC
may not be due to DISC. CRS, however, presents no
evidence to the contrary, and Treasury is unaware of any
such evidence.
Further, Treasury's assumption that the difference in
growth rates is due to DISC appears reasonable, since all
exporting firms, regardless of their prior export performance,
could potentially benefit from DISC, and it is unlikely
that only firms which both expected and actually expanded
their exports at a higher than average rate formed DISCs.
2. Apparent "negative DISC effect"
In their Study, CRS was particularly critical of
Treasury's treatment in the Report of product groups
in which non-DISC exports apparently grew faster than DISC
exports. In such cases, as noted in the relevant tables
of the Report, Treasury assumed the incremental DISC

J?*7
effect was zero.

CRS argued in their Study that a

"negative DISC effect" should have been mechanically
computed in such cases.
In Treasury's May 7 Memorandum, it was pointed out
that Treasury's procedure was based on careful consideration
of timing adjustments, possible reporting errors, and
product comparability in the particular groups.

The

Memorandum also describes why these factors were especially
relevant in Treasury's treatment of two product groups in
DISC Year 1973 -- grains and soybeans, and transportation
equipment -- for which nearly all of the "negative DISC
effect" had been mechanically computed by CRS.
In their Response, CRS concedes that the Treasury
procedure "...seems plausible and should be accepted in
the absence of contrary evidence."

However, the Response

continues by suggesting that the Treasury Report made no
mention of timing adjustments, possible reporting errors,
and product comparability.

This is simply not the case.

Treasury's 1973 Annual Report on DISC contained an
extensive discussion of these factors, particularly timing
8/
adjustments and product comparability,
and this discussion

£/
was prominently referenced in the 1974 Report.
8/ Department of the Treasury, The Operational and Effect of
the Domestic International Sales Corporation Legislation?
1973 Annual Report, April 1975. pages 26-28.
9/ See footnote 1, page 29.

- 13 The CRS Response also suggests that Treasury made no
attempt to make proper timing adjustments, to correct
reporting errors, or to ensure product comparability for
product groups in which DISC exports grew more rapidly
than non-DISC exports. On the contrary, as noted in the
Report, Treasury made a substantial effort to make such
adjustments and to ensure product comparability between
DISC exports and total U.S. exports. Data reported on DISC
tax returns are subject to numerous manual and computer
checks and cross checks to ensure reliability. All known
errors were corrected prior to publication of the 1974 Annual
Report.
3. Flexible Exchange Rates
CRS also suggests that Treasury's estimate of the
effect of DISC on exports may be too high because no
allowance is made for flexible exchange rates in making the
estimate. The CRS Response appears to confuse increased
exports and increased net exports (i.e., exports minus imports).
As noted in Treasury's Report, the effect of DISC on net
exports is uncertain. This does not alter the fact that
DISC does increase exports, and therefore helps offset
the distortions in U.S. trading relations with foreign
countries caused by our tariff and corporate tax systems.
It cannot be the case, as CRS suggests in its Response,

J'?
that DISC is simply a subsidy to foreign consumers of U.S.
products.

This suggestion completely ignores the value to

U.S. consumers of reducing the distortions in our trade
with foreign countries caused by other features of our tax
and tariff system.

OoO

FOR IMMEDIATE RELEASE
REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
NEW YORK CHAMBER OF COMMERCE AND INDUSTRY
JUNE 3, 1976
Thank you Mr. Champion, Dr. Murphy, Mr. Lanigan,
members of the New York Chamber of Commerce and Industry,
ladies and gentlemen.
It is a pleasure for me to be here this evening in
this great and historic hall to share my views on economic
issues with a group that is so knowledgeable and so vitally
concerned.
Because New York is our nation's largest city, our
richest port, our financial capital and a leader in manufacturing and service industries, you have a keen understanding of not only the strengths and weaknesses of the
city's economy, but of the entire American economy.
I only wish that more of our fellow citizens shared
your working knowledge of this truly remarkable and incomparably productive system of ours.
Unfortunately, many Americans do not. If there is any
subject that is generally misunderstood by an overwhelming
number of our citizens it is the dynamics of our free enterprise system. In fact, this information gap -- what some
authorities have called the economic illiteracy of the
American people -- is one of the problems I would like to
discuss with you a bit tonight.
I would also like to share with you a few thoughts on
some of the issues and problems facing America at this
critical point in our history -- issues that will still be
with us long after the tumult of this election year dies
down.
WS-903

- 2
&

/

I truly believe that America has reached a stage
where we must face a crucial question that goes
far beyond party and faction.
And how we answer it will determine what our democracy
is to become in future years.
Throughout our history, at one crucial turning point
after another, this question has concerned our leaders and
our people. At the end of the Constitutional Convention,
Benjamin Franklin emerged from the meeting hall where the
delegates from the 13 states were assembled. A lady
asked him, "What kind of government are you going to
give us?" His reply was: "A republic Madame, if you can
keep it."
In fact, the central challenge of our time is no different today than it was in Franklin's day. Securing a stable
and lasting republic means dealing fairly and effectively
with conflicting national goals; weighing competing priorities and values; reconciling the security and stability of
our basic institutions with the need for individual freedom
and privacy; and coping with our many national needs while
recognizing that our human and material resources are not
unlimited.
The challenge is to apply common sense solutions to
interlocking problems and demands without further expanding the power of government over our daily lives, and in the
process, further eroding both our economic and individual
liberties. In short, it is to maintain the political, social
and economic balance necessary to preserve the American
republic.
As we look back in this bicentennial year, we can take
great pride in the fact that our free institutions have survived for 200 years while so many other countries have declined
or undergone violent upheaval.
It is well worth remembering that less than 25 democracies
are left in the world today. And so, for a free nation
such as ours, to have survived for 200 years with our institutions intact, is quite an achievement in the history
of theMuch
world.
of the credit for the survival of our freedoms
must go to the strength, individuality and boldness of our

^/ipeople. But a great deal must go to our founding fathers,
who in their wisdom gave us the separation of powers doctrine
and a limited government based on political equality.
Our founding fathers, as Mr. Justice Frankfurter once
observed, "had no illusion that our people enjoyed biological, psychological or sociological immunities from the
hazards of concentrated power." They were acutely aware of
the tendency of power to corrupt and in doing so to threaten
our liberty.
But they also knew that a strong commercial society
based on maximum economic freedom was essential to the maintenance of political freedom.
They were convinced that if people were free to enrich
themselves materially, they would not only learn through trial
and error, but in the long run, everyone in the society would
benefit from their endeavors.
As this philosophy took root on our shores, another
event of equal significance to our nation took place in 1776,
3000 miles away.
It was the publication in Edinburgh, Scotland, of Adam
Smith's classic work, "The Wealth of Nations," a book which,
for the first time, elucidated the economic laws which
explain how and why free markets create the greatest amount
of wealth for the greatest number of people.
Our founding fathers had been practicing much of what
Adam Smith preached before the publication of "The Wealth
of Nations." But the work profoundly affected the subsequent development of our national economy, and thus is responsible for much of our material, economic and social wellbeing.
Just as the Declaration of Independence expressed the
ideal of political freedom, "The Wealth of Nations" expressed
the ideal of economic freedom. In America these twin ideals
grew and flourished and together produced a burst of energy
and achievement unrivalled in any other nation in a brief
200 year period.
4

Adam Smith ranked freedom first in the "natural order
of things." "The obvious and simple system of natural liberties established itself of its own accord," he wrote of a
free economy. "Every man, so long as he does not violate

&3
the laws of justice is left perfectly free to pursue his
interests in his own way and to bring both his industry and
capital into competition with those of any other man or all
men."
Adam Smith had strong faith in the individual. He
believed that in his efforts to better his condition, man
would inevitably improve society for all.
As he put it: "The natural efforts of every individual to better his own condition when suffered to exert himself with freedom and security is so powerful a principle
that it is alone and without any assistance not only capable
of carrying on the society to wealth and prosperity but of
surmounting a hundred impertinent obstructions which the
folly of human laws too often encumber this operation."
Adam Smith also recognized in the profit motive a
mighty engine for human progress. The extraordinary rise in
the American standard of living over the past 200 years
proved that he was right in this fundamental point. As we
have seen, his prescription for successful economic development included the belief that government power should be
limited. Fortunately, our founding fathers agreed and limited
governments to their 'just powers derived from the governed."
They were acutely aware that too much government threatens the basis of democracy: economic, political and individual freedom. Indeed, Adam Smith minced no words about this.
He wrote: "Once you ask the State to do something for you,
you must then expect the State to do something to you."
It is no secret that for most of the past 40 years we
have been asking the State to "do something" for us. We
may well ask now: In return, what has the State done to us?
Let's start with a few facts about government spending
and what that has done to us.
For most of our history, the Federal Budget stayed somewhere below the $100 billion mark -- usually way below it.
Then in 1962, we finally hit $100 billion -- and that
was only the beginning. Seven years later, the budget broke
the $200 billion barrier and then, only four years after
that, we hit the $300 billion mark. And now, in our bicentennial year, we have reached the point where the Federal
Government is spending more than $1 billion a day.

2'+
- 5-

Indeed, our Federal Government is spending more than
$1 billion every single day, and, more importantly, it is
going into debt another $1 billion every week.
And as the budget and debt grow, the government comes
to occupy a more and more dominant role within our society.
In 1930, government spending at all levels -- Federal,
state and local -- amounted to about 10 percent of the Gross
National Product. Today, government accounts for almost
40 percent of our entire national output. If the government
spending trends of the past two decades prevail, the government's share of the total economy will reach 60 percent by
the end of this century.
What will that do to us? Well, the lessons of history
are clear enough on this point. The alarming fact is that
in every country in which the government's share of economic
activity has increased rapidly to a dominating level there
has been a tendency to move toward instability, toward minority government and toward a threat to the continuation of
a free society.
The issues involved are by no means narrowly economic.
They concern fundamental principles of equity and of social
stability. The trouble with growing government spending is
that however good the intentions which underlie the growth,
those intentions are not achieved; that, instead, the growth
in government spending makes low-income people worse off,
undermines social cohesion and threatens the very foundation
of a free society.
The average American today bears a tax burden of more
than 30 percent of his earnings: that means working for the
government instead of yourself from January to May.
We have suffered a string of Federal Budget deficits
that are unparalleled in our history. In 16 of the last 17
years, the budget has been in the red. And now, just when
a healthy balanced economic recovery is moving into its
second year, the advocates of big spending would have us
launch another round of reckless spending and runaway inflation.
The massive federal deficits over the last decade also
had a significant impact on our monetary policies.

*z>
From 1955 to 1965, the money supply of the United
States was growing at approximately 2-1/2 percent a year.
During that period we enjoyed relative price stability.
But from 1965 to the present, the average rate of growth
in the money supply has more than doubled. It is no accident that during this same period we have also had spiraling inflation.
This past decade has also seen tremendous growth in
the regulatory apparatus of the government. Government
agencies now directly regulate more than 10 percent of
everything bought and sold in the United States and indirectly regulate almost every other sector of the private
economy. Just to fill our the necessary Federal forms, the
American people now spend over 130 million work hours a
year. The regulatory process has become so burdensome, for
all businesses big and small, that it is threatening to
strangle much of free enterprise in red tape. Consider
the staggering costs involved. Last year, business spent an
estimated $20 billion just to do the paperwork demanded
by Federal bureaucrats. Of course, it is you and I and
every other consumer who pay for this in the form of higher
prices
and higher
taxes*
President
Ford
has made reform of the governmental
regulatory process one of the chief priorities of his
Administration. Our aim is not to eliminate all government regulations, but to eliminate those outmoded and
unnecessary regulations which do nothing but feed the incurable appetite of the expanding government bureaucracy.
In one recent year, this army of regulators on the Potomac
actually issued 45,000 pages of directives and decrees in
the Federal Register.
Now, there is no doubt that many health,
safety and environmental regulations are necessary and desirable. However, we believe that the time has
come when we must look closely at the costs of such programs
as well as the prospective benefits -- to consider what
they will do to us as well as for us. Part of the trouble
is that the agencies that draft regulations of this type
are mission-oriented; that is, when they draft regulations
they don't necessarily consider what it will cost us as consumers and what overall impact the regulations may have on
the economy and our individual lives.

-7-

Recently, I came upon a letter to the editor of the
Wall Street Journal that bears on this point eloquently.
The writer, Mr. Wyatt E. Craft, is a businessman in Jackson,
Mississippi. He was prompted to write, he said, after he
had read an article in the Journal by Dr. Murray Weidenbaum
objecting to excessive government regulation and the philosophy that the government can do all things for all men.
"As an individual businessman encountering government
rules every day I take an even darker view than does Dr.
Weidenbaum," Mr. Craft wrote.
"At my operational level the torrent of rules and
regulations that have been poured on us in the last five
years have been almost totally counter-productive. I am
now controlled and regulated by the EPA, the FEA, the 0E0,
the HEW, the OSHA, the Department of the Interior, the
Department of Agriculture, and probably others I do not even
know about.
"These agencies do absolutely nothing constructive for
me," he went on. "I am ordered to fill out complicated *
forms and certify under penalties of perjury that the information is accurate. I am requested to return telephone
calls to unknown government officials at my expense; I am
ordered to open my books for audit by outsiders; my work
is delayed and made more expensive by the deadening inefficiency of federal employees. . .
"The American people must realize," Mr. Craft concluded,
that the "government" can do nothing for anyone except
give them a handout at someone else's expense.
Multiply Mr. Craft's problems by millions and you
will understand why the degree of governmental intervention into our lives has reached such a level of irritation
and constraint that individuals and businesses are now
demanding relief from the collosus that government has become.
But despite the abuses that government inflicts upon
our individual citizens and upon our economy as a whole,
we are in an enviable position as compared with the rest
of the world. The facts tell us that our country remains
the world's greatest economic power; and we are proving
our basic strength by the speed and security of our
economic recovery.

-8-

£/7

Economists generally agree that the economy began to
turn around about 14 months ago, that the recovery began
sooner than expected, and that it has been stronger than
expected. This is not to say that everything is fine. But
for more than a year the U.S. economy has been expanding
rapidly, and the benefits of a reviving private sector have
already accomplished much in unwinding the severe inflation
and unemployment caused by the stop-go policies of the past
decade.
Even so, our basic desire for progress, in the form of improved
living standards and employment opportunities, will surely be
frustrated unless we better control the insidious inflation
which has destroyed economic stability by triggering a costly
series of booms and recessions. The tragic policy errors of
the past and our basic hopes for the future must force us to
recognize a basic reality: Inflation is the greatest threat
to the sustained progress of our economy and the ultimate
survival of all of our basic institutions. There is a clear
record from the past: When inflation distorts the economic
system and destroys the incentives for real improvement the
people will no longer support that system and society
disintegrates. History is littered with the wreckage of
societies that have failed to deal with this problem. I am
convinced that even our uniquely creative and productive
society will eventually collapse if we permit inflation to
dominate our economic affairs. There is no tradeoff betweert
the goals of price stability and low unemployment as some
critics have erroneously claimed. To the contrary, the
achievement of both goals is interdependent. If we are to
increase the output of goods and services and reduce unemployment, we must make further progress in reducing inflation.
The intensity of my feelings about inflation and deficit
spending has resulted in some critics labeling me a "fanatic."
I readily accept that label if it helps to communicate my
deep concerns, although I am not so much fanatical as I am
downright antagonistic to those apologists for big spending
who really desire bigger government even though bigger
deficits would result from their fuzzy political thinking.
We must always remember that it is inflation that causes
the recessions that so cruelly waste our human and material
resources and the tragic unemployment that leaves serious
economic and psychological scars long after economic recovery
occurs.

Inflation should be identified for what it is: The
most vicious hoax ever perpetrated for the expedient purposes of a few at the cost of many. There should be no
uncertainty about its devastating impact, particularly for
low-income families, the elderly dependent upon accumulated
financial resources and the majority of working people who
do not have the political or economic leverage to beat the
system by keeping their incomes rising even more rapidly
than inflation. When inflation takes over an economy the
people suffer and it is time that this basic point is
emphasized by every responsible citizen and the full brunt
is brought to bear on their elected officials. For I must
warn you that regardless of the rhetoric emanating from
Washington, D . C , the spend-spend, elect-elect, syndrome is
alive and well.
One clear example of economic illiteracy I mentioned
at the outset is Congress' periodic upward revision of the
minimum wage. Of course, we all desire the expansion of
permanent, productive employment opportunities. This is
the hallmark of a rising real standard of living, a dynamic
expanding job market characterized by upward mobility, and
a non-inflationary environment. The problem is that we
can't simply legislate it. Sad as it is to some, there are
markets out there in the real world away from the banks of
the Potomac River.
What happens when the minimum wage is increased? People
lose their jobs — the sales clerk fresh out of high school
is no longer needed at such a high cost; the unskilled
factory worker becomes unemployed because the wage differential
between him and a skilled worker is no longer so great. Costs
go up; some jobs are abolished. Business cannot absorb
such costs so prices also go up. In other words, increases
in the minimum wage do not guarantee higher real income for
people but rather inflict hardship on certain members of
our society least able to absorb it. Such wage increases
hurt the very people who supposedly benefit from the increased
minimum wage — teenagers, women, minority groups. For these
people, the true minimum wage is zero and not what some economic
edict out of Washington proclaims.
Indeed the economic myopia has reached a level where
there are calls to "index" the minimum wage; to make it go
up automatically with the cost of living. If ever there was
an open invitation to a publicly mandated wage-price inflationary spiral, this is it.
So here we are, faced with excessive governmental regulation, ballooning Federal budgets and chronic Federal deficit
spending.
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Jltf
here. To a large extent, ours is already a controlled society,
whether we like it, or realize it, or not. And we had better
wake up to this fact and begin to make some changes before
it is too late.
Thomas Jefferson foresaw the dangers of big government
and the erosion of individual liberties. To preserve our
independence, he once wrote, "we must not let our rulers
load us with perpetual debt. We must make our choice between
economy and liberty or profusion and servitude."
That is why we must break free from the governmental
constraints increasingly being placed upon us and begin,
individually and collectively, to reshape our national
destiny.
President Ford, I believe, has given us a good start
in the right direction.
And if each of us will just act responsibly and consider the facts calmly on the political and economic issues
of the day we have every reason to be optimistic about our
country's future. The free enterprise ideals and principles
that have guided this nation for 200 years will be true to
us as long as we are true to them.
The balanced program this administration has pursued
so far is designed to fight inflation and unemployment
simultaneously and strengthen the private sector of our
economy.
We firmly believe that this course is working, that
it is right for the Nation, and that it is leading us forward toward robust growth and expanding opportunities.
President Ford urged that we strike a "new balance"
in our national life:
— A balance that favors greater freedom and vitality
for our private enterprise system.
— A balance that favors greater honesty and realism
in dealing with the challenges of our time.
These are great goals — goals worthy of the greatest
nation on earth. We should not celebrate our Bicentennial
year by retreating into the past, but by going forward into
the future with a combination of patience, realistic hope,
courage and common sense.
It is not going to be easy to achieve the proper balance
that will keep our society free and at the same time on the
path to sustained economic growth and more prosperity and
jobs for our people. But I have faith that it can be done.

^

Even the most cursory glance at history shows us that
the American economy is the most successful the world has
ever known -- precisely because it is an essentially humane
creation of the people, by the people, and for the people.
No other country — no other system — has achieved
so much for its people. Yet these tremendous achievements
are the product of the same free-market system that now
incredibly finds itself under attack.
Despite the growing influence of government over our
lives, the private sector produces the food we eat, the
goods.weuse, the clothes we wear, the homes we live in.
It is the source of five out of every six jobs in
America, and it provides directly and indirectly, almost
all the resources for the rest of the jobs in our all-toorapidly expanding public sector.
It is the foundation for defense security for ourselves
and most of the Free World.
It is the productive base that pays for government
spending to aid the elderly, the jobless, the poor, the
dependent and the disabled. Indeed, far from being the
anti-human caricature painted by political demagogues, the
American private sector is in reality the mightiest engine
for social progress and individual improvement ever created.
This ladies and gentlemen,is the crucial theme that
must be communicated broadly and deeply into the national
consciousness: The American production and distribution
system is the very wellspring of our nation's strength —
the source of present abundance and the foundation of our hopes
f° r a better future. America can solve its pressing problems
if it preserves and continues to improve this immensely
productive system. And in this process, we'll also be
preserving the freedoms that made it all possible. Let us
make Thank
that our
common resolve.
you.

FOR IMMEDIATE RELEASE

Contact: William F. Hausman
Extension 2713
June 4, 1976

ARTHUR F. BRANDSTATTER SELECTED
AS DIRECTOR OF THE FEDERAL LAW ENFORCEMENT TRAINING CENTER
IN GLYNCO, GEORGIA

Secretary of the Treasury William E. Simon announced today
that Arthur F. Brandstatter of East Lansing, Michigan, has been
selected to head the Federal Law Enforcement Training Center at
Glynco, GA. Mr. Brandstatter is currently Director of the School
of Criminal Justice at Michigan State University and has been
recognized nationally and internationally for many years as a
leader in law enforcement training.
Mr. Brandstatter, 61, has headed the law enforcement program at Michigan State University since 1947, introducing many
academic innovations such as studies in Police Science, Crime
Prevention, and Highway Traffic Administration; a doctoral program in Criminal Justice and Criminology; field service training;
and an annual National Institute on Police and Community Relations.
He has advised many state and local police forces on their training programs, as well as the police organizations of foreign governments and, in the 1950's, the Treasury law enforcement training
program of that time.
In post-World War II Germany he served as consultant on
Public Safety to U.S. High Commissioner John J. McCloy; in 1953
he assisted the fledgling government of South Vietnam in organizing a police service following the withdrawal of the French
Government; later, he planned the reorganization of the national
police service of South Korea and its training program. He is
retired from the U.S. Army Reserve with rank of Brigadier General
and holds the Legion of Merit for service as Commanding General,

WS-904

- 2 300th Military Police Prisoner of War Command.
He served as official U.S. Delegate to the Fifth United
Nations Congress on the Prevention of Crime and the Treatment
of Offenders in Geneva in September 1975.
In 1961 he was the recipient of Sports Illustrated's
All-America Silver Anniversary Award.
Born December 27, 1914, in McKees Rocks, PA, Mr. Brandstatter
earned a B.S. degree in Police Administration from Michigan
State University in 1938, and an M.A. degree in Political Science
and Public Administration in 1950 from the same institution.
Mr. Brandstatter and his wife, the former Mary Elizabeth
Walsh of Bay City, Michigan, have five sons, Arthur F. Jr.,
John Frederick, Robert Walsh, T. Michael, and James Patrick.
The selection was made following a nation-wide search
which elicited 156 applications. Mr. Brandstatter's appointment
awaits confirmation by the Civil Service Commission.

oOo

FOR IMMEDIATE RELEASE
REMARKS BY THE HONORABLE GEORGE H. DIXON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
NATIONAL ECONOMISTS CLUB
WASHINGTON, D.C.
JUNE 1, 1976
Ladies and Gentlemen:
It is a privilege to be here today to address this distinguished group. I would like to share with you today a few
brief comments about a subject which is important to all of us:
our taxes. At the outset, let me emphasize that I am not
speaking this afternoon on behalf of the Administration, but
as a representative of the Treasury who shares the frustration
of so many Americans who want to bring greater equity and
rationality to our tax system.
This Bicentennial year seems a particularly appropriate
time to talk about taxes, since they were very much at the
heart of the decision of our original thirteen colonies some
200 years ago to assume a bold stance against certain practices
of their mother country. As you recall, beginning with the
Stamp Act of 1765, the American colonists lodged a steady stream
of protests against what they regarded as "taxation without representation." These protests ultimately led to the Boston Tea
Party and to the opening battles of the American Revolution.
And you're well acquainted with where those battles eventually
led.
We've come a long way in the last two hundred years—to a
position of preeminence in the industrialized world—but I can't
help but wonder if despite all the progress we've made, we might
now be in danger of going full circle. Are we once again facing
a system of taxation without representation? Or perhaps what
we've really come to is taxation with misrepresentation. Our
tax system has become so complex that our citizens must contend
with a tax code and regulations that now exceed 6,000 pages of
fine print. Two taxpayers in every five must now seek outside
assistance, usually at some expense, to complete their tax forms.
And there seems to be significant question as to whether even
WS-905
IRS experts fully understand the system anymore.

- 2 How did this complex and unwieldy tax structure come about?
Why is it constantly being stitched and restitched, patched and
repatched?
Perhaps the answer lies in a fundamental change which has
taken place in the method of operation of this country. Back in
1913, when the Internal Revenue Code was first enacted, its provisions were quite simple, because our Government, and the demands
that our people placed upon it, were relatively simple. But—as
you well know—this situation has changed dramatically in recent
years, as our tax system has become ever more complex in direct
proportion to the increasing size and complexity of government and
government spending programs.
Let's take a brief look at what's happened to government
spending practices:
— For most of our history—185 years to be exact—the
Federal budget stayed somewhere below the $100 billion
mark—usually well below it.
— Then, in 1962, we finally hit $100 billion—and that
was only the beginning. Seven years later, the budget
broke the $200 billion barrier. Then, only four years
later, we hit the $300 billion mark.
— And now, in our Bicentennial year, we have reached the
point where the Federal government is spending $1 billion
a day and going into debt at the rate of $1 billion each
week.
The beleaguered American taxpayer, of course, has never had
to ante up so much money. Over the years, a great deal of the
real pain has been dulled or concealed by that very popular
anesthesia known as public borrowing. And until quite recently,
public borrowing has generally been regarded as different from
individual or corporate borrowing. Somehow it seemed that there
need never be a day of reckoning for local, state or federal
governments—not even when the Federal government has accumulated
a debt so massive that the mere interest on it is now almost
$35 billion a year, and it's headed higher, fast.
But the recent financial plight of New York City and of other
state and metropolitan areas has at last and painfully underscored
once again the century-old wisdom of that century-old adage:
"There is no such thing as a free lunch."

- 3 And this message seems to be getting through once again to
the American people. In the 19 74 general elections, for example,
voters across the country turned down some three-quarters of all
bond issues on the ballot. And when—as a recent poll of the
Louis Harris organization indicates—72 percent of the American
people feel they are not getting their money's worth from their
tax dollars—even the most free-spending of politicians begins
to listen.
But government spending is only a part of the problem. A
further significant difficulty is the manner in which we write,
enact and implement our tax laws. Back in 19 36, the original
Form 1040 was a fairly simple document. There was a single page
of instructions which spelled out that the tax rate was 1 percent
on incomes over $3,000, plus a so-called "super tax" ranging up
to 6 percent on the incomes of the very wealthy. Only 1 of every
271 Americans had to pay any tax at all that year. There were
only 425,000 tax returns compared with over 80 million last year—
a rate gain greater than our population's growth.
You've undoubtedly seen this year's Form 1040. The instructions alone run to 36 pages of small type and large charts, and
our refreshingly candid Commissioner of Internal Revenue—Don
Alexander—says on the cover: "I am sorry that this Form 1040
is more complex than last year's and this package is larger
than last year's." Commissioner Alexander who, we must remember,
only carries out the mandate of Congress, goes on to say: "The
keys to a simpler tax return are: (1) a simpler tax law, and
(2) our asking for only what the law requires us to obtain."
The IRS has carried on an intense effort in recent years to
accomplish its information-reduction goal, but finds its efforts
in this area increasingly frustrated by the lack of progress
toward achieving the first and more difficult objective: the
reform of our tax system.
Let me elaborate for a moment about what I see to be some
of the fundamental problems with the tax system:
First, it has become increasingly apparent that the federal
tax structure is poorly equipped to deal with periods of rampant
inflation. Millions of taxpayers now legitimately complain that
the extraordinarily high rates of inflation we have experienced
in recent years have hit them with a "double whammy"—at the same
time that inflation is eroding their real purchasing power, it is
also pushing them into higher tax brackets.
Secondly, because of rapid growth in the size of government
at all levels since the early 1960's, the portion of income tax

- 4 that must be paid to Federal, state, and local governments is
rising steadily. You may well be familiar with the Conference
Board report published in 19 75 showing that the single item which
rose the greatest in the American family budget during the last
six years was taxes. While the general cost of living climbed
about 40 percent during that period, the total bill for taxes—
Federal, state and local—jumped by 65 percent.
Finally, over the years, the continuing efforts by various
groups to achieve narrow, though often worthy objectives, through
the use of special provisions of the Internal Revenue Code have
led us to a situation in which the confidence of the American
taxpayer in the very foundation of the Federal Revenue System—
the individual income tax—is being seriously threatened.
As our tax system has become increasingly complex, the faith
of taxpayers in the basic fairness of the system has diminished.
Today, a growing number of taxpayers feel that taxes are being
imposed upon them without their consent, that too many of their
fellow taxpayers are escaping their responsibilities through
dozens of "loopholes," and that the Internal Revenue Code itself
has become a labyrinth of legal double-talk. You may recall the
informal study conducted a few years ago by an executive in
Atlanta. Working with the Wall Street Journal, he visited five
different IRS centers around the country, presenting to each of
them the same set of facts about his income and possible deductions and then asking how much he should pay. The result? Five
different answers.
As each of you well knows, the success of our tax system
rests upon the voluntary compliance of our taxpayers. If there
were to be widespread abuses of the system, we could not possibly
police them. Yet, when people begin to lose faith in the basic
fairness of the system, it almost inevitably follows that the
system itself will falter. In point of fact, and though it is
difficult to measure, the rate of compliance appears to have
begun to drop in recent years.
Given these circumstances, it seems to me—as it must to
most of you—that the time has come for a sincere, well-devised
attempt to sensibly and prudently overhaul the Internal Revenue
Code. To achieve the greater fairness, simplicity and efficiency
which should be the goals of this effort, the following should
be given serious consideration:
First and foremost, our elected officials at every level of
government must take all reasonable steps to halt the ever-upward
spiral of public spending. By cutting back on the growth in spending-

- 5 we can also cut back in the growth of taxes, and thus do as much
to alleviate the distress of the taxpayer as any single reform
could ever accomplish. Restraining the growth of public spending
is also essential if we are to defuse growing taxpayer discontent.
And equally important, by holding down spending, we will be able
to begin the critical process of returning to the taxpayer the
ability to control more of the decisions that affect his life.
The choice as to how to spend a significant portion of his earnings
will no longer be made in Washington, but rather in his own home.
This is the essence of economic freedom; it is also at the heart
of our political and social freedoms; of our liberty.
Secondly, we must develop a clearer understanding of what
is—and what is not—"tax reform." Effective tax reform should
strive to create a simpler tax system for the American taxpayer—
one which contains a minimum of complex terminology and necessitates
a minimum of mathematical calculation. But recent trends appear to
be headed in exactly the opposite direction. My point might best
be illustrated by a brief look at a recent action of the Senate
Finance Committee.
After extensive debate, the Committee voted to take away part
of the Federal income tax deduction for state and local gasoline
taxes. Under present law, an individual can deduct all state and
local gasoline taxes paid in a year. Under the Committee proposal,
which arose out of a compromise between legislators who wished to
disallow the deduction entirely and those who wished to retain it,
an individual would be able to deduct only those taxes in excess
of $50. This method of implementation will undoubtedly give rise
to additional regulation, further tax code complexity, and greater
headaches for the American taxpayer. This approach to tax reform
reminds me of the story of the surgeon who told his patient that
his leg was diseased and would have to be cut off. After the
operation, the patient asked the surgeon how it had gone, to
which the surgeon replied:
"Well, I have some good news and some bad news."
The patient asked for the bad news first, and the surgeon
said:
"We cut off the wrong leg."
"Then what's the good news?"
"Your sick leg is getting better."
It seems that many of our recent attempts to relieve taxation
ills have resulted in the kinds of "cures" illustrated by this

- 6 story, and have left us with a tax system which is in many ways
crippled by its own complexity. If we are to bring better health
to our tax system, we must correctly diagnose the problem to be
one of terminal complexity, and take those curative steps which
are consciously and expressly tailored to bringing greater
simplicity to the system.
Along these lines, a third concept which I believe deserves
serious consideration is the tax simplification proposal advanced
by Secretary Simon last December. In essence, the proposal would
eliminate all personal tax preferences, special deductions and
credits, exclusions from income and the like, imposing instead a
single, progressive tax on all individuals.
There have been many studies by responsible organizations
which indicate that if special deductions and credits, exclusions
from income and preferences are eliminated or drastically curtailed,
we could significantly reduce individual tax rates and keep our
total income tax revenues at present levels. Secretary Simon has
suggested that rates could be set at 10-12 percent at the low end
and 35-40 percent at the high end. Thus, a family of four with an
income of $15,000 might have an annual Federal tax bill of $1,200;
the lowest income families would continue to pay no Federal taxes
at all; and wealthier individuals would pay a tax of 35 percent on
their income over $50,000—with no ifs, ands, or buts. Everyone
would pay his or her fair share.
Developing the precise details of such a program clearly
involves hard work. Significant political decisions would also
have to be made, especially in establishing the tax rate schedules
which would be applied to the broadened tax base. An equally
important task would be to re-evaluate objectively the fundamental
basis of the widely-held conviction that our tax system can and
should be used to promote and achieve certain economic and social
goals.
Calls for reform of our tax system have been heard many times
and from many quarters in the last two decades. They are usually
welcomed, applauded and quickly endorsed by weary taxpayers. But
all too frequently the calls for reform soon turn to whispers and
eventually disappear in the face of "it simply cannot be done"
retorts which point immediately and instinctively to the numerous
difficult hurdles that must be overcome before reform can be
accomplished. You're well acquainted with the naysayers' argument—
"There is simply no feasible way to eliminate the charitable contribution deduction, or the medical expense deduction, or mortgage
interest deductions, or casualty loss deductions, or deductions for
expense required to earn income" they say, and thus a simpler tax
system is not a realistic possibility.

- 7 It seems to me this kind of knee-jerk negativism is inconsistent with the spirit of American achievement we recall with
such pride in this Bicentennial year. Difficult problems are
not something new to us as a nation. Difficulty wasn't a shroud
to be wrapped around the spirit of our founding fathers, but
rather a challenge to overcome nearly impossible odds. We were
born of a Constitution which said: "Let us be done with kings
and dictators and have freedom."
And we had it. Ordinary people were free to fail—or to
make extraordinary accomplishments. Dormant talents were
awakened, and our nation survived, grew and prospered.
But none of it was easy. It was hard every step of the way.
The Old World leaders of Europe were aghast at our Constitution.
"It simply can't be done," they said. Most governments refused
to recognize this new federation of states and almost all said
it would collapse.
Almost all. But there were some European leaders that did
not share that viewpoint. Among them was Count Aranda of Spain,
who sounded a note of warning to the Old World monarchies when
he said: "This Federal Republic is born a pygmy. But a day will
come when it will be a giant, even a collosus."
That was 200 years ago.
Let us not be guilty of the same kind of short-sightedness
that plagued the Old World monarchs. Our tax system can be
improved. Equity, simplicity and efficiency can be achieved.
Excess complexity can be eliminated. Faith in the system can
be restored.
But it will not be easy. It will be difficult every step
of the way. Yet for those who do not believe this tough challenge
can be met, I'm reminded of the simple message of this short verse
by Edgar Guest:
"Somebody said that it couldn't be done,
but he with a smile replied,
that maybe it couldn't, but he would be one,
who wouldn't say so 'til he tried.
So he jumped right in with a trace of a grin
on his face. If he worried he hid it.
He started to sing as he tackled the thing...
that couldn't be done -- and he did it.
Thank you, Ladies and Gentlemen, for the opportunity to be
with you today. And remember: If you try to pay your taxes with
a smile, you'll find the IRS will always insist on cash.
0O0

FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE ROBERT A. GERARD
ASSISTANT SECRETARY OF THE TREASURY
FOR CAPITAL MARKETS AND DEBT MANAGEMENT
BEFORE THE SENATE FINANCE COMMITTEE ON TAX PROPOSALS
RELATING TO MUNICIPAL BOND INTEREST
MONDAY, JUNE 7, 1976, 10:00 A.M.
Mr. Chairman and Members of this distinguished Committee,
thank you for the opportunity to discuss with you whether the
federal government should try to change the current tax^treatment of municipal bond interest, particularly by extending
the minimum tax to such income.
The proposal to impose minimum tax on interest from
municipal bonds derives from the general concern with
tax equity. While the Treasury Department supports
the objective of improving the equity of the tax system,
we are also concerned that taxing municipal bond interest
payments will significantly increase the borrowing costs of
state and local governments and, if interest on existing holdings is taxed, it will substantially reduce the value of these
holdings. For these reasons, Treasury is strongly opposed to
such a proposal. We recommend, instead, that serious consideration be given to an alternative — the taxable bond option--which
will contribute to tax equity and do so in a manner that will
improve the structure of the municipal bond market.
Implications of Extending the Minimum Tax
While there are reasons for viewing the municipal bond
market as a separate market, its essential characteristics
are virtually identical to those found in every financial
market — that is, the value of a municipal security is a direct
function of the risks inherent in owning it and the return it
provides. What distinguishes the municipal bond market, of
course, is that the return on municipal securities—the interest
paid—is exempt from federal taxation. Accordingly, the
economic value of the interest payments on municipal bonds
varies according to the tax circumstances of the holder.
WS-906

- 2 In looking at the implications of extending the minimum
tax to income from municipal securities it is vitally important that this value/return relationship be clearly understood.
From a financial standpoint, an investor in the 50% bracket
is indifferent as to whether he receives $50 of tax-exempt
income or $100 of fully taxable income. Accordingly, where
the income on a bond is exempt from tax, the interest rate
which must be offered to attract his investment in it need
only be half as large. Any increase, however, in the taxes
which must be paid by this investor has the effect of reducing
the value of tax-exempt income relative to taxable income and
therefore will increase, automatically, the amount of interest
the issuer must offer in order to attract the investment.
The first and most serious concern we have about
extending the minimum tax to municipal bond interest is
that it would directly and substantially increase the
cost of borrowing for state and local purposes. We must
also take into account the potential impact of such tax in
reducing the capital values of the more than $220 billion
of municipal obligations held by the public. This impact
would be significant because these assets provide the means
for carrying out important financial functions, such as the
collateralization of deposits of public funds.
The response of the market to the adverse impact of the
minimum tax on returns from municipal bonds would be to require higher yields on new issues in order to maintain the
same net returns. Such higher yields would mean higher
interest costs, and higher taxes at the state and local level
to meet these costs.
To obtain some indication of how the preference tax might
impact on borrowing costs, let us assume that the annual interest generated by new tax-exempt issues is somewhat more
than $2.5 billion. If the minimum tax were extended'to both
individuals and corporate bondholders, virtually this entire
amount would be added to the minimum tax base. Even if the
tax applied only to interest on bonds owned by individuals,
perhaps $1 billion annually would be included in the base.
Individual investors are the purchasers of tax-exempt
debt at the margin. Thus, even if the minimum tax were
limited to individual investors, the effect of imposing the

- 3tax would be to increase the interest rates that state and
local borrowers have to pay. The precise impact would depend on the particular structure of the minimum tax, including
the tax rate and whether an exemption or an offset for regular
taxes paid was allowed. Even if the minimum tax increased overall municipal borrowing costs by only 5%, the interest burden
on state and local governments could rise by some $125 million
the first year. This would increase by about the same amount
each successive year for perhaps 10 years. Accordingly, by
the tenth year, state and local governments would be bearing
an additional annual interest burden of more than $1 billion
solely as a result of the minimum tax.
The Municipal Bond Market Today
Because the minimum tax proposals could have substantial
impact on the municipal bond market, I want to take a few
moments this morning to discuss more generally the state of
this market.
The municipal bond market is basically sound and continues
to provide an adequate mechanism for state and local government
financing. Even in the face of widespread problems, the market
as a whole performed very well in 1975, with a record $29 billion
in new long-term issues and an equally large amount of shortterm debt. Table 1 shows that this was the culmination of a
steady upward trend over the past 15 years.
There is, however, an artificial and unnecessary constraint
on the efficient financing of state and local government, since
potential lenders are presently limited to those who can profitably use tax-exempt income. Thus, the largest borrowing
sector in our capital markets after the federal government is
restricted to a limited range of potential lenders. Some of
the nation's largest groupings of financial assets are effectively barred from the market.
The limitation on the class of potential lenders has
two implications:
"" First, more so than other markets,
the municipal market seems to be
susceptible to cyclical variations;

- 4 Second, the market is vulnerable to
long-term, basic changes in supply/
demand patterns.
The cyclical variability of the municipal market is caused
by the behavior of the major purchasers of state and local
debt--commercial banks, fire and casualty insurance companies,
and individual investors, including personal trusts. As
shown in Table 2, commercial banks generally have been the
most important purchasers. This means that the municipal
market may be adversely affected during periods of credit
stringency or strong demand for bank loans, or when the banking
system's need for tax-exempt interest diminishes.
There is growing concern that because the need of commercial banks for tax-exempt interest has declined, they will
on average be less interested in holding municipal bonds in
the future. Table 3 shows the ownership of municipal securities for selected periods since 1960. Commercial banks
absorbed over 70% of the net new issues over the period from
1960 to 1970, when their share of the total municipal debt
outstanding almost doubled. Since 1970, however, they have
absorbed only one-half of the net new issues, barely enough
to keep their share of the total debt constant. Consequently,
insofar as long-term development of the market is concerned,
other sources of financing must be found if the overall demand
for municipal securities is to be maintained.
Increased participation by individual investors typically
will not fully offset the decrease in participation by commercial banks. In such circumstances, the total demand for
state and local government debt tends to decline. Secondly,
the shape of the demand curve also changes, since individuals
are willing to absorb larger amounts of municipal debt only
at sharply increasing interest rates. The result, as shown
in Table 4, is a fluctuating relationship between taxable and
tax-exempt interest rates.
The volume of municipal debt and the interest rates at
which it can be sold are thus critically affected by the fact
that the market responds not only to overall changes in credit
supply and demand, but also to short run changes in the financial situation of a single group of institutional lenders.

- 5 At the same time that bank participation is diminishing,
inflationary pressures have created sharply increased levels
of demand for credit by municipalities. The impact of inflation is reflected in the higher cost of capital improvements
which must be financed with tax-exempt bonds.
The long-range prospect for the municipal bond market
is thus clouded by two interrelated elements: a static
supply of credit to the market and a growing demand by
municipalities for it.
A third related problem is that the cost of federal tax
exemption is substantially greater than the benefit to
municipal borrowers.
To analyze this cost, we begin with the fact that,
primarily due to market efficiency factors, the degree to
which tax exemption reduces municipal interest costs varies
with the maturity
of the debt. Shorter-term exempt securities enjoy a greater reduction in interest rates relative to
taxable securities than do longer-term bonds. On average,
tax-exempt rates are more than 50% below taxable rates for
issues of a year or less, about 30% for intermediate issues,
and about 20% for 30 year bonds. This represents the saving
to municipal borrowers.
The tax cost of the exemption can be determined by
reference to the marginal tax rate of the average investor.
It has been estimated that the average marginal tax bracket
of investors in tax-exempt bonds is over 40%. If all these
investors purchased taxable rather than tax-exempt bonds, tax
revenues would increase by over 40% of the interest that would
be paid on such bonds. This revenue cost is substantially
greater than the benefit to state and local governments.
For example, if $30 billion of long-term debt were issued at
a tax-exempt interest rate of, say, 6.3%, as contrasted with
a taxable rate of 9%, interest payments by state and local
governments would be reduced by some $800 million in the first
year. If that interest had been taxable, however, and if
purchasers of that debt had no investment alternatives except
taxable bonds, the gain in federal revenue would be $1.1
billion. The $300 million difference represents revenue
losses which are not passed through to issuing governments.

- 6 There are other problems currently associated with the
municipal bond market. For example, the Municipal Finance
Officers Association and the Securities Industry Association
have recommended repeal or substantial limitation of the
pollution control exemption for private companies. This
recommendation warrants serious consideration as an additional
method of improving the market for state and local securities.
The large volume of such issues has had an adverse effect on
interest rates for longer-term municipal obligations, with
which these private credits compete.
The proposal to extend the minimum tax to municipal
bond interest involves an attempt to deal with the question
of tax equity, not the structural problems of the municipal
market. It is thus not surprising that such tax would
simply exacerbate these critical problems. Treasury believes
that a preferable alternative is the taxable bond option,
which can ameliorate the structural problems of the market
while contributing in a meaningful way to increased tax
equity.
The Taxable Bond Option
The Treasury Department recommends that the Committee
consider--as an alternative to the minimum tax concept--the
taxable bond option.
This proposal would give state and local governments the
option of issuing either tax-exempt debt or taxable debt in
return for a federal subsidy payment. We have proposed a 307o
subsidy limited to the first 12% of the interest payable on
the taxable municipal bond. We think that this is the right
subsidy level to provide a needed "safety valve" for the
municipal market, particularly in the longer-term maturities.
We would be concerned about the impact on the municipal market
and the cost to the federal government of a subsidy figure
in excess of the 307o level.
Treasury believes that the taxable bond option will
increase the liquidity and improve the stability of the
municipal bond market. It will deal with the problem of
cyclical variations by freeing municipal issuers from their
overdependence on the need of investors for tax-exempt income
and the availability of credit from a particular class of
lenders. Under this option, new sources of long-term credit
will become available to municipal issuers. Naturally, issuers
will elect the taxable bond option only if their net interest
costs can be reduced. Furthermore, to the extent part of the
supply of new state and local issues shifts to the taxable
market, those who continue to issue exempt bonds will also
find that their interest costs are reduced.

- 7The changes brought about by the taxable bond option
will also have important implications for tax equity. To
the extent that fewer bonds are issued in the tax-exempt
market than would otherwise be the case, there will be less
use of such bonds as a tax shelter. Secondly, because the
option will reduce interest rates on new tax-exempt bonds,
those who continue to purchase tax-exempt securities will
receive a lesser amount of interest. Thus, high-bracket
investors will no longer be able to command as much in the
way of excess return from municipal bonds as they do today.
The taxable bond option therefore addresses both the
structural problems of the municipal bond market and the tax
equity issue.
Revenue and Cost Effects of Taxable Bond Option
The net cost of the taxable bond option will depend on
the gross subsidy paid to municipal issuers of taxable
securities, less the additional revenues generated by the
higher volume of taxable issues.
While the increase in tax revenues will offset some of
the gross subsidy costs, it is not reasonable to expect that,
on balance, Treasury will make money from the plan. This is
because the plan is an optional one, and state and local
governments will only use it if there is a cost saving to be
realized. Therefore, the taxable bond option should not be
advocated as a revenue raiser. It is fully justifiable
because its benefits will be large relative to any net federal
costs.
In Table 6, we show the cost components of a 30% interest
subsidy and how those costs will vary over time. It should
be noted here that the first-year costs are only a fraction
of what the total long-run costs will be, since each successive
year's issue cf new debt will generate subsidy costs in
addition to those of the previous years. With a 30%, subsidy,
the gross subsidy costs are $39 million the first year and
rise to $486 million per year by the tenth year. Offsetting
these costs are federal tax revenues of $32 million the first
year and $405 million per year by the tenth year. Thus, the
net annual cost grows from $7 million to $81 million over
10 years.

- 8 The table also indicates the benefits to state and
local governments in terms of lower net interest expense.
As a result of the plan, interest rates paid by state and
local governments would decline by about 46 basis points
in the over 15-year maturity range. Therefore, over 10 years,
these savings in annual interest payments grow from $69
million to $868 million. Thus, the ratio of state and local
benefits to net federal costs could exceed ten to one. I
want to caution you that the precise costs and benefits will
depend on market conditions which cannot be foreseen in
advance. However, while the figures shown in the table can
only reflect the particular assumptions made, we believe them
to be indicative of general market conditions which may be
expected to prevail in the future.
Recommended Procedures for the Taxable Bond Option
An effective taxable bond option requires a relatively
automatic procedure and certain safeguards. Thus, if
a governmental unit elects to issue federally taxable obligations and Treasury agrees to pay the subsidy, neither the
election nor the subsidy could be revoked or adversely modified, even if the statute were later amended or repealed.
In most cases the subsidy agreement should be obtainable
automatically through appropriate certification that certain
general standards have been fulfilled. For example, the subsidy would be payable only if the instrument is marked to
show clearly that all interest payments are subject to federal
tax. The subsidy itself would be a fixed percentage of the
issuer's net interest expense and could not be varied administratively. The subsidizable amount would be determined
after deducting appropriate administrative costs. We anticipate
that such costs will be minimal because there will be no
federal involvement in state and local financial decisions.
Administrative procedures for paying the subsidy would
be simple. The subsidy payment would be made to the payinp,
agent immediately before the interest is payable to the holder.
The subsidy would not be released for payment to the holder
unless and until the issuer paid its portion of the interest
then due. The payor would file an information return with
the Internal Revenue Service reporting the payment of taxable
interest, including the subsidy.

- 9An issuer could elect the taxable bond option only for
state or local obligations which would be exempt under the
Internal Revenue Code but for the election. Certain municipal
bonds otherwise eligible would not qualify, including:
Obligations as to which the United
States provided other financial
assistance, including agreements to
guarantee the payment of principal
or interest or to acquire the bonds;
and
Obligations held by parties related
to the issuer.
The first limitation is necessary to prevent additional
federal subsidies for certain transactions already subsidized
by federal agencies. The rule disqualifying obligations to
be acquired by related parties is intended to prevent the
issuance of bonds merely to obtain the federal interest subsidy—for example, where two issuers swap their new obligations.
We believe that, at a minimum, these two limitations are
necessary.
The statute must be drafted carefully to prevent
arbitrage—issuing obligations in one market for the purpose
of investing the proceeds in a different market at a higher
yield. Congress attempted to limit arbitrage in 1969 by
providing that municipal bonds will be taxable if the proceeds
are invested in securities producing a materially higher yield
over the term of the bonds. The artificially low yields so
required has the undesirable, and doubtless unintended, effect
of creating large windfall profits for underwriters, consultants
and promoters. It has proved to be very difficult to remedy
this situation administratively. Based on this experience,
we caution you that any taxable bond option should incorporate
appropriate restrictions on arbitrage.
Treasury Perspective on the Taxable Bond Option
There are some who may advance the taxable bond
option for the ultimate purpose of eliminating the
tax-exempt bond market. This strategy would involve
enacting a taxable bond option with a relatively high
level of subsidy, attracting a large volume of

- 10 new state and local issues into the taxable market through
the subsidy and then, at some future date, pointing to the
decline in interest and activity in the tax-exempt market as
a justification for repealing the exemption entirely. Needless
to say, we strenuously oppose this approach, and in light of
this, we are quite concerned about the appropriate level of the
subsidy. At 40% or above, there is little doubt that this
strategy would have a reasonable chance of
success.
Additional support for the taxable bond option comes
from those who believe that there should be greater federal
subsidization of state and local borrowing. They are urging
a form of revenue sharing, if you will, but revenue sharing
tied to the amount the state or local government is willing
to borrow, rather than based on broader economic and demographic
factors. Again, the percentage level of the subsidy is
critical. At the 30% level we have suggested, there will be
little in the way of new subsidies which must be paid for by
federal taxpayers; at 40% or more, the subsidy cost will be
very substantial. Moreover, because the subsidy level would
be governed in this case by the desire to provide benefits
substantially exceeding what the market now provides, it
would have to be set at a level—e .g. , 40% or more--where the
viability of the tax-exempt market would be threatened.
We view the taxable bond option from an entirely different
perspective. As I have indicated, we are sensitive to the
cyclical problems, as well as to the real possibility that a
basic change in the supply/demand characteristics of the
market is occurring. We also cannot help but be cognizant
of the concern that the current system, if left unchanged,
does generate excessive benefits for certain taxpayers.
Indeed, I doubt that we would be here today if this were not
the case.
We fear that this range of concerns could lead to measures
which would impair the ability of state and local governments
to finance their legitimate needs in a sound and responsible
manner. I have testified at some length this morning on one
such measure: the inclusion of tax-exempt interest in the
minimum tax. Needless to say, a more troublesome prospect
would be the attempt to deal with all of these concerns by
eliminating the tax exemption entirely.

-lilt is for these reasons, and these reasons alone, that
we have proposed and support a taxable bond option at a 30%
subsidy level. As I suggested a few moments ago, we believe
that such an approach will, in effect, provide a safety valve
for the tax-exempt market without either threatening the basic
viability of the market or imposing substantial costs on^
federal taxpayers. Moreover, to the extent market efficiency
is enhanced by this modest alternative, and we believe it will
be, concerns about tax equity will be alleviated materially.
In short, we are convinced that the nation would be best
served at this point by responsible measures designed to maintain the traditional and proven method of financing state and
local government. We strongly oppose radical change in either
direction: inclusion of tax-exempt interest in the minimum
tax, or the virtual elimination of the tax-exempt market
through authorization of taxable bonds with a federal interest
subsidy of 40% or more. If a change is warranted, and we
believe it is, we urge the Committee to consider providing a
truly optional taxable bond—that is, one with a 30% subsidy.
o

0

o

Table 1
Volume of Gross New Issues of Long-Term Municipal Bonds by Year
(millions of dollars)

Year

1960

7,229

1961

8,359

1962

8,558

1963

10,107

1964

10,544

1965

11,084

1966

11,089

1967

14,288

1968

16,374

1969

11,460

1970

17,762

1971

24,370

1972

22,941

1973

22,953

1974

22,824

1975

29,224

Office of the Secretary of the Treasury
Office of Tax Analysis
Source:

Gross Issues

Bond Buyer.

January 15, 1976

Table 2
Ownership of Municipal Securities
Year-End Outstandings, Selected Years
(billions of dollars)

Households
Billions
Percent
of
of
Dollars
Total

Commercial Banks
Billion?
Percent
of
of
Dollars
Total

All Other
Nonlife Insurance
Billions:
Percent
Billions
Percent
of
:
of
of
of
Dollars
Total Dollars :.Total

Year

Total

1960

$ 70.8

$ 30.8

1965

100.3

36.4

36.3

38.9

38.8

11.3

11.3

13.7

13.7

1970

144.5

45.6

31.6

70.2

48.6

17.8

12.3

10.9

7.6

1974

204.1

60.3

29.6

100.3

49.2

30.7

15.1

12.8

6.3

43.5%

$ 17.7

Office of the Secretary of the Treasury
Office of Tax Analysis
Source:

Federal Reserve Board, flow of funds data,

25.0%

$

8.1

11.4%

$ 14.2

20.1%

January 15, 1976

Table 3
Net Change in Ownership of Municipal Securities
Seasonally Adjusted Annual Rates

Year

:
Total
Fire & Casualty
:
All Other
Individuals
: Commercial Banks
:Billions :
: Billions
. Billions :
: Insurance Companies :Billions:
:
Billions
:
:
of :
of
:
of
:
:
:
of
:
of
Dollars
:
Percent:
Dollars
:Percent
Dollars : Percent
Dollars
:
Percent
Dollars
: Percent

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975 1/

5.3
5.1
5.4
5.7
6.0
7.3
5.6
7.8
9.5
9.9
11.2
17.6
14.4
13,7
17.4
16.2

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

3.5
1.2
-1.0
1.0
2.6
1.7
3.6
-2.2
-.7
9.6
-.8
-.2
1.0
4.3
10.0
10.0

66.0
23.5
-18.5
17.6
43.3
23.3
64.3
-28.2
-7.4
96.9
-7.2
-1.1
7.0
31.4
57.5
61.7

Office of the Secretary of the Treasury
Office of Tax Analysis
1/

First three quarters annualized.

Source: Federal Reserve Board, flow of funds data.

.6
2.8
5.7
3.9
3.6
5 2
2.3
9.1
8.6
.2
10.7
12.6
7.2
5.7
5.5
2.4

11.3
54.9
105.6
68.4
60.0
71.2
41.1
116.7
90.5
2.0
95.5
71.6
50.0
41.6
31.6
14.8

.8
1.0
.8
.7
.4
.4
1.3
1.4
1.0
1.2
1.5
3.9
4.8
3.9
1.8
2.2

15.1
.4
19.6
.1
14.8
-.1
12.3
.1
-.6
6.7
.0
5.5
23.2 -1.6
18.0
-.5
.6
10.5
12.1 -1.1
-.2
13.4
22.2
1.3
1.4
33.3
-.2
28.5
10.4
.1
13.6
1.6

7.6
2.0
-1.9
1.8
-10.0
-

-28.6
-6.4
6.3
-11.1
-1.8
7.4
9.7
-1.5
0.6
9.8

January 15, 1976

Table 4
Tax-Exempt and Taxable Interest Rates
and Ratio of the Two

Year

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975

:

:
Taxable Interest Rate
Tax-Exempt
:
(Moody ' s Corporate
Interest Rate
New Issue)
(Bond Buyer 20) :

3.54 %
3.45
3.17
3.16
3.22
3.25
3.81
3.92
4.42
5.66
6.36
5.52
5.25
5.22
6.09
7.06

Office of the Secretary of the Treasury
Office of Tax Analysis

4.82 %
4.70
4.46
4.41
4.54
4.71
5.59
5.91
6.70
7.97
8.85
7.74
7.47
7.88
9.08
9.42

Ratio
:

73.5
71.6
71.1
71.7
70.9
69.0
68.2
66.3
66.0
71.0
71.9
73.9
70.3
66.3
67.1
75.0
January 20, 1976

Table 5
Tax-Exempt Borrowing
(millions of dollars)

Other
Gross
:
:
Industrial
Long-Term :
: Tax-Exempt : Pollution * Development
Bonds
Year :: Borrowing : Control
:

»

Percent
Total
of
. Nongovernmental :• Market

•

$ 220

$ 313

1.3^

594

471

1,065

4.6

22,953

1,750

270

2,020

8.8

1974

22,824

2,140

337

2,477

10.9

1975

29,224

2,508

398

2,906

9.9

1971

$ 24,370

$ 93

1972

22,941

1973

Office of the Secretary of the Treasury
Office of Tax Analysis
Source:

Bond Buyer.

January 15, 1976

Table 6
Annual Costs and Benefits of Taxable Municipal Bond
Plan with 30 Percent Subsidy
(millions of dollars)

10

Year

Gross subsidy cost

39

79

122

166

213

486

Revenues generated

32

66

102

139

178

405

13

20

27

35

81

141

218

297

381

868

Net subsidy cost
Reduction in state
and local interest
costs

69

Office of the Secretary of the Treasury
Office of Tax Analysis

January 20, 1976

FOR RELEASE AT 12:45 P.M.

June 4, 1976

*•• TREASURY OFFERS $2,000 MILLION OF TREASURY BILLS
The Department of the Treasury, by this public notice, invites tenders for
$2,000 million, or thereabouts, of 9-day Treasury bills to be issued June 8, 1976,
representing an additional amount of bills dated December 18, 1975, maturing
June 17, 1976 (CUSIP No. 912793 ZM 1 ) .
The bills will be issued on a discount basis under 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 all Federal Reserve Banks and Branches up to
12:30 p.m., Eastern Daylight Saving time, Monday, June 7, 1976. Tenders will not be
received at the Department of the Treasury, Washington. Wire and telephone
tenders may be received at the discretion of each Federal Reserve Bank or
Branch. Tenders must be for a minimum of $10,000,000. Tenders over $10,000,000
must be in multiples of $1,000,000. The price on tenders 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 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 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 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. Settlement for accepted tenders
in accordance with the bids must be made at the Federal Reserve Bank or Branch on
June 8, 1976, in immediately available funds.
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

WS-907
(OVER)

-2are 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.

oOo

S T A T E M E N T B Y T H E H O N O R A B L E WILLIAM M . GOLDSTEIN
D E P U T Y ASSISTANT S E C R E T A R Y F O R T A X POLICY
BEFORE THE
S E N A T E FINANCE C O M M I T T E E
M O N D A Y , J U N E 7, 1976, 10:00 a.m.
Mr. Chairman and Members of the Finance Committee, m y name
is William M . Goldstein, and I appear before you today with Donald C.
Alexander, the Commissioner of the Internal Revenue Service. Your
Committee has requested the Treasury Department to testify on the
subject of imposing a withholding tax on dividends and interest. I shall
speak first, then Commissioner Alexander. Since there is no specific
proposal before your Committee, our remarks are intended to present
to you the general considerations regarding both such a tax and alternative
methods of acheiving the same result.
As we understand it, your interest in this subject derives in part
from the Commissioner's recent testimony before the Subcommittee
on Commerce, Consumer and Monetary Affairs of the House Committee
on Government Operations. There he described the extent to which
the Internal Revenue Service uses Forms 1099, on which are reported
the payment of many items of interest and dividends. At present there
is no complete program for matching these forms against taxpayers'
income tax returns, and thus it is possible to have undetected nonreporting
of interest and dividends.
»

Also, your Committee is not unmindful of the potential impact on
the budget that imposition of a withholding tax might produce, both
by extracting payment of presently unreported dividends and interest
and by accelerating the payment of tax on items which honest and careful
taxpayers would report in any event.
We in the Treasury share your concern over the possibility that
significant amounts of dividends and interest are not being reported.
While our present estimate of the magnitude of such nonreporting is
subject to considerable error, there may be as much as $1 billion
of dividends and $7 billion of interest on which tax is potentially due.
The amount due would be in the order of $1. 5 billion. Some major
sources of unreported income include U.S. bearer obligations and " E "
bonds, bearer obligations such as certificates of deposit issued by banks
WS-908

-2and other corporations, and loan transactions between private parties.
Although these figures are, I repeat, speculative, and must be viewed
in context -- in 1976 we estimate that $81 billion of dividends and
interest will be reported, on which a tax of $18. 5 billion will be paid -they are nevertheless most disturbing. They represent a nontrivial amount
of revenue owed the Government. More important, it is an outrage
that numbers of taxpayers are in this manner failing to pay their fair
share of tax. Such conduct diminishes public respect for the operation
of the tax system and could indeed jeopardize our voluntary system of
compliance.
In formulating an appropriate legislative and/or administrative
response to this problem, we must not lose sight of other goals of
the tax system. Any new proposal must be efficient in terms of the
total costs imposed on taxpayers, on payors of dividends and interest,
and on the Government. It must be fair; that is, we must do our best
to avoid imposing unreasonable burdens on any particular groups of
involved parties. Finally, although I sometimes wonder whether
we are ever successful in this regard, the system should be as simple
as possible.
With regard to withholding tax on dividends and interest, the notions
of efficiency, fairness, and simplicity are not idle abstractions. In
1942, 1950, 1951, and 1962, the House of Representatives passed tax
measures imposing a withholding tax on dividends and /or interest. Each
time the Senate refused to accept such a tax, largely out of regard for
the principles of efficiency, fairness, and simplicity, and no withholding
tax was enacted.
I believe it is worthwhile for me to describe in some detail what
transpired in 1962, despite subsequent changes in the substantive tax
laws and, more important, the impressive technological advances in
computing and processing equipment since that time. By and large
the debate generated by the 1962 proposal highlights the issues which
pertain to any withholding scheme and, in addition, shows their complex
and far-reaching nature.
By way of background, I note that in 1962, prior to the legislation
ultimately enacted, corporations were required to file information
returns reporting payments of dividends of $10 or more; all persons
engaged in a trade or business were required similarly to report interest
payments of $600 or more. The practical scope of the requirement
to report interest was limited by the large floor: at the going rate
of 4 percent annual interest, it took principal of $15, 000 in a single
account to produce $600 of interest. This amount exceeded, for example,
the ceiling on the federally insured portion of savings accounts.
In 1961, President Kennedy proposed a plan to require withholding
at 20 percent on dividends and interest. It was to apply to most dividends
payable in cash or in kind with a few exceptions, such as stock dividends
or stock rights, distributions in connection with reorganizations, and

-3dividends paid to other members of an affiliated group of corporations
which filed a consolidated return. The interest subject to withholding
included amounts paid with respect to deposits at banks and thrift
institutions; amounts paid on bonds, debentures, notes, or certificates
issued by corporations with interest coupons or in registered form;
and amounts paid on U.S. obligations. Excluded were such items
as interest paid by individuals; interest paid on U.S. or corporate
discount obligations issued for 1 year or less; and interest paid on
open accounts, notes, and mortgages.
To lessen the burden on payors, the plan required withholding even
where the receipient was not taxable on the item paid -- for example,
tax-exempt organizations or persons with no taxable income. Also,
payors were not required to furnish a statement of the gross amount
of the payment, the portion withheld, and the portion actually paid.
Statements were not thought necessary because a recipient, provided
he properly identified an item as subject or not subject to withholding,
could always be sure that it represented 80 percent of the gross amount
due him. To compute the gross amount, or to "gross-up", he had only
to increase the amount received by 25 percent.
It was recognized that this system, while administratively simple for
payors and the Treasury, would rarely result in withholding precisely
the amount of tax ultimately due; by using the flat rate of 20 percent,
it would inevitably produce under and over withholding. Obviously
overwithholding imposes a degree of hardship on the recipient by depriving
him of the use of the overwithheld money until he can claim a refund of
tax. To minimize this effect, the Treasury plan would have permitted
the filing of quarterly refund claims; in addition, tax-exempt organizations
were to be allowed to offset the withholding tax against the amounts they
would otherwise be required to pay the Government by reason of wage
withholding on their employees.
I should point out here that reasonable people can differ as to the
harshness of overwithholding. On the one hand, persons with dividends
and interest necessarily own capital, and usually some of that capital
is held in a fairly liquid form, such as a savings account. Also, many
such persons have income from other sources. Therefore, cash flow
is not typically a problem, and the only detriment is the foregone interest
on the overwithheld funds. On the other hand, in some situations the
recipient does not have ready access to funds to replace the overwithheld
amounts until they are refunded to him. Also, particularly in the case of
tax-exempt organizations and nontaxable individuals, the lost use of the
overwithheld funds represents, in the long run, a significant levy. In
addition, some recipients, through confusion over the system or lack of
information will fail to avail themselves of the opportunity to file proper
refund claims.
The House Ways and Means Committee generally followed the
President's recommendations as to the definition of dividends and
interest subject to withholding and the quarterly refund procedure.

-4Illustrative of the minor technical changes m a d e , the Committee
excluded school savings programs from withholding. However, the
Committee struck a decidedly different balance between simplicity
and fairness with respect to the problem of overwithholding. The
Committee provided that all individuals under 18, those individuals
over 18 who expected to have no tax liability, and tax-exempt organizations could file exemption certificates relieving them of withholding
in certain cases. For individuals, the certificates applied to dividends
and to most interest except interest on corporate indebtedness and U.S.
obligations. For tax-exempt organizations, the certificates operated
only with respect to interest on deposits in banks and thrift institutions
and to interest on noninterest-bearing U.S. discount obligations. To
compensate payors for the cost of compliance, the Committee provided
that remittance of withheld funds was to be m a d e quarterly, on the
last day of the month immediately following the end of each calendar
quarter; this gave payors the use of the funds withheld for a considerably
longer period than would have been the case in the absence of withholding.
The Committee's rationale for the restrictions placed on the scope
of exemption certificates was in part based upon the assumption that
the market price of a bond subject to withholding which was traded
between interest payment dates would reflect the fact that part of the
interest would be withheld. That is, the buyer and seller could compute
and take into account the allocation of the withheld amount in much
the same manner as they took account of the accrued interest. This
system would, however, break down if the seller was subject to withholding
and the buyer was not: the tax-exempt buyer would pay a price for the
bond that was reduced by the accrued amount to be withheld, but this
amount would never in fact be withheld. A similar problem would arise
in the case of stock transferred after the record date but before the
payment date. Consequently, the Committee attempted to curtail the
use of exemption certificates as to marketable securities, although
admittedly it did not do this in a completely consistent manner.
The Ways and Means Committee's approach became section 19 of
the House bill which passed in 1962 and was referred to this Committee.
It was apparent that the compromise a m o n g efficiency, fairness, and
simplicity was unsatisfactory. A n analysis by the staff of the Joint
Committee outlined the problems. O n the one hand, exemption certificates
were not available to any persons with tax liability, even if it was very
small; and the quarterly refund procedure, which was available, promised
to be slow, complicated, and in certain situations not sufficiently generous.
O n the other hand, the exemption certificates were difficult for payors to
process properly; and both the certificates and the refund procedure would
have created serious administrative problems for the Internal Revenue
Service, especially as to policing. It was noted in particular that those
persons who are not inclined to report dividends and interest would likely
be inclined to treat themselves to undeserved exemption certificates.
The bottom line in 1962 was that your Committee rejected withholding
entirely, opting instead for making the informational reporting system

-5more rigorous. Much optimism was expressed regarding the benefits
of the new automatic data processing equipment which the Service was
just beginning to install and experiment with. The Senate, by a wide
margin, agreed with your Committee's approach and the expanded
reporting system was utlimately enacted into law.
So much for history per se. Our Department and your Committee
must now determine the relevance of this history in view of the
substantial technological advances of the last fourteen years and our
increased sophistication as to the practical limits of this technology
even after these advances.
Before presenting to you our current thinking, I want to make clear
that what I say should not be taken as the Treasury's definitive position.
Because of our heavy commitment to working with you and your staff
on the comprehensive tax reform legislation now before your Committee
and because of the short notice of your desire to hear testimony on
withholding, we have by no means been able to devote to this subject
the research and considered thinking it deserves. The remarks which
follow can thus be fairly characterized as tentative observations.
There are serious problems with exclusive reliance on matching
information returns with taxpayers' income tax returns. If you desire,
the Commissioner can explain these in greater detail. Briefly, there
is first the substantial job of doing the matching. Second, where a
mismatch is detected, it is necessary to determine if the mismatch is
justified or improper. For example, a person whose income is less
than the sum of the personal exemptions to which he is entitled plus
the low income allowance is not generally required to file a return.
Another situation involves a person who buys a bond between two interest
payment dates; he will be shown on a Form 1099 as having been paid the
full amount of the second of these interest payments, but only his
allocable share of this amount is taxable to him as interest. Third,
even where an improper mismatch is discovered, it is still necessary
actually to assess and collect the tax. In most cases, this would be
a time-consuming and expensive process in relation to the amount of
tax involved.
In contrast, withholding might prove to be a cost-efficient means
of collecting tax on dividends and interest. One problem faced in 1962
would probably no longer be a problem -- the furnishing to recipients
of dividends and interest withholding receipts showing the gross amount
paid and the amount withheld. W e believe that the technology exists
to do this, even on a payment-by-payment basis, as well as on an annual
basis with a revised Form 1099, although we have not yet had the opportunity to fully explore the cost to payors of such a system. These
receipts would eliminate much confusion for recipients and also would
potentially provide a way for the Service to verify the accuracy of returns.
Withholding can also be expected to have its share of disadvantages.
One relatively minor item would be its adverse impact on certain automatic
investment arrangements such as bank certificates of deposit and mutual

-6fund dividend reinvestment plans. The income derived from such
activites is of course taxable; but by paying the tax out of other
funds, the individual can at present take advantage of the very
low transaction costs involved when earnings are left in the hands
of the business enterprise.

Of much greater concern is whether we can satisfactorily deal
with the problem which ultimately defeated the 1962 legislation,
overwithholding. It can be seen on the first table in the Appendix,
describing the 1973 individual income tax returns which reported
dividend and/or interest income, that there were some 5 million such
returns which were nontaxable. Obviously there were also many other
individuals who received dividends and/or interest but who were not
even required and had no need to file returns. Moreover, millions
of additional individuals who received dividends and/or interest and
who did owe tax had a much lower effectiverate than 16 2/3 or 20
percent. Finally, of course, there are thousands of completely
tax-exempt organizations with this type of income: charities; pension
plans; state governments; and so on.
The quarterly refund procedure in the 1962 House bill lacks appeal.
If overwithholding is to be alleviated -- and I remind you that the
degree of hardship imposed is subject to debate -- a broader program
of exemption certificates might be the answer. However, the more
expansive such a program becomes, covering not only tax-exempt
organizations, but also individuals who expect to pay no tax, who expect
to pay only a minimal tax, or who expect otherwise to pay enough
estimated tax to avoid any civil penalties, etc., the more such a program
raises the same type of enforcement problems as a system based upon
matching. There would have to be some type of policing; and once
again, small improprieties will be relatively expensive to correct. Also,
in order to make the program function properly, it may well be necessary,
in connection with implementing withholding, to update and revise our
estimated tax system.
A third problem with withholding relates to bearer instruments,
including those issued by the United States. It has been suggested that
we have across-the-board withholding on them. It is likely that certain
holders of those obligations, such as tax-exempt organizations, could
avoid any complication merely by registering their securities. However,
for the majority of holders, withholding might adversely impact upon
the usefulness and marketability of those important debt instruments.
I would now like to turn to an aspect of withholding which-is of consid
able, immediate interest to your Committee, that is its revenue impact.
Members of the Treasury staff, the Internal Revenue Service, and the
Jomt Committee staff have consulted with each other and produced
estimates of the effect which a withholding system, if timely implemented,
could have in fiscal 1977 and subsequent years. These estimates are
included in the Appendix to this statement. At this point, however, we
do not believe that this system could be put in place in time to have
any significant revenue impact in fiscal 1977.

-7Before any withholding system can be implemented, Congress must
determine the optimal combination of matching and withholding -- or,
alternatively, adopt an even better solution which has not yet been
explored. Even if we could, today, agree upon the broad outlines
of a withholding system, you would have to draft legislation dealing
with a myriad of technical dilemmas. I note that the 1962 House bill
section on withholding was almost 50 pages long and was accompanied
by a 30-page technical explanation.
Under any withholding system, all payors of dividends and interest
would have to develop procedures for withholding, reporting, and
remitting the money and/or the information involved. In addition, it
should be noted that many payors which do not now issue Form 1099
and have no system for doing so would be required to address those
problems for the first time.
If the withholding system is to include an exemption procedure, the
Service would have to design, print, and distribute forms. Recipients
of dividends and interest would have to obtain the forms, learn how to
fill them out, and send them to payors. How many of us have any idea
of the names, much less the addresses, of the paying agents of our
dividends and interest? The payors would have to assimilate the information
on the exemption certificates, a fair proportion of which is likely to be
incorrect, and modify their withholding systems accordingly. W e just
do not see how all of these tasks could be carried out by the Government,
the recipients, and the payors in the next six months.
In conclusion, I want to repeat that we are concerned about the
problem of nonreporting of dividends and interest, and we are determined
to do something about it. Once the current legislative effort is concluded,
we will carefully examine the various proposed solutions in terms of
efficiency, fairness, simplicity, and cost to all concerned. W e
would greatly appreciate the opportunity to come back to your
Committee with a comprehensive proposal on this important subject
within a few months.

TABLE 1
TABULATION OF ALL INDIVIDUAL RETURNS WITH DIVIDEND AND

Total Dividend
and Interest
Income

$
0
$ 100
$ 1000
$10000

$
100
$
1000
$ 10000
and over
Total

Total Dividend
and Interest
Income

$
0
$ 100
$ 1000
$10000

$
100
$
1000
$ 10000
and over
Total

Total Dividend
and Interest
Income
$
0
$ 100
$ 1000
$10000

$
100
$
1000
$ 10000
and over
Total

INTEREST INCOME, 1973

Tax
Liabilities
Amount
($ Millions)

Returns

$17888
28441
22904
11068
80301

12136262
13788151
7478138
768470
34171020

Withholding
Average
($)
$ 1474
2063
3063
14402
2350

Amount
($ Millions)

Returns

$ 933
3101
7185
6957
18176

657346
1644306
3339289
713784
6354726

$1123
2654
4384
2674
10835

Returns
1762435
3808063
4419402
503081
10492981

($)
13382647
13497931
4781047
278429

$1594
2117
2905
7461

65875

31940053

2062

Overpayments
Average
($)
$1419
1886
2152
9746
2860

Amount
($ Millions)

Returns

$5156
5194
2155
894

12265398
11232510
3409304
277982

$ 420
462
632
3215

13398

27185194

493

Balance
Due
Amount
($ Millions)

Average

$21335
28574
13889
2077

Estimated
Payments
Amount
($ Millions)

Returns

Average
($)

Total Tax On
Dividends and Interest
Average
($)
$ 637
697
992
5315
1033

Amount
($ Millions)
$ 91
1057
4581
6164
• 11,893

Returns
11689012
13738077
7477598
767825
33672511

Average
($)
$

8
77
613
8028
353

TABLE 1 CONTINUED
Total Dividend
and Interest
Income

X

o

I 100
$ 1000
$10000

$
100
$
1000
$ 10000
and over
Total

Dividends Less Than Or
Equal to Excludable Amount
Amount
Returns
($ Millions)
$ 34
1266808
152
2357845
58
874223
1
14348
246
5413224

Total Dividend
Average Taxpayer
and Interest
Rate of Tax on Dividends and
Income
Interest
?
0 - $
100
16,.57.
17,,77.
$ 100 - $
1000
17,
,67.
$ 1000 - $ 10000
26,,97.
and
$10000 over
17.,4%
All Tax Returns
Office of Secretary of the Treasury
Office of Tax Analysis

Dividends and
Interest
Average
($)

$27
65
67
165
54

Amount
($ Millions)
$ 540
5894
25266
20202
51,902

Returns

Average
($)

14245498
15707470
8582598
790019
39,325,585

$ 36
375
2944
25572
1320

Average Rate of Tax on All Dividends
and Interest
16.97.
17.97.
18.17.
30.57.

22.97.

June 5, 1976

TABLE 2
TABULATION OF RETURNS WITH AT LEAST ONE INDIVIDUAL OVER 65

Total Dividesnd
and Interest
Income
$
0
$
100
$ 1000
$10000

-

$
100
$
1000
$ 10000
and over
Total

Tax
Liability
Amount
($Mlllions)
194
922
3688
4752
9556

Total Dividend
and Interest
Income
$
0
$ 100
$ 1000
$10000

- $
100
- $
1000
- $ 10000
- and over
Total

-

$
100
$
1000
$ 10000
and over
Total

Returns
240632
1112524
2744080
452647
4549882

Withholding
Average
($)
805
828
1344
10499
2100

Amount
($Mlllions)
246
844
1282
409
2781

Estimated
Payments
Amount
($Mllliona)
" 30
205
1875
3622
5733

Total Dividend
and Interest
Income
$
0
$ 100
$ 1000
$10000

TH DIVIDEND AND/OR INTEREST INCOME, 1973

Returns
46063
239321
1548790
439237
2273412

2256

Returns

Average
($)
759
794
1377
4436

324286
1062609
931045
92240
2410180

1154

Overpayments
Average
($)
658
856
1211
8247
2522

Amount
($Mlllions)
88
276
350
372
1086

Balance
Due
Amount
($Milllons)
21
217
992
1024

Returns

Returns

Average
($)
275
266
339
2340

318724
1035747
1032456
158843
2545771

426

Total Tax On
Dividends and Interest

78143
479833
1884156
299612

Average
($)
275
453
527
3419

2741744

823

Amount ($Millions)
2
86
1450
3197
4735

Returns
226335
1112524
2744062
452614
4535535

Average
($)
8
77
529
7063
1044

TABLE 2 CONTINUED

Total Divi<dend
and IntereiSt
Income
$
0
$ 100
$ 1000
$10000

-

$
100
$
1000
$ 10000
ami over

Dividends and
Interest

Dividends Less Than Or
Equal to Excludable Amount
Amount
($Mlllion8)
1
11
21
0
34

Returns
43506
187644
318227
6686
556063

Total Dividend
Average Taxpayer
and Interest
Rate of Tax on Dividends and
Income
Interest
$ 0 - $ 100
8.5%
$ 100 - $
1000
9.5%
$ 1000 - $ 10000
10.9%
$10000 - and over
23.1%
All
Tax
Returns
11, n
Office of the Secretary of the Treasury
Office of Tax Analysis

Average
($)
28
60
67
56
62

Amount
($Millions)
21
891
12021
11306
24238

Returns
460102
1883534
3502972
463719
6310327

Average
($)
45
473
3432
24382
3841

Average Rate of Tax on All Dividends
and Interest
9.5%
9.7%
12.1%
28.3%
19.5%

June 5, 1976

TABLE 3
SUMMARY OF CHARACTERISTICS OF TAX RETURNS
WITH DIVIDEND AND/OR INTEREST INCOME
1973
Average rate of tax on interest and
dividends for an average taxpayer

17.4%

Average rate of tax paid on all
dividends and interest

22.9%

Percentage of returns with dividends
and interest which owe no tax

13.1%

Average amount of dividends and
interest

$1320

Average tax on interest and dividends
of all taxpayers with interest and
dividends

$ 302

Average tax on interest and dividends
of all taxpayers with dividends and
interest who have some tax liability

$ 353

Percent of interest and dividends
reported on returns with at least
one over-65 exemption
Office of the Secretary of the Treasury
Office of Tax Analysis

46 . 7%

TABLE 4
ROUGH ESTIMATES OF REVENUE GAINS
-- WITHHOLDING PAYMENTS ON INTEREST AND DIVIDENDS (INDIVIDUALS ONLY)1 -AT 20% WITHHOLDING RATE

Fiscal 1977
Fiscal 1978
Fiscal 1979

Change
in 2 «
Evaders
Timing*"3
.7
1.3
1.4
1.4
1.5
.4
AT 16 2/3% WITHHOL]

No
Tax
Liability2'4

Total

.4
.4
.1

2.,4
3.,2
2,.0

.2
Fiscal 1977
.6
1.1
.2
Fiscal 1978
1.1
1.2
.1
Fiscal 1979
1.2
.3
^Estimates assume that withholding becomes effective January 1, 1977.
exclude increased costs of administration for government and decreased
from deductions of administrative costs for business.

1 .9
2 .5
1 .6
Estimates
revenues

^To the extent that tax returns with interest and dividends are on average
currently overwithheld, revenue gains from "change in timing" and taxation of
those with "no tax liability" represent an increase in net overwithholding.
Revenue gains in these categories do not result in net gains in tax collected
over time.
-*For fiscal 1980 and later years, the revenue effect from change in timing could
become negative as taxpayers decrease other withholding and estimated payments to
compensate for withholding on interest and dividends.
Allows individuals who show proof of zero or negligible tax liability to request
exemption from the withholding rate.
Office of trie Secretary of the Treasury
Office of Tax. Analysis

Table 5

*" "eturnS: Sources of Income, Deductions, and Tax Items by Size of Adjusted Gross Income—Continued
I All Htures are estimates based on samples—money amounts art in thousands of doners I
Sales ol property
other than capital
auetx net fain
last lots

Sales el capita asuti
Stae ei adfeistoa'
ijgo iacam

Nat phi

Net loss

ttumbar of
raturnt
(17)

Number of
returns
(II)

(II)

Amount

Number erf
return

(20)

(21)

Dividends in
adjusted frost
income

Interest received

Number at
returns
(22)

(23)

Number et
returns
(24)

(25)

(mount
<2i>

Rent

Pensions and
annuities in adjusted
gross income
Number ol
returns
(27)

net Income list lots
Net loss

Amount
(21)

Number ol
returns

Amount
(30)

(21)

Number of

(31)

Amount

number ol
retires

(32)

(33)

AN returns, total

3.313.112

15.1I7.02J

2.737.174

1,170.117

121.495

447.169

I.M4.013

21.471.341

40.27t.72t

40.394,151

4.711.433

17.102,233

3.M4.2SI

8.131.112

2.845.243

4.141.092

311.701

No adjusted crass income
31 ur.rfer Jl 000
_
S1.000 under 32 000
32 000 under 33.000
33.000 jnder $4,000
34.000 under 35.000
35 000 under $6,000
36 300 under $7,000
3.'000 under 38 000
3* 0O) under $9 000
$9 000 under $10 000
310.000 under $11000
Sil COO under J12 000
31? M O under $'.3 000
SI3CO0 under 314 000
JUC-'iO under 115000
$15'XX) under $20 000
320 COO under $25 000
325 iro under 330.000
330 -V: under $50 000
$50,000 under 3100,000
$U0 000 under 3200 000
32-JC CK.-U under $500,000 ....
$>X' COO under 31000.000
31.000 0O0 or more

97.791
75.052
127.863
231.077
206.670
230.155
251 742
207 148
189415
188780
208514
157473
195.320
165919
181905
176394
757 206
557 652
366 471
510815
236.921
56.671
14.149
2.066
743

658243
62.958
98.452
204.834
203.645
229 891
279 290
257.390
249 578
258330
293.887
242079
265.526
263 860
355.979
245 359
1.298 302
1.088 943
890 131
2.167 636
2.020 742
1.350.072
1.019.319
509.112
673 471

20.940
26 848
29.183
44.651
73676
66.280
66.173
68 106
79.856
89652
82.888
90,260
79,156
90976
74830
83682
425 628
339 989
245 362
409.207
196.45/
44.374
8.550
865
285

23.358
20.170
18,570
31.085
64.596
58.454
59 246
41204
59896
56.275
57.273
63.439
49.797
58.693
46.533
56.162
281,240
229,880
169.829
315.898
161.762
38.897
7.6/1
796
263

63.153
20.045
18597
30.763
25.321
37.107
33.400
25 041
24 561
38 480
47 184
35 265
34 521
40.773
28.535
22.363
109.230
75.640
56.708
88.611
48.205
13.717
3.407
6C0
268

— 109.947
—4,903
-5,799
-5.546
—30.458
-273
-2.921
4.852
4.309
1.505
15.317
23.378
3.560
12.474
1.408
4.43R
36.241
74.943
78259
138.700
102.381
38.800
31.170
18.447
17.634

48,694
149.196
184.391
345.459
380.033
409.258
320.750
336.861
335.885
356.863
326.003
284.958
277.948
276.326
276.627
248,927
1.235640
942.262
625.042
961.751
448.041
105.645
23.487
2.948
1.018

203.373
54.928
65.101
216,93?
320.511
374.053
297.347
435.815
365.335
452.552
382.691
356 099
330.314
311.378
328.712
286.622
1.516057
1.545.450
1.409.766
3,099.002
3.601.428
2.426.31?
1.741.935
658.443
698.190

229.313
1.045 228
1,554.798
1,734.241
1.813.438
1.831,037
1.751.704
1,727.081
1.582.30?
1.656.696
1.775 549
1.580.046
1,698.934
1.672 978
1.780.616
1.623.278
6.677.817
3.826.509
1.921.980
1.972.255
660.743
129.728
26.149
3.198
1.108

367.068
210.916
510.116
988.982
1,581.922
1.802.953
1.788.126
1,769 005
1.559 08:
1.384.599
1.652.527
1.224.108
1,259490
1.242.974
1,126.537
1.079.921
4.839.240
3.430.994
2,579.161
4.492.847
3.180.813
1.368.561
619.550
188.714
145.945

19.411
50.339
129.891
266.897
459.924
447.188
372965
387 234
292.469
219.444
271.318
162.220
199.596
143.178
129.588
124.826
457,569
266.474
118.022
140291
43.602
10,784
2.689
394
120

65.039
114.956
151.611
448.35?
990.478
1.088.919
1.151626
1.291.656
1.142.184
898.771
1.031.854
694.418
870.098
643.958
619.791
537.773
2.044.434
1.434.714
626.862
788.866
323.316
99.186
35,757
5,472
2.142

45.072
50.144
122.656
170.415
189.810
197.039
167.086
159.381
134.166
151073
163.218
159.598
137.655
150.720
147.741
137.479
543.792
339.526
187.975
267.706
139.487
33.991
7.254
903
369

100.260
37.255
101.685
173.569
208.771
276.041
268.538
244.778
163619
229.679
235.785
230.493
237.187
206.164
189.838
183.436
975.421
746 789
542142
1.150.014
958.774
410.261
131.080
25.365
12.248

57.021
40.722
47.731
75.373
103.056
87.047
68 719
89 023
97.553
112636
109.545
121.93?
164.037
117.974
122.770
124.854
502.753
326666
162.036
203.138
87.020
19 067
4.199
644
227

440.421
44.749
46.279
114.307
121.332
85 500
94.594
89«U
85.539
116.87?
93.98?
120.395
174.246
102086
134 205
114.746
565533
372.588
251.202
425.691
338.475
132.006
55.713
17.511
8.656

11903
8073
8917
17.354
15.838
20.92?
11971
16513
76 904
17 603
20 9/1
I6 64B
23.001
20 781
21.536
8136
72 595
58.576
44 364
83 047
47161
13.649
4.404
683
251

Taubto returns, total

4.3IS.HI

13,705.319

2.547,964

1.101.305

IH.209

332.746

1.001.554

20.423.SIS

33.S20,ttS

37.031.436

3.123.000

Il.4t0.t2l

3,221,111

7.212.454

2.414.700

3.271.1K

311.184

178.322

26

835
C)

1.270

51.41?
C)
18 521
370 067
1,056,980
1.372.088
1.597.219
1.665.010
1.504.426
1,333.525
1.601.622
1,183,204
1.242.498
1.224.692
1.105.880
1.053.717
4.816.227
3.397.507
2.558.565
4.446.884
3.148.211
1.349.188
604.452
183.917
143.069F

24.144

5.211
9.199
15.811
15.596
17.156
20.092
29.679
41.349
29.881
31 755
37,399
26.744
20814
105.007
74.090
55.767
87.072
47.877
13.54?
3.36?
587
264

5.263
C)
C)
-2.207
-16.345
12.064
—2.046
3.729
2.036
1,57?
13.344
13.494
1.720
10 014
-2.078
3.263
24 990
72464
75.563
134.668
102.288
37.789
28.161
16 45b
16.051

C) •
30.575
49.297
47.696
50.070
63.738
78.490
106(39
85.864
112.378
169 649
101576
129 956
114 034
555368
35591?
246.395
412878
329.01?
177.843
53750
17.397
8.510

460
C)
C)
4 442
10.373
14,393
9.141
15338
260)0
17257
20.756
16.030
22273
70.781
21.460
8.057
71.174
58464
44 237
82.811
41.775
13.55/
4364
671
251

-104.710

No (justed grass income
31 under 31 000
31fK) under 32 000
J7 0.Xi under J3 COO
S3 O'O under 34 000
34 0 0 under 35 COO
35 050 under J6 000
$6 000 under J.'000
$7 0 0 urder $8 000
$8 POO under $9 000
$9 000 enter $10 000
$10000 under $11 000
$11000 under $12 000
312 000 unde- 313 000
313 000 under SH.0O0
314 500 under 315 000
315 TOO under 320 000
$:-n. JOO under 325 000
Sr'-'XJO under 330 000
IX 000 under $50 000
$50 000 under $100,000 ..
Jiryipoo under $200 000 ....
$?0i. 000 under $500,000 ... .
$50)005 under $1.000,000
$! (OP 000 or more

2.004
11.000

16009

79.058
106 600
146.580
189.952
177 609
178 795
169.903
197,317
146,540
188.507
161.050
176 239
173.862
745359
553.843
363 460
508.869
235.917
56 362
14.067
2 053
743

Total wrtajoBht rehires.
All returns, wmnrujry
Returns under $5 000 . IMunu $5 000 jnder $10.000..
Ret m i $10,030 under 315.000
Re(j.n>s $15 000 or more
footnotes at end of tobie.

26

C)

C)

42 807
92.577
134.548
194519
212.103
224 727
199 498
283 129
223 227
250,016
244 210
307 989
238.461
1 249.837
1.070 747
869 670
2.139 002
1.997.905
1.338.789
1.016.026
507.800
673.471

16.863
38.742
54.731
57.812
60.507
76.990
87.238
79.892
86672
78.325
89 591
74675
83 601
423.318
339.330
244.034
405.980
195787
44.175
8.499
859
285

10 838
30.795
38.620
51.505
35.462
57.852
54.546
55.864
61.387
49.340
57.545
46.428
56.084
279 435
229.515
169.601
313.153
161.102
38.516
7.622
790
263

IM.223

1.411.440

ItMIO

164.671

232,216

968.608
1.045.599
877,011
2.502.694

1.458.023
1.338.475
1.372.803
11.017.728

261.578
386.675
418.904
1.670.717

216.231
273.894
274.625
1.206.235

194.986
168.666
161.457
396.386

(*)

-156.925
23.062
45.2571
536.574fl

44.587

13.091

2.665

160.531
269 046
319.574
286 585
308,215
320.977
346 036
313.661
277.874
274.616
274.778
272,184
247.559
1.227.532
937.772
621.331
957.095
446.460
105.111
23.32?
2.921
1.013

101.788
226.805
284.394
264 251
406 655
346.904
437.113
361.158
332.727
325772
308.852
295.280
276.429
1.476.140
1.528.469
1.357.877
3.061.183
3.549.178
2.392 060
1.716 034
647.563
685.702

2.028
C)
26.966
971.801
1,335.523
1.536,077
1.623,786
1644.506
1,535.715
1.614,097
1,748.449
1.557,493
1.689 811
1.663.646
1,769,372
1.616.64?
6.660.625
3.818 307
1.917,386
1.963.109
658.617
129.177
25.976
3.169
1.103

IK.4SI

1.044.760

4.75C.031

3,112.716

713.433

1.517,031
1.676.362
1.364 786
4,345.834

1.234.898
1.933.740
1.613.124
16.696.581

8.208.055
8.493.332
8.355.85?
15.219.487

5.461.958
8,153.339
5.933.030
20.845.826

1,373.650
1,543.430
759.408
1.039.945

160

494

7.158

33.777
111.410
136.192
141.416
147.675
121.128
144.577
158.352
156.179
135.273
149.123
145.443
135.148
540.008
337.369
187,770
265.486
138.951
33.787
7.193
885
367

C)
C)
26.461
124.263
188.122
231.937
224.250
147.243
219 387
231.162
219.196
229.965
195.963
185.60B
180.272
961.456
739.623
540.318
1.102.918
955.279
405.556
129.107
24.498
12.221

432
C)
C)
16.748
49.775
54.586
48.882
73.933
93.773
107.592
106.203
118933
162.775
117,375
121.841
124.765
499.611
325.160
161847
199904
86.447
18.879
4.149
639
226

575.37$

751.741

350,543

174.125

•2.517

775.136
774.924
733.193
1.521,003

897,582
1.142.401
1.047.119
4.952,094

410.950
476.976
651.567
1.305.750

852.588
480.451
645 678
2.167.375

82.957
88.96?
90.102
319.680

725

C)
C)
66.646
269.331
321.081
343230
371.668
285.345
209.039
268.506
160.014
197.568
141.052
129.284
123 689
456.326
266.786
116.766
139.748
43.315
10.767
2.662
394
120

C)
125.230
596387
780.432
1.029.951
1,227,417
1.117.385
880.816
1,024.805
680.456
865049
628.018
618.549
530.300
2,043,045
1,434.271
625.953
787.797
322.374
98.777
35.527
5.472
2.142

1.MUM
2.159.355
5.516.090
3.366.038
5.360.749

(*)

<*)

Table 6
Adult Shareowners by HOUSEHOLD INCOME
r^uuirni

pmmmimm

r

i m

bfjpaarejBjwwy

'mm*

«^.,iJBJJ..,i|(NI

IND.VIDUA.tSH
Mid-1975
Number

Under $5,000
$ 5,000$ 7,999
$ 8,000$ 9,999
$10,000$.4,999
$15,000-$24,999
$25,000 and Over
Sub-Total
Minors
Not Classified
by Income

TOTAL

Source:

Percent
of Total

SET
-^—2,389,000
2,857,000
2,923,000
8,346,000
7,670,000
4,114,000

23,388.000

28,299,000

1,818,000

2,221,000

25,270,000

New York Stock Exchange

imrnej

I
.

780,000
1,279,000
1,357,000
4,552,000
8,778,000
6,642,000

64,000

•'

330,000
30.850,000

•-

---J

8.5%
10.1
10.3
29.5
27.1
14.5
100.0%

Hie Department of theTRE/[$URY
VASHINGTON,O.C. 20220

TELEPHONE 964-2041

FOR IMMEDIATE RELEASE

June 7, 1976

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,300 million of 13-week Treasury bills and for $3,400 million
of 26-week Treasury bills, both series to be issued on June 10, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing September 9, 1976
Price
High
Low
Average

98.624
98.618
98.620

Discount
Rate
5.444%
5.467%
5.459%

26-week bills
maturing December 9, 1976

Investment
Rate 1/
5.60%
5.62%
5.61%

Price

Discount
Rate

Investment
Rate 1/

97.090
97.079
97.084

5.756%
5.778%
5.768%

6.01%
6.03%
6.02%

Tenders at the low price for the 13-week bills were allotted 17%.
Tenders at the low price for the 26-week bills were allotted 77%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District

Received

Accepted

43,925,000 $
27,625,000
Boston
4,079,635,000
1,772,700,000
New York
30,440,000
26,325,000
Philadelphia
71,030,000
37,460,000
Cleveland
26,780,000
20,380,000
Richmond
34,760,000
33,870,000
Atlanta
320,780,000
186,835,000
Chicago
53,265,000
32,265,000
St. Louis
53,305,000
7,805,000
Minneapolis
41,850,000
35,350,000
Kansas City
29,330,000
18,330,000
Dallas
723,635,000
104,695,000
San Francisco
T0TALS$ 5 > 508 > 735 » 000

Received

Accepted

$
35,215,000 $
11,715,000
5,650,425,000
3,183,385,000
19,160,000
8,345,000
168,540,000
17,040,000
67,975,000
14,475,000
72,410,000
24,310,000
291,155,000
34,435,000
64,030,000
29,570,000
37,770,000
4,770,000
34,305,000
24,145,000
28,160,000
12,160,000
548,855,000
36,055,000

$2,303,640,000 a/$7,018,000,000

$3,400,405,000 b/

a/ Includes $440,320,000 noncompetitive tenders from the public.
b/ Includes $216,710,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.

tfS-909

FOR IMMEDIATE RELEASE

June 7, 1976

The Federal Reserve System and the Treasury Department
today announced that they will participate with central
banks of the Group of Ten countries, Switzerland, and the
Bank for International Settlements in making available to
the Bank of England standby credits totalling $5 billion.
These arrangements have been made in the light of the recent
fall in the value of the pound sterling under exchange market
pressures which have led to disorderly market conditions,
and in the common interest in the stability and efficient
functioning of the international monetary system.
Of the total amount, the Federal Reserve System will
stand ready to make available $1 billion under its existing
$3 billion reciprocal arrangement with the Bank of England
and the Treasury, through the Exchange Stabilization Fund,
will stand ready to make available $1 billion under a swap
arrangement with the Bank of England.
oOo

WS-910

STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
SUBMITTED FOR THE RECpRD
TO THE SENATE JUDICIARY COMMITTEE
IN CONNECTION WITH S. 2387
JUNE 9, 19 76

Qil Company Divestiture
Due to the cancellation of the June 8, 1976 hearings
on the Petroleum Industry Competition Act of 1976 (S. 2387)
I am, pursuant to the Committee's request, submitting
this written statement for the record.
My statement is concentrated on the financial
aspects of divestiture -- with particular emphasis on
tjie effects on capital formation in tjie energy industry.
However, in order to determine whether divestiture is
in our national interest, we also examined the probable
effects on the supply and price of energy, the effect
on overall industry efficiency, the impact on our ability
to deal with the OPEC cartel and the legal aspects of
d}vestitureT All of these factors are important because
in one way or another, they enable us to answer what
should be our ultimate question: whether oil company
divestiture will enhance or impede our energy objectives.

WS-911

- 3A.

Basic Reasons For Opposing Divestiture Legislation
At the outset, I shou^ make it clear that the

Treasury department has concluded that divestiture would
be contrary to U,$. national interests and severely handicap
the achievement of our national energy goals.
include the following:

Our reaspns

First, divestiture would create

uncertainties, inefficiencies, and new entry barriers,
which would seriously hamper the development of additional
energy supplies and in all likelihood put upward pressure
on energy prices.
table in

The uncertainty which would be inevi-

the transition period and the eventual

loss of economic efficiencies which now exist in integrated
oil operations will reduce the ability and efforts
of the energy industry to develop additional sources of
supply.

Given the fact that one of the critical parts

of our national energy program must be to increase
domestic energy supplies, it would be contrary to our
national interest to embark on a course which will, in
all likelihood, lead to lesser supply and greater imports.
Second, the financial uncertainties resulting from
divestiture will increase the cost of capital to affected
firms and reduce their ability to raise external capital
for investment in alternative energy supply sources.
Third, divestiture would in all probability increase
OPEC's influence in the international oil market,
thus increasing our vulnerability to a cut-off in

- 3supply by OPEC.

Divested U.S. firms would probably be less

able to develop non-OPEC foreign sources of supply, an4 a
diveste^ U.S. international energy industry would
complicate the operation of the Internationa^. Energy
Agency emergency oil sharing program -- one of our
main lines of defense in case of another embargo.
The proponents of divestiture claim that it will
increase competition, lead to lower energy prices,
greater energy supplies and a reduced influence and
dominance of the oil producing countries.

Our analysis

shows why we believe the opposite effects would take
place, and I believe that the burden of proof should
be on those who are calling for this costly restructuring
of the energy industry to establish the benefits that would
result.

The proponents of divestiture have simply not

demonstrated that there will be substantial benefits
from divestiture.

They have produced no convincing

evidence that it will lead to lower prices and increased
or more secure supplies of energy.
By enacting a divestiture bill, Congress would be
circumventing normal antitrust procedure and substituting
its judgment for the judgment of the judicial system.
The preambles of most of the recently introduced
energy divestiture bills imply (1) that our antitrust
agencies have been dilatory and ineffective because

- 4they have not found sufficient

evidence of monopoly

power in tfre oil industry to support a national antitrust
complaint under existing law, an4 (2) that Congress
needs yo take independent action.

As such, by enacting

divestiture legislation, Congress would be legislating a
guilty verdict an^ a harsh penalty without a trial based
on carefully accumulated evidence.
Our antitrust laws are sufficient to cure any of the
alleged problems resulting from^ the present structure
and operation of the petroleum industry; and, in our view,
we shpuld rely on them rather than rushing into the
broad restructuring implied by divestiture legislation.
These are the fundamental reasons why we strongly
oppose divestiture.

In the balance of my testimony,

I will outline in more detail the basis for our position.
B. Uncertainty Created by Implementation pf Divestiture
'

'

'

M '•' J ' '

1

i

I—I

\

T "

1

'

|

'

'

1

•

Clearly, one of the significant effects of
divestiture will be the uncertainty created by
the administrative and legal problems associated with

T

- 5the actual implementation of divestiture. This uncertainty
will, in our view, have a major impact on the ability
and incentive of the industry to develop new energy
supplies.
Method of Implementation -- Divestiture has been used
as an antitrust remedy in the past; and the resulting
legal and administrative problems, while complex, have
been manageable. What is different in this case is the
scope of the undertaking, the nature and structure of the
affected industry, and the critical time at which divestiture of this vital industry would be ordered.
Under vertical divestiture, 18 affected companies
would be allowed to continue operating in only one of the
following sectors of the petroleum industry: production,
transportation (by domestic pipeline), or refining/marketing.
Analysis of the breakdown in investment by these companies
in each area indicates that typically 40 percent to
60 percent of their assets would have to be divested.
Divestiture could be implemented by outright sales
of assets. However, it is doubtful that the sale of
assets alternative would be used extensively because of
(1) the large volume of assets to be divested ($70 - $80
billion), which may drive down the values received upon
sale, and (2) questions about the availability of buyers
capable of purchasing the assets for cash and their
acceptability from an antitrust and national interest

- 6standpoint,

Divestiture could a^so be implemented

by spin-offs -- the transfer of assets to a new corporate
entity owned by existing stockholders.

However, spin-offs,

because they dispose of assets without direct return of
value, reduce the ^sset and earning power backing for the
divesting cpmpany's outstanding debt,
Legal Prpblems -- Although S. 2387 ca^ls for a transition period of five years, legal challenges to the constitutionality of the legislation and to the fairness of
specific divestiture plans pould suspend or impede full
implementation of divestiture until due process is given
and the legal issues resolved.

TJius, it is possible tjiat

the transition period would extend for ten or more years.
In a4dition, the question of whether existing loan
covenants and indenture agreements are actually violated
by divestiture plans is likely to lead to litigation and
add to tfy© uncertainty of the transition period.

Lenders

who are relying on a company's overall creditworthiness
as security for investments may believe that their
interests are a4versely affected under divestiture and
might litigate or attempt to enforce their rights
under existing loan agreements which generally place
restrictions on the sale or spin-off of assets.

While

- 7negotiated solutions to such problems with lenders
will eventually be arranged in most cases, the results
which are achieved may entail shorter repayment
schedules, security against some of the corporation
assets and higher interest rates.
In some situations, negotiations with lenders might
solve such problems by allocating the outstanding debt
among the divested companies. In other situations,
negotiated solutions might be achieved by use of crossguarantees, under which each entity created from the former
corporation would guarantee the full amount of the
outstanding debt. However, that approach poses several
legal and practical problems with respect to enforceability
of such guarantees and may even be prohibited as constituting a form of "control" impermissible under the
legislation.
Lastly, there are particularly difficult problems
relating to foreign entities and the treatment of the
foreign assets and liabilities of U.S. companies. For
example, foreign government or entities whose interests
are harmed by divestiture might bring legal proceedings
under their own laws and courts and thus enjoy tl^e possibility

or

* enforcing their claims and executing judgments

against assets located outside the United States before
divestiture is actually implemented. Laws in countries
requiring the government's approval of foreign investments

- 8may operate to prevent certain planned dispositions of
foreign assets or, by limiting potential purchasers,
to deny U.S,-sellers the highest market value for the
assets being sold.

Analysis of the location of the

assets and liabilities of the major international
petroleum companies indicates that these problems
are potentially very significant for some firms.
Substantial Differences From Previous Divestiture
r

'

-i

1—I

1

1

'

1

'

'

n

<

— '

*-

Experience -- The foregoing discission indicates a number
of significant legal and administrative problems in implementing divestiture.

The types of problems encountered

have, of course, been faced before in other divestitures,
both judicial and legislative, as well as in voluntary
corporate spin-offs.

However, there are substantial

differences in the proposed vertical divestiture and
previous divestiture experiences,

First, much judicially-

ordered prior divestiture experience has been in connection
with Clayton Act antimerger cases, making divestiture
easier since the divested components are already relatively
independent.

This, is also true for the legislated

divestitures involving the banking and the public
utility industry (i.e. the Glass-Steagall Act, mandating
separation of commercial and investment banking; the
Bank Holding Company Apt of 1956, requiring bank holding

- 9companies to divest non-banking operations; and the
Public Utility Holding Company Act of 1935, which
broke up utility holding companies).

Vertical divestiture

of the functional components of an integrated company
is

substantially different and more difficult.

Second, as contrasted to the proposed vertical
divestiture, the amount of assets divested in other
Situations has frequently been quite small relative to the
assets of the ongoing corporations, thus reducing the
problems in negotiating satisfactory agreements with
existing lenders and attracting new external financing
during the transition period.
Third, in no previous divestiture case have "fhe
problems involved in the treatment of foreign assets and
liabilities even approached the ones created by the proposed vertical divestiture.
Fourth, the absolute size of the undertaking in
terms of the amount of assets to be divested ($70-$80
billion) substantially exceeds that of previous
divestitures, including the Public Utility Holding
Company Act.

This Act required the divestiture of assets

valued, in current dollars, at about one half that involved
in the proposed divestiture.

The simultaneous divestment

- 10 of such a large amount of similar assets may create
significant problems in finding acceptable buyers at
reasonable prices.
Clearly, the combination of these problems and the
high probability of extended litigation will create
substantial uncertainty in the minds of existing and
potential investors,
C. Financial Implications of Uncertainty
Capital Needs -- This uncertainty will, in turn,
create significant financial and capital formation
problems for the domestic petroleum industry as

it

tries to meet its substantial capital investment and external
financing requirements.

Forecasted capital requirements

for the U.$- domestic petroleum industry for the 1976-1985
period approach $250 billion (in 1974 dollars).

It is

clear that substantial amounts of external financing will
be required if that overall level of capital investment is
to be achieved.

For example, between 1965-197^4, a group

of 30 large petroleum companies producing oil and gas
in the United States raised external financing of $38.3
billion (of which $35.1 billion was long-term debt).

- 11 This external financing represents approximately 28
percent of those companies' $139 billion in world-wide
capital expenditures, investment, and increases in
working capital.

The impact of vertical divestiture

on the ability of affected petroleum companies to raise
new external capital is thus of critical concern,
especially since the industry's future proportion of
external financing is expected to rise even higher
than the historical level due to the need for sharply
higher amounts of capital investment.
Raising External Capital -- When assessing the
,i.

,.

.v

_,

r_J—;

•

•—'*!'

I

'

ability of the affected companies to raise external
financing during the transition period, three important
factors must be weighted and balanced.

First, many,

although not all, of the affected companies rank among
the largest and most creditworthy firms in the nation.
Such firms must be assumed to have a considerable
capacity to adjust to and cope with the problems created
by divestiture.

Second, both existing and potential

investors face a situation where the company in which
they have an interest will undergo a radical alteration;

- 12 and they would, in many cases, end up with smaller
investments in several new companies.

Third, the great

bulk of external financing is debt financing provided
by financial institutions such as commercial banks,
life insurance companies and pension funds, which, as a
matter of policy and/or as required by law, generally
follow conservative investment practices.
In the normal course of business operations, both
equity and debt investors are accustomed to assuming certain
risks.

However, with vertical divestiture -- particularly

in the early stages of the transition period -- investors
will he faced with a multitude of uncertainties for which
the ultimate resolution is essentially unpredictable.
For example, there will be a lengthy period of
uncertainty about the structure of the new firms, their
relationships with existing creditors and equity owners,
their future creditworthiness, and the treatment of
foreign assets and liabilities.

All of these factors

will have a detrimental effect on the availability
of external capital to these firms.

With a

significant increase in uncertainty, it can be
expected that the cost of new external financing would

- 13 rise, and in certain cases, supplies of capital would
discontinue making investments until tbe divestiture
uncertainties are resolved.
More specifically, we believe that the financial
effects of divestiture upon the affected companies during
tl>e transition wou^d include the following:
--The sale of new unsecured long-term debt issues,
including the refinancing of maturing issues,
would probably not be possible until lenders could
ascertain what corporate entity would be responsible
for debt repayment.

Under current bills, this

hiatus could run 1 - 1-1/2 years or longer
if delays are encountered.

In addition,

should the FTC or some other body be
given the power to rewrite loan covenants,
problems in attracting significant
amounts of new debt investments could
persist for marry years unless such
investments are exempted from FTC reformation, and thus ppssibly given a preferred
position over existing creditors' rights.

- 14 --Some amount of secured long-term debt, such as mortgages
"

' 'I

'

"

' I III I I

r

bS*i->^'J

*

on specific buildings, may be possible since the basic
security of the loans would be the asset rather than the
creditworthiness of the parent company.

However, tjie

potential volume of such financing, with the possible
exception of loans secured by future oil production,
may be limited by the specialized nature of many of
the oil companies' assets.
--It is unclear what the impact on the availability
of unsecured short-term seasonal loans would be.
However, such short-term lenders woul4 have many
of the same concerns as long-term lenders if it
appeared that their loans might not be repaid prior
to actual divestiture.

Some amount of short-term

credit secured by accounts receivables and/or
inventories probably could be arranged during the
transition period.
--Judgments about the availability of new equity capital
during the transition period are particularly speculative.
However, it is likely that the huge uncertainties prevailing during that period will have a temporary freezing effect
on equity investors.
Conclusion -- The financial problems associated with
divestiture will clearly vary from firm to firm and will depend
not only pn the availability of external capital but also on the
company's ability to generate and use internal funds.

However, it

x

$ clear that as long as the uncertainties associated with imple-

menting divestiture exist, the cost of capital for most companies
would rise and the ability of some to attract external capital
and

finance energy investments would be adversely afy^i-pH

- 15 In addition, the firm's incentive to make such new
investments would be adversely affected by such uncertainties.
Although it is difficult to forecast with precision
the exact size of the shortfall in investment, given
all the above factors? we believe that the magnitude
could be substantial.
D. Long-Term Financial Effects
These transition period effects on investment
and the development of new energy supplies are
particularly significant.

This transition period,

which I would emphasize could extend for the next 10
years or more, is the same period during which the
domestic energy industry must make massive investments
if the nation is to reduce its dependence on foreign
oil.

However, in addition to these transition

effects, there may also be adyerse post-transitional
period financial effects of divestiture.
First, the existing integrated companies would, in
all probability, have a greater debt capacity than the
aggregate debt capacity fo the divested component companies
since an integrated company has greater stability in its
level of cash flow and is viewed as offering a greater

- 16 likelihood for principal and interest payments on debt to
be met.

Second, in the case of vertical divestiture, the

required levels of working capital probably would also
rise.

Finally, the size and output thresholds imposed by

divestiture would effectively place growth ceiling on
firms approaching those limits and dampen incentives
to invest in those firms.
E. Supply and Price Implications of Divestiture
A major expectation of divestiture proponents is
that it would increase competition, thus resulting in
increased supplies and lower prices.

Even if we ignore OPEC

market dominance in the near-term, no evidence has been
presented to support such a conclusion.

In fact,

we believe the reverse is far more likely:

that divestiture

will lead to a rise in domestic prices and a decline in
domestic supplies.
We believe that this result will occur because of
a number of factors, including the following:

first, in

response to short-term uncertainties, firms will be
reluctant to commit internally generated funds to new
projects and external financing will, as I noted previously,
be more difficult and/or more costly to raise.

Moreover,

corporate management will have to direct a significant
amount of its

- 17 effort and attention to preserving or realizing the value
of existing assets rather than expanding energy supplies.
As a result, priorities for the vigorous expansion of
domestic oil and gas resources will be downgraded, which
will delay the development of these resources and result
in domestic supply being less than it would have been in
the absence of divestiture. The gap would, of course, be
made up by increased imports from OPEC. Lower investment
in new supplies would, therefore, result in upward pressure
on price and tend to strengthen OPEC market power.
Second, divestiture introduces new barriers to the
flow of investment resources. For example, entry barriers
in crude pro4uction, and refining-marketing will be raised
by vertical divestiture, since divested firms would be
prohibited from reentering 4ivested segments. Hence, new
entry by firms that otherwise would rank among the most
likely potential entrants and have both the capability
and incentives to enter would be prohibited by law. Moreover, since divestiture specifies a minimum-size operation
that would be subject to the divestiture law, firms not
currently affected by this legislation could not grow
beyond that specified limit. As markets and technology
change over time, the legislated limitations on size could
lead to some companies being trapped in relatively
inefficient operating modes. Introduction of barriers to
the flow of resources usually results in decreased

- 18 efficiency of production and consumption of goods and
services.
Third, we have found no evidence to suggest that
divestiture would produce an increase in operating efficiency and, consequently, place downward pressure on prices.
On the contrary, there appear to be logistical, managerial, and risk-avoidance efficiencies associated especially
with vertical integration which would be lost under
divestiture.

As a minimum, inefficiencies attributable

to the need to build more flexibility into refineries and
transportation systems, maintain larger inventories, and
duplicate managerial and administrative functions, will
result.

The added costs associated with these new ineffi-

ciencies would tend to create upward pressure on price.
On balance, the uncertainties, new entry barriers
and potential inefficiencies introduced by divestiture
would most likely result in greater costs and lower
production.

- 19 F. Effects on Relations with OPEC
Proponents of divestiture also argue that it will
lead to lower world oil prices and a weakening of the market
power of OPEC over our petroleum imports. We have reached
different conclusions. We believe that the proposed
divestiture legislation (1) would not reduce our vulnerability
to continued OPEC price fixing, (2) would likely seriously
impact on U.S. control of delivery of our essential
petroleum imports, and (3) seriously complicate our
efforts to minimize the impact of any future oil embargo
by means of the emergency sharing program of the International
Energy Agency (IEA). In addition, we believe that the
divestiture of the foreign portion of the activities of
our U.S. oil companies implied by the legislation under
consideration could seriously retard development of non-OPEC
foreign sources of oil. Clearly, this would have an
adverse impact on our efforts, and those of our IEA partners,
to reduce our dangerous overdependence on OPEC oil.
While recognizing that the impact of divestiture on
the international operations of U.S. oil companies will
depend on the specific language of the legislation and

- 20 the course of action elected by each company, it appears
that they must either divorce their international operations from their U.S. operations or fragment their international operations along the same lines as they elect
domestically.
Clearly, fragmentation of the existing U.S. oil companies into many independent units will offer the OPEC
the advantage of dealing with an increase in the number
of companies who must compete with each other for whatever
crude oil OPEC chooses to make available. Confronting a
cartel with an increase in the number of alternative
purchasers of its oil will certainly not weaken its
market power. In fact, by fragmenting whatever bargaining power and flexibility our integrated companies now
have vis-a-vis the OPEC, the reverse is clearly much more
likely to be the case.
As I have already pointed out in discussing the
financial implications of divestiture, a likely consequence
will be an increase in costs of capital. In addition, we
have pointed out that fragmentation of companies could not
only eliminate existing efficiencies but introduce inefficiencies.
We believe that these factors could significantly raise
the cost of development of non-OPEC foreign sources of
oil, thus reducing the likelihood that such investments will
be made. In addition, we believe that divestiture, by creating
barriers to investment activities of U.S. energy
companies, is likely to eliminate one

- 21 of the strongest motives for worldwide exploration and
development of new sources of oil by our companies--the
assurance of secure supplies of crude oil for their
downstream activities.
In short, we have concluded that divestiture
appears likely to retard significantly our progress toward
elimination of the dangerous vulnerability to price
increase and embargo which results from our overreliance
on OPEC oil.
Conclusion
I have concentrated my statement today on a rather technical
analysis of the effects of divestiture.

However, in order

to appreciate fully the consequences of divestiture, it is
important to view the proposed legislative actions as part
of a general policy choice that faces us today.

Although

legislated divestiture of the oil industry is not a new
idea, I believe the present level of support for this
proposal is part of a growing willingness by many people
to inject the government into the activities in our private
sector in a counterproductive and inappropriate manner.
We seem tempted to turn more and more to superficial
political solutions to complex economic problems.

Not

enough people seem to have recognized that more often than
not, government "solutions" lead to further problems and
yet more government involvement to undo the effects of

- 22 earlier '.'solutions." For example, the expected shortfall
in the level of capital investment during the transition
period could create substantial pressure for increased
Federal financial assistance to the petroleum industry.
Unfortunately, we have not yet learned that the appealing
solution politically often yields poor economic results.
The divestiture proposals now before Congress are an
extraordinary example of this unfortunate situation,
and for the reasons I have outlined for you today, the
Treasury Department strongly opposes enactment of S. 2387.

DepartmentofthtTREASURY j j
INGTON, D.C. 20220

I LLtKHUIMt bb4

June 7, 1976

FOR IMMEDIATE RELEASE

RESULTS OF AUCTION OF $2,000 MILLION
OF 9-DAY TREASURY BILLS
The Treasury has accepted $2,010 million of the $6,007
million of tenders received for the 9-day Treasury bills to be
issued June 8, 1976, and to mature June 17, 1976, auctioned
today. The range of accepted bids was as follows:
Price
High
Low
Average

99.865
99.861
99.862

Discount Rate

Investment Rate

5.400%
5.560%
5.520%

5.48%
5.65%
5.60%

Tenders at the low price were allotted 22%

WS-912

FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE SUBCOMMITTEE ON MATERIALS AVAILABILITY
JOINT COMMITTEE ON DEFENSE PRODUCTION
WEDNESDAY, JUNE 9, 1976, at 11:00 a.m.
Economic Stockpiling
Madam Chairman, Members of the Committee:
I appreciate the opportunity to speak to you today about
economic stockpiling -- a subject which in recent months has
received a great deal of attention, but perhaps not enough
economic analysis. The Treasury Department has considerable
interest in the concept of economic stockpiling because of
its implications for U.S. commodity policy and its potentially
substantial cost. We have only recently managed to relieve
American taxpayers of the burden of excessive grain stockpiles; further, we have significantly reduced our strategic
stockpiles to levels which are more consistent with our real
needs and we are studying additional steps that can be taken.
Underlying these policies is our belief that we should be

WS-913

- 2 -

doing everything we can to minimize government involvement
in commodity markets. Our emphasis should be on strengthim1
the functioning of market forces which can best determine
price and allocate supply.
Our experience with agricultural stock programs and
with strategic stockpiles for critical materials cannot
easily be applied to more general stockpiles for non-fuel
industrial commodities. Nevertheless, the difficulty which
we have had in operating effective agricultural and strategic
stockpile programs alone makes us highly skeptical of propo:;:ls
for a broader economic stockpile.
I would like to discuss with you today the principles
of our commodity policy which I believe argue strongly against
the creation of further domestic stockpiles at this time. I
will offer our judgment of the impact that such stockpiles
would have had upon the 1972-74 commodity shortage situation.
And I will discuss in more detail the applicability of our
strategic stockpile operations to a broader economic stockpile
My testimony will attempt to demonstrate that we Jo not believe
there is evidence to support a broad economic stockpiling pro
gram for industrial products at this time. Because our knowledge of such stockpiles is inadequate, however, we do belicv
that further work should be done in this area and we are
willing to participate in this effort jointly with the Congress

- 3-

U.S. Commodity Policy
The fundamental objective of U.S. commodity policy is
to help promote sustainable non-inflationary growth for the
U.S. economy with maximum employment. Our system relies
primarily on the functioning of markets to identify demand
and the necessary production to satisfy that demand at prices
that clear the market. The Government's role is to provide
stable and responsible fiscal, monetary and related policies
that allow the market to allocate the consumption and investment of resources efficiently to achieve U.S. economic objectives.
We believe that government's interference in the operation of markets should be limited to those activities which
are essential to promoting efficient allocation of resources
to meet the economic needs of its citizens. At the same time,
we are willing to consider proposals to solve individual
commodity problems on a case-by-case basis. We have steadfastly adhered to that policy, in spite of strong efforts by
developing nations to launch negotiation of a series of new
commodity agreements to maintain or increase commodity prices -without economic analysis of the dynamics of each individual
commodity -- through buffer stocks and a common fund for
financing. As a result of the recent UNCTAD IV conference
in Nairobi, we have agreed to participate in preparatory

- 4-

meetings for particular commodities to determine, without
commitment, the measures which might be suitable for each
product. This agreement is consistent with our case-bycase approach and our determination to negotiate agreements
only for those commodities for which we think they are
appropriate.
We believe this is a realistic approach. It has led
us to a decision to join the International Tin Agreement,
and the International Coffee Agreement. We reached these
decisions because we concluded that these agreements would
not artificially raise prices. We will not participate in
any agreement that has the effect of fixing price above the
market. It's for this and other reasons that we did not
sign the new International Cocoa Agreement. We are willing
to participate in a renegotiation of this agreement if one
is callech but only on terms that will improve the operation
of the market. We also have agreed to participate in
negotiation of a new International Sugar Agreement,
Recent demands that the U.S. Government become more
involved in commodity and other markets stem in part from
the belief that highly volatile prices and alternate
shortages are symptoms of "malfunctioning" markets. Those
demands are usually based on the assumption that the

- 5-

government' tan- a*ct; quickly 'ifith perfect foresight
and- thus achieve more-efficient market performance
than the free;interplay of natural' economic forces.
In this regar*d;; proposals for government-operated
economic stockpiles are perhaps the most commonly
recommended vehicles'fot government action to improve market performance.
The Administration recognizes that ideally '
operated stockpiles might reduce"Volatility in
certain markets•in certain - circumstances. but we
feel the costs of such stockpiles" are potentially
of such magnitude"that they must'be 'analyzed carefully to establish; that ;'the benefits substantially
outweigh the Jtosts.*''
The Role of .Stockpiling
Although hin theory stockpiles can blay a valuable role in reducing excessive volatility in certain
markets, we have found in practice that stockpiling
to stabilize ^iriternational commodity trade has had
little; impact on UhSv'markets.

r

For example, the '

operation of the International Tin Buffer Stcck has
had no appreciate!:e effect $n U.S. prices of tin.

- 6-

A principal difficulty with effective stockpiling is
the identification of probable future shortages far enough
in advance to accumulate the needed stocks without unduly
disrupting the market. We think that the private sector
is far more able than the U.S. Government to identify
potential shortages. They can take actions to build private
stockpiles to balance the risk that industry faces. For
example, there currently is a great deal of concern about
the future supply of chromite ore and chrome alloys because
much of the U.S. supply originates in Rhodesia where
political events could disrupt supply. Private companies
are aware of this potential difficulty and have on hand
inventories of 370,000 tons of chrome, enough to satisfy
U.S. consumption needs for nearly a year.
A second difficulty is the potential disruption of a
commodity market that can be caused by the buying and selling
of the material by the stockpile activity, as was demonstrated by the U.S- acquisition of a tin strategic stockpile in the early 1950's. The United States began buying
at the beginning of the Korean conflict to build a reserve
against a possible cutoff of southeast Asian supplies. The
purchases coincided with major increases in purchasing by
private firms to guard against the same potential supply

- 7-

interruption, thus causing large price increases.

In

early 1951, the U.S. Government ceased its purchases for a
time and the price fell. These unpredictable and quick
changes by a government agency caused great uncertainty for
U-S. industry and exporting countries.
Most proposals for stockpiles involve general
objectives, such as (1) to moderate price fluctuations,
(2) to assure a flow of supplies, or (3) to promote a
stable investment climate. The problem, however, is that
these proposals rarely specify the detailed objectives that
can be translated into operational criteria that will guide
a board of directors or a stockpile manager. Before any
stockpile system can be initiated, many questions must be
answered. For example:
1. For which commodities will stockpiles be instituted?
2. What criteria will be used in selecting a commodity?
3. What level of 'normal" prices or supplies is that
country willing to set as targets?
4. What is the cost to government of building stockpiles of sufficient size to reduce price fluctuations
by a certain amount and how much is the U.S. willing
to budget for a national or international stockpile program?

- 8-

5.

How large an agency for information analysis and

management will be required?
6. By how much will government stocks displace
private stocks in a stockpiling scheme?
7, What is the long run impact of economic stockpiling on production and consumption of a
commodity?
8. What are the external and intangible benefits to
the public that would justify government stockpiling in excess of normal private stockpiling?
If thorough investigation of these issues shows clear
net benefits for a particular commodity and improvements
in market efficiency, then we are certainly willing to
give full consideration to implementation of a stockpile
scheme for that commodity. But we believe that we should
be wary of sweeping programs that are devised solely on
the basis of the recent oil embargo or the 1972-74 commodity price boom. Studies have shown that capital will
be scarce enough during the next decade without the U.S.
Government diverting scarce capital resources into nonproductive stocks and away from needed investment for
the goods and services demanded by the world economy.

- 9-

Types of Economic Stockpiles and Their Effectiveness
As part of any analysis, it is important to identify
the various types of stockpiles and the functions they
are expected to perform. Though they are not mutually
exclusive, the major types and the principal functions
are as follows:
-- strategic stockpiles to assure supply availability
in case of national military emergency
-- international buffer stocks (or national buffer
stocks that are internationally coordinated) to
reduce volatility of world prices for a commodity
-- domestically held reserves for economic contingencies such as relief of unexpected shortages
-- price support stocks to guarantee a minimum price
for a commodity
-- seasonal stockpiles to provide stead supply on an
annual basis.
All of these types of stocks could be applied to food,
industrial, or mineral commodities, but seasonal reserves
would be more applicable to agricultural commodities, while
strategic stockpiles would be most relevant for industrial
materials. The other three types could be used for any

- 10 -

storable commodity.

As perishability increases, the manage-

ment of a stockpile becomes increasingly difficult, and
stockpiling schemes are not feasible for highly perishable
commodities.
Since the primary concern of most stockpile proposals
is economic stockpiles for industrial commodities, I would
like to focus on the two major types of economic stockpiles-buffer stocks and contingency reserves.
Buffer Stocks.

Even though there is only one international

buffer stock in operation, the model for such stocks usually
calls for management in accordance with agreed rules so
that the buying and selling activities of the stockpile
manager will counteract rapid changes in prices for the partcular commodity.

The manager has a stock of commodities and

a fund of cash that he can use to prevent low prices by
buying commodities or to prevent high prices by selling from
the stockpile.

A successful buffer stock operation must have

a skillful governing board that can set the floor and ceiling prices so that prices are stabilized, but are not sustained
at artificially high or low levels.

The manager's effec-

tiveness will be limited by the funds available to buy, when
prices are low, and the stocks on hand to sell, when prices
are high.

- 11 -

Buffer stocks are attractive because of their theoretical simplicity--buy low and sell high. In practice, however, buffer stocks are usually supplemented by direct supply
management, usually export or production controls, in order
to limit stockpile funding requirements. Exact estimates
of the cost of financing buffer stocks are difficult to.
obtain, but some studies have projected a maximum investment
of $1-2 billion for copper alone. Further, the cost of supporting agricultural prices has several billion dollars
a year during the late 1960's and early 1970's. These large
potential costs have led to supply control measures to support the operation of the.buffer stock in defending the floor
of the price range. No corresponding mechanism is available
to supplement the defense of the ceiling in the event of
stockpile exhaustion. Consequently, there is a danger that
buffer stocks combined with supply management will artificially raise long-term prices by being much more effective
in protecting the floor than in protecting the ceiling-unless the floor and ceiling are carefully set and frequently
adjusted to reflect actual market trends.
A severe operational problem is the correct "reading"
of the market to permit timely purchases and disposals.

- 12 -

Unless a manager can forecast-* the market trends accurately,
he will not be able to counteract market forces and may even
accentuate them. In practice, then, the operation of international buffer stocks is very difficult.
Contingency reserves. Contingency reserves are accumulated
as insurance against a disruption of foreign or domestic
supply because of such things as embargoes or natural disasters, or against a sudden surge in demand that temporarily
exhausts supply. The major concern we have with such a
reserves program relates to the timing of accumulations and
disposals and the determination of an adequate size stock.
We do not believe that adequate analysis has been done to
show how and when such accumulations would occur or how
large a stock would be needed. Further, the list of commodities that should be considered for contingency reserves
has not been clearly identified. A recent review by the
Administration identified three critical commodities that
showed some potential for interruption of foreign supply
that might damage U.S. industry -- bauxite, chrome and platinum. Other people have suggested cobalt, molybdenum, and
nickel as candidates for stockpiling to guard against
domestic or international shortages. We believe that further

- 13 -

study is needed to identify which commodities are appropriate for such reserves.
Operational Needs of Stockpiles --Data, Analysis, Management
Effective operation of stockpiles would require a system of data collection, analysis and economic forecasting
well beyond our present capabilities. A recent study published by the Brookings Institution shows the difficulty
of trying to run an effective buffer stock on the basis of
available forecasting capabilities. That economic analysis of the 1971-74 period shows that under a standard
forecasting model, we should have expected prices of metal
commodities to start rising in early 1972. On this basis,
if we had an operating stockpile-at that time, a stockpile
manager might have reached the conclusion that stocks should
have been released to prevent the price increases. In
fact, prices did not actually rise sharply until late 1972,
and it is entirely possible that a manager's premature
release of stocks based on his projection would have further
depressed prices of metals and would have injured producers.
To further illustrate the difficulty that a stockpile
manager would have faced during that time, it might be useful

- 14 -

to review what actually took place in 1973 with respect
to the General Services Administration's sales of excess
stockpiles. As actual prices rose rapidly in 1973, large
volumes of excess materials in the Strategic Stockpile
were sold by the General Services Administration in an
effort to hold down the rise in commodity prices. During
1973 GSA sold 19,300 tons of tin -- about 35 percent of
U.S. consumption. This amounted to one of the largest
sales of a raw material by a stockpile organization.
Despite the volume of these sales, prices continued to
rise; in fact, by 81 percent. The reason for this was that
highly speculative factors were operating in domestic and
world markets as consumers built huge inventories in the
fear that their operations would suffer if supplies of
materials were curtailed. If such sales did not affect the
price of tin, it would appear unlikely that smaller volumes
of sales from stockpiles could affect the price of a raw
material either. It would seem to be impossible to satisfy
the kind of demand th.it existed in 1973 by dumping enori
mous amounts of stockpiles.
In addition, the(model in the Brookings study indicated that prices should have started falling in late 1973,

- .15 -

a signal for a stock manager to stop selling an4 eventually
start buying.

In fact, however, actual prices kept rising

at a fast rate until early 1974 and buyers' demands for
inventories seemed insatiable.

Thus a decision by a stock

manager to stop sales would have made the situation worse.
After the rapid decline in metals prices in 1974, we
might have expected a stockpile manager to start rebuilding his inventories.

However, it would have been almost

impossible for him to decide the proper time because even
though metals prices reached a bottom in late 197 5 they
were still 29 percent above the low of 1972. A conservative manager might still be waiting for prices to drop
to the old low!
Stockpiles designed to meet interruptions in supply
also would have faced considerable problems during 1972-74.
The most difficult problem would have been timing the
acquisition and disposal of a particular commodity.

Whether

the stock is meant to protect against outright physical
shortage (a situation in which the selected material is
simply not available), or is meant to moderate or discourage
a price increase imposed by producers who control supply,
decision rules for release of stocks are not simple.

- 16 -

In the case of an outright physical shortage, the
signal to trigger the release of stocks might have been
the price of the material, the lead time for delivery of
the material, purchasers' and suppliers' inventories of
the material, or some combination of these indicators.
The problem with such signals is that the,,normal,'changes
in them, which result from the normal working of the market, are difficult, if not impossible, to distinguish from
the abnormal changes which might indicate a shortage.
There is too much at stake to permit disruption of markets
by sale/purchase decisions taken by government employees.
In the case of an imposed price increase, it is somewhat easier to distinguish foreign producer countries'
efforts to increase price artificially, from price increases
that result from market conditions.

However, we have con-

cluded that overriding economic realities make artificially
high pricing by producers unlikely for most raw materials
that the United States imports.

Therefore, it would be a

mistake to focus a large contingency stockpile program
solely on discouraging potential cartel pricing action by
producers.
Another illustration of the difficulties that are
involved in managing an economic stockpile can be found

- 17 -

in the experience of managing the nation's Strategic
Stockpile. Though we have nearly 100 materials in that
stockpile to supply our industrial base during a war,
there is great uncertainty over the amount of each material
needed. Indeed, the Administration currently cannot dispose of excess materials in those stockpiles because it
cannot reach agreement with Congress on the amount of
excess. The Federal Preparedness Agency, which is in charge
of managing the stockpile, has in recent years developed
new analytical procedures to determine the level of stockpiles needed. Those procedures, while a substantial improve
ment over earlier ones, are still imprecise in determining the most efficient size of a strategic stockpile. In
addition, the experience with the Strategic Stockpile would
not be particularly helpful to the operations of an economic
stockpile because the Strategic Stockpile by law is operated so that its activities do not disrupt markets, whereas
an economic stockpile is specifically designed to change
market situations.
Conclusion and Outlook
In light of all of these factors, we have concluded
that there simply has not been enough analysis done about

- 18 -

the criteria or the technical details to operate an economic stockpile successfully -- whatever its purpose. Therefore, we believe that it would not be in the United States'
interest to proceed legislatively or otherwise to establish economic stockpiles at this time. However, there are
efforts in progress to increase our understanding of economic stockpiling and to improve the related institutional
capabilities in the government. The National Commission
on Supplies and Shortages is now examining some of the
conceptual and operational problems associated with stockpiles. After its report later this year, we may be in a
much better position to assess the need and feasibility
of economic stockpiles for particular commodities. The
Commission is also studying possible changes in government
institutions to enhance the capability to identify and
handle shortages. The Office of Technology Assessment has
also suggested alternative ways to restructure institutional
arrangements to provide greater capability for dealing with
shortages. The Federal Preparedness Agency is conducting
a reevaluation of the methodology which guides the management of the nation's defense-related stockpile. When these
endeavors are completed, we should know a great deal more

- 19 -

about establishing and operating economic stockpiles and
we will be better able to judge if they can be used to
improve economic performance in the U.S. and around the
world.
Until we know much more, however, I believe that our
experience with stockpiles shows that it is relatively
easy for a manager to take actions that will destabilize
the market rather than improve market performance.

In

light of this, and considering that in most cases the
market will correct a volatile situation by itself, we
should proceed cautiously and not create economic stockpiles until it can be clearly established that the economic benefits in terms of stability and efficiency justify
the increased role the government will have to play in
the market.

FOR RELEASE U P O N DELIVERY

Statement by J. Robert Vastine
Deputy Assistant Secretary of the Treasury
for Trade and R a w Materials Policy
Before the Senate Committee on Interior and Insular Affairs,
Subcommittee on Minerals, Materials, and Fuels
Tuesday, June 8, 1976

I welcome this opportunity to express the Treasury
Department's views of the status of the L a w of the Sea negotiations
and their relationship to the overall economic policy objectives of
the United States. I would like to focus on the Committee I deep
seabed negotiations and discuss Treasury's interest in the negotiations, the results of the N e w York session, and the issues that
remain to be resolved.
Treasury Interest in the Law of the Sea Negotiations
Treasury is strongly committed to obtaining a Law of the
Sea Treaty which will permit successful deep seabed mining by
private U.S. companies operating within the context of the free
market. The treaty should permit U.S. firms to compete with
private and state-owned mining ventures of other countries, and
with an enterprise established by the International Seabed Resource
Authority, in order to promote the efficient exploitation of seabed
resources.
In the long run, any provisions of a deep seabed legal
regime that lead to an inefficient allocation of resources or that
deter the natural development of seabed mining would lead to
unnecessarily high prices for the American consumer and to less
efficient industrial production, thus retarding economic growth in
all countries.

WS-914

- 2-

Preserving the development of efficient international
markets for the minerals of the seabed has thus been Treasury's
overriding objective in the L a w of the Sea Negotiations. W e
seek
to relate the effects of a seabed regime on minerals
development to U. S. policy toward all commodities. Treasury
has played a major role in the formulation of U. S. commodity
policy, and with the State Department jointly heads the Commodity
Policy Coordinating Committee created by the Economic Policy
Board and National Security Council. W e have consistently taken
the view that the U.S. should attempt to improve the efficiency
and operation of commodities markets. However, we have agreed
that we will join other producers and consumers of all key
commodities to discuss means of improving markets, and that we
will consider on a case-by-case basis agreements designed to
limit excessive price volatility. W e believe this same policy
applies to the four major seabed minerals.
W e do not intend
to apply to seabed minerals a regime of controls on production
or price that would be inconsistent with our overall commodity
policy.
Therefore, Treasury's interest in the last session of the
Conference in N e w York focused mainly on seabed issues,
particularly the provisions of Article 9, the system of voting in
the Council, access to seabed resources, revenue sharing, the
Enterprise, and provisional application. I would like to review
briefly the situation with respect to
these issues, including
those which have yet to be resolved satisfactorily in order to meet
stated U.S. policy objectives.
Participation by the Authority in Commodity Negotiations and

Article 9(4)(i) establishes that the Authority m a y participate
in conferences and negotiations about the four seabed minerals.
It provides also that the Authority m a y become a party to such
agreements to the extent of its production of the mineral in
question. The Authority is envisaged in this provision as an
ensurer of equitable application to all seabed producers of any
decisions about production taken pursuant to a commodity agreement.
Inherent in Article 9, therefore, is a case-by-case approach to
commodity negotiations, which is consistent with our government's
commodity policy toward land-based production.

- 3-

Production Limitation
Article 9(4)(ii) provides for an interim production limitation tied to the projected growth in the world nickel market,
currently estimated to be about six percent a year. This would
in effect place a ceiling on seabed production of the other minerals
found in manganese nodules, including copper, for a temporary
period. This limitation assures the developing country land-based
producers that the initial effects of seabed mining will be predictable and that their economies will have time to make any
necessary adjustment.
Compensatory Adjustment Assistance
Because seabed mineral production may adversely affect
the market position of some land-based producers, Article 9
contains a provision for a compensatory adjustment assistance
program. This provision envisions that if seabed production
does become a threat to land-based producers - - a proposition
which we believe to be quite doubtful — that adjustment assistance
measures should be taken. That is, we envisage that the Authority,
on its own account or operating through an existing international
financial institution, would make loans to land-based producers
to help them either become competitive with seabed producers,
or enter new, competitive lines of production. As Secretary
Kissinger said in his major speech on L a w of the Sea issues on
April 8, an adjustment assistance program should be created to
"assist countries to improve their competitiveness or diversify
into other kinds of production if they are seriously injured by
production from the deep seabeds".
A Voting System in the Council which Adequately Reflects the
Economic Interest of Producers and Consumers of the Deep
Seabed Minerals
In his April LOS address, Secretary Kissinger expressed
a policy which has been very strongly supported by the Treasury:

- 4 -

He said that the "voting machinery must be balanced and equitable,
and must insure that the relative economic interests of countries
with activities in the deep seabeds be protected, even though
these countries m a y be a numerical minority". Treasury believes
that the Council must have responsibility for implementing the
broad policy guidelines of the Assembly. Decisions of the Council
should be made by a voting procedure similar in concept to those
of international organizations such as the IMF, the World Bank,
the Tin Agreement, or the International Fund for Agricultural
Development. The Council power and voting procedure is now
the most important unresolved issue in the deep seabed negotiations.
Open, Unobstructed Access to Deep Ocean Resources
A cardinal tenet of the United States position has been to
insist on nondiscriminatory guaranteed access, with security of
tenure, for U.S. and other private or state owned or national
firms. In his April speech, Secretary Kissinger emphasized
this point when he said, "What the United States cannot accept
is that the right of access to seabed minerals be given exclusively
to an International Authority, or be so severely restricted as effectively to deny access to the firms of any individual nation
including our own". The Authority cannot have any discretionary
power with respect to the issuance of contracts that satisfy the
objective criteria set out in the Treaty and its Annex.
Similarly, we are inalterably opposed to attempts to
impose any system which would arbitrarily limit the number
of sites that firms of any one signatory can exploit. Such attempts
appear to be merely an effort by other industrial countries to
constrain the United States competitive edge in seabed technology
and mining activity, or to protect their existing land-based
production.
Price and Production Controls
Although as part of an overall package settlement we are
prepared to agree to the interim production limitation I have
described above, we oppose granting the Authority discretionary

- 5 -

price and production control powers that would effectively
inhibit development of supplies of seabed minerals. W e intend
to give continuing close attention to this issue during the
remainder of the negotiations.
Revenue Sharing
We believe that Approach A of the Special Appendix
could lead to an acceptable system of revenue sharing which can
be applied equitably to the miners of all states, whether they
come from a market economy or a socialist economy. Thus,
we are now assured that all miners will have to share revenues
with the international community. W e believe such revenues
should be used to fund the Authority's adjustment assistance
program and to provide other benefits for
developing
countries. W e are opposed to an onerous burden of payments
that would impede deep seabed mining activity. Treasury
opposes any extension of foreign tax*credit treatment to shared
revenues.
The Enterprise
The United States has agreed to the creation of an
operating a r m of the Authority, the Enterprise, which can exploit
the deep seabeds under the same conditions that would apply to
all mining. At issue is how the Enterprise will be financed,
especially during the initial period. Mandatory contributions
on the part of States Parties would be an unreasonable burden
on U.S. taxpayers.
Provisional Application
The revised Single Negotiating Text now recommends
that the Plenary Group of the L O S Conference discuss this issue.
W e believe this must be made part of the final Treaty package.
Without provisional application it m a y be several years before
the regime established in the Treaty could take affect. This
would be an unacceptable delay in the development of a new source
of raw materials, and thus might make unilateral action the only
remaining course of action. W e will therefore be watching the
negotiation of paragraph 20 of the Annex, dealing with transitional
arrangements, with great care.

- 6 -

Conclusion
Treasury is strongly committed to ensuring that new
supplies of raw materials from the most efficient sources
available come on stream during future decades in response to
market demand and in order to avoid disruptive shortages. By
the end of the next N e w York session we expect to have a L a w
of the Sea Treaty package which is consistent with our overall
economic and commodity policy objectives. Secretary Simon
has personally followed the developments in these negotiations.
At his direction the Treasury Department is participating
actively in the negotiations to assure that the outcome is
consistent with U. S. policy and that the Treaty finally concluded
will be worthy of receiving the advice and consent of the Senate.

STATEMENT BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY, BEFORE THE HOUSE COMMITTEE
ON INTERNATIONAL RELATIONS
WEDNESDAY, JUNE 9, 1976, at 10:00 A.M.
Mr. Chairman, I am pleased to have the opportunity to
present the views of the Administration on H.R. 11463,
proposed amendment to the Export Administration Act that
deals with foreign boycotts of countries friendly to the
United States, specifically the Arab boycott of Israel. I
would also like to take this opportunity to review with you
our concerns over other legislative proposals now pending
before the Congress.
Mr. Chairman, let me begin by stating unequivocally the
Administration's opposition to the boycott. We share the
concerns underlying H.R. 11463 (the Koch Bill) and other
proposed legislation. We believe, however, that the approach
reflected in these proposals would be counterproductive to
the resolution of the boycott problem. In my presentation,
I would like to provide you with the Administration's reasons
for believing that present U.S. legislation and regulations
provide a forceful and balanced approach which best serves
U.S. interests by meeting the challenge posed by the Arab
boycott, while at the same time enabling us to progress
toward a Middle East peace settlement.
In so doing, I am aware that some people believe our
approach to the problem of the Arab boycott has not been
forceful enough and that our belief in the need for measured
restraint has not been based on the weight of evidence. In
this regard, we clearly have a disagreement; for I believe
that we have taken extensive steps in the past year to
address the Arab boycott issue and that additional legislation now would be counterproductive to our shared desire
to end the boycott.
In this regard, I believe it is important to understand
that the policy that underlies the Arab boycott arose out of
WS-915
the state of beligerency that exists between Israel and the

- 2 Arab nations. According to its governing principles, the
Arab boycott of Israel is not based on discrimination
against U.S. firms or citizens on ethnic or religious
grounds. The primary boycott, which dates from 1946, involves
the Arab countries' refusal to do business with Israel. It
was designed to prevent entry of certain products into Arab
countries from territory now part of Israel. The secondary
boycott introduced in 1951, operates to prevent firms
anywhere in the world from doing business in Arab countries
or from entering into business undertakings with Arab firms
if they have especially close economic ties with Israel, or
if they contribute to the Israeli defense capability. It
was designed to inhibit third parties from assisting in
Israel's economic and military development. Both aspects
of the boycott are considered by the Arab League States to
be legitimate acts of economic warfare.
U.S. Action to Deal With Discrimination and The Arab
Boycott
At the outset I would like to review some of the major
steps that have been taken to deal both with respect to the
boycott and with respect to discrimination.
In February 1975, President Ford issued a clear statement that the U.S. will not tolerate discriminatory acts
based on race, religion or national origin.
The President followed this in November 1975 with an
announcement of a series of specific measures on discrimination :
— He directed the heads of all departments and
agencies to forbid any Federal agency in making
selections for overseas assignments to take
into account exclusionary policies of foreign
governments based on race, religion or national
origin.
— He instructed the Secretary of Labor to require
Federal contractors and sub-contractors not to
discriminate in hiring or assignments because of
any exclusionary policies of a foreign country
and to inform the Department of State of any
visa rejections based on such exclusionary
policies.
--He instructed the Secretary of Commerce to issue
regulations under the Export Administration Act

- 3 to prohibit U.S. exporters and related service
organizations from answering or complying in
any way with boycott requests that would cause
discrimination against U.S. citizens or firms
on the basis of race, color, religion, sex or
national origin.
— Also, in January 1976, the Administration submitted
legislation to prohibit a business enterprise from
using economic means to coerce any person or entity
to discriminate against any U.S. person or
entity on the basis of race, color, religion, sex,
age, or national origin.
— In March 1976, the President signed into law the
Equal Credit Opportunity Act, which amended the
Consumer Credit Protection Act making it unlawful
for any creditor to discriminate against any
applicant with respect to a credit transaction
on the basis of race, color, religion, national
origin, sex, marital status or age.
— The Comptroller of the Currency, the Securities
and Exchange Commission and the Federal Home
Loan Board have all issued statements
to the institutions under their jurisdiction
against discriminatory practices.
In recent months, the Administration has also taken
the following actions to make clear that it does not support
boycotts of friendly countries.*
1. In November 1975, the President instructed the
Commerce Department to require U.S. firms to indicate
whether or not they supply information on their dealings
with Israel to Arab countries.
2. In December 1975, the Commerce Department announced
that it would refuse to accept or circulate documents or
information on trade opportunities obtained from materials
known to contain boycott conditions.
3. The State Department instructed all Foreign Service
posts not to forward any documents or information on trade
opportunities obtained from documents or other materials
which were known to contain such boycott provisions.
4. In. December 1975 and January 1976, the Federal
Reserve Board issued circulars to member banks warning them

- 4 against discriminatory practices and reiterating the Board's
opposition to adherence to the Arab boycott.
5. In January 1976, the Justice Department instituted
the first civil action against a major U.S. firm for violation
of anti-trust laws arising out of boycott restrictions by
Arab countries. The Justice Department has a continuing
investigation in this area.
This record indicates clearly that the Administration
has not ignored the problem of the Arab boycott, but has
taken vigorous action to address the issue. But equally
important we have done so in a manner that would not be
injurious to our broad, fundamental interests in the Middle
East, or counterproductive to our objective of bringing
about the liberalization and ultimate termination of Arab
boycott practices.
Despite our efforts there has been considerable pressure
on the Administration to mount a confrontational attack on
the Arab boycott. Each step we have taken has immediately
been met with demands for additional action.
We have strongly opposed such confrontation and intend
to continue to do so because we are convinced that such a
course would fail to achieve its stated objectives. The
ultimate effect of such an approach is to tell Arab nations
that either they must eliminate the Arab boycott entirely,
irrespective of a settlement in the Middle East, or cease
doing business with American firms. We have seen no evidence
that such a policy would result in elimination of the
boycott. In fact we believe that the effect of such pressure
would harden Arab attitudes and potentially destroy the
progress we have already made.
The argument is made that the Arab world when faced
with such a choice will recognize the importance of continued
access to U.S. goods and services and therefore eliminate
what they consider one of their principal weapons in the
political struggle against the State of Israel. Unfortunately, this argument fails to reflect several basic
facts.
The U.S. alone among industrial countries has a clearly
established policy and program of opposition to foreign
boycotts of friendly countries, including the boycott of
Israel. Other countries already supply a full 80
percent of the goods and services imported by the Arab
world. There is no evidence that these nations are

- 5 prepared to lose that $50 billion a year market or to
jeopardize their stake in the rapidly expanding economies of
the Arab nations. Further, there is precious little that
the U.S. presently supplies to Arab nations that is not
available from sources in other countries and they are eager
to take our place. The major Arab states have the funds and
the will to incur any costs such a switch might entail. ^
They see that the U.S. has frequently engaged in economic
boycotts for political purposes, for example in Cuba, Rhodesia,
North Korea and Viet Nam, so they cannot accept the argument
that they are not entitled to do the same.
Mr. Chairman, I believe that we must face an essential
and widely recognized fact. The Arab boycott has its roots
in the broad Israel-Arab conflict and will best be resolved
by dealing with the underlying conditions of that conflict.
Problems With a Legislative Approach
For these and other reasons which I will mention, it is
the position of the Administration that no additional
legislation is necessary or desirable at this time and that
in fact new legislation would be detrimental to the totality
of U.S. interests both here and in the Middle East.
Present U.S. policy and anti-boycott measures already
are quite effective. Further, a number of Arab governments
are now negotiating or considering contracts with U.S.
firms, notwithstanding the public commitment of these firms
to maintain investment, licensing or other special economic
relationships with Israel. Other U.S. firms are making
some progress in working boycott clauses out of the various
stages of their transactions, for example, contracts, letters
of credit and shipping instructions. Although the pattern is
not uniform as to company, transaction or country this
reflects a gradual easing of enforcement practices over the
past six months.
A number of firms do business with both Israel and the
Arab countries. Recently, a prominent U.S. business leader
informed me that he had successfully concluded a commercial
contract with an Arab country even though he maintains
extensive ties with Israel. The Arab countries, in fact,
are considering the adoption of a standard policy of exempting
from the boycott list any firms which make as significant a
contribution to them as to Israel.
New legislation at this time could alter these favorable
developments regarding enforcement practices. As you know

- 6 boycott rules are not uniformly enforced throughout the Arab
world. Each country has the right to maintain its own
national boycott legislation and has exercised this right.
Some countries have chosen not to follow stringent boycott
practices. Other countries are continuously reviewing their
policies to ensure that any actions they take with respect
to the boycott do not conflict with their own national
interests. I am concerned that new legislation could raise
the issue to a higher political and emotional plane and
thereby become a major negative factor as these countries
assess the advantages and disadvantages of applying a
boycott as they review individual trade and investment
proposals by U.S. firms.
Finally, legislation as evidenced by the several bills
now pending, tends to involve an all or nothing approach,
and fails to take into account the fact that a broad range
of measures to deal with specific aspects of the boycott
have already been adopted during the last year and a half.
Opposition to Specific Legislation Before the Congress
Mr. Chairman, I would like to turn to the specific
legislation that is now before the Congress. I would like
to discuss first the anti-boycott amendments contained in
the Koch bill (H.R. 11463).
The provisions of these bills would: (1) mandate
disclosure of required reports by U.S. firms to the Commerce
Department of their responses to boycott-related requests;
(2) prohibit U.S. firms from furnishing, pursuant to a
boycott request, any information regarding the race, religion,
sex or national origin of their or other firms directors,
officers, employees or shareholders; and (3) prohibit a
refusal by a U.S. firm to deal with other U.S. firms pursuant
to foreign boycott requirements or requests.
The Administration is concerned about each of these
provisions.
With respect to disclosure of reports of U. S. firms,
by publicizing information about their compliance with
boycott requests, the disclosure provision will also make
available information concerning non-compliance. This
disclosure would give boycott officials an enforcement tool
and make it more difficult for Arab business partners to
tolerate de facto, non-compliance by U.S. businesses.

- 7 In addition, although a firm might disclose that it has
indicated to Arab governments, for example, that it does not
ship on Israeli vessels, or have other specified business
dealings with Israel, such a disclosure would not and could
not provide evidence as to whether this was the result of
Arab pressures or an antonomous, voluntary business decision.
Firms wishing to avoid the risk of adverse domestic reaction
to their disclosure might then decide it necessary to cease
doing business in the Arab world, even though they would
continue to have no business dealings with Israel.
With respect to the provision of these bills barring
the furnishing of information on race, religion, sex or
national origin, sought for boycott purposes, we believe
that adequate and effective measures have been taken by the
President and the respective agencies which make such a
provision unnecessary.
With respect to the prohibition of refusal to deal
among U.S. firms pursuant to Foreign boycott requirements
or requests, U.S. anti-trust laws already prohibit agreements
or conspiracies to engage in anti-competitive, boycott
activities and the Justice Department has one suit pending
in this area. It is not clear whether the refusal to deal
provision in HR 11463 is intended to go beyond existing
anti-trust laws. If the bill is intended to cover cases
where a firm unilaterally — without any agreement — chose
not to do business with another firm, it could in our view
place the government and the courts in a very difficult
situation of assessing the motives behind the choice of
one's business associates or his other business decisions.
Even if the provisions could be altered to make them
enforceable, other serious problems would remain. U.S.
firms might well be able to meet the new legal requirements
by sales and shipments via parties in third countries and
thus avoid, for example, having to refuse use of ships or
insurance companies which are on boycott lists. The provisions
could also have the unintended and undesirable effect of
encouraging some firms to make general use of non-boycotted
suppliers in their worldwide trade. The reason for this
would be a fear that if they used boycotted firms except for
projects in boycotting countries, it might be considered
prima facie evidence of refusal to deal. Finally, responsible
enforcement would require extensive staffing and funding
resources going well beyond the requirements for enforcement
of existing Export Administration Act provisions directly
related to national security interests.

- 8 -

Other Legislative Proposals
While the Stevenson-Williams and Koch Bills do not
prohibit the provision of information to Arab governments by
U.S. firms on their business dealings with Israel, HR 4967,
the Bingham Bill, does impose this requirement. The Administration continues to oppose this bill both because it is
inequitable and could well be self-defeating. We do not
believe that Arab governments will abandon their policy of
not dealing with firms which may be assisting Israel in a
significant economic and/or military way simply because of a
requirement that prohibits such firms from indicating either
the existence or the extent of their relationship with
Israel. There are a variety of other sources which Arab
governments could use to attempt to develop such information.
Many of these sources would probably be unreliable and could
thus erroneously place U.S. firms on the Arab boycott list.
Moreover, even firms which for reasons that have nothing to
do with the boycott, have no business or commercial connections
with Israel would be prohibited from acknowledging this
fact.
Former Under Secretary of Commerce, James Baker,
outlined in great detail the Administration's opposition to
this bill before your Subcommittee on International Trade
and Commerce on December 11, 1975, and I want to reiterate
the Administration's continued opposition to this bill.
Mr. Chairman, we must proceed in this entire area with
great caution not only because existing legislative proposals
place us in a confrontational stance with the Arab nations
but also because in at least some instances, they could
seriously distort major economic forces in this country and
around the world. Proposals such as the Ribicoff bill (S.
3138) would go so far as to alter a number of major tax
provisions. This bill would restrict use of the foreign tax
credit, the DISC provisions and the earned income exclusion
of the Internal Revenue Code and tax on a current basis the
earnings of foreign subsidiaries of taxpayers who participate
in the Arab boycott. Such changes in our tax laws would
significantly impact U.S. companies, employees and investors
alike, while imposing new and onerous burdens on the Revenue
Service that would impair its capacity to fulfill its basic
function as a collector of tax revenue by creating an
administrative nightmare.

- 9 Complicated and delicate questions of foreign policy
are not susceptible to rigid solutions which are prescribed
through the Internal Revenue Code. Such actions are contrary
to the resolution of the boycott problem, contrary to the
efficient administration of the fair laws and contrary to
sound principles of tax policy. For these reasons Assistant
Secretary Walker of the Treasury Department in a letter to
Chairman Long of the Senate Finance Committee expanded at
some length on the serious problems we have with this type
of legislative approach. I would like to include a copy of
that letter for the record.
Constructive Approach to the Boycott Question
Mr. Chairman, we are determined to solve this difficult
and complex problem. Any approach inherently involves a
certain degree of subjective judgement. We believe that
peace in the Middle East is the only ultimate answer. In
the Administration's view, heavy-handed measures which could
result in direct confrontation with the Arab world will not
work. A far more constructive approach, we believe, is to
work through our growing economic and political relations
with the Arab states as well as our close relations with
Israel and the broad range of contacts which the Executive
Branch and the regulatory agencies maintain with the U.S.
business community to achieve progress on the boycott issue,
As Administration witnesses have indicated in testimony
during the past year, all of the agencies concerned with the
boycott and discrimination issues have kept these important
questions under continuing review and are prepared to take
whatever steps they consider necessary to deal with those
problems.
Many of the Administration's actions have dealt with
discrimination which, as the President said in a statement
early last year, is totally contrary to the American tradition
and repugnant to American principles. We have wanted to
leave no misunderstanding here and abroad of our determination to eliminate discrimination on racial, religious
and other grounds. At the same time, we have taken a number
of steps as I have outlined to lessen the impact of boycott
practices on American firms. In our contacts with the U.S.
business community, we have also found that a number of
firms are working on their own to eliminate boycott conditions
from their commercial transactions or have announced that
they will not comply with boycott requirements.

- 10 We consider these to be healthy signs from our business
community, and in my view we should encourage this kind of
movement rather than rush into coercive legislation that
would be disruptive and damaging to the business community,
cause widespread uncertainty in our commercial relations
with the Middle East, and have the other adverse effects I
have described.
In addition to these developments, our approaches to
the Arab governments have brought a greater awareness of the
economic cost to them of the boycott and a better underStanding of the obstacle it imposes in the path of better
relations with the U.S.
I and my colleagues have had a number of conversations
with the leaders of Arab Governments including Saudi Arabia,
Kuwait, Egypt and Syria to make very clear to them our^
opposition to the boycott and all discriminatory practices.
We have also emphasized that the boycott is a significant
impediment to greater U.S. private sector participation in
the economic development of these countries. From my own
conversations and reports that have come to my attention, I
believe that Arab Governments are beginning to recognize
that this issue is prejudicial to their own economic interests.
The meeting of the U.S.-Saudi Arabian Joint Commission
on Economic Cooperation last February provided an occasion
for further discussion of these issues. I was able to make
representations at the highest levels of the Saudi Arabian
Government on the question of discrimination against Americans
on racial, religious and other grounds, and the Joint
Communique issued on February 29 contains a public affirmation by the Saudi Arabian Government disavowing such discrimination. In fact, many Arab leaders have stated to us
that it is against Islamic tenets to engage in such discrimination.
At the same time, Mr. Chairman, I would like to make
clear that our opposition to legislation or other confrontation
in dealing with the boycott problem in no way suggests a
dimunition of our concern for Israel's welfare and our
desire to help overcome obstacles to more rapid economic
development and prosperity in that country. We remain
committed to a free and independent State of Israel. As you
know, we have been, and will continue to be, generous in our
aid to Israel. In addition, we have taken significant steps
to assist Israel's economy in other ways. As Co-chairman of
the U.S.-Israel Joint Committee for Investment and Trade, I

- 11 have met on numerous occasions with Israel's economic
leadership and have worked out practical means to meet
Israeli needs and to cooperate on a wide range of economic
and commercial matters.
The Joint Committee has also been instrumental in
helping organize the Israel-U.S. Business Council which is
now holding its inaugural joint session in Israel. We look
to the Council to help develop closer relations between the
two business communities and to make practical contributions
to expansion of direct trade and investment ties. The
activities of the Joint Committee and the Business Council
are constructive efforts in our continued support of Israel
and are part of our broader bilateral economic program to .
help deal with all of the economic problems of the Middle
East.
In conclusion, Mr. Chairman, I would note that we have
had talks with Arab and Israeli leaders and with leaders of
the American Jewish community on boycott issues and on ways
to eliminate racial, religious and other discrimination. We
have made the point that our basic goal must be to encourage
progress toward peace. It is our considered judgment that
confrontational policies will not work to remove the boycott
and could undermine the delicate search for peace in that
troubled region of the world. The Administration sought and
continues to seek effective ways to eliminate this divisive
policy and simultaneously achieve a just and lasting peace
in the Middle East.
I can assure the Committee that we will continue these
efforts as well as our strong policy of combating any form
of racial, religious and other discrimination against and
among Americans. The Congress and the Administration share
the goals of a just Middle East peace and an end to boycotts
and discriminatory practices. I hope we can agree that the
legislative proposals now before the Congress are not the
best measures to achieve these goals.

FOR RELEASE AT 4:25 P.M.

June 8, 1976

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 $5 300 million »
thereabouts, to be issued

June 17, 1976,

or

as follows:

91-day bills (to maturity date) in the amount of $2,100 million, or
thereabouts, representing an additional amount of bills dated

March 18, 1976,

and to mature September 16, 1976 (CUSIP No. 912793 A9 7), originally issued in
the amount of $3,103 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,200 million, or thereabouts, to be dated
and to mature December 16, 1976

June 17, 1976,

(CUSIP No. 912793 C6 1).

The bills will be issued for cash and in exchange for Treasury bills maturing
June 17, 1976,

outstanding in the amount of $7,606 million, of which

Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,665 million.
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 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 Daylight Saving time, Monday, June 14, 1976.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in
multiples of $5,000.

In the case of competitive tenders the price offered must

be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
WS-916

(O^ER)

-2securities 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 $500,000 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 j U ne 17, 1976,

in cash or

other immediately available funds or in a like face amount of Treasury bills
maturing June 17, 1976.
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 not*
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 Banker
Branch.
oOo

3<deral

a" ^>
E <£>

financing bank

V) CsJ

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE
SUMMARY OF LENDING ACTIVITY
May 16 - May 31, 1976
Federal Financing Bank lending activity for the period
May 16 through May 31, 1976 was announced as follows by
Roland H. Cook, Secretary:
The Federal Financing Bank made the following loans to
the United States Railway Association (USRA):
Date

Note

5/17
5/25
5/28

6

Date

Borrower

Maturity

Amount

Interest
Rate

$3,050,000
12/26/90
8.055%
6
900,000
12/26/90
8.055%
3
516,000
5/31/76
5.737%
On May 31, USRA rolled over Note #3 in the amount of
$1,017,095.89 and borrowed $2,369.74 to pay the interest
due. The loan matures June 30, 1976, and bears interest at
a rate of 5.765%. USRA borrowings from the Bank are
guaranteed by the Department of Transportation.
The FFB made the following loans to utility companies
guaranteed by the Rural Electrification Administration:
Amount

Maturity

Interest
Rate

5/17 United Power Assn

$5,000,000

12/31/10

8.305%

5/17 Tri-State Generation and Transmission Assn.
5/17 Colorado-Ute
Electric Assn.

116,000

12/31/10

8.305%

4,700,000

12/31/10

8.305%

5/19 East Ascension
Telephone Co.

210,000

12/31/10

8.280%

5/19 Central Louisiana
Telephone Co.

344,839

12/31/10

8.280%

WS-917

- 2Maturity

Interest
Rate

5/22/78

7.279%

391,000

12/31/10

8.314%

266,000

12/31/10

8.365%

5/28/78

7.524%

Amount

Date

Borrower

5/20

South Mississippi Electric
Power

5/21

Doniphan Telephone
Company

5/25

Florida Central
Telephone Co.

5/28

Southern Illinois
Power Coop.

$11,900,000

1.,230,000

Interest payments on the above REA loans are made on a
quarterly basis.
The Bank purchased the following Notes from the Department of Health, Education and Welfare (HEW):
Maturity

Interest
Rate

Date

Series

Amount

5/18

D

$1,100,000

7/1/00

8.327%

5/27

D

1,683,000

7/1/00

8.323%

5/27

E

2,390,000

7/1/00

8.328%

HEW had previously acquired the notes which were issued
by various public agencies under the Medical Facilities Loan
Program. The notes purchased by the Federal Financing Bank
are guaranteed by HEW.
The Bank made the following advances to borrowers guaranteed by the Department of Defense under the Foreign Military
Sales Act:
Interest
Date
Borrower
Amount
Maturity
Rate
5/19
Government of
$645,780.23
4/30/83 7.772%
Argentina
5/27
Government of
Israel 6/10/85 7.996%
31,360,294.48
5/27
Republic of
2,665,724.49
Korea 6/30/83 7.843%

3On May 19, the Bank purchased the following debentures
from Small Business Investment Companies:
Interest
Company

Amount

Maturity

Rate

Northwest Business $230,000 5/1/81 7.835%
Investment Corp.
Louisiana Equity 900,000 5/1/86 8.145%
Capital Corp.
Tomlinson Capital 300,000 5/1/86 8.145%
Corporation.
These debentures are guaranteed by the Small Business
Administration.
The National Railroad Passenger Corporation (Amtrak)
made the following drawings against Note #7:
Interest
Date

Amount

Maturity

Rate

5/21 $10,000,000 6/14/76 5.693%
5/28 7,000,000 6/14/76 5.765%
Amtrak borrowings from the Bank are guaranteed by the
Department of Transporation.
On May 28, the United States Postal Service borrowed
$700 million at an interest rate of 7.78%. The loan will
be repaid in 5 serial installments commencing on May 30,
1977 and ending on May 30, 1981. Proceeds of the loan
were used to repay $252 million of notes maturing with the
Bank, to pay $80 million in interest owed to the FFB,
and to raise additional funds.
On May 28, the Tennessee Valley Authority borrowed $225
million to repay $200 million of notes maturing with the
FFB and to raise additional funds. The loan matures August
31, 1976 and bears interest at a rate of 5.738%.
On May 28, the FFB purchased a $300 million 5 year
Certificate of Beneficial Ownership from the Farmers Home
Administration. The maturity is May 28, 1981. The interest
rate is 8.21% on an annual basis.
Federal Financing Bank loans outstanding on May 31, 1976
totalled $22.7 billion.
oOo

FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
CHICAGO BOARD OF TRADE ANNUAL PRESS DINNER
CHICAGO, ILLINOIS
WEDNESDAY, JUNE 9, 1976, AT 8:00 P.M.
Agriculture and Commodity Policies: More Government
Intervention or Less?
It is a pleasure for me to be here in Chicago and to
have the opportunity to address an issue which I know should
be of a major concern to you -- the role of government in our
agricultural and commodity trade. The issue is a crucial one, for

it involves not only the extent to which governments should determine
the quantities and prices of goods that will be exchanged in
international markets, but also the degree of government
intervention at home.
This question is really part of a broader issue of
whether we seek more or less government involvement in every

aspect of the world economy. Today, at home, there are some prominent
people calling for greater government control of price and
su

PPly, government allocation of credit, government economic

planning, and a major expansion of government spending.
Internationally, others are seeking governmental redistribution
WS-918

- 2of wealth, governmental intervention into the operations of the
market, unreasonable restrictions on the activities of multinational corporations, and government cartels for
basic commodities. Advocates of such policies are no
longer the isolated few; they are growing in numbers, I
submit to you that the policy choices we make now will
determine whether our private enterprise system and our
economic strength can be maintained.
Private enterprise is one of the basic cornerstones upon which
our nation was founded.

It is one of the essential freedoms to

which we as a nation have been committed, and it has made possible
one of the highest standards of living the world has known.
Yet recently, our free enterprise system has come under
increasing attack from those who would have government take
on a greater role in regulating or controlling all aspects
of our lives -- and who see

advocates of free enterprise

as either outdated theorists or a new generation of economic
exploiters, indifferent to human suffering and only out to
make a fast buck for themselves and their companies.
It is ironic that at a time when Americans are enjoying
such great abundance and such great opportunity, too many of
us have lost sight of the principles and institutions that
have made our way of life possible.

Too many Americans --

especially those born into an affluent society which seemed
to have no beginning or end, no cause and no effect -- take

- 3the fruits of the free enterprise system for granted:

the

abundance, the opportunity, the freedom of choice, the
unprecedented opportunities for learning, travel, and general
upward mobility. Not everyone understands the basic economic
facts of life that create all these benefits.
This evening, I would like to discuss with you how
government has taken on an ever increasing role, and focus
on our agricultural policy at home as well as our commodities
policy abroad. Hopefully, it will bring about a better
understanding of where policy should be moving in the future.
The first point I want to emphasize is that the government has already become too dominant a force in our lives.
The Federal budget has quadrupled in 15 years, and we have
doubled the national debt in just 10 years time. The Federal
government today is the nation's biggest single employer, its
biggest consumer, and its biggest borrower. It spends at
the rate of $1 billion a day. And if present trends continue
until the end of the century, government at all levels could
account for almost 60 percent of our gross national product.
Further, regulatory agencies of the government now
exercise direct control over 10 percent of everything bought
and sold in the United States and indirect control over almost
every other sector of the private economy. It costs private
industry -- and that means each one of us as consumers -approximately $20 billion a year just to do the paper work
demanded by Federal bureaucrats. And let us not delude ourselves

- 4about how well the government can run something once it
obtains control.

It is no accident that three of the most

economically troubled industries in this country today -railroads, airlines and utilities -- are also among the most
tightly regulated.

And yet some would have us create even larger

bureaucracies and increase government regulation of the economy
through controls on prices and supplies, allocation of credit,
and national economic planning.
All of these facts point to the real danger we face -that government tampering with our free enterprise system will
make the economy less responsive and less efficient, and
goods and services more expensive.

I am convinced that the

pendulum has swung too far toward too much government interference in the marketplace and that we must carefully weigh
the costs and benefits of what we have been doing in this
area -- and what we plan to do for the future.
Our task should not be to increase, but to decrease
unnecessary government regulations -- reducing inefficiency
and waste in government regulatory agencies through a major
reform and review of their operations in agriculture and
industry alike.

Some of our

regulations are, of course, necessary.

But many of them are

counter-productive, wasteful, or obsolete.

And I believe

those regulations and regulatory bodies that no longer serve
a useful purpose should be abolished, before we strangle in
our red tape.

- 5It is clear that we must strike a new balance in our
economy - - a balance that favors a much stronger and healthier
free enterprise system.
Agricultural Policy
This is particularly true with respect to our agricultural
policy.

Today, over one-half of the grain moving across

international boundaries throughout the world is grown by the
American farmer.

We are actively seeking improved access for

our grain exports to foreign markets in the Multilateral Trade
Negotiations.

However, if we want dependable export markets

for our food, the United States must be a reliable supplier.
Twice in the last two years, the government was forced to
request U.S. exporters on a temporary basis to voluntarily
restrict sales of certain farm commodities.

These actions

resulted in confusion and concern among some of our farmers.
In October of 1974, the Soviet Union suddenly, and without any
notice whatsoever, entered our markets to buy at a time when
we had the worst crop failure in four years.

The U.S.

Government was forced to intervene to leamthe full extent of
Soviet intentions and the discussions that followed finally led
to an agreement that the Soviets would adjust their purchases in
accordance with the U.S. supply situation.

We believe that this

was in the interest of our livestock producers and our regular
grain-buying customers overseas and the American public.
also in the best long-term interest of U.S. grain farmers.

It was
These

actions headed off the danger of even more severe legislative
restrictions by the Congress.

In addition, an export monitoring

- 6 system was established to keep policymakers fully aware of the
changing export situation.
Last summer, the Soviets suffered an extremely short crop.
They again turned to the United States farmer for supplementary
grain supplies.

A temporary hold on new sales by exporters to

the Soviets was requested only after they had purchased 9.8 million
metric tons of grain -- again without warning -- in the space
of a few weeks.

At the same time, there was a growing concern

about dry weather and deteriorating conditions in Iowa, our
largest corn producing state, despite a record wheat harvest
and good crop conditions in other states.

Since dry weather

had already damaged corn in the western corn belt, there was
no way of knowing if we would have a repeat of the drought
which hit the corn crop the previous year.
Again, this temporary hold was placed on new grain sales
to the Soviet Union -- and later to Poland -- I can assure
you, with extreme reluctance.

Pressures in the Congress were

increasing to halt all private grain sales and put agricultural
exports in the hands of a government management and control
board.

In addition, the dock workers in Texas were threatening

to refuse to load grain destined for the Soviet Union.

The

temporary hold on the new sales permitted us to work out a
five-year agreement with the Russians.

Since then, in the open

market, we have made substantial new sales to the Soviet Union
and Poland.

- 7We recently held consultations with the Russians in
Washington under the provision of the long-term grain
agreement. At these meetings the U.S. noted that supply
prospects at this time for the 1976-77 crop would permit
sales in excess of 8 million metric tons. Both sides agreed
that it was too early to determine a volume of sales in excess
of 8 million metric tons, but it was agreed that contacts be
continued in order to reach a definite decision later.
There is no question that the government temporarily
injected itself in the market in these instances, but we believed
it was for the long-term good of the American farmer, the American
consumer and the marketplace -- notice I said "temporarily"
and for the good of "the marketplace." We do not view these
actions as indication of the future role of the government.
On these occasions, the government was able to transform an
occasional and erratically disruptive customer into a regular
buyer of U.S. grain. In so doing, we have averted an outcry
every year that the Russians are coming to make secret purchases
in our markets, and we have preserved and strengthened the private
marketing system.
The danger is that some people do not view the role of
the government this way. They would turn our crop over to
a government control board to manage and sell overseas.
We must continue to resist such moves. In these complicated and controversial times, it is imperative that we

- 8maintain the freedom of farmers to produce and market their
crops as required by the marketplace.

Strong agricultural

exports are basic to America's farm policy and if we alter
the freedom of every farmer to manage his own farm, we cannot
hope to retain our agricultural strength.
Our farmers must export two-thirds of each year's wheat
crop, 50 percent of their soybeans, 40 percent of their
cotton, and at least one-fourth of their feed grain
or cut back production.

In short, our farmers

must export to keep farming profitable in America.

In order

for them to do so, we must maintain a policy at home that will
maximize the role of the marketplace and minimize the role of
the government.
Commodities Policy
As important, we must seek to transform such a domestic
approach into an international policy, and here again, we
must be aware of what the proper role of the government is.
Our economic system is based upon government understandings
which establish a framework for freer trade -- not on understandings which determine how specific commodities should be
priced or traded.

Governments should establish tax policies

and tariffs and help to provide the necessary climate for
investment.

However, the businessman, the trader, and the

investor must be left to set the details of how a product should
be traded and at what price.

- 9Today, in international forums, strident voices tell us
that we must alter this system. Spokesmen say that the market
has victimized them through unfair pricing which governments
must alter through price fixing commodity agreements and other
measures.
We cannot accept this. We recognize that a perfect free
market does not exist and that improvements can be made to help
moderate excessive fluctuations in prices and supplies, to
improve access to supplies and markets, and to encourage the
location of efficient processing industries in developing
nations. We are also willing to sit down with producers and
consumers of specific commodities to work toward the solution
of existing problems. However, we cannot support a trading
system that requires a prior commitment to commodity agreements
based on a system of administered prices and arbitrary government controls that would frustrate market forces. We believe
that each commodity is unique, subject to its own dynamics, and
that a system of government administered prices would never work
in a dynamic world of technological discoveries and changing
consumer and investor preferences. The market system is the
most efficient means of balancing the supply and demand for
commodities and for rewarding economic efficiency.
Consistent with our position that commodity issues must
be addressed on a case-by-case basis, we have agreed to work
programs at the recent United Nations Conference on Trade
and Development (UNCTAD IV) in Nairobi to review 18 specific

- 10 commodities in individual meetings in the appropriate bodies
over the next 18 months.

There is no U.S. commitment to

enter into a new series of commodity agreements.
At the Nairobi meeting, we rejected aspects of the developing countries' "Integrated Program", including a Common
Fund which would finance buffer stocks and also prod producers
and consumers to negotiate commodity agreements.

Instead, we

proposed an alternative approach which would help developing
nations overcome fluctuations in earnings from exports of raw
materials without destroying the clear advantages of the market
system.

This proposal includes measures to assist countries

suffering from fluctuating export earnings, to provide better
access to developed country markets for semi-processed and manufactured products using raw materials, and increased emphasis
on investment in the development of national resources by private
interests and the international financial institutions.
These proposals are aimed at strengthening the functioning
of the market, not hampering it.

Unfortunately, at Nairobi

other countries rejected elements of our approach to commodities
and, unbelievably, refused even to study our proposal for the estab
lishment of an International Resources Bank.
believe that such a Bank would be beneficial

We continue to
to all countries.

In this regard, it is important to understand what it would be
and what it would not be.

We see it as a means of increasing

private investor participation in other countries by reducing
the non-commercial, or political, risks related to investment
in developing countries.

The price risk inherent in any investment

- 11 will remain. We do not see it as a financing vehicle which will
be a substitute for investment from the private sector.

We

will continue to advocate adoption of such a means to increase
investment in the developing world.

At the same time, we will

resist, as we did in Nairobi, proposals that are contrary to
our interests and the interests of the world as a whole.
Although still challenged by some countries, we need not
be defensive about the proposals we have put forward.

Too often

today, we hear that the United States is "isolated" from the
rest of the developed world -- that we are not "forthcoming"
enough.

I suggest that we have been most "forthcoming," short

of abandoning a market-oriented economic system which we favor
and which we believe will benefit all countries.

It takes

firmness and resolve to maintain that system, it is essential
that we demonstrate to the world that we are committed to it.
Conclusion
My comments today have focused on the role of government
in two important policy areas -- agriculture and commodities.
These fields are but two examples of the danger we face if we
allow government to usurp the traditional role of free
enterprise.
The credibility of the United States -- our credibility
around the world -- rests upon our vast resources as much as
our defenses.

Some nations with other political philosophies

have virtually the same tractors and the same combines that our

- 12 farmers use but their farmers do not have the same incentives.
Our farmer earns his income from a free market, not from a
government check financed by the taxpayer.

We must continue

this vigorous market-oriented free enterprise in agriculture
and commodities, not just for the benefits today, but more
important for the future.
We need not distort our economic system in order to
satisfy one or two interests at home or to appease a few
abroad.

Instead, we must avail ourselves of a rare opportunity

to fight for policy which is both principled and in the economic
interest of this country and the world.
This is how we as a country will retain our economic
strength.

Much of what we do in the months ahead will determine

the strength of our own economy for years to come.

The decisions

we make now on domestic regulatory reform and spending, our
ability to cooperate with other countries meaningfully and in
a way that preserves our market system, and our efforts to
secure a free and open environment for international trade and
investment will determine the direction we will go.

It is

crucial to avoid what may be politically expedient today, but
disastrous for the U.S. and world economy tomorrow.

Our economic

strength and our freedom depend on it.
If there is one message I can leave with you today, I hope
it is that the effort that we, you and I,

make now is critical -•

it is a test of our ability to maintain man's freedom.

And

that freedom can only be preserved if we can minimize governmental

- 13 control. Each intrusion of government takes economic
freedom away from the individual. We must strive for a new
level of political wisdom that will permit, in fact require,
that economic principles be supported for the good of all.

0O0

FOR R E L E A S E U P O N DELIVERY

Statement of J. Robert Vastine
Deputy Assistant Secretary of the Treasury
for Trade and Raw Materials Policy
before the Subcommittee on
International Resources, Food, and Energy
of the
House Committee on International Relations.
Washington, D. C.
Wednesday, June 9, 1976, at 2:00 p.m.

Mr. Chairman, Members of the Subcommittee:
I welcome this opportunity to discuss with you the subject
of resource development in South Africa. The United States has
conflicting interests with regard to South Africa. W e find its
domestic apartheid policy abhorrent and wish to avoid any actions
which support that policy. At the same time we depend on South
Africa for a number of important raw materials and have a strong
economic interest in maintaining access to those commodities.
I would like to focus my remarks on three interrelated
aspects of our relations with South Africa:
1. First, I will describe our economic interest in its mineral
resources.
2. Second, I will summarize our political position on the issue of
apartheid and indicate how it affects our bilateral commercial
and tax policies.
3. Finally, I will discuss our broader international monetary and
commodity policies as they affect South African resource
development.
WS-919

- 2 -

South African Resource Production
South Africa's mineral industries have been a major factor
in its development and continue to be a principal support upon which
its strong economic growth is based. In 1974, the mineral industries
-- including gold, diamonds, and metals -- accounted for 17 percent
of South Africa's gross domestic product. South Africa's Economic
Development Program for 1974-79, which calls for a projected
average annual growth rate of 6.4 percent, requires the mineral
industries to expand at an average rate of 4. 9 percent per year. In
1974, minerals accounted for $4. 9 billion in exports, or 57 percent
of South Africa's total exports.
South Africa ranks among the world's top three producers
of over 10 minerals including, in 1974:
- 64 percent of the world's gold production,
- 35 to 45 percent of the world's production of platinumgroup metals and vanadium,
- 20 to 25 percent of the world's production of antimony,
chromite, industrial diamonds, and manganese ore; and
- 13 percent of the world's production of uranium.
Of these resources, the gold mining industry is specially
important to the South African economy, both in terms of foreign
exchange and as a generator of economic activity. In 1974, gold
exports totaled $3.8 billion, 44 percent of South Africa's export
receipts.
South Africa produces coal and uranium ample for its
energy needs. At present, South Africa relies upon coal for about
75 percent of its primary energy. The remainder is supplied by
imported oil. As the Department of State has already testified,
South Africa has under construction a large coal-conversion plant
to extract petroleum from coal and has announced plans to build
several nuclear power plants over the next 20 years. With 20
percent of the world's reserves of uranium, South Africa has more
than enough domestic reserves eventually to produce all its power
by means of nuclear energy.

- 3 -

U.S. Use of South African Raw Materials
The United States has a substantial economic and political
interest in the availability of resources from South Africa. In 1975
we imported $841 million in commodities and semi-processed
goods from South Africa, more than triple the value of our 1971
imports. In addition, U.S. companies have invested approximately
$200 million in South Africa mining and smelting operations. Half
of that investment has taken place since 1967.
A number of the raw materials we import from South Africa
are necessary raw materials such as chromite, ferrochrome,
ferromanganese, platinum-group metals, vanadium and antimony,
for which alternative sources either are not available or can only
be found in substantial quantities in the Soviet Union, the People's
Republic of China, or Rhodesia.
We are heavily dependent upon imports from South Africa
for several key commodities, as the attached table demonstrates.
In fact,
- 35 percent of U.S. imports of ferrochrome and ferromanganese,
- 57 percent of U.S. vanadium imports,
- 43 percent of U.S. antimony imports,
- 20 percent of U.S. imports of platinum-group metals, and
- 13 percent of U.S. imports of industrial diamonds.
The Political Dimension and Our Bilateral Commercial Policy
Our economic relations with South Africa are complicated
by South African internal policies of racial discrimination through
the system of apartheid which we condemn as morally and politically
reprehensible. The Treasury's view is that the U.S. Government
must not take any steps to promote or encourage the South African
system of minority rule based upon racial segregation. Our preference is that South Africa experience a peaceful, steady political
evolution to majority rule and the attainment of basic human rights
for all its citizens, and we believe that U.S. policies will promote
these objectives.

- 4 -

While we m a k e clear our opposition to the nature of the
South African political system, we have maintained a basically
neutral commercial policy vis-a-vis South Africa. Our policy
is to treat South Africa, with some exceptions, as we do other
Western industrialized states in trade, financial and investment
matters.
American companies are free to invest in South Africa
without U.S. Government restrictions. They do so under the
provisions of a U. S. -South Africa Tax Treaty, concluded in 1946,
which assures tax neutrality for U.S. firms. This tax treaty,
however, is somewhat m o r e limited than other U.S. tax treaties,
in that it does not include preferential withholding rates on interest
or dividends derived from income earned in U-S. ventures in South
Africa. While this makes the treaty an exception to general practice,
it does not indicate an effort to discriminate against South Africa.
A s best we can determine, the treaty's negotiators were simply
unable to agree on this point. And there has never been a move
to renegotiate the treaty to bring it into conformity with most other
treaties. Our tax treaty with Australia is similar in this respect.
South Africa is a member of the General Agreement on
Tariffs and Trade (GATT) and the same G A T T trading rules apply
to South Africa as to our other developed G A T T trading partners,
including M F N treatment and unfair trade practices as defined by
G A T T and U. S. law. The Treasury Department, for example,
last year undertook a countervailing duty investigation of alleged
South African subsidies for ferrochrome exports. W e concluded
in December that no government bounties or grants within the meaning
of the U.S. countervailing duty law were being paid to South African
producers or exporters of ferrochrome, and therefore took no
countervailing action.
Despite our essentially neutral commercial policy, South
African human rights policies have caused us in certain cases to
impose government restrictions or to use moral suasion to affect
U.S. -South African commercial relations. W e have, for example,
imposed restrictions on the availability to E x l m Bank resources
to finance trade with South Africa. A s a result of a National Security
Council directive in the early 1960's, there can be no direct Exlm
Bank loans to South Africa. I believe that a senior official of the

- 5 -

Exlm Bank has fully testified on its policy. W e encourage U.S.
companies that operate in South Africa to adopt more equal employment practices. And, as you know, the U.S. maintains a
comprehensive embargo on arms shipments to South Africa.
Finally, our tax credit policy with regard to investment
in Namibia (formerly South-West Africa and an international
territory under the supervisory authority of the United Nations)
has presented a unique problem in our relations with South Africa.
As you know, Mr. Chairman, in 1920 South Africa was accorded
the mandate to govern South-West Africa by the League of Nations.
In 1966 the United Nations revoked this mandate and declared any
continued occupation of Namibia by South Africa to be illegal.
This action was confirmed by the International Court of Justice in
1971. However, South Africa has refused to accept the United
Nations decision and continues to exercise jurisdiction and de facto
control over Namibia.
In the past, Mr. Chairman, you have sought the termination
of U. S. Federal tax credits for taxes paid by U. S. firms operating
in Namibia to the South African Government. In our review of
existing U.S. tax law in 1973, we determined that our law requires
the extension of such tax credits regardless of the legal status
of the foreign taxation. W e have not supported legislation which
would modify current law in this area.
At the same time, however, we have taken other steps since
1970 to discourage investment by U.S. nationals and companies in
Namibia. These include both an announcement that the U. S.
nationals who invest in Namibia on the basis of rights acquired
through the South African Government since 1966 will not receive
U.S. Government assistance in protecting such investments against
claims of a future lawful government of the territory, and the
termination of Exlm Bank credit guarantees for exports to Namibia.
International Economic Policy Implications
Let me touch briefly on recent international initiatives and
their bearing on South African resources development.

- 6 -

A s you know, the International Monetary Fund at an Interim
Committee meeting in Jamaica this past January considerably
revised international monetary arrangements and agreed to phase
gold out of the international monetary system. The agreement
specifically eliminated any requirements on m e m b e r s to use gold
in transactions with the I M F and called for the sale of one-third
(or 50 million ounces) of the IMF's gold holdings in public auctions
over a four-year period. These decisions, by increasing supplies
of gold in the world market, could affect South Africa as a major
gold producer and exporter.
Resource development over the next several years will be
affected by the recently concluded talks at U N C T A D IV in Nairobi.
The United States and other developed countries agreed at Nairobi
to sit down with producers of 18 specific commodities over the next
18 months to identify problems in market structures and to seek
solutions to those problems. W e expect the developing countries to
attempt to focus the work program on the problem of price instability
while we see the need for greater attention to the question of adequate
investment in raw materials, including serious consideration of the
International Resources Bank proposal to guarantee private investments in developing countries against political risk.
We do not expect this extensive program of preparatory work
on commodities to have any appreciable effect on South African
resource development. First, South Africa is a major producer of
only one commodity in the U N C T A D list of 18 -- that is manganese.
Secondly, if the U.S. proposal for an International Resources
Bank is adopted, its operations will be limited to facilitating the
flow of private investment into projects in developing countries, and
South Africa is considered a developed country.
A stated objective of U. S. economic policy is to achieve
greater reliability of our supplies of imported raw materials. One
way for the United States to achieve greater supply assurances from
South Africa is through the negotiation of multilateral trading rules
which would apply to the use of export controls or the negotiation
of supply access commitments in return for market access commitments in the Multilateral Trade Negotiations.

- 7-

Conclusion
Mr. Chairman, we have endeavored to maintain a neutral
commercial policy toward South Africa. Because of our political
opposition to South Africa's domestic apartheid policies, we have
been very cautious not to adopt economic policies that will promote
its system of institutionalized racism or help solidify its illegal
hold on Namibia. Nonetheless, our trade and investment in South
Africa's minerals continue to grow. There is no question that m a n y
of these minerals are important to our economy, and that alternative sources of supply for some of them are not readily available
or unavailable. The implications of these facts seem to support
the conclusion that the United States should continue its present
commercial and political policy thrust in the hope that they will
bring about the changes w e consider necessary.

•S. - South Africa Trade in Selected Commodities
U.S. Imports
Percent of
Commodity

1975

Antimony

54

jVsbestos

91

Chromite (ferrochrome)
Copper

100

Percent of
U.S. Imports
,

J. i UJH

Percent of U.S.
Percent of South
Consumption
African Exports
JUUUI
j u n t a , n o m soutn arrica, to united Stat
1975
1975
1972
32
17
44
3
30 (35)

3
30 (35)

8
30 (47)

6

3

a

Diamonds (industrial)

84

13

11

Fluorspar

90

2

2

12

Gold

70

1

1

N/A

Iron Ore

40

a

a

1

8 (36)

8 (36)

4 (60)

Manganese Ore (ferroman ganese)

100

__

N/A

Nickel

90

2

2

20

Platinum - group metals

95

48

46

94

Uranium

75

15

11

21

Vanadium

27

50

14

34

Vermiculite

10

100

10

14

Less than 1 percent
N/A = not available

U.S. Trade Pattern with South Africa, 1971-75
(millions of U.S. dollars)

1971

1972

U.S. Exports to
South Africa

622

603

U.S. Imports from
South Africa

236

325

+386

+278

Net Trade

oOo

1973

646

1974

1975

1,160

1,302

377 609 840
+269 +551 +462

FOR IMMEDIATE RELEASE

Contact; James C. Davenport
Ext. 8585
June 10, 1976

ANTIDUMPING INVESTIGATION INITIATED ON
ROUND HEAD STEEL DRUM PLUGS FROM JAPAN
The Treasury Department announced today the initiation of
an antidumping investigation on imports of round head steel
drum plugs from Japan.
Notice of this action will be published in the Federal
Register of June 11, 1976.
The Treasury Department's announcement followed a summary
investigation conducted by the U.S. Customs Service after receipt
of a petition alleging that dumping was occurring in the United
States. The information received tends to indicate that the
prices of the merchandise exported to the U.S. are less than
prices of such or similar merchandise sold in the home market.
Round head steel drum plugs are used for closures in
steel drums, which in turn are used as containers for petroleum,
chemical and food products.
Imports of the subject merchandise from Japan amounted to
roughly $10,000 in 1975.
* * *

WS-920

- 2 A Mutual Cause
But today our two countries face a challenge which far
transcends the problems that arise in our bilateral trade. It
too requires close consultation, and concerted action in international forums. The essence of this challenge is whether we
should permit more government intervention in the international
economy. Is government intervention desirable as a way to
smooth out fluctuations in prices and supplies of major
commodities? Does it frustrate the normal operation of the
market and result in inefficient production and higher prices?
Where do we draw the line between intervention that is
acceptable -- and desirable -- and intervention that is an
excessive infringement on our economic freedoms?
Nations and individuals have sharp differences of opinion
about these issues. A n increasing number consider advocates
of frvi> enterprise to be either outdated theorists, or economic
exploiters, indifferent to human suffering, out to make a quick
buck. They consider free markets as synonymous with wild
price fluctuations, with alternating glut and shortage. Nations
highly dependent on exports of a few commodities for foreign
exchange see free markets as the cause of earnings instability,
the downfall of their development goals.
We see these; issues differently. We believe in free
enterprise because we understand its strengths and enjoy its
fruits. Freedom for individual enterprise is a cornerstone of
our national heritage and it is the well-spring of our unequalled
material prosperity. Our objective is both to preserve and
strengthen our economic system, and to share its methods and
benefits with other societies. W e want others to experience the
abundance, the freedom of choice, the opportunities for individual
achievement and reward that are inherent in our own system.
Our objective, of course, is nothing less than a peaceful and
fair world in which all nations have an overriding stake in mutual
prosperity.
Nonetheless, there have been important instances in
winch our government has permitted over-regulation of markets,
instances we are trying to redress. W e are taking major steps

- 3 -

to return to the market in agriculture. W e are deregulating
our oil industry. Under President Ford's leadership, we are
working at the very difficult task of eliminating excessive
regulation of major economic sectors.
Internationally- the challenge is even more difficult.
W e believe the international economic system -- established
painstakingly during the period of post World W a r II reconstruction --is fundamentally sound because it is based on
classical liberal economics favoring freedom of trade, payments,
and investments. But we have found that this "old" order is
under relentless attack. And we have found that this profound
difference of approach has divided the world into two major
blocs -- the "North" and "South". Thus, it has created in m a n y
instances an artificial polarization that has caused m o r e stalemate than progress, that has caused unnecessary confrontation.
Creative, Comprehensive Proposals
Our policy has been to try to respond to the challenge
by creating the structure and framework for a productive new
dialogue, and by formulating a comprehensive package of
substantive proposals which we offer developing countries as
the right answers to the real problems. For we have not been
doctrinaire. Consistent with our economic philosophy, we have
conceptualized, proposed, then implemented major new programs
in the areas of compensatory financing, food reserves, investment
and aid.
This is the positive spirit of compromise with which we
entered our last encounter with the "South" at the fourth session
of the U. N. Conference on Trade and Development, in Nairobi.
That conference and its outcome have received a great deal of
attention. It was the latest forum at which the proponents of the
"old" and the "new" international economic orders attempted to
forge a c o m m o n ground of agreement and progress.
In his opening address to the Conference, Secretary
Kissinger proposed a broad spectrum of actions which we believe
will meet the real needs of the developing countries. This
comprehensive approach aims to:

- 4 -

-

ensure sufficient financing for resource development
and for equitable sharing in their benefits by the host
nation;

- improve the conditions of trade and investment in
individual commodities and moderate excessive
price fluctuations;
- stabilize the overall export earnings of developing
nations; and
- improve access to markets for processed products
of developing countries while assuring consumers
reliability of supply.
One of our major new initiatives has been a proposal to
create an International Resources Bank (IRB) to help develop
raw material resources in the developing nations. Such a bank
would:
(1) substantially reduce the political risks of investment
in developing countries;
(2) insure sufficient financing for sound resource
development projects;
(3) assist developing countries to develop needed management
and technological skills;
(4) guarantee an equitable sharing of the benefits of the
project between the investor and host country; and
(5) contribute to the stabilization of foreign exchange
earnings, while providing assurances of market
and supply access.

- 5 -

W e were gravely disappointed that our initiative did not
receive more serious consideration at U N C T A D . W e believe it
is a sound proposal that will benefit both developed and developing
nations and provide a real basis for increased cooperation. W e
intend to pursue it in other forums.
UNCTAD's Impact on Future Commodity Trade
One of the major products of UNCTAD IV was agreement
upon an ambitious work program on commodities which I would
like to summarize.
The results of this work could have a profound impact on
the future of world commodity trade.
The Conference agreed to two undertakings in commodities.
First is a series of preparatory meetings on 18 commodities
stretching over the next year and a half. The intent is that these
lead to formal negotiating sessions for new commodity agreements.
These negotiations must be completed by the end of 1978. Total
world trade in these 18 commodities averaged $25 billion annually
in 1970 through 1972, 60 percent of non-oil commodity trade.
Second, the Conference agreed to preparatory meetings
leading, by March of 1977, to a negotiating conference on the
creation of an international fund. This "common fund" would
provide financing for each of the 18 commodities for which countries
agree that buffer stocks are an appropriate price stabilizing
mechanism. Such a fund could cost as much as $3 to $6 billion or
more, the major part to be contributed by the richer consuming
countries.
These programs were adopted overwhelmingly. All the
developing countries and socialist countries endorsed the resolution.
And 16 of the developed countries, led by the Netherlands and
Norway, endorsed explicitly what they called the positive elements
in the resolution. The common fund itself has been specifically
endorsed by over 40 countries.

- 6 The United States Response
Against this overwhelming consensus, the United States,
the United Kingdom, Germany and Canada nonetheless made
interpretive statements at the closing hours of the Nairobi
Conference. They said that they would participate in both work
programs, but that they would not make prior commitments to
commodity agreements, or to a common fund.
The United States, for its part, made its position
explicitly clear. W e said that we would enter preparatory
discussions on the 18 commodities in order to identify the nature
of the problems affecting particular commodities, and to determine
the measures which might be appropriate to each product. W e
believe that such meetings will show us the cases where we could
enter negotiation of agreements or other arrangements which
could encompass a broad range of measures to improve trade
and market conditions in commodities, not just agreements
designed to influence prices. W e will join constructively in
efforts to improve trade through market access and supply
assurances, diversification, product development, and improved
productive efficiency.
We also said that we will participate in preparatory meetings
to consider whether further arrangements for financing of buffer
stocks, including common funding, are desirable. W e did not
commit ourselves to enter negotiations for a common fund. W e
continue to believe that the common fund is not needed, and is not
practical. W e believe it would divert scarce capital resources
from other critical needs.
The essence of the common fund is symbolic. While many
developing countries privately understand that it is unworkable and
unnecessary, it is a symbol of the drive for a new international
economic order that few developing countries could politically afford
to reject.
Thus the developed countries -- particularly those committed
to free market ideals -- find themselves facing a period of protracted
negotiations in which they will bear the burden of the defense of the
international market system.

- 7 -

One view is that we must concede on several major
points and must accept some form of common fund. How, it
is asked, can the United States permit a common fund to be
created of which we are not a member? M y own view is that
we need not join such a fund even though other countries
may agree to join one. W e are convinced that the concept is
unworkable and, if our analyses are correct, will not work
even if other countries decide to commit resources to it.
Certainly, we do not see any link between the establishment of an International Resources Bank and the creation of a
common fund. W e believe that the work on commodities
undertaken in U N C T A D has focused on the single issue of price
instability while inadequately addressing other important
problems related to commodities. In particular, we believe
that a comprehensive approach to commodity issues must
include investment in raw materials production
and income stabilization for countries that depend on raw
materials exports. W e have made major strides in dealing
with the problem of income instability through reforms in the
IMF. However, the area of investment still needs serious
attention. Our IRB proposal addresses this problem in a
meaningful way. W e will advance it strongly, but we will not
agree to join a common fund for buffer stock financing in
exchange for agreement to create an IRB.
Conclusion
The path toward increased government intervention and
control in commodity markets, which the developing nations
would have us follow after U N C T A D , clearly leads us away
from the principles of free trade and competition in open
markets on which our system is based.
We remain convinced that the market mechanism -though not perfect -- has worked better than any other economic
system we have known. Our challenge is to improve upon the
system we have, to smooth out excessive fluctuations in prices
and supplies where necessary, to reduce the political risks and

- 8 -

m a k e available needed resources to encourage increased
investment in raw materials, and to eliminate excessive and
unnecessary government interference in the market which
distorts trade, results in inefficient production, and reduces
the benefits of trade for all nations.
Preserving the freedom of private enterprise to invest,
produce, buy and sell as it chooses is one of our fundamental
economic objectives, both at h o m e and abroad. And 1 a m
convinced that, as Japanese businessmen, you can agree that
this is, indeed, a worthy goal for our relations with each other
and our mutual relationships with the world.
Thank vou.

KDepartmentoftheJREASURY

June 11, 1976

FOR IMMEDIATE RELEASE

SECRETARY SIMON TO VISIT EASTERN EUROPE
Secretary of the Treasury William E. Simon will travel
to Poland, Romania and Yugoslavia June 22-25. Prior to
visiting these countries, he will attend the Annual Conference
of the Organization for Economic Cooperation and Development
(OECD) in Paris, France.
"The purpose of my visit to Eastern Europe is to
explore ways in which economic, trade, and financial
relationships between the U.S. and these countries
may be broadened. We believe that increasing economic
cooperation and promoting the growth of trade will
help us to achieve mutually beneficial relationships,"
Simon said.
Secretary Simon will then join President Ford in
Puerto Rico for the International Summit Conference to
be held on June 27 and 28.

oOo

WS-923

FOR RELEASE ON DELIVERY

REMARKS OF DR. H. I. LIEBLING
DEPUTY DIRECTOR, OFFICE OF FINANCIAL ANALYSIS
OFFICE OF THE SECRETARY, U.S. TREASURY DEPARTMENT
AT THE
11TH ANNUAL MASS RETAILING INSTITUTE CONVENTION
MIAMI BEACH, FLORIDA
MONDAY, JUNE M , 1976
12:OO p.m., EST

THE THREE FACES OF THE ECONOMIC EXPANSION

LAST SEPTEMBER, THE QUESTION WAS ASKED: "THE RECOVERY:
HOW FAST AND HOW FAR?"

AT THAT TIME, AND EVEN EARLIER,

THERE WERE MANY WHO FELT THAT PROSPECTS FOR THE ECONOMY WERE
VERY UNCERTAIN.

SOME REAL GROWTH IN THE ECONOMY WAS CONCEDED

BY SOME, AND A FEW TALKED EVEN OF RECESSION.

STRONG AND

STIMULATIVE FISCAL AND MONETARY POLICIES WERE RECOMMENDED AS
THE VITAMINS THAT WOULD BE REQUIRED FOR A HEALTHY RECOVERY.
INDEED, THE DOUBTING THOMASES HAVE NEVER LEFT THE SCENE

WS-924

—

- 2-

THEY CONTINUE TO APPEAR IN SMALLER OR GREATER NUMBERS.
TODAY, THEY ARE VERY MUCH IN THE MINORITY, BUT THEY ARE
LURKING THERE IN THE BUSHES.

A RECENT LAG IN RETAIL SALES,

WHICH MADE A STATISTICAL APPEARANCE IN MAY AND EARLY JUNE,
MIGHT MAKE THEM SPRING FORTH IN FULL VIEW AGAIN.

BUT, IF

THE FORECAST I WILL PRESENT DEVELOPS, THEY WILL BE RETREATING
BACK TO THE BUSHES BY SUMMER OR EARLY FALL.

NEVERTHELESS, FORECASTING IS RISKY AND I SHOULD BE
COMPELLED TO DEFEND MY VIEWS.

ECONOMIC ANALYSIS SHOULD

INVOLVE MORE THAN MERE INTUITION, ASSERTION, AND IT IS
IMPORTANT THAT IT AVOID POLITICAL PREJUDICE OR PREFERENCE,
IF ONLY TO ADVANCE THE CAUSE OF PROFESSIONALISM.

BY NOW PERHAPS IT IS CLEAR THAT NOT ONLY DID THE RECOVERY GAIN IN MOMENTUM, AS IT DEVELOPED, BUT
THAT ITS PROGRESS WAS GREATER THAN EXPECTED, EVEN BY THE
OPTIMISTS.

I WANT TO BRING TO YOUR ATTENTION SOME STATISTI-

CAL PERSPECTIVES.

THEY RELATE TO THE PROGRESS OF THE

CURRENT ECONOMIC EXPANSION AS MEASURED AGAINST OTHERS IN THE
POSTWAR PERIOD.

THEY CAST LIGHT ON THE NEED FOR ADDITIONAL

FISCAL OR MONETARY STIMULUS —

AND, IF REQUIRED, HOW MUCH.

- 3AS DEVELOPMENTS HAVE UNFOLDED, THE FIGURES ON THE
PROGRESS OF THE RECOVERY HAVE POINTED TO AN ECONOMIC EXPANSION THAT MIGHT BE CONSIDERED AS "CLASSICAL" IN PATTERN.
WITH EACH SUCCEEDING MONTH, A NEW AFFIRMATION OF THAT HAS
BEEN RECORDED.

IF APRIL 1975 IS CONSIDERED THE TROUGH OF

THE RECESSION, THEN APRIL AND MAY 1976 REPRESENTED THE
TWELFTH AND THIRTEENTH MONTHS OF ECONOMIC RECOVERY.

AGAINST

THAT PERSPECTIVE, I WOULD LIKE TO BRING TO YOUR ATTENTION
THE FOLLOWING ECONOMIC DEVELOPMENTS TO SUPPORT THAT CONCLUSION:

t SINCE THAT TROUGH OF APRIL 1975, EMPLOYMENT HAS INCREASED 4.0%.

THIS IS A FAR GREATER INCREASE THAN IN

ANY OF THE PRECEDING FOUR ECONOMIC EXPANSIONS OVER A
CORRESPONDING PERIOD OF TIME.

IT COMPARES WITH AN

AVERAGE INCREASE OF 2.5% DURING THE LAST FOUR EXPANSIONS,

t IF THE CYCLICALLY SENSITIVE SECTOR OF MANUFACTURING IS
CONSIDERED, AN EQUALLY FAVORABLE OUTCOME MAY BE PERCEIVED.

SINCE THE WORKWEEK AND

EMPLOYMENT ARE

B L E , A MEASURE OF TOTAL NUMBER OF PERSONHOURS
PREVIOUSLY KNOWN AS MANHOURS —
CONSIDERED.

AVAILA-

~

IN MANUFACTURING MAY BE

IN THE THIRTEENTH MONTH OF THE PRESENT

RECOVERY, THAT ADVANCE WAS 9.4?, WHICH WAS LARGER THAN
THAT SHOWN IN THREE OF THE LAST FOUR RECOVERIES.

IT

COMPARES WITH AN AVERAGE INCREASE OF 8.5% OVER THIS
PERIOD,

- 4ONE PUZZLER IN THIS ARRAY OF FIGURES IS THE FAILURE OF
INDUSTRIAL PRODUCTION TO SHOW THE SAME PATTERN AS THE
"PERSONHOUR" ADVANCE.

IN THIS EXPANSION, THE TWELFTH

MONTH HAD REGISTERED AN INCREASE OF 11.5%, WHICH WAS
LESS THAN THE AVERAGE ADVANCE OF 13.3% IN THE FOUR
PREVIOUS EXPANSIONS.

RELATIVELY SLOWER PRODUCTIVITY

GROWTH IS IMPLIED BY THE GREATER INCREASE IN PERSONHOURS
THAN IN PRODUCTION.

THAT MIGHT SEEM IMPROBABLE IN AN

ECONOMIC EXPANSION.

PERHAPS THE OUTPUT MEASURE WILL BE

REVISED UP -- AS SUCH MEASURES TEND TO BE IN STATISTICAL
HISTORY.

A SECOND EXPLANATION, OF COURSE, MIGHT BE THAT

INSUFFICIENT INVESTMENT OUTLAYS IN RECENT YEARS HAVE
LOWERED PRODUCTIVITY GROWTH.

ANOTHER STANDARD THAT MIGHT BE USED TO SHOW THE CLASSICAL
PATTERN OF THIS EXPANSION IS THE PROGRESS OF REAL
PERSONAL INCOME.

THIS MEASURE IS REAL IN THE SENSE

THAT PERSONAL INCOME HAS BEEN CORRECTED FOR CHANGES IN
CONSUMER PRICES ~

AND ALSO, I MAY ADD, BY THE EXCLUSION

OF SUCH TRANSFER PAYMENTS AS UNEMPLOYMENT COMPENSATION
AND THE LIKE.

IN OTHER WORDS, THIS MEASURE REPRESENTS

REAL PERSONAL INCOME GENERATED IN PRODUCTION.
PRESENT EXPANSION, THAT INCREASE WAS 6.2%.

IN THE

THAT COMPARES

WITH THE SAME INCREASE OF 6.2% AVERAGED IN THE LAST
FOUR EXPANSIONS.

- 5•

PURCHASES OF GOODS BY CONSUMERS ALSO HAVE CONFORMED
WITH THE CLASSIC PATTERN.

IN THE TWELFTH MONTH OF

THIS EXPANSION, REAL RETAIL SALES INCREASED 8.5%, WHILE
THE AVERAGE INCREASE IN EARLIER EXPANSIONS WAS 9.2%

~

NOT VERY DIFFERENT AT ALL.

IT IS AGAINST THE PERSPECTIVE OF THOSE STATISTICS WHICH
I SHOULD LIKE YOU TO JUDGE THE VIGOR AND EXPECTED DURATION
OF THE PRESENT ECONOMIC EXPANSION.

WLTH RESPECT TO VIGOR,

IT WOULD APPEAR ON THE BASIS OF THE FIGURES PRESENTED ABOVE
THAT THERE IS LITTLE DIFFERENCE THUS FAR, AS COMPARED WITH
AN AVERAGE UPSWING.

WITH RESPECT TO DURATION, IT MIGHT BE USEFUL TO CONSIDER
WHAT HISTORY TELLS US:

• THE SHORTEST ECONOMIC EXPANSION IN THE POSTWAR PERIOD
WAS 24 MONTHS.

IF APRIL 1975

is CONSIDERED A CYCLICAL

TROUGH, THEN THIS ECONOMIC EXPANSION WOULD PERSIST INTO
APRIL 1977 —

ROUGHLY ONE MORE YEAR IF IT PERSISTS ONLY

AS LONG AS THE SHORTEST OF THE POSTWAR EXPANSIONS.

- 6•

IF THE STANDARD OF THE MEDIAN POSTWAR DURATION IS USED,
WHICH AMOUNTED TO 39 MONTHS, THEN THE DURATION OF THE
CURRENT ECONOMIC EXPANSION WOULD TAKE US WELL INTO

1978.
ACCORDINGLY, THE ECONOMIC OUTLOOK WOULD APPEAR TO BE
RATHER ENCOURAGING ON THE BASIS OF THE SHEER ARITHMETIC OF
THE PAST.

OF COURSE, IT MIGHT BE SAID THAT IT IS ONLY

ARITHMETIC.

HOWEVER, PROSPECTS MIGHT BE JUDGED FROM THE

STANDPOINT THAT THE PAST HAS RELEVANCE.

IF THAT WERE NOT

SO, IT WOULD DENIGRATE NOT ONLY THE SIMPLE TYPE OF ARITHMETIC
ANALYSIS JUST PRESENTED, BUT ALSO THE MORE COMPLICATED
ECONOMETRIC INVESTIGATIONS WHICH FORMALIZE IN MATHEMATICAL
EQUATIONS THE EXPERIENCE OF THE PAST.

ACCORDINGLY,

RECOGNI-

TION AND IMPORTANCE SHOULD BE GIVEN TO THE MOMENTUM IN THE
GROWTH OF EMPLOYMENT, PRODUCTION, INCOMES AND SPENDING THAT
HAS BEEN AND IS IN PROCESS; AND TO PROJECT ON THAT BASIS A
FORECAST THAT PROMISES CONTINUED ECONOMIC EXPANSION WELL

INTO 1977.

DIFFERENT FACTORS MAY HAVE UNDERLY THE ENERGIZING FORCE
OF SUCH EXPANSIONS IN THE PAST —

A CAPITAL GOODS UPSURGE,

INVENTORY REBUILDING, TAX CHANGES, ETC.

WHATEVER THE ORIGINAL

IMPULSE, THE RISE IN INCOMES AND SPENDING USUALLY BECOMES

- 7-

CUMULATIVE AND RE-ENFORCING OVER A RELATIVELY LONG PERIOD

~

UNLESS SOME SHOCK TO CONFIDENCE REVERSES THE INITIAL IMPULSE.

BEFORE TURNING TO THE SPECIFIC DYNAMICS OF THE PRESENT
EXPANSION, WHERE DO WE STAND NOW?
FERENTIATED:

TWO PHASES CAN BE DIF-

THE ECONOMY HAS PROCEEDED BEYOND THE PERIOD OF

RECOVERY AND IS NOW IN A SO-CALLED PERIOD OF GROWTH.

UOT EVERY

SECTOR HAS RECOVERED COMPLETELY BACK TO ITS PRE-RECESSION
PEAK —

HOUSING AND CAPITAL GOODS SPENDING ARE EXAMPLES OF THAT,

BUT THE BROADEST AGGREGATE MEASURES SHOW THAT THE ECONOMY DURING
THE FIRST QUARTER OF 1976 HAD RECOVERED ALL OF THE LOSS THAT WAS
EXPERIENCED DURING RECESSION; AND THAT THE SECOND QUARTER WILL
BE SETTING MARKS WHICH ARE ABOVE THE PREVIOUS RECESSION PEAK.
IN THE FIRST QUARTER OF THIS YEAR, TOTAL EMPLOYMENT AVERAGED
86.4 MILLION, 200,000 HIGHER THAN IN THE PRE-RECESSION PEAK
OF THE THIRD QUARTER OF 1974.

RUT, BY MAY 1976, EMPLOYMENT

HAD INCREASED TO 87.7 MILLION PERSONS, WHICH WAS 1,4 MILLION
HIGHER THAN THE PRE-RECESSION PEAK.

IN TERMS OF GROSS NATIONAL PRODUCT — THE MOST COMPREHENSIVE MEASURE OF PRODUCTION FOR THE ECONOMY —

THAT, TOO,

HAD RECOVERED BY THE FIRST QUARTER OF THIS YEAR ALL OF THE
LOSS SINCE THE PRE-RECESSION PEAK.

I AM CERTAIN THAT THE

SECOND QUARTER WILL SHOW A GAIN TO ABOVE THE PRE-RECESSION
LEVEL, IN REAL TERMS.

- 8-

LOOKING AHEAD, THE DYNAMICS OF THE RECOVERY AND THE
EXPANSION

INTO ITS GROWTH IN THE REMAINDER OF 1976

AND INTO 1977 MIGHT BE DIVIDED INTO THREE PHASES:

THE

CONSUMER BOOM, THE INVENTORY BOOM AND THE CAPITAL EXPANSION
BOOM

AS THE PRIMARY FORCES IN THE EXPANSION. THE CONSUMER

BOOM ALREADY IS HISTORY —

THOUGH IT SURELY WILL BE PLAYING

A LARGE SUPPORTING ROLE IN THE MONTHS AHEAD.

IN THE EARLY

MONTHS OF 1975, A TURNAROUND IN CONSUMER ATTITUDES AND
SPENDING APPARENTLY RESULTED FROM THE GENERAL RECOGNITION
THAT THE ERA OF DOUBLE-DIGIT INFLATION WAS OVER.

THIS

SUBSTANTIAL IMPROVEMENT IN THE INFLATION OUTLOOK MADE PEOPLE
MORE WILLING TO SPEND ON AUTOMOBILES, HOMES AND OTHER TYPES
OF GOODS IN A FAIRLY PROMPT FASHION.

INDEED, THE EVIDENCE

FOR THE TURNAROUND IN CONSUMER SPENDING EMERGED EVEN PRIOR
TO THE EFFECTIVE DATE OF THE TAX REDUCTIONS OF MAY 1, 1975 —
THOUGH THE LATTER MAY HAVE HELPED PROVIDE

FURTHER MOMENTUM.

THAT THE DIMINISHMENT OF THE INFLATION WAS THE CAUSAL
FACTOR IN THE CONSUMER BOOM IS CLEARLY REVEALED BY THE TREND
IN THOSE FACTORS WHICH ARE GENERALLY CONSIDERED AS DETERMINANTS
OF SPENDING —

THE REAL FINANCIAL WEALTH OF CONSUMERS AND

THEIR REAL INCOMES.

- 9WITH RESPECT TO REAL FINANCIAL ASSETS OWNED BY HOUSEHOLDS,
ITS PEAK VALUE AT $2,377 BILLION (IN 1972 DOLLARS) HAD
STEADILY DETERIORATED AS A RESULT OF THE INFLATION IN
1973 AND 1974.

BY THE THIRD QUARTER OF 1974, THOSE

ASSETS HAD DECLINED TO $1,774 BILLION, OR ONE-FOURTH.
THEREAFTER, AS THE INFLATION DIMINISHED, REAL FINANCIAL
ASSETS CLIMBED SHARPLY HIGHER AND BY THE FIRST QUARTER
OF 1976 HAD INCREASED TO $2,054 BILLION, ONE-SIXTH
HIGHER THAN IN THE THIRD QUARTER OF 1974.

THUS, THE

TURNAROUND IN CONSUMER SPENDING CLEARLY WAS ASSOCIATED
WITH THE DIMINISHMENT OF INFLATION AND THE RISE IN
HOUSEHOLD OWNERSHIP OF REAL FINANCIAL ASSETS.

REAL DISPOSABLE INCOME ALSO ROSE OVER THE SAME PERIOD
OF TIME AND, PERHAPS MORE COMPELLINGLY, WAS THE SUPPORTING
FORCE FOR THE CONSUMER BOOM.

THE INFLATION HAD STEADILY

ERODED THE PURCHASING POWER OF THESE INCOMES WHICH DECLINED 3% BETWEEN THE FOURTH QUARTER OF 1973 AND THE
FOURTH QUARTER OF 1974.

THIS WAS A CIRCUMSTANCE WHICH

MUST HAVE BEEN THE PRIME CAUSE OF THE RECESSION BECAUSE
IT WAS ACCOMPANIED BY A CORRESPONDING DECLINE IN REAL
CONSUMER SPENDING.

OVER THE NEXT FOUR QUARTERS, HOWEVER,

REAL DISPOSABLE INCOME INCREASED 3-1/2%, AND SO DID
CONSUMER SPENDING —

BY THE SLIGHTLY GREATER AMOUNT

- 10 OF 4.1%.

IN THE FIRST QUARTER OF THIS YEAR REAL

DISPOSABLE INCOME ROSE BY 6.1%, ANNUAL RATE, WHILE
SPENDING INCREASED EVEN MORE — 8.0%.

THE IMPROVEMENT IN CONSUMER ATTITUDES, AS REFLECTED IN
THEIR SPENDING, WAS ALSO CLEARLY REGISTERED BY THEIR
WILLINGNESS TO ASSUME MORE DEBT IN THE PURCHASE OF
CONSUMER DURABLES AND OF HOMES.

THE RATIO OF INSTALL-

MENT REPAYMENTS OF DISPOSABLE PERSONAL INCOME HAD RISEN
IN 1973 AND 1974, AS CONSUMERS REQUIRED CREDIT TO
SUSTAIN PURCHASING DURING A PERIOD OF RISING PRICES.
THAT RATIO REACHED A HIGH OF 16.2%

IN MID-1974.

THEREAFTER, THE RATIO DECLINED BECAUSE SPENDING DECLINED.

BY THE FIRST QUARTER OF 1976 THE RATIO HAD

INCREASED TO 15.6%.

THIS SUGGESTED A LESSER BURDEN ON

SPENDING THAN IN 1974 AND SOME ROOM FOR CREDIT EXTENSION THAT COULD HELP SPENDING WITHOUT RISK.

INDEED, THE FINANCIAL SITUATION OF HOUSEHOLDS DURING
THE FIRST QUARTER OF 1976 IN ITS ENTIRETY ~

TAKING

ACCOUNT OF ALL FINANCIAL ASSETS AND LIABILITIES —

HAS

SHOWN A VAST IMPROVEMENT SINCE THE LAST HALF OF 1974,
WHEN IT REACHED ITS CYCLICAL LOW.

IN EARLY

-11 1976, THE IMPROVEMENT IN THE HOUSEHOLD NET FINANCIAL
POSITION WAS ONE-FIFTH MORE FAVORABLE THAN IN LAST HALF
1974 ~

IN REAL TERMS.

THE RECENT RETAIL SALES FIGURES WOULD INDICATE THAT
SOME SLOW-UP IN CONSUMER SPENDING DEVELOPED IN MAY AND IN
EARLY JUNE.

THIS HAS GENERATED SOME CONCERN THAT THE

CONSUMER BOOM WAS WANING.

HOWEVER, AS LONG AS REAL WEALTH

AND REAL INCOMES CONTINUE TO RISE —

AS THE FIGURES WILL

SURELY VERIFY WHEN THEY BECOME AVAILABLE FOR THE SECOND
QUARTER -- CONSUMERS MIGHT BE EXPECTED TO MAINTAIN SPENDING
IN SOME USUAL RELATION TO THESE HISTORICAL DETERMINANTS.
STEADY, STRONG AND ROBUST INCREASES IN RETAIL SALES MIGHT BE
TOO MUCH TO EXPECT IN EVERY SINGLE MONTH.

INDEED, LAST

YEAR'S EXPERIENCE -- THE PAUSES OF LAST AUGUST AND SEPTEMBER
IN RETAIL SALES —

MIGHT PROVIDE SOME CONFIDENCE THAT A

RENEWAL OF ADVANCES CAN BE EXPECTED, AS WAS THE CASE THEN.
A SECOND PHASE OF THE EXPANSION PRESENTLY IS IN PROGRESS
AND MAY BE EXPECTED TO PROVIDE SUPPORT FOR GOOD GROWTH IN
1976 AND INTO 1977.

THIS IS THE INVENTORY BOOM —

ONE WHICH

WILL CARRY THE ECONOMY TO HIGHER REAL GNP GROWTH RATES THAN
HAD BEEN OFFICIALLY FORECAST LAST JANUARY IN THE ECONOMIC
REPORT AND THE BUDGET,

CHANGES IN INVENTORY INVESTMENT

TYPICALLY REPRESENT AN IMPORTANT SWING ELEMENT IN RATES OF
CHANGE IN GROSS NATIONAL PRODUCT DURING ECONOMIC CONTRACTIONS
AND EXPANSIONS.

DURING PERIODS OF DECLINE IN ECONOMIC

- 12 -

GROWTH, INVENTORIES ACCUMULATE BECAUSE PRODUCTION CANNOT
BE CURTAILED QUICKLY ENOUGH IN REACTION TO THE DECLINE IN
"FINAL SALES"
TRAST,

( I . E . , GNP

LESS

INVENTORY C H A N G E ) ,

IN C O N -

PERIODS OF ECONOMIC UPSWING TYPICALLY ARE CHARACTERIZED

BY UNDER-ACCUMULATION OF INVENTORIES —

BECAUSE PRODUCTION

CANNOT BE EXPANDED QUICKLY ENOUGH TO PROVIDE FOR THE
DEFICIENCY OF STOCKS RESULTING FROM RAPID ADVANCES IN
FINAL SALES,

THAT PATTERN IS BEING REPEATED IN THIS LATEST BUSINESS
CYCLE EXPERIENCE.

AS REAL FINAL SALES DECLINED DURING THE

COURSE OF 1974, THE INVENTORY-SALES RATIO FOR THE ECONOMY
REACHED A POSTWAR HIGH BY THE END OF THAT YEAR.

IN THE

SUBSEQUENT ECONOMIC EXPANSION THAT HAS NOW PROCEEDED INTO
THE FIRST QUARTER OF 1976, REAL FINAL SALES ROSE DRAMATICALLY AN INCREASE THAT HAS NOT ONLY ABSORBED THE INVENTORY OVERHANG WHICH HAD DEVELOPED, BUT ALSO HAS CREATED SHORTAGES
IN STOCKS IN SOME AREAS.

THE DECLINE IN THE INVENTORY-SALES RATIO PRIMARILY
REGISTERED AN ADVANCE IN FINAL SALES FOR THE ECONOMY AT
LARGE AT A RATE OF ABOUT 4-1/2

PERCENT FROM THE FIRST

QUARTER OF 1975 TO THE FIRST QUARTER OF 1976 (CONSUMER
SPENDING INCREASED AT A MORE RAPID PACE OVER THIS PERIOD —

- 13 ABOUT 5-1/2 PERCENT, WHILE OTHER ELEMENTS OF FINAL SALES,
BUSINESS FIXED INVESTMENT, NET EXPORTS AND GOVERNMENT, ROSE
SOMEWHAT LESS).

IT WAS THIS ACCELERATED RATE OF EXPANSION IN FINAL
SALES THAT HAS ERASED MUCH OF THE INVENTORY OVERHANG AND
SET THE STAGE FOR 1976 AS A YEAR OF AN INVENTORY BOOM.

THE PRINCIPAL SOURCE OF THAT MIGHT BE EXPECTED AT RETAIL.
THE LEVEL OF INVENTORIES IN RELATION TO RETAIL SALES HAS
BEEN PARED DRASTICALLY.

DESPITE THE STRONG REBOUND OF

RETAIL SALES IN 1975 AND EARLY 1976, MERCHANTS' ORDERING
TO RESTOCK SHELVES HAS BEEN EXTREMELY CAUTIOUS.

BY THE

FIRST QUARTER OF 1976, THE CONSTANT DOLLAR VALUE OF RETAIL
INVENTORIES TO CONSUMER GOODS PURCHASES HAD REACHED THE
LOWEST LEVEL SINCE 1969.

IF RETAILERS DO NOT RESTOCK SOON,

SALES GAINS WILL BE SMALLER THAN THEY OTHERWISE WOULD BE.
PRESUMABLY, ORDERING FOR RE-STOCKING WILL GROW STRONGER,
CONTRIBUTING TO THE INVENTORY EXPANSION TO BE EXPECTED IN

1976 AND 1977.
IN CONTRAST, SOME OVERHANG OF PRODUCTION MATERIALS AND
SUPPLIES STILL EXISTS AT THE MANUFACTURING LEVEL, EXPECIALLY
AMONG DURABLE GOODS MANUFACTURERS.

(SOME OF THIS OVERHANG HAS

- 14 -

BEEN MASKED BY SHIFTS IN ACCOUNTING METHODS, WHICH HAVE
DISTORTED THE COMMONLY CITED RATIOS OF BOOK VALUE INVENTORIES
TO SALES.)

IN TERMS OF CONTRIBUTION TO 1976 ECONOMIC GROWTH, THE
BIGGEST SWING MAY ALREADY HAVE TAKEN PLACE, AS REAL STOCKBUILDING MOVED SHARPLY FROM THE NEGATIVE TO THE PLUS COLUMN
IN THE FIRST QUARTER OF THIS YEAR.

HOWEVER, IN VIEW OF THE

LOWER THAN OPTIMAL STOCK-SALES RATIOS, ALREADY MAKING THEIR
INFLUENCE FELT IN THE LEADING INDICATORS OF INVENTORY INVESTMENT, AND DUE TO EXPECTED GAINS IN FINAL SALES, THE LIKELIHOOD
REMAINS THAT ADDITIONS TO INVENTORIES WILL BE PROVIDING A
CONTRIBUTION TO REAL GNP GROWTH THROUGHOUT THE REMAINDER OF
THIS YEAR.

THE THIRD PHASE OF THIS EXPANSION THAT MIGHT BE EXPECTED
TO EMERGE AND SUPPORT CONTINUED GOOD GROWTH IS THE CAPITAL
GOODS BOOM.

WHILE RECENT REPORTS OF DIMINISHED EXPECTATIONS

OF FIXED CAPITAL SPENDING HAVE APPEARED DISAPPOINTING TO SOME/
IT WOULD APPEAR BETTER FOR THE NEEDS OF BALANCED GROWTH IN
THE ECONOMY THAT THE MAIN IMPACT OF THESE OUTLAYS DEVELOPS

IN 1977.

- 15 THE NEED FOR CAPITAL EXPANSION SURELY WILL HAVE EMERGED
EVEN BEFORE THEN ON THE BASIS OF THE CONSUMER AND INVENTORY
BOOMS THAT WOULD HAVE RAISED OPERATING RATES IN THE ECONOMY
SUBSTANTIALLY.

INDEED, ON THE BASIS OF USUAL RELATIONSHIPS

OF MANUFACTURING CAPACITY UTILIZATION RATES TO GNP GROWTH,
IT WOULD APPEAR THAT IN THE SECOND QUARTER OF 1976 THE LARGE
GAP

AS

MEASURED

AGAINST

THE 1973 PERIOD OF SO-CALLED

SHORTAGES WAS RAPIDLY CLOSING TO ONLY 10 PERCENTAGE POINTS.
BY MID-YEAR 1977,

IT APPEARS

THAT ONLY ABOUT 7% OF THE

MANUFACTURING CAPACITY GAP WILL REMAIN AND EY THAT END~YEAR
POSSIBLY ONLY 5% MIGHT PERSIST.

THIS WOULD SUGGEST CONSIDERA-

BLE PRESSURE ON RESOURCES WHICH WOULD PROVIDE THE BASIS FOR
LARGE CAPITAL GOODS EXPENDITURES IN 1977 ~

GIVEN THE ABILITY

OF BUSINESS TO FINANCE THOSE OUTLAYS.

OF

COURSE, THE REALIZATION OF THIS SCENARIO OF SUBSTAN-

TIAL

REAL GNP GROWTH IN 1976 AND 1977 —

REDUCTION IN THE UNEMPLOYMENT RATE ~

AND THE ASSOCIATED

DEPENDS ON A FEW

VARIABLES WHOSE OUTCOME MUST BE FAVORABLE.

AND, INDEED, AN

OPTIMISTIC VIEW OF THEM MIGHT APPEAR TO BE CHANCY AND UNDEFENDABLE
BY SOME.

THE MOST IMPORTANT OF THESE IS THE ASSUMPTION OF

CONTINUED MODERATION IN THE RATE OF INFLATION.

JlJST AS THE

DOUBLE-DIGIT VARIETY OF INFLATION CAUSED A REDUCTION IN REAL
INCOME AND WEALTH AND GENERATED A RECESSION IN 1974 AND
1975, SO WOULD A REPETITION OF THAT EXPERIENCE OF INFLATION

- 16 -

CREATE THE CONDITIONS OF A SIMILAR DOWNTURN IN THE ECONOMIC
OUTLOOK.

NEVERTHELESS, IT DOES NOT APPEAR UNREASONABLE TO ASSUME
CONTINUED MODERATION IN THE RATE OF INFLATION RIGHT NOW.
MUCH OF THE DOUBLE-DIGIT INFLATION DID RESULT FROM SHARPLY
RISING FOOD AND FUEL PRICES, A REPETITION OF WHICH IS NOT
EXPECTED.

FOR THE REST -- THE SO-CALLED BASIC DETERMINANTS

OF PRICES, COMPENSATION PER MANHOUR, UNIT LABOR COSTS,
PROFIT MARGINS ~

ALL WOULD POINT TOWARD A RATE OF INFLATION

NOT MUCH DIFFERENT THAN HAS BEEN PREVAILING DURING THE
SECOND QUARTER.

INDEED, THE EXPERIENCE OF THIS COUNTRY

RELATIVE TO OTHER INDUSTRIALIZED NATIONS IS QUITE FORTUNATE
IN THAT AVERAGE HOURLY EARNINGS HAVE RISEN VERY MODERATELY —
ONLY AT A 7,3% SEASONALLY ADJUSTED ANNUAL RATE
SEPTEMBER AND MAY.

BETWEEN

THIS SPEAKS OF CONSIDERABLE RESTRAINT WHICH

HOPEFULLY MIGHT BE EXTENDED DURING THE DIFFICULT LABOR
NEGOTIATIONS WHICH LIE AHEAD.

THOUGH THERE ARE SOME WORRI-

SOME ELEMENTS WHICH HAVE EMERGED, BY AND LARGE, THE RISE IN
INDUSTRIAL PRICES ALSO MIGHT BE CONSIDERED MODERATE.

SHOULD

THIS ENVIRONMENT PREVAIL, THE OPPORTUNITY FOR PRODUCTIVITY
GAINS WHICH USUALLY ACCOMPANIES AN EXPANSION MIGHT BLUNT
MUCH OF THE INFLATIONARY PRESSURES WHICH WOULD OTHERWISE
DEVELOP ON THE COST SIDE.

- 17 ANOTHER IMPORTANT VARIABLE IS RECOGNITION BY THE
GOVERNMENT, BOTH IN THE EXECUTIVE AND CONGRESSIONAL BRANCHES,
THAT THE PRIVATE FORCES IN THE ECONOMY ARE STRONG AND
GROWING -

SUFFICIENTLY

TO CARRY TOTAL GNP GROWTH AT

RATES WHICH WILL BE SUFFICIENT TO RE-EMPLOY AVAILABLE
EXISTING EXCESS RESOURCES AT A STEADY AND COMFORTABLE PACE,
HOPEFULLY, SHOCKS TO THE SYSTEM NOW UNFORESEEN WILL NOT
DEVELOP.

UNFORTUNATELY, THEY DO.

TION OF FORECASTERS.

0O0

THAT REMAINS THE FRUSTRA-

DATE

LJUJAL

TREASURY BILL RATES
13-WEEK
LAST WEEK:
TODAY:

ihVliJT 9<o
r.sso'Qc

26-WEEK
5", r? l-C^o

HIGHEST SINCE

^//o

LOWEST SINCE
-^ / r /

<r - - ~ r>

rtmentoftheTR[A$URY
, D.C.20220

TELEPHONE 964-2041

June 1 4 , 1976

FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $2,100 million of 13-week Treasury bills and for $3,200 million
of 26-week Treasury bills, both series to b e issued on June 1 7 , 1976,
were opened at the Federal Reserve Banks today. The details a r e as follows:
26-week bills
maturing
December 1 6 , 1976

RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing September 1 6 , 1976
Price
High
Low
Average

98.641
98.634
98.640

Discount
Rate

Disnaiint Tnuoet"mont"

Investment

5.376%
5.404%
5.380%

DATE:

TREASURY BILL

a/ Excepting 1 tender of $545,001
Tenders at the low price for
Tenders at the low price for
TOTAL TENDERS RECEIVED AND ACCEPTE
District Received | Ace
Boston $ 62,465,000 $
New York
3,008,635,000
Philadelphia
23,685,000
Cleveland
56,030,000
Richmond
26,805,000
Atlanta
30,230,000
Chicago
174,185,000
St. Louis
50,690,000
Minneapolis
40,385,000
Kansas City
58,400,000
Dallas
33,660,000
San Francisco 791,940,000

13-WEEK
LAST WEEK:
TODAY:

26-WEEK

"LA^SlL L J^J.l^Jj.s.
S",3So ^o
S-(/is
'. <v.

1,2$
S

HIGHEST SINCE

5
1
53

LOWEST SINCE
• • r~ l > o

T0TALS$4,357,110,000 $2,10
b/Includes $ 433,575,000noncompetitive tenders from the public.
c/lncludes $ 1 7 1 , 2 0 0 , 0 0 0 n o n c o m P e t i t i v e tenders from the public.
1/ Equivalent coupon-issue yield.

WS-925

RATES

r/,o
c~

fin

Contact:

FOR IMMEDIATE RELEASE

Helene Melzer
964-8706

June 15, 1976

TREASURY DEPARTMENT CASH ROOM
TO CLOSE JUNE 30, 1976
The Treasury Department will close the Cash Room
in the Main Treasury Building in Washington as a Treasury
check-cashing facility and Government receipts depositary
at the close of business June 30, 1976.
Fiscal Assistant Secretary David Mosso said that a
printed notice of the closing has been given to users of
the facility since April 1, advising them to make other
arrangements for cashing their Government checks.
The Cash Room was first established in 1869 as part
of the Independent Treasury System, with nine subtreasuries
throughout the United States. With the establishment of the
Federal Reserve System in 1913, all other subtreasuries became obsolete and were discontinued by legislation in 1920.
The Main Treasury facility has remained the only Subtreasury in operation since that time, and each year has
become more expensive to continue. The present service
principally consists of peak-load activity on only a few
days each month and does not justify the support staff and
other operating costs, Mosso said. Direct deposit of Federal
payments in individual bank accounts and the availability of
numerous other financial and commercial inst.ltutinns for
check-cashing purposes now further minimize the need for
such an installation in the Treasury building, according to Mr.
Mosso.
Since the original closing announcement two months ann,
the volume of business has significantly diminished, Mr. Mosso
said, "indicating that many users have made other arrangements."

WS-926

STATEMENT BY JOHN M. NIEHUSS
DEPUTY ASSISTANT SECRETARY FOR INVESTMENT
AND ENERGY POLICY
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY
HOUSE COMMITTEE ON INTERNATIONAL RELATIONS
WEDNESDAY, JUNE 16, 1976, 2:00 p.m.
Mr. Chairman and Members of the Subcommittee:
I appreciate your invitation to present our views
on data collection with respect to foreign investment
and, more specifically, on three bills, S. 2839,
H.R. 13684, and H.R. 13738, which you are currently
considering.
We feel that these bills are quite timely, and wewelcome the opportunity to discuss them with you today.
As you know, the Treasury and Commerce Departments have
just completed their respective studies of foreign
investment in the United States. We concluded that our
existing programs for collecting data in this area are
satisfactory, and we have now turned our attention to
the question of what should be done to meet our future
data needs — with respect not only to investment by
foreigners in this country but also investment abroad
by Americans — and the adequacy of our current legal
authority for collecting such data.
Background — Foreign Investment Study Act of 1974
This is not the first time that Congress and the
Executive Branch have dealt with this question. You may
recall that more than two years ago, in the context of
increasing public concern about a rise in foreign investment in this country, we undertook an examination of our
data in this area and found it inadequate. Consequently,
legislation to meet the need for more and better data on
foreign investment in this country was introduced in both
houses of Congress and this subcommittee had a hand in

WS-927

- 2 considering it. That legislation was eventually passed
and signed into law by the President as the "Foreign
Investment Study Act of 1974."
The Study Act, however, provided authority only for
the studies that we have just completed and, moreover,
has recently expired. We now face once again the question
of how best to provide for the collection of necessary
data with respect to foreign investment. We are encouraged
by the indications, as reflected in the bills before you,
that our concerns are shared in the Congress.
Inadequacies of Existing Authority for Data Collection
The Executive Branch agencies have been collecting
data on foreign investment for some time, but our current
authority for these programs is deficient in a number
of respects. One problem is that there is no single
unified authority for data collection and studies in
this area. We are currently operating under the authority
provided by several statutes, including Section 5(b)
of the Trading With the Enemy Act and Section 8 of the
Bretton Woods Agreements Act.
Of the two, the Bretton Woods Act is the most
broadly used as a legal basis for collection of data
on foreign investment by the Treasury and Commerce
Departments. This authority is subject to an inherent
limitation, however, insofar as it authorizes the
President to collect data only in the detail necessary
to comply with requests for information from the International Monetary Fund, and our requirements for data
in this area generally go beyond those of the Fund.
The Trading With the Enemy Act contains broad
authority for the Executive Branch to require reporting
with respect to a wide variety of international transactions. It is, for example, one of the basic authorities
cited for the Treasury foreign exchange reporting system.
We can rely on this statute as long as the several
existing declarations of national emergency remain in
effect, but there is considerable sentiment in Congress
that an emergency powers statute should not be used as a
legal basis for programs of permanent or indefinite

- 3duration. In fact, legislation is now presently pending
before Congress which would require a study of whether
the section of the Act used as a basis for the Treasury
program should be retained in its present form as an
emergency powers statute.
Thus, we are currently relying on a patchwork of
laws that, even taken together, will not fully meet our
needs for a sound statutory basis for our data collection
programs in the international investment area in the years
ahead. Clearly there is a need — recognized by this
subcommittee and the sponsors of the bills before us —
for unambiguous and permanent authority for the Executive
Branch to collect data on international investment.
Type of New Authority Needed
We have developed a number of ideas that I would
like to share with you regarding desirable features that
we believe such a bill should have. First, it should
contain a broad grant of authority. It should allow us
to collect data on outstanding amounts of direct and
portfolio investments of both foreigners in this country
and U.S. citizens in other countries, as well as on current
transactions in these areas.
Second, we need the assurance of permanent authority
so that we can plan our future data collection activities
in a systematic and coordinated fashion. This would
allow us to use personnel and other resources with
maximum efficiency and to minimize the inconveniences
of reporting requirements on the business community.
Third, we believe the mandate contained in the bill
should be quite general. One problem with being too
specific with regard to the types of data to be collected
is that we cannot foresee precisely what kinds of
information would be topical and desirable in the years
ahead. Thus, we may risk locking ourselves into the
collection and analysis of some types of information which
would be costly to provide but not of interest at the
time the studies are done. We might also create a basis
for doubt about the Executive Branch's legal authority
to collect kinds of information that were not specified
in the bill. This would hamper our ability to collect
data on aspects of international investment that may
become of interest at some time in the future because the

- 4 need for such information was not foreseen today.
In order to ensure that the information we collect
remains timely, we intend to keep our data requirements
under continuing review and assessment. As our priorities
change over time, we will make the necessary adjustments
in our data collection programs. Furthermore, we will
take steps to secure the views of all concerned segments
of our society on these matters, creating where necessary
independent public advisory committees for this purpose.
Thus, we will be able to develop and respond to a broad
national consensus as to the kinds of information our data
collection programs should be producing.
With these thoughts as background, I would now like
to offer some specific observations on the legislation
before us.
Specific Comments on S. 2839
As you may know, we have expressed our support for
S. 2839 in testimony before a Senate subcommittee. This
bill would basically meet our needs for permanent,
comprehensive data collection authority, and we think it
is a good piece of legislation.
We did, however, have a few reservations about the
bill which I would like to review with you. One difficulty
we have with the bill is that it directs the Treasury
Department to conduct benchmark statistical surveys on
foreign portfolio investment in the United States. As you
know, the Treasury Department has been collecting and
publishing data on portfolio investment, i.e., international investment other than direct investment, for
many years — our most recent effort being the study of
foreign portfolio investment in the United States that
we just completed. We anticipate that Treasury will
retain responsibility for these programs for the foreseeable future, but we see no reason to freeze this arrangement by law for all time. Instead, we believe that it
would be preferable for any new legislation to give the
President the flexibility to reallocate this responsibility
should he find that desirable. If, for example, at some
future time, it was decided that all data collection should
be centralized in one agency, the President could reassign
it from the Treasury Department to the new agency.

- 5 Second, in accordance with my earlier remarks
concerning the desirability of avoiding excessive
specificity as to the types of data to be collected, we
would recommend deletion from S. 28 39 of sub-section
4(b)(2) which itemizes the data that the Treasury should
collect in its benchmark surveys on foreign portfolio
investment in the United States.
Specific Comments on H.R. 13684
H.R. 13684 appears to be virtually identical to
S. 28 39 so most of my general remarks on the Senate bill
would apply to it as well. H.R. 13684 does differ,
however, from the Senate version in a few noteworthy
respects.
One difference is that the House bill meets our
concerns about the allocation of responsibility for data
collection in the foreign investment area in that it
gives the authority for conducting surveys of inward
portfolio investment to the President. However, in doing
so, the bill introduces a new element: it directs the
President to act through the Council on International .
Economic Policy. In view of the fact that the Council's
role is to coordinate U.S. international economic policy,
we believe it would be inappropriate to give it any
operational responsibilities with respect to the U.S.
data collection activities. A substantial number of
additional technical personnel would be needed even if
CIEP's role were limited to general supervision.
Furthermore, this provision might represent an infringement
on the responsibilities of the Office of Management and
Budget, which is charged with coordinating Federal
Government statistical programs.
H.R. 13684 also departs from the Senate version in
that it mandates that benchmark surveys of foreign portfolio
investment in the United States be undertaken at least
every five, rather than ten, years. We believe that it is
unnecessary to conduct such surveys so frequently and are
concerned about potential burdens that this would place
on the reporting community. We would recommend that no
time interval be set. We would prefer to have the leeway
to undertake these surveys whenever we feel that
conditions warrant them rather than according to some
arbitrary timetable. This would also allow us to be

- 6able to assure the American business community that the
reporting burdens we put on them were for a good reason
other than simply to update the data — whether it is
needed or not. However, if the Congress considers it
desirable to mandate the frequency with which such
surveys should be done, we would urge that the interval
be set at 10 years as is provided for in S. 28 39.
H.R. 13738
H.R. 13738, which was introduced by the Chairman,
is more limited in scope than the other two bills under
consideration today. It would provide authority for a
study to be done of American investment overseas and
specifies a number of aspects of such investment that
the study should cover — including its nature and scope,
current U.S. policies, the reasons behind it, and its
economic and political impact. The study is to be
submitted to the Congress not later than one year after
enactment of the bill.
Since the substance of this bill falls mainly
within the Commerce Department's area of responsibility,
I will leave it to the Commerce witness to comment on
this bill in detail. I would like to go so far, however,
as to say that the study required by this bill is the
type that would be done in conjunction with a benchmark
statistical survey in this area and would appear to be
provided for in S. 2839 and H.R. 13684.
Conclusion
I would like to conclude by repeating that, with the
minor changes I have noted, we believe that S. 2839 and
H.R. 13684 would provide the basis we need to satisfy our
future requirements for data in the foreign investment area.
The authority these bills would provide would be unambiguous,
broad enough to cover all of our statistical collection
activities with respect to international investment, and
permanent. They would make a valuable contribution to
our efforts to maintain a sound statistical basis for our
policy-making with respect to foreign investment.
We would be glad to work with the Subcommittee and
its staff on the changes suggested in my statement as
well as any other changes which would help avoid unnecessary
costs to the Government and the private sector.

REMARKS BY THE HONORABLE GEORGE H. DIXON
BEFORE THE
1976 NATIONAL OPERATIONS
AND
AUTOMATION CONFERENCE
AMERICAN BANKERS ASSOCIATION
JUNE 14, 1976

Ladies and Gentlemen:
It is a privilege to be here with you today on the
occasion of your 1976 National Operations and Automation
Conference. As Barry Sullivan noted in his gracious
introduction, I've been a member of the "Treasury Team"
for a relatively short period of time. If this were last
year, I would probably be sitting in a group similar to this,
listening to some Washington bureaucrat, and recalling the
wisdom of Will Rogers, who used to say: "I don't tell jokes—
I just watch the Government and report the facts."
Now that I'm no longer just watching the Government,
the wisdom of Will Rogers seems much less compelling. It's
really quite remarkable what a few months in Washington will
do to one's perspective and to change one's expectations.
And it's also quite remarkable what a short stint at
the Treasury Department will do for one's appreciation of
the complexities and capabilities of our economic system..
As you know, the last three years have been a time of economic
uneasiness for all of us. We've experienced the worst
inflation in our peacetime history and the worst recession
in more than a generation. Too many of our fellow citizens
have been out of work. And for the first time since our
rise to preeminent industrial power, our system has become
seriously vulnerable to the political pressures of foreign
nations through embargo actions of the OPEC cartel.
But if there has been a silver lining in this experience—
and I think there has—it lies in the fact that in the last
year, through a clearer understanding that there's a lot we

WS-928

- 2 don't understand, and at least the beginning of the application
of fundamental economic concepts, we've made significant
progress in getting the economy moving ahead again. Over the
past nine months, total national production has risen at
an annual rate of eight percent and there exists at present
plenty of evidence that the momentum will continife for some time.
The rebound of the industrial sector of our economy
has been even stronger. From its lowest point in April, 1975,
the output of factories, mines and power plants has increased
at an annual rate of eleven percent. As business activity rose,
employment across the nation increased by nearly 3 million to
bring the total employed to the highest levels in our history,
to 87.7 million people, 1.4 million more than the pre-recession
high (in July, 1974) of 86.3 million.
The recovery we've experienced during the last year
provides, I believe, solid grounds for encouragement. It
came earlier, had an impact sooner, and remained stronger than
many forecasters predicted. Its pattern has matched the
pace of previous cyclical upturns, and there is every reason
to believe that expansion will continue throughout 1976, and
1977, if reasonably good decisions are made and implemented.
The situation is so generally positive that I can't help but
be reminded of one of Murphy's Laws: the Law of Random
Perversity: "If everything appears to be going well, you've
obviously overlooked something."
I believe it was Winston Churchill who once advised that
"short words are best, and simple words when short are best
of all." In keeping with the Prime Minister's sage advice,
I would like to share with you this afternoon a few brief
thoughts concerning the pronounced upward trend in government
spending in recent years and the potential impact that
excessive government outlays could have on the long-term
economic stability of this nation.
During the 1960's, you will recall, there was a popular
belief—many of us shared it—that we had outgrown the business
cycle: the government, it was thought, could through its
fiscal policies simply fine-tune the economy, pulling or
pushing on its controls to assure a continually smooth, upward
ride. Central to this process was the use by the government
of deficit financing. Enough about economics has been stuck
under our noses for most of us to know that under traditional
Keynesian theory, deficit financing is intended to be used as
a tool to stimulate the economy in sharp recessionary periods.
But in recent times that purpose has generally been lost from
view, as deficit financing has been used for a multitude of
other purposes—to fight a costly war in Asia, to finance
social and welfare programs, and to create a government that
at all levels has become too overbearing.

- 3 The trend of government spending makes it clear that
we've been guilty of trying to cram four pounds of commitments
into a three pound bag. Consider these facts:
For most of our history—for 185 years to be exact—
the Federal budget stayed somewhere below the $100
billion mark—usually well below it. Then in 1962,
we finally hit $100 billion—and that was only the
beginning. Seven years later, the budget broke the
$2 00 billion barrier, and then, only four years after
that in 1973 we hit the $300 billion mark. And now,
in our bicentennial year, we have reached the point
where the Federal Government is spending over $1 billion
a day, and going into debt at the rate of about
$1 biilion each week.
The very size of these numbers makes them almost
meaningless to the average American. But consider
the following analogy: suppose that on the day Christ
was born, a man had been given $1 billion on the
condition that he or his heirs spend $1,000 every day,
seven days a week until the money was entirely used up.
How long would the $1 billion last? Adding it up you'd
find that today, almost 2 000 years later, the man's
grandchildren would still not have spend the full_
billion dollars. In fact, the money would not run
out until the year 2716, 740 years from now. And that
is what our Federal Government spends each day of
the year.
In sixteen out of the last seventeen years, our
Federal Government has spent more than it has taken
in—and in the last few years a great deal more.
We not only have had deficits in periods of economic
boom, but even larger deficits in periods when there
has been less than full utilization of our resources.
Over the past decade, the Federal Government has borrowed
nearly one-third of a trillion dollars in our capital
markets, and during that period the interest on
our national debt has more than tripled—to almost
$38 billion this year. And its headed higher, fast.
For taxpayers, the burden of paying the Government's
bills has become so heavy that many are now in open
rebellion. In the 1974 general elections, for example,
voters across the country turned down some threequarters of all bond issues on the ballot. And a
recent poll of the Louis Harris organization reflected
the fact that 72 percent of the American people do not
feel they are getting their money's worth from their
tax dollars.

- 4 There can be little doubt that excessive government spending
and deficit financing contributed significantly to the doubledigit inflation underlying the severe recession of 1974 and 1975.
And as long as the levels of government spending and Federal
ohelicits continue to rise, the threat of renewed inflation
remains. We must always remember that it is " f 1 ; ^ which
destroys the purchasing power of our people. It is inflation
that drives up the cos? of food, housing, education, recreation
and cultural opportunities. And it is inflation which can
ultimately affect everyone-from the businessman interested
In expanding his plant to create new jobs to the young couple
trying to buy their first home, to our elderly citizens on
fixed incomes trying in vain to keep abreast of rising prices.
Inflation and other economic difficulties of recent years
have unquestionably brought hardship to many of our citizens,
but a positive result of the turmoil we've faced has been that
the American people—you and I—are wiser now about our economy
than we were only a few years ago. As a nation, we have a
deeper appreciation of fundamental economic concepts and a
clearer understanding of the choices we face.
One area of increased understanding is with respect to
the realistic limitations of our government and of our economy.
Once again we've learned that Washington does not hold the.
answer to all of our problems and, in fact, very often isn t
even asking the right questions. Indeed, government itself —
in the form of government spending, government deficits,
government bureaucracy, and government regulation—lies at tne
core of many of our national problems. Most of us would agree
that the government must serve many beneficial purposes, but we
have increasing doubts about its ability to accomplish everything
it is trying to do. In talking about the role of the United
States in the world, Arnold Toynbee once said that "America
is a large, friendly dog in a very small room. Every time it
wags its tail, it knocks over a chair." Much the same can
be said about the Federal Government within our economy—
and its time that we put the government on a shorter leash.
We also now have a better grasp of the implications of
ever-increasing government spending and Federal deficits for
our financial system. Today, government takes about 80 percent
of the net funds borrowed in the securities markets, leaving
only 20 percent to the private sector, the part which still
produces virtually all our goods and services and employs 83
percent of all our workers. This massive government presence
has been an important factor in the high interest rates and
other strains we have seen in our financial markets. As
bankers, you are keenly aware of the impact that these increase
businesses
government borrowings
and the lives
andof
high
your
interest
customers.
rates can have on your

- 5 In the last few years, there has also been a growing
awareness of the need for much higher levels of capital
investment. There is now widespread agreement within the
business community and even in Washington that in order to
create almost 20 million jobs during the coming decade, and
to meet other economic goals such as self-sufficiency in
energy, we must turn our economic system away from its heavy
emphasis upon consumption and government spending toward a
greater stress upon private savings and investment. Our
presently estimated need for $4-1/2 trillion new investment
in the next decade is formidable by any standard, but it can
be done if we remove the shackles that government has imposed
upon the free enterprise system.
There is another lesson of recent years that we may not
have learned so well, one which I would like to explore more
deeply with you this afternoon. It is a lesson that is
central to our efforts and critical to our future. Unless
we need it, our struggle to preserve and strengthen the free
enterprise system in America is doomed to fail. The lesson
is simply this: to restore faith in the American economic
system—the kind of faith that holds the system together—we
must not only make basic changes in the way that government
oenaves, but the business community must also undertake a
tar-reaching effort to put its own house in order.
Though it is hard for me to grasp and to believe, it
appears that our fellow citizens have almost as little faith
m business today as they have in government. According to
a recent Louis Harris survey, confidence in business has
suppled m the last decade from more than two-thirds of the
population to less than one-fifth.
+*- ^T?iS laSk °f confidence would have a decisive impact on
u T ^ U f V
°? r £u e S e n t e r P r i s e system. History has shown
us time and again that the public attitudes of one era become
the public statutes of the next. Thus, it is entirely possible
of b u s i n L f a r S ^ a V V n i S e S n 0 t l e S S government regulation
of business—as the Ford Administration strongly advocates—
~ £ a K ? * more governmental regulation. A recent private poll
established that three-quarters of the American people want
greater regulation of business: They want the Feder-al
?nl^? m ? n t t 0 r e ^ u l a t e ma Jor companies, industries and
institutions more extensively.
leaderfl^86 circumstances, I would suggest that business
ind^d " 5 V r ! a b ° U t t h e f u t u r e o f f r e e enterprise—and
set a b o n ? f / r ^ e d o m ^self-have an urgent responsibility to
intf^n? restoring public trust and confidence in the
institutions they run.

- 6 In meeting this responsibility, businessmen must initiate
a far more energetic program of basic public education in the
economic as well as the political values of freedom. In the
early 1960's, after he had served as Secretary of Commerce,
Luther Hodges remarked: "If ignorance paid dividends, most
Americans would make a fortune out of what they don't know
about economics." I don't say this to be flippant, but rather
to point out a fundamental weakness in this country today.
Now, far from being a joke, the widespread lack of economic
understanding could destroy our economy, our prosperity, and
indeed, our freedom. For our economic freedom and our political
freedom are indivisible—one cannot ultimately survive without
the other.
Those who practice free enterprise—more than anyone
else—should be responsible for getting its success story
across to the American people. Let us begin by teaching everyone the fundamentals of that "old time economic religion"—
about profits, capital investment, and productivity, and what
they have meant to our unique economic system. Over the years,
the United States has created the highest standard of living
in the world; the average family income approached $14,000 in
1975; poverty has been sharply reduced to 13 percent of the
population, and jobs have been created for over 87 million
people. But our task is far from complete. Over the next ten
years, if we are to sustain our economic growth and our economic
competitive strength around the world, it is estimated that we
will have to create almost 20 million new jobs as contrasted to
the 13 million of the past decade, and invest as much as a
trillion dollars to meet our special energy needs. If we are
to meet goals of this order of magnitude, the free enterprise
ideals and principles that have guided this nation for 200 years
will have to be maintained and openly encouraged.
And I believe there is yet a further critical task which
lies before our business leaders. I should have known it, but
one of the most disconcerting experiences I have had since
coming to Washington has been to see how many businessmen regard
the question of competition. When asked, most businessmen will
tell you in the abstract that competition and our economic
system should be given freer rein. However, when they become
specific and talk about their industry, the response often
changes. Sure they would like a freer rein in area X, but then
it would not be a good idea to let other companies enter this
area because the market would then become disorderly. Have you
ever noticed how much the need for orderly markets is used to
justify a monopolistic or ologopolistic advantage?
Thus, many businessmen enthusiastically support deregulation
in certain areas but not in others. In many cases, they have
grown comfortable with the regulations imposed upon them,

- 7 because these regulations, after all, let them escape the
uncertainty associated with competition and, in some cases,
support the survival of inefficient operations. We must all
recognize that we have an enourmous stake in restoring
competition to the marketplace in concert with the public
interest, and it seems therefore clearly in the best interest
of American business to support a systematic and continuing
process of regulatory reform.
Let me conclude with these few observations:
As we enter our third century as a nation, I believe the
time has come not to reappraise our dedication to a better
life for all—that dedication remains clear—but to reappraise
what we can realistically undertake as a nation and how we
can pay for it. The current financial plight of New York
City and the overwhelming size of our Federal deficits should
serve as grave warnings to us. We can continue to pay for
what we now enjoy and provide for the future only if our great
capitalist economy does its job—produces goods and services
in a free market and makes a sufficient profit.
We must now do everything possible to encourage a "new
balance" in our national life:
A balance that favors greater freedom and vitality
for our free enterprise system;
a balance that favors greater liberty and selfreliance for individual Americans; and
a balance that favors greater honesty, realism
and genuineness in dealing with the challenges of
our time.
These are great goals—goals worthy of the greatest
nation on earth. We should resolve in this, our Bicentennial
Year, to go forward into the future with a shared sense of
purpose, patience, realistic hope, courage and common sense.
If we work together, with pride in ourselves and our
nation, the goals we set today can become the first great
achievements of America's third century!
And now I'm reminded of a story Mark Twain used to
tell: "I once heard a preacher who was powerful good. I
decided to give him every cent I had with me. But he kept at
it too long. Ten minutes later I decided to keep the bills
and just give him my loose change. Another ten minutes and
I was darned if I was going to give him anything at all. Then,
when he finally stopped, and the plate came around, I extracted
two dollars out of sheer spite."

- 8 So that I won't-tempt any of you fine people to charge
me for too long a sermon, I'll conclude by thanking you for
your patience, for the opportunity to be with you this afternoon and with the proposition that the best of the spirit of
Adam Smith be always with you.
o 0 o

FOR RELEASE AT 4:00 P.M.

June 15, 1976

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 $5,200 million »
thereabouts, to be issued June 24, 1976,

or

as follows:

91-day bills (to maturity date) in the amount of $2,100 million» or
thereabouts, representing an additional amount of bills dated March 25, 1976,
and to mature September 23, 1976 (CUSIP No.912793 B2 1 ) , originally issued in
the amount of $3,103 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,100 million, or thereabouts, to be dated June 24, 1976,
and to mature December 23, 1976

(CUSIP No. 912793 C7 9).

The bills will be issued for cash and in exchange for Treasury bills maturing
June 24, 1976,

outstanding in the amount of $5,510 million, of which*

Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,841 million.
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 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 Daylight Saving time, Monday, June 21, 1976.
Tenders will not be received at the Department of the Treasury, Washington.
Each tender must be for a minimum of $10,000. Tenders over $10,000 must be in
multiples of $5,000.

In the case of competitive tenders the price offered must

be expressed on the basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in Government
WS-929
(OVER)

-2securities 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 $500,000 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 June 24, 1976,

in cash or

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

June 24, 1976.

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 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.

oOo

Department of theJREASURY
, D.C. 20220

TELEPHONE 964-2041

For information on submitting tenders in the Washington, D. C. area: PHONE WO4-2604
June 15, 1976

FOR RELEASE AT 4:00 P.M.
TREASURY TO AUCTION $2,500 MILLION OF 2-YEAR NOTES

The Department of the Treasury will auction $2,500 million of 2-year notes to
refund $1,998 million of notes held by the public maturing June 30, 1976, and to raise
$ 502 million of new cash. Additional amounts of the notes may be issued to Government accounts and the Federal Reserve Banks for their own account in exchange for
$ 705 million of maturing notes held by them, and to Federal Reserve Banks as
agents of foreign and international monetary authorities for new cash.
The notes now being offered will be Treasury Notes of Series N-1978 dated
June 30, 1976, due June 30, 1978 (CUSIP No. 912827 FS 6) with interest payable
semiannually on December 31, 1976, June 30, 1977, December 31, 1977, and June 30, 1978.
The coupon rate will be determined after tenders are allotted. The notes will
be issued in registered and bearer form in denominations of $5,000, $10,000, $100,000
and $1,000,000 and they will be available for issue in book-entry form to designated
bidders.
Tenders will be received up to 12:30 p.m., Eastern Daylight Saving time, Monday,
June 21, 1976, 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 June 20. Tenders must be in the amount of $5,000 or a multiple thereof,
and all tenders must state the yield desired, if a competitive tender, or the term
"noncompetitive", if a noncompetitive tender. 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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 rate will be determined at a 1/8 of one percent increment that translates
into an average accepted price close to 100.000 and a lowest accepted price above
99.500. That rate of interest 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
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. Noncompetitive bidders will be required to pay the average
price of all accepted competitive tenders. BIDDERS SUBMITTING NONCOMPETITIVE
TENDERS SHOULD REALIZE THAT IT IS POSSIBLE THAT THE AVERAGE PRICE MAY BE ABOVE PAR,
IN WHICH CASE THEY WOULD HAVE TO PAY MORE THAN THE FACE VALUE FOR THE NOTES.

WS-930

(OVER)

-2-

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 $500,000 or
less, and all tenders from Government accounts and the Federal Reserve Banks
for themselves and as agents of foreign and international monetary authorities,
will be accepted in full at the average price of accepted 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 Government securities and borrowings thereon, may submit tenders for
the account of customers, provided the names of the customers are set forth
therein. 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, foreign central banks and foreign States, dealers who make
primary markets in Government securities and report daily to the Federal Reserve
Bank of New York their positions with respect to Government securities and
borrowings thereon, Federal Reserve Banks, and Government accounts. Tenders from
others must be accompanied by payment of 5 percent of the face amount of notes
applied for. 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 with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Wednesday, June
30, 1976. Payment must be in cash, 8-3/4% Treasury Notes of Series 1-1976, which
will be accepted at par, in other funds immediately available to the Treasury by
the payment date 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, June 25, 1976, 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) Wednesday, June 23, 1976, if the check is
drawn on a bank in another district. Checks received after the dates set forth in
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 will be
canceled and the deposit with the tender up to 5 percent of the amount of notes
allotted will be subject to forfeiture to the United States.

oOo

FOR RELEASE ON DELIVERY

STATEMENT OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL, DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
JUNE 17, 1976, 10:00 A.M. EDT
TESTIMONY ON S. 13^3, "THE RIGHT TO
FINANCIAL PRIVACY ACT OF 1973"
Mr. Chairman and Members of this Distinguished Committee:
I am pleased to have the opportunity to appear before
you today to discuss the provisions of S. 13^3, "The Right
to Financial Privacy Act of 1973."
While the Department of the Treasury agrees that access
to private financial information should not be abused, we
firmly believe that access in connection with legitimate law
enforcement activity is not an abuse. We believe that S. 13^3
goes beyond what is necessary to protect the interest of
individuals in the confidentiality of financial records, and
therefore, we strongly oppose its enactment. We believe this
bill alters substantively the body of Federal law regarding
access to these records by investigative agencies and would
have a detrimental effect upon the law enforcement activity
of Treasury as well as other Federal agencies.
The effect of the bill would be to prevent or impede
Federal investigators from examining records which are routinely
viewed by parties to such commercial activities as well as
business and credit institutions interested in their financial
reliability. Furthermore, the restriction would be placed
solely on law enforcement agencies, while access to such information would be left freely available to private parties
under the long established legal procedures which are universally applicable. The major benefits of the bill would accrue
only to those persons who find it necessary to cloak their
business activity from the legitimate scrutiny of the Government.
WS-931

-2I want to focus particularly upon those provisions of
the bill which are of great concern to the Treasury Department,
including the Internal Revenue Service, as we are charged with
responsibility for a major part of the Federal law enforcement
effort.
Confidentiality of Records
Sections 4 and 5 of the bill, in effect, extend to the
customer of the defined financial institutions the right to
prevent or delay the disclosure to Federal, State and local
governments of financial records in the possession of a third
party, thereby creating a privilege heretofore unknown in our
law for records which are neither the customer's nor required
by present law to be confidential. This goes well beyond what
the Constitution requires or fairness dictates. As recently
as April of this year the Supreme Court, in United States v.
Miller,
U.S.
, in rejecting a bank customer's standing to challenge a grand jury subpoena of certain
bank records, stated that customers of financial institutions
possess no "legitimate expectation of privacy" in the records
of such institutions. The Court pointed out that checks and
similar records are not confidential communications, but rather
negotiable instruments which merely reflect information voluntarily conveyed to a bank by the customer. The Court also
observed that, absent a privileged relationship, a person
cannot successfully object on privacy grounds to the disclosure
to the Government of information revealed to another party even
on the expectation that the information will be used only for
a limited purpose. Thus, the Miller and similar court decisions
define a relationship between financial institutions and thtfir
customers different from that asserted in the Findings and
Purpose provisions of this bill.
Sections 4 and 5 establish new limitations on access to
financial records by governmental agencies. No similar limitations are placed upon access by nongovernmental entities or
individuals. In the normal course of business such information
is passed among commercial businesses, credit reporting agencies
and other financial institutions virtually without restriction,
and often without the customer's specific knowledge or approval.
The Department recognizes that the basic objective of
This is an essential part of normal commercial life and is
expected by those participating in it.
Administrative Summons

FOR RELEASE ON DELIVERY

STATEMENT OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL, DEPARTMENT OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
JUNE 17, 1976, 10:00 A.M. EDT
TESTIMONY ON S. 13^3, "THE RIGHT TO
FINANCIAL PRIVACY ACT OF 1973"
Mr. Chairman and Members of this Distinguished Committee:
I am pleased to have the opportunity to appear before
you today to discuss the provisions of S. 13^3, "The Right
to Financial Privacy Act of 1973."
While the Department of the Treasury agrees that access
to private financial information should not be abused, we
firmly believe that access in connection with legitimate law
enforcement activity is not an abuse. We believe that S. 13^3
goes beyond what is necessary to protect the interest of
individuals in the confidentiality of financial records, and
therefore, we strongly oppose its enactment. We believe this
bill alters substantively the body of Federal law regarding
access to these records by investigative agencies and would
have a detrimental effect upon the law enforcement activity
of Treasury as well as other Federal agencies.
The effect of the bill would be to prevent or impede
Federal investigators from examining records which are routinely
viewed by parties to such commercial activities as well as
business and credit institutions interested in their financial
reliability. Furthermore, the restriction would be placed
solely on law enforcement agencies, while access to such information would be left freely available to private parties
under the long established legal procedures which are universally applicable. The major benefits of the bill would accrue
only to those persons who find it necessary to cloak their
business activity from the legitimate scrutiny of the Government.
WS-931

-2I want to focus particularly upon those provisions of
the bill which are of great concern to the Treasury Department,
including the Internal Revenue Service, as we are charged with
responsibility for a major part of the Federal law enforcement
effort.
Confidentiality of Records
Sections 4 and 5 of the bill, in effect, extend to the
customer of the defined financial institutions the right to
prevent or delay the disclosure to Federal, State and local
governments of financial records in the possession of a third
party, thereby creating a privilege heretofore unknown in our
law for records which are neither the customer's nor required
by present law to be confidential. This goes well beyond what
the Constitution requires or fairness dictates. As recently
as April of this year the Supreme Court, in United States v\?
Miller,
U.S.
, in rejecting a bank cus*tomer's standing to challenge a grand jury subpoena of certain
bank records, stated that customers of financial institutions
possess no "legitimate expectation of privacy" in the records
of such institutions. The Court pointed out that checks and
similar records are not confidential communications, but rather
negotiable instruments which merely reflect information voluntarily conveyed to a bank by the customer. The Court also
observed that, absent a privileged relationship, a person '£d
cannot successfully object on privacy grounds to the disclosure
to the Government of information revealed to another party even
on the expectation that the information will be used only for
a limited purpose. Thus, the Miller and similar court decisions
define a relationship between financial institutions and their
customers different from that asserted in the Findings and
Purpose provisions of this bill.
Sections 4 and 5 establish new limitations on access to
financial records by governmental agencies. No similar limitations are placed upon access by nongovernmental entities or
individuals. In the normal course of business such information
is passed among commercial businesses, credit reporting agencies
and other financial institutions virtually without restriction,
and often without the customer's specific knowledge or approval.
This is an essential part of normal commercial life and is
expected by those participating in it.
Administrative Summons
The Department recognizes that the basic objective of

-3section 7, which provides for notification of a bank customer
at the time financial records are sought by means o.f an administrative summons, seeks to provide a balance that is fair
to both the individual and to the investigating agency. However, the procedures contemplated by section 7 go far beyond
what is necessary to achieve this objective. The section
would seriously inhibit the proper and effective use of the
administrative summons by Federal agencies. Further, the
House has recently passed and the Senate is presently considering "The Tax Reform Act of 1975" (H.R. 10612), section
1211 of which regulates the use of third party administrative
summons by the Internal Revenue Service, the principal agency
with statutory authority to issue administrative subpoenas.
The Ways and Means Committee of the House and now the Senate
Finance Committee have given extensive consideration to the
problem in the tax area and have attempted to tailor section
1211 to fit the needs and problems of both the public and the
Internal Revenue Service. In this connection, section 1211
is technically designed to fit into and supplement existing
provisions of the Internal Revenue Code. Thus it accomplishes
the objective within the Code without creating unintended
conflicts and interpretive problems. This fact was pointed
out in a letter recently sent by Chairman Ullman to Chairman
Rodino in connection with a similar bill under consideration
by the House Committee on the Judiciary. While that provision
of H.R. 10612 and S. 1343 deal with similar issues, they do
have significant differences and the enactment of both would
place an intolerable burden upon the Service in attempting to
comply with the differing but overlapping requirements of both
bills.
Under present provisions of the Internal Revenue Code, a
summoned party who believes the summons is improper may refuse
to comply with an administrative summons and cause the Service
to commence a court action to enforce the summons, in which
action objections to enforcement will be reviewed. Section 12
as modified by the Senate Finance Committee, would amend the
present provisions of the Internal Revenue Code dealing with
the use and enforcement of administrative summons to extend
essentially the same procedure to the person to whom the third
party's records pertain.
The relevant provisions of H.R. 10612, as modified by the
Finance Committee, would generally provide that in the case of
a third-party summons (when the identity of the taxpayer is
known), the Service would be required to include sufficient
information to enable the third-party recordholder to locate

-4the records. The taxpayer (or other person to whom the
summoned third party's records pertain) would receive notice
of the summons from the Service within 3 days of its service
on the summoned third party, and would have the right to stay
compliance with the summons by notifying the summoned third
party (within 14 days after the date on which the notice of
the summons is given him) not to comply with the summons.
The Service would then be required to seek enforcement of the
summons in a Federal court and the taxpayer who had stayed
compliance would have standing to intervene in that court
action to raise objections and challenge enforcement.
In the case of the "John Doe" summons (where the identity
of the taxpayer is not known), the Service would have to go
into court, establish reasonable cause for requesting the summons, and receive court approval before issuing the summons.
To assist banks and other third party record keepers on
whom summons have been served, H.R. 106l,2, as modified, authorizes the Commissioner to reimburse certain costs incurred
by the summoned third party in complying with the summons.
In order to protect against the new procedure being used
simply as a tool to thwart and delay the very investigations
the IRS is required to make, H.R. 10612, as modified, provides
an exception for summons in aid of collection of an assessed
tax liability (to locate assets) and for summons which merely
seek to ascertain whether.records exist (as opposed to examination of their contents). Also, upon application to a Federal
court and a showing that the giving of notice would likely lead
to attempts to flee, or to concealment, destruction or alteration of records, or to intimidation, bribery, or collusion with
witnesses, the court may grant an order dispensing with the
necessity of notice in a given case.
H.R. 10612, as modified, also contains one other provision to mitigate against the new procedure simply becoming a
"one way street" by which to thwart enforcement of the revenue
laws, viz., a tolling of the civil and criminal statutes of
limitation for the taxpayer's years involved during the period
compliance with the summons is stayed by action of the taxpayer.
Under section 7(a) of S. 1343, agencies using an administrative summons would be required to serve a copy of the summons
upon the customer prior to service upon the financial institution. This could provide an unscrupulous individual with an
opportunity for all sorts of mischief after such a warning that

-5he was under investigation. Also, since the bill makes no
exception for tax collection actions by the Internal Revenue
Service, the requirement of prior service could detrimentally
affect the collection of taxes due by allowing a delinquent
taxpayer the opportunity to clean out his bank account.
Notice to the customer shortly after service of the summons,
with deferral of the time for response to the summons, would
assure the customer ample opportunity to object while better
protecting the Government's interests. The Internal Revenue
Code now provides for a ten-day waiting period before complying with a summons and H.R. 10612 would provide a fourteenday period.
.
The bill requires an affirmative approval on the part of
the bank customer before access may be obtained by an administrative summons. Thus an important investigation of a
violation of law can be halted by the individual's simple
failure or neglect to direct the institution to comply. In
such a case, even though the customer may not actually object,
the investigating agency must resort to enforcement action in
the Courts. Absent court action, both the financial institution and the government official could be subject to the bill's
penalty provisions by providing or receiving financial records
when the customer does not in fact object but simply because
he has not affirmatively authorized it. More practically, the
bill should permit access by government agents when the customer
fails to object within a specified period of time. Any legislation affording notice, however, should be limited to procedural requirements and should not afford a customer a substantive right to deny access by a government official carrying
out legitimate law enforcement functions.
The bill also effectively blocks any examination of the
bank's records in the course of an audit with respect to the
bank's own obligation to comply with the law, to the extent
such audit should require examination of records pertaining to
the bank's transactions with its customers. It would also
severely limit or prevent a bank supervisory agency from
turning over evidence of criminal violations to the Department
of Justice.
Finally, the present use by the Internal Revenue Service
of a "John Doe" summons (which has been upheld by the Supreme
Court in U.S. v. Bisceglia) would be abrogated by the notice
requirement of the bill, since the records requested are not

-6identifiable with a particular customer. The "John Doe" summons
is a valuable tool of an effective tax administration process
and should not be wholly eliminated. Its use, however, must be
restricted to appropriate cases and with proper safeguards.
The Internal Revenue Service has issued and is enforcing such
safeguards presently. The need for such an investigative tool
is recognized in the provisions of H.R. 10612.
Judicial Subpoena
Section 9 establishes a 10-day period between service of
a judicial subpoena upon a financial institution and the date
that it can be required to respond to the subpoena. This
provision would severely damage, if not destroy, the ability
of a Grand Jury to inquire into the commission of a crime
involving such records. Not only would it jeopardize the
secrecy of grand jury proceedings, it would telegraph the
fact that such an investigation was under way but every such
investigation would be subjected to repeated judicial hearings
on motions to quash subpoenas—even if made solely for tactical
purposes of delay or confusion. Setting this rigid time frame
also unnecessarily limits the ability of a court to obtain
financial documents that may be required in a judicial proceeding. It would seem, for example, that this waiting period
would apply to the subpoena of financial records by the Government during an ongoing civil or criminal trial. To require the
court to wait 10 days before receiving the records, or notice
of intent by the customer to quash the subpoena, would delay
the trial unduly and unnecessarily.
Furthermore, the restriction only applies to a government.
Private litigants would be free to have judicial subpoenas
issued and enforced in the normal manner established by many
years of usage and customary law.
Record Keeping and Reporting
One effect of the record-keeping and reporting section of
this bill would be to prohibit the Secretary of the Treasury
from exercising his authority under the Bank Secrecy Act of
1970 to require financial institutions to report certain transactions. Congress has recognized the importance of these
reports as an effective tool to help curb white-collar crime
and Federal tax evasion and the Department's experience has
been that these reports have proven to be an invaluable law
enforcement tool. We strongly believe that the Secretary's
authority to require these reports should not be eliminated.

-7Jurisdiction
Section 13 would allow an action to enforce any provision
of this bill to be brought in State as well as Federal courts.
Subjecting Federal agencies to the jurisdiction of State courts
would interject State courts in the Interpretation of Federal
law for purely Federal purposes. It would also unnecessarily
complicate administration of the Act by subjecting Federal
agencies to varying chains of appeal, rules of decision and
other procedural matters.
Criminal Penalties Section
Section 15, which provides criminal penalties for violation
of the provisions of this Act, goes beyond what is necessary to
insure compliance0 Subjecting Government officials to criminal
penalties for what, in essence, may be a technical violation of
the Act's requirements would unduly inhibit the official in the
conduct of an investigation and could subject him to possible
harassment and abuse. We believe that the civil penalties
under section 14 would provide adequate assurance (if any is
needed) that Government officials will comply with the Act and
prescribe proper remedies for noncompliance.
In conclusion, it is Treasury's view that S. 1343 goes far
beyond what is necessary to protect an individual from undue
invasion of his personal privacy. S. 1343 would seriously impede
legitimate investigative efforts by providing the individual not
only with notice and opportunity to challenge governmental
access, but by providing also a substantive basis for preventing
Government access. The effect of this bill would be to hamper
unduly legitimate law enforcement activities without really
giving the honest and law-abiding citizen the protection he
needs from the dishonest persons that the law enforcement agencies are created to apprehend. I am convinced that the bill
goes beyond the reasonable and normal expectation of the average
citizen. He seeks protection from unreasonable and high-handed
governmental action against which he has no defense. He does
not seek to cripple the legitimate and proper activities of his
Government which are necessary for his daily life and well-being.
While I am sure that it may have been quoted to you before,
recognize
that
the Justice
authority
vested statement
in
I think it"We
well
to repeat
Chief
Burger's
in
the Bisceglia case to the effect that:

-8tax collectors may be abused, as all power
is subject to abuse. However, the solution
is not to restrict that authority so as to
undermine the efficacy of the federal tax
system, which seeks to assure that taxpayers
pay what Congress has mandated and prevents
dishonest persons from escaping taxation and
thus shifting heavier burdens to honest taxpayers. "
We would urge the Committee and the Congress not to adopt
the restrictions contained in S. 1343.

o 0 o

FOR IMMEDIATE RELEASE
JOINT COMMUNIQUE OF
WILLIAM E. SIMON, SECRETARY OF THE TREASURY OF THE UNITED STATES
AND
JUAN MIGUEL VILLAR MIR, VICE PRESIDENT FOR ECONOMIC AFFAIRS
AND MINISTER OF FINANCE OF SPAIN
JUNE 16, 1976
At the invitation of Secretary of the Treasury William E.
Simon, the Vice President of the Spanish Government for Economic
Affairs and Minister of Finance of Spain, Juan Miguel Villar Mir,
visited Washington on June 14-16, 1976. Minister Villar Mir
was received by President Ford on June 16.' During the visit,
Minister Villar Mir also met with Secretary of State Henry
Kissinger, with Chairman Stephen M. DuBrul, Jr. of the ExportImport Bank, and with Acting Secretary of Commerce John Smith.
The visit represented further confirmation of the mutual
cooperation between the United States and Spain under the
leadership of King Juan Carlos and of the close economic and
financial relations between the two countries as well as their
mutual interest in strengthening those relations.
During extensive and wide-ranging discussions, Minister
Villar Mir and Secretary Simon reviewed the economic situation
in Spain in the context of general world economic conditions.
They felt that the broadly-based economic expansion now developing
in the U.S., Japan, and many European countries would prove of
substantial benefit to the Spanish economy which under the
present economic policies of the Spanish authorities is in a
recovery stage. They recognized, however, that economic expansion
could not be sustained without further progress in reducing
inflation, both in Spain and in the United States, and pledged
themselves to pursue policies designed to achieve reduction of
inflation rates and sustainable economic growth. Minister
Villar Mir informed the Secretary that there were significant
signs in the Spanish economy that real activity will rebound
in the second half of this year and that there will be also an
improvement on the external accounts.
Outstanding issues affecting economic and commercial
relations between the two countries were reviewed, and possible
areas of closer cooperation in the economic sphere, especially
between financial, commercial and industrial institutions, were
WS-932
explored.
The Ministers
agreed that both countries would benefit
from increased
economic cooperation.

- 2In discussing trade and investment flows between the two
countries, the Ministers noted that the U.S. tends to be a net
exporter of goods to Spain, while Spain is a net recipient of
service and capital flows from the U.S. The two sides discussed
United States-Spanish agricultural trade trends. The Ministers
expressed their concern to avoid the development of a trade
imbalance which could be mutually disadvantageous to their
overall economic relations. Both Ministers reiterated their
commitment to avoid measures which restrict the free flow of
goods between nations as well as those which unfairly subsidize
exports. The Ministers noted that these issues will be discussed
at the upcoming OECD Ministerial meeting in the context of the
proposed renewal of the Trade Pledge. Consistent with their
intention to strengthen the economic and financial ties between
them, they expressed a desire to seek an expansion of the volume
of their bilateral trade, within the general context of growing
world trade. Both sides discussed in detail their positions on
the question of the U.S. extension of the Generalized System of
Preferences to Spain. They agreed to carry on further consultations to determine the necessary steps to qualify Spain as a,
beneficiary country of the Generalized System of Preference^.
They discussed trends of American tourism to Spain and the ,-j
possibilities of increasing this flow with its positive impact
on the Spsnish Balance of Payments.
•I
Similarly, they discussed the important role which U.S.,
capital has played in the growth and development of the Spanish
economy. Minister Villar Mir indicated that his Government
will continue to maintain an environment which is conducive to
increased foreign investment. Secretary Simon welcomed thisj;
policy. He assured the Minister that while the U.S. Government
maintains an open and neutral policy toward the flows of
capital across international boundaries, it considers new flows
of U.S. private capital to Spain as likely to be in the best
interests of both nations. The Ministers concluded that the
prospects for continued flows of U.S. capital to Spain, given
the underlying strength of the Spanish economy, are excellent
and that such flows should contribute to future economic
expansion.
Minister Villar Mir presented the possibility of Spanish
companies participating in the U.S. domestic financial market
by issuing bonds or other financial instruments. Secretary Simon
confirmed that domestic United States financial markets are open
to the Spanish government and to the Spanish private sector.
Minister Villar Mir described the industrial projects
foreseen in Spain during the next four years and estimated that
possible requirements of procurement and financing in the U.S.
With
for these
regard
projects
to this,
could
Secretary
amount Simon
to $1.5
noted
billion
that discussions
to $2 billion.
between

- 3Minister Villar Mir and Export-Import Bank Chairman DuBrul
underlined the strong interest which the Bank has in Spain.
In discussions between Minister Villar Mir and Chairman
DuBrul, Chairman DuBrul observed that Eximbank experience
in Spain has been very favorable and assured the Minister that
the Bank would continue to assist in channeling U.S. capital
to Spain. He stated that it is Eximbank's general policy not
to establish any specific maximum dollar limit on new
financing to Spain. Minister Villar Mir welcomed this
expression of support and recognized the important role
which Eximbank has played -- and will continue to play -in Spain. The Ministers expressed their confidence that
Eximbank activities in Spain would continue to be mutually
satisfactory and beneficial.
Secretary Simon noted U.S. agreement to develop closer
economic and financial relations with Spain by working with
the ^Spanish authorities at all levels. Minister Villar Mir
shared the hope that these contacts between the Spanish
Finance Ministry and the U.S. Treasury would become a regular
feature of the U.S.-Spanish relationship.
Secretary Simon and Minister Villar Mir agreed that the
implementation of these initiatives would lead to a substantial
strengthening of the close economic and financial relationships
between both nations.
To pursue such cooperation, Secretary Simon and Minister
Villar Mir established a joint working group under the
responsibility of the U.S. Assistant Secretary of the Treasury
for International Affairs and the Spanish Subsecretario de
Economia Financiera, which will meet every six months or
whenever it is needed. The group will operate within the
framework of the Agreement for Friendship and Cooperation upon
its ratification.
Juan Miguel Villar Mir
Vice President of the Spanish
Government for Economic Affairs
and Minister of Finance

William E. Simon
Secretary of the Treasury

FOR RELEASE AT 4:00 PM June 15, 197£
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
it Offered ($ Millions):
*
the public
ription of Security;

$2,500

>e of security *Notes

:urity date June 30, 1978
1 date No provision
TO • 2 years
erest coupon rate To be determined at auction based on the
average of accepted bids

estment yield To be determined at auction
mium or discount To be determined after auction
erest payment dates December 31 and June 30
imum denomination available. $5,000
of Sale:
hod of sale Yield auction
ment by subscriber of accrued
terest

None

ferred allotment Non-competitive bids for $500,000 or less

osit requirements -• 5% of face amount with tenders

rantee of deposit Acceptable

rtes:
Jline for receipt of tenders Monday , June 21, 1976 by 12:30 pm EDST

Element date (final payment due) Wednesday, June 30, 1976
Lvery date for definitive bearer
purities.. .,

Wednesday, June 30, "197 6

REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
GRAND VALLEY STATE COLLEGES
ALLENDALE, MICHIGAN
JUNE 17, 1976
Congressman Vander Jagt, President Lubbers, Bill Seidman,
Phil Buchen, Dr. Zumberge, ladies and gentlemen:
Thank you for your warm welcome. It is a great privilege
for me to share in your tribute tonight to three individuals
who have done so much to establish Grand Valley State Colleges.
And it is a very special pleasure when two of the honorees
are men with whom I have worked closely in recent years, and
have come to know well and respect: Bill Seidman and Phil
Buchen.
Bill, Phil and Jim Zumberge, at whose university I had
the pleasure of speaking just two months ago, each exemplify
the remarkable spirit of commitment to America's future that
is an inspiration to all of us.
Each, in his own way, has stretched his horizons to the
limit in serving our society. And, most importantly, each
has given unselfishly of his time, effort and dedication to
building a better community and a better America. Their
work in this community in establishing the unique educational
institution of Grand Valley State Colleges is well known to
all of you and is in our time-honored tradition of selfless
dedication to helping others.
Indeed, each had a unique role to play. Bill Seidman,
I understand, was the moving force behind the founding of
the college. He gathered the popular support necessary to
establish it and served as the first chairman of its Board
of Trustees. Phil Buchen was the college's first employee
and its first Vice-President. And Jim Zumberge, now President
of Southern Methodist University, was recruited to be the
school's first president.
WS-933

-2I was interested to learn that the six Grand Valley
State Colleges comprise an institution that is probably
unrivalled in the nation for the degree of its responsiveness
and flexibility to community educational needs. And despite
its relative youth, Grand Valley has grown and diversified
into one of the truly remarkable educational institutions of
our Nation. Much of the credit for this growth belongs to
all of you in this room, and I can only congratulate you and
marvel at your ability and determination to create and
maintain a flourishing and important center of learning as
a centerpiece of your community.
I also want to salute the establishment of the GVSC
Enrichment Fund, which I understand will finance programs to
promote greater awareness and improved understanding and
communication between the academic world and the business
world.
To say that a gap in understanding exists between these
two worlds today would be an understatement. This institution
is to be commended for its present efforts to bridge this
gap with a program that places hundreds of interns in the
fields of public service and business. Admirable though
this is, even more worthy, is the greater goal of your new
Enrichment Fund, because if we are ever fully to understand
both the theory and practice of our free enterprise system
we must improve communication among all segments of our
society.
Much of what is best about our society — its initiative,
its civic spirit and its common sense approach to problems —
is exemplified by the three men we honor here tonight. But
these values, which stem directly from our heritage of
personal and economic freedom, can only thrive and can only
endure if each new generation of Americans understands and
supports them.
It may seem strange, and it is certainly ironic, but at
a time when Americans are enjoying such great abundance and
such great opportunity, too many of us have lost sight of
the principles and institutions that have made our way of
life possible. Somewhere along the line, there has been a
dangerous breakdown in communication.
Too many Americans — especially those born into an
affluent society which seemed to have no beginning or end,
no cause and no effect — have lost sight of, or have never
been taught, the dynamics of prosperity in a free society.

-3Today, when nearly everyone takes the fruits of the
free enterprise system for granted — the abundance, the
opportunity, the freedom of choice, the unprecedented
opportunities for learning, travel, and general upward
mobility — not everyone understands the basic economic
facts of life that create all these benefits.
Small wonder then, that when economic difficulties like
the recession hit, millions of otherwise reasonable people
fall for the quack nostrums of politicians who are more
interested in promising than performing, and for quick fix
government spending programs that provide some short term
relief but only aggravate the long-term economic ills of
inflation and stagnation in the private sector.
I am pleased to find here at Grand Valley State Colleges
a dedication to certain proven and fundamental values, which
I think should apply not only to the world of business and
academia but to the political world as well.
These values include the openness and frankness of
intellectual dialogue and inquiry; the importance of an
objective, continuing democratic educational experience; and
a climate of intellectual inquisitiveness that fosters
creative criticism and creative change.
The opinion polls tell us the people want men and women
in Washington they can trust to make value judgments
for them — leaders who are honest and forthright, and have
the courage to talk sense to the American people. Certainly
opinion polls clearly indicate that the public appreciates
any public official who levels with them.
And I have always believed that reality, stark though
it may be, is better than illusion; and that the truth, even
though at times unpleasant, is better than sham and deceit.
Americans did not turn their backs on reality 200 years ago
and there is less reason to do so today.
Because of this, I believe that the time is ripe for an
economic heart-to-heart talk with the American people.
What is at stake is not just the future of this or that
industry. At stake is the survival of the private sector,
and the individual liberties which have never long survived
the collapse of a society's free enterprise system.

-4Unless we get the facts across today, the America of
tomorrow — of our children and grandchildren — will be
doomed to a system of economic and political bondage that is
the very opposite of all that we hold dear.
The problem already exists, as I have had ample opportunity to observe in my job as Secretary of the Treasury.
And it is getting worse, not better. It is a question of
both policy and perception for faulty perception of the
economy makes faulty economic policy almost inevitable.
And I am firmly convinced that, taken together, misunderstanding and misdirection of the American economy have
become the central, underlying problem of our times.
Part of it is a matter of image. Frequently, and
especially to youthful idealists, those who support bigger
government spending and more government domination of the
private sector are perceived as concerned, socially progressive
men and women who "care" — in a nutshell, they are seen as
the humane champions of the persecuted underdog.
On the other hand, those who warn that the government
should not — and cannot — effectively solve every new
problem that comes down the pike, and who advocate instead
the strengthening of the free enterprise system are seen as
either outdated theorists or a new generation of economic
exploiters, indifferent to human suffering and only out to
make a fast buck for themselves and their companies.
To make matters worse, surface appearances often tend
to confirm this inaccurate impression. Advocates of big
government are able to wax eloquent for hours about the ills
they imagine they can cure by cranking out more currency and
soaking up more credit through massive deficit spending.
They have as many arguments as there are social, economic
and political problems — even though the spending they
advocate, as we have seen with the New Frontier's war on
poverty, is often part of the problem rather than part of
the solution.
Those of us who recognize the fallacy of the big
government approach have only one argument. It's the right
one, but, by dint of repetition, people are getting tired of
hearing about it. For we constantly invoke the free enterprise
system, too often without defining the freedoms and the
opportunities that it, and it alone, provides. We chant a
slogan, a label, without defining it in comprehensible,
human terms.

-5We can talk about the free enterprise system until we
are blue in the face, but it still won't mean anything to
those who do not understand what it really is and what makes
it work. It's like trying to sensibly discuss the birds and
the bees with someone who is unshakable in his belief that
babies are delivered by the stork.
People who have never seen what happens in countries
with state-controlled economies simply have no standard for
comparison.
They have never witnessed the long lines of workers and
housewives who have to queue up for hours outside stateowned food and department stores in order to buy a poor
selection of over-priced food staples and state-manufactured
clothing and merchandise.
They don't realize what a miracle of variety, economy
and productive competition the average American shopping
center would represent to nine-tenths of the earth's people.
They have never asked themselves why a country like the
Soviet Union, with some of the largest, richest tracts of
grainland in the world, but with a government-owned and run
agricultural system, cannot even feed its people without
turning to American farmers who own their own land, make
their own decisions and feed not only our own people, but
millions of others as well.
Too often they have been taught to scoff at the very
profit and property motives which make our prosperity
possible.
They have never lived in countries where the seemingly
idealistic dream of a non-profit, propertyless society has
turned into a nightmare reality — where the state and the
state alone dictates what kind of education you will receive;
whether or not you will be allowed to travel; what kind of
job you can have; what you will be paid; what merchandise
you can buy with your earnings; where you will live; where
you will receive medical treatment; and, ultimately, where
you will be buried.
Just as importantly, they have not seen first-hand the
political and social aftermath in democratic societies where
the government has destroyed or eroded private enterprise —
the economic decay that follows, the demoralization of the
population and often even the massive emigration of skilled
workers and professionals indispensable to economic growth
and vitality.

-6The issues involved are by no means narrowly economic.
They concern fundamental principles of equity and social
stability. For, as we have seen throughout history, the
personal rights all Americans cherish — freedom of worship,
freedom of speech and freedom of association — have never
long endured once economic freedom has been destroyed. As
Alexander Hamilton warned so long ago, "power over a man's
substance amounts to power over his will."
History also tells us that without the individual
profit motive, people simply do not work as hard, produce as
much, or bother to come up with as many new improvements.
Whether we like it or not, it is an immutable law of human
nature.
Unfortunately, like clean air, economic freedom is
something most people don't really appreciate until it
begins to run out — and then it is often too late.
So we have reached the point where, although the free
enterprise system works, and works better than any other
economic system in effect anywhere in the world — and
although it feeds, clothes and houses more people more
affluently than any other while serving as the underpinning
of our free society — it is somehow losing the semantic war
to an alien philosophy of government control and economic
irresponsibility that has never worked but has somehow
managed to preserve an aura of altruism that attracts many
idealists.
What I am simply saying is that those of us who believe
in the free enterprise system have got to do a better job of
getting our story across to all Americans, and especially to
young Americans.
All of these misconceptions would be unimportant if
they were not so misleading — so blatantly phoney. My
experience in Washington has convinced me that almost every
man and woman in a position of high public trust cares
deeply about the well-being of our people, especially those
who are impoversihed or face disadvantages because of their
sex or the color of their skin.
The central question is not who cares the most, but
rather how we broaden prosperity and reduce human hardship
without sacrificing our freedom or destroying the most
successful economic system that man has ever known.
That is really what is at issue underneath the semantics
and the misleading labels.

-7Let's look at a few facts about government spending.
For most of our history, the Federal Budget stayed somewhere
below the $100 billion mark — usually way below it.
Then, in 1962, we finally hit $100 billion — and that
was only the beginning. Seven years later, the budget broke
the $200 billion barrier and then, only four years after
that, we hit the $300 billion mark. And now, in our bicentennial
year, we have reached the point where the Federal Government
is spending $1 billion a day, and going into debt another $1
billion every week.
Government spending at all levels was only 17 percent
of our GNP when I graduated from college. It now accounts
for approximately 40 percent of our gross national product,
and if recent trends continue, will reach 60 percent by the
end of the century.
Government spending has continued to grow in recent
decades because we suffer from a failure of success. The
superiority complex that was our legacy as a nation from
World War II led us to believe that any problem could be
solved by government, any flaw in our society could be
corrected by government and that government could attain any
goal.
In short, we have perpetuated the notion that somehow
government can identify, solve and pay to rectify every
problem that comes along.
At home, technological progress and economic buoyancy
fanned the spending fires, feeding the engines of social
reform with many costly and hastily conceived programs.
Basking in an era of heady confidence symbolized by spaceage achievenemts and rapidly rising standard of living, with
no hint of scarcity or resource limitations, we may have
forgotten a promise of our Declaration of Independence: the
pursuit of happiness, not happiness itself. We may have
misunderstood that a promise of our founding fathers was
that this nation should be built on a principle of equality
of opportunity, not a promise of equal gain for all.
The consequence is what Columbia sociologist Robert
Nisbet has called this generation's dissatisfaction with
equality of opportunity and its demand, instead for absolute
equality regardless of individual merit and initiative.
Looking back only over the past 15 years or so, it is
clear to any objective observer that despite their good
intentions, programs of the Great Society were doubly
flawed. First in their presumption that public generosity
could atone for personal inhumanities; and second, by

-8an unrealistic accounting of their costs and future escalations
of those costs and their consequences.
The tendency of Congress, as Stanford President Richard
Lyman has observed, has been "to legislate in haste and
repent at leisure."
One result is a growth in government spending that has
far exceeded the rate of expansion of our economy. For the
past 20 years, for example, annual Federal spending has
increased by 430 percent while our gross national product
has risen only 280 percent.
Another result has been a residue of cynicism and
disillusionment with government fed by society's overexpectations and government's under-performance.
In recent years, much of the growth in the Federal
budget has come from transfer programs — programs of benefits
designed to provide some degree of security and freedom from
want for our people.
While most of these programs are admirable in intention,
they have grown at a rate of over 13% per year during the
past twenty years. This is more than a tenfold increase in
two decades and such outlays now comprise over half of the
Federal budget. This rate of increase is simply not sustainable.
Even after allowing for inflation, such spending growth is
almost three times greater than the sustainable growth in
our economy and far exceeds any reasonable expansion of our
tax base. Both common sense and economic reality tell us
that we cannot continue the rate of rise in the cost of such
programs.
I have been amazed, during the time I have been in
Washington, by the growing reliance on the government for
solutions to what are essentially private industry problems.
And this being an election year, such pleas do not go
unheeded. We are hearing calls for still more government
spending — for new programs of high cost but uncertain
benefit. Congress already has recommended raising President
Ford's proposed FY 1977 $395 billion Federal spending level
to $413 billion. This would increase the fiscal year deficit
to more than $50 billion — a blueprint for more Federal
spending, bigger Federal programs, higher taxes, higher
inflation and deeper debt. In essence, Congress is telling
Americans: We would rather spend your tax cut than let you
spend it yourself."

-9But in talking about how much we can afford to spend
from the Federal treasury, let's look at where the money
comes from as well as where it goes. How much can we raise
through taxes? How much can we safely borrow?
The Federal tax on the average household now is $4,150,
double what it was in 1968 and four times the 1956 tax.
Interest payments on the national debt now run to $38
billion a year, or one-tenth of all budgeted expenditures.
And in FY 1977, it will be $45 billion and will represent
the third largest expense in the Federal budget. There is
a point beyond which people cannot, or, in a political
democracy, will not be taxed. After all, the government
does not create wealth. It is the private sector which
ultimately is the source of economic well-being for all of
our people, and it is by healthy, sustained growth in the
private sector that resources will become available to meet
our social and economic needs.
We certainly are getting no nearer to the solutions of
these problems by increasing, rather than beginning to slow
down, the string of Federal Budget deficits that are unparalleled
in our history. In 16 of the last 17 years, the budget has
been in the red. And now, just when a balanced, healthy
economic recovery has begun, the advocates of big spending
would have us launch another round of reckless spending and
runaway inflation.
The performance of our economy over the past year tells
us in no uncertain terms that present policies are
working. The unemployment rate, at a height of almost 9
percent last March, has been dropping steadily and now
stands at 7.3 percent. More importantly, 87.7 million
Americans are now working, more than ever before in our
history. And the rate of inflation which had climbed to
13.5 percent as 197 5 opened has been sharply reduced to an
underlying rate of approximately 5 to 6 percent. Leading
economic indicators testify to a continued strong business
recovery and a new prosperity.
So we have made considerable headway in the past 14
months and we will make even more in 1976 and 1977 if
consumers and businessmen remain confident that the government
will not apply excessive economic stimulus to gain political
advantages. But we still face serious long-term problems
and we cannot afford to be complacent. Unemployment is
still intolerably high, and inflation is by no means under
control.

-10Our desire for progress, in the form of improved
living standards and employment opportunities, will surely
be frustrated unless we better control the insidious inflation
which has destroyed economic stability by triggering a
costly series of booms and recessions. The tragic policy
errors of the past and our hopes for the future must force
us to recognize a basic reality: Inflation is the single
greatest threat to the sustained progress of our economy and
the ultimate survival of all of our basic institutions.
There is a clear record from the past: When inflation
distorts the economic system and destroys incentives for
real improvement the people no longer support that system
and society disintegrates. History is littered with the
wreckage of societies that have failed to deal with this
problem. I am convinced that even our uniquely creative and
productive society will collapse if we permit inflation to
dominate economic affairs. There is no tradeoff between the
goals of price stability and low unemployment as some critics
have erroneously claimed. To the contrary, the achievement
of both goals is interdependent. If we are to increase the
output of goods and services and reduce unemployment, we
must first make further progress in reducing inflation.
Because I feel so strongly about inflation some critics
have labeled me as obsessed. I readily accept that label if
it helps to communicate my deep concern although I am not so
much obsessed as I am downright antagonistic to the apologists
for big spending who really want bigger government even
though bigger deficits would result from their fuzzy political
thinking. We must always remember that it is inflation that
causes the recessions that so cruelly waste our human and
material resources and the tragic unemployment that leaves
serious economic and psychological scars long after economic
recovery occurs. It is inflation which destroys the purchasing
power of our people. It is inflation that drives up the
cost of food, housing, clothing, transportation, medical
attention, education, recreation and cultural opportunities.
Inflation is not now, nor has it ever been, the grease that
enables the economic machine to progress. Instead, it is
the monkey wrench which disrupts the efficient functioning
of the system. Inflation should be identified for what it
is: The most vicious hoax ever perpetrated for the expedient
purposes of a few at the cost of many. There should be no
uncertainty about its devastating impact. Low-income families,
the elderly dependent upon accumulated financial resources
and the majority of working people who do not have the
political
or
economic
leverage
to
beat this
the
system
by
keeping
emphasized
the
their
hardest
people
incomes
by
suffer
hit
rising
every
ofand
all.
responsible
even
it When
is
more
time
inflation
rapidly
citizen
that
than
and
takes
basic
the
inflation
over
full
point
anbrunt
are
economy
is

-11is brought to bear on their elected officials. But let me
assure you that regardless of the rhetoric emanating
from Washington, D.C., the spend-spend, elect-elect syndrome
is alive and well, and it will continue to be until our
elected officials recognize that repeated votes for deficit
spending will mean early retirement from elective office.
The great 19th century historian Thomas Carlyle once
called political economics the "dismal science." On the
surface, it seems nothing more than a pile of charts and a
jumble of numbers so large as to be incomprehensible in
everyday terms. To put it mildly, economics seldom makes
"sexy" news stories. And yet the economy is the one thing
that affects every other aspect of American life — the food
we eat, the quality of our education, our mobility, our
freedom of choice in careers, services and merchandise, and
our material and personal sense of pride and independence.
The smallest shock to the economy is felt in every limb
of the body politic. And that is a big story, if only a
graphic, gripping way of telling it could be found.
I wish that there were some way for television cameras
to portray this story as vividly as they did the war in
Vietnam or the race riots of earlier years. For, while the
visual images are less dramatic, the problem is every bit as
pressing and important.
I am convinced that all of us in government and in the
academic and business world must do a better job in getting
this message across to the American people.
We must erase the economic illiteracy that could
destroy the spirit of self-reliance that has supported the
creative and productive energies of our people. Someone
must tell the taxpayer the truth. There is no free lunch in
Washington. As one humorist has put it — and, yes, one can
still find a sense of humor in the Capital — "A billion
here, a billion there, and pretty soon it adds up to real
money." And the bill has to be paid, by us or by future
generations.
The truth is that the American economy is the most
successful the world has ever known not because of undisciplined
self indulgence but precisely because it is an essentially
humane creation of the people, by the people, and for the
people.

-12No other country — no other system — has achieved so
much for its people. Yet these tremendous achievements are
the product of the same free enterprise system that now
incredibly finds itself under attack.
Despite the growing influence of government over our
lives, the private sector produces the food we eat, the
goods we use, the clothes we wear, the homes we live in.
It is the source of five out of every six jobs in
America, and it provides directly and indirectly, almost all
the resources for the rest of the jobs in our all-toorapidly expanding public sector.
It is the foundation for defense security for ourselves
and most of the Free World.
It is the productive base that pays for government
spending to aid the elderly, the jobless, the poor, the
dependent and the disabled. Indeed, far from being the
anti-human caricature painted by political demagogues, the
American private sector is in reality the mightiest engine
for social progress and individual improvement ever created.
This, ladies and gentlemen, is the crucial theme that
must be communicated broadly and deeply into the national
consciousness: The American production and distribution
system is the very wellspring of our nation's strength —
the source of present abundance and the foundation of our
hopes for a better future. America can solve its pressing
problems if it preserves and continues to improve this
immensely productive system. And in this process, we'll
also be preserving the freedoms that made it all possible.
Let us
makeyou.
that our common resolve.
Thank

? Department of theJREASURY
HINGTON, D.C. 20220

TELEPHONE 964-2041

REMARKS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE COMMONWEALTH CLUB OF CALIFORNIA
SAN FRANCISCO, CALIFORNIA
JUNE 18, 1976
Thank you, Mr. Brooks Walker, Jr., President John B.
Bates, Mr. A. Frank Bray, Distinguished members of the Head
Table, Ladies and Gentlemen...
For an Easterner like me, it's always a pleasure to
come to San Francisco. But it is a very special privilege
and honor to meet again this year with the Commonwealth Club
of California, a group that is so knowledgeble and so vitally
concerned with the great issues of our day.
I only wish more Americans shared your concern with the
future of our democratic society and the great and productive
engine for progress that is at its heart — our free enterprise
system.
Unfortunately many of our fellow citizens do not.
Ironically, in this Bicentennial year, the one subject that
is generally most misunderstood by an overwhelming number of
Americans is the dynamics of the free economy which contributed
so much to our nation's growth and greatness. In fact, this
information gap — this economic illiteracy — o f many
Americans is one of the problems I would like to discuss
with you today.
Much of what is best in our society — its initiative,
civic spirit, individuality and common sense approach to
problems is exemplified by the men and women in this room.
But these qualities, which are firmly rooted in our nation's
heritage of personal and economic freedom, can only thrive
and endure if all Americans and their succeeding generations
understand and support them.
Justice Holmes once said, "The great thing in this
world is not so much where we stand, as in what direction we
are moving." So before I take your questions, I'd like to
take a few minutes to look at where we stand, where we

WS-934

-2are moving and how we can move in new directions to preserve
the values of freedom and human dignity that has made the
American experiment the hope of the world.
Of course we stand today for what we have stood for
throughout our history — for individual freedom and individual
rights, for personal and economic liberty.
And yet, if we are to preserve these principles — if
we are to allow them to grow and flourish, under stresses
and challenges, we must work together to create a climate of
understanding in which this will happen.
It may seem strange, and it is certainly ironic, but at
a time when Americans are enjoying such great abundance and
such great opportunity, too many of us have lost sight of
the principles and institutions that have made our way of
life possible. Somewhere along the line, there has been a
dangerous breakdown in communication.
Too many Americans — especially those born into an
affluent society which seemed to have no beginning or end,
no cause and no effect — have lost sight of, or have never
been taught, the dynamics of prosperity in a free society.
Today, when nearly everyone takes the fruits of the
free enterprise system for granted — the abundance, the
opportunity, the freedom of choice, the unprecedented
opportunities for learning, travel, and general upward
mobility — not everyone understands the basic economic
facts of life that create all these benefits.
Small wonder then, that when economic difficulties like
the recession hit, millions of otherwise reasonable people
fall for the quack nostrums of politicians who are more
interested in promising than performing, and for quick fix
government spending programs that provide some short term
relief but only aggravate the long-term economic ills of
inflation and stagnation in the private sector.
I am pleased that the Commonwealth Club of California
is dedicated to certain proven and fundamental values, which
I think should apply to all segments of our society.
These values include the openness and frankness of
intellectual dialogue and inquiry; the importance of an
objective, continuing democratic educational experience; and
a climate of intellectual inquisitiveness that fosters
creative criticism and creative change.
The opinion polls tell us the people want men and women
in Washington they can trust to make value judgments

-3for them — leaders who are honest and forthright, and have
the courage to talk sense to the American people. Certainly
opinion polls clearly indicate that the public appreciates
any public official who levels with them.
And I have always believed that reality, stark though
it may be, is better than illusion; and that the truth, even
though at times unpleasant, is better than sham and deceit.
Americans did not turn their backs on reality 200 years ago
and there is less reason to do so today.
Because of this, I believe that the time is ripe for an
economic heart-to-heart talk with the American people.
What is at stake is not just the future of this or that
industry. At stake is the survival of the private sector,
and the individual liberties which have never long survived
the collapse of a society's free enterprise system.
Unless we get the facts across today, the America of
tomorrow — of our children and grandchildren — will be
doomed to a system of economic and political bondage that is
the very opposite of all that we hold dear.
The problem already exists, as I have had ample opportunity to observe in my job as Secretary of the Treasury.
And it is getting worse, not better. It is a question of
both policy arid perception for faulty perception of the
economy makes faulty economic policy almost inevitable.
And I am firmly convinced that, taken together, misunderstanding and misdirection of the American economy have
become the central, underlying problem of our times.
Part of it is a matter of image. Frequently, and
especially to youthful idealists, those who support bigger
government spending and more government domination of the
private sector are perceived as concerned, socially progressive
men and women who "care" — in a nutshell, they are seen as
the humane champions of the persecuted underdog.
On the other hand, those who warn that the government
should not — and cannot — effectively solve every new
problem that comes down the pike, and who advocate instead
the strengthening of the free enterprise system are seen as
either outdated theorists or a new generation of economic
exploiters, indifferent to human suffering and only out to
make a fast buck for themselves and their companies.

-4To make matters worse, surface appearances often tend
to confirm this inaccurate impression. Advocates of big
government are able to wax eloquent for hours about the ills
they imagine they can cure by cranking out more currency and
soaking up more credit through massive deficit spending.
They have as many arguments as there are social, economic
and political problems — even though the spending they
advocate, as we have seen with the New Frontier's war on
poverty, is often part of the problem rather than part of
the solution.
Those of us who recognize the fallacy of the big
government approach have only one argument. It's the right
one, but, by dint of repetition, people are getting tired of
hearing about it. For we constantly invoke the free enterprise
system, too often without defining the freedoms and the
opportunities that it, and it alone, provides. We chant a
slogan, a label, without defining it in comprehensible,
human terms.
We can talk about the free enterprise system until we
are blue in the face, but it still won't mean anything to
those who do not understand what it really is and what makes
it work. It's like trying to sensibly discuss the birds and
the bees with someone who is unshakable in his belief that
babies are delivered by the stork.
People who have never seen what happens in countries
with state-controlled economies simply have no standard for
comparison.
They have never witnessed the long lines of workers and
housewives who have to queue up for hours outside stateowned food and department stores in order to buy a poor
selection of over-priced food staples and state-manufactured
clothing and merchandise.
They don't realize what a miracle of variety, economy
and productive competition the average American shopping
center would represent to nine-tenths of the earth's people.
They have never asked themselves why a country like the
Soviet Union, with some of the largest, richest tracts of
grainland in the world, but with a government-owned and run
agricultural system, cannot even feed its people without
turning to American farmers who own their own land, make
their own decisions and feed not only our own people, but
millions of others as well.
Too often they have been taught to scoff at the very
profit and property motives which make our prosperity
possible.

-5They have never lived in countries where the seemingly
idealistic dream of a non-profit, propertyless society has
turned into a nightmare reality — where the state and the
state alone dictates what kind of education you will receive;
whether or not you will be allowed to travel; what kind of
job you can have; what you will be paid; what merchandise
you can buy with your earnings; where you will live; where
you will receive medical treatment; and, ultimately, where
you will be buried.
Just as importantly, they have not seen first-hand the
political and social aftermath in democratic societies where
the government has destroyed or eroded private enterprise —
the economic decay that follows, the demoralization of the
population and often even the massive emigration of skilled
workers and professionals indispensable to economic growth
and vitality.
The issues involved are by no means narrowly economic.
They concern fundamental principles of equity and social
stability. For, as we have seen throughout history, the
personal rights all Americans cherish — freedom of worship,
freedom of speech and freedom of association — have never
long endured once economic freedom has been destroyed. As
Alexander Hamilton warned so long ago, "power over a man's
substance amounts to power over his will."
History also tells us that without the individual
profit motive, people simply do not work as hard, produce as
much, or bother to come up with as many new improvements.
Whether we like it or not, it is an immutable law of human
nature.
Unfortunately, like clean air, economic freedom is
something most people don't really appreciate until it
begins to run out — and then it is often too late.
So we have reached the point where, although the free
enterprise system works, and works better than any other
economic system in effect anywhere in the world — and
although it feeds, clothes and houses more people more
affluently than any other while serving as the underpinning
of our free society — it is somehow losing the semantic war
to an alien philosophy of government control and economic
irresponsibility that has never worked but has somehow
managed to preserve an aura of altruism that attracts many
idealists.
What I am simply saying is that those of us who believe
in the free enterprise system have got to do a better job of
getting our story across to all Americans.

-6All of these misconceptions would be unimportant if
they were not so misleading — so blatantly phoney. My
experience in Washington has convinced me that almost every
man and woman in a position of high public trust cares
deeply about the well-being of our people, especially those
who are impoversihed or face disadvantages because of their
sex or the color of their skin.
The central question is not who cares the most, but
rather how we broaden prosperity and reduce human hardship
without sacrificing our freedom or destroying the most
successful economic system that man has ever known.
That is really what is at issue underneath the semantics
and the misleading labels.
Let's look at a few facts about government spending.
For most of our history, the Federal Budget stayed somewhere
below the $100 billion mark — usually way below it.
Then, in 1962, we finally hit $100 billion — and that
was only the beginning. Seven years later, the budget broke
the $200 billion barrier and then, only four years after
that, we hit the $300 billion mark. And now, in our bicentennial
year, we have reached the point where the Federal Government
is spending $1 billion a day, and going into debt another $1
billion every week.
Government spending at all levels was only 17 percent
of our GNP when I graduated from college. It now accounts
for approximately 40 percent of our gross national product,
and if recent trends continue, will reach 60 percent by the
end of the century.
Government spending has continued to grow in recent
decades because we suffer from a failure of success. The
superiority complex that was our legacy as a nation from
World War II led us to believe that any problem could be
solved by government, any flaw in our society could be
corrected by government and that government could attain any
goal.
In short, we have perpetuated the notion that somehow
government can identify, solve and pay to rectify every
problem that comes along.
At home, technological progress and economic buoyancy
fanned the spending fires, feeding the engines of social

-7reform with many costly and hastily conceived programs.
Basking in an era of heady confidence symbolized by spaceage achievenemts and rapidly rising standard of living, with
no hint of scarcity or resource limitations, we may have
forgotten a promise of our Declaration of Independence: the
pursuit of happiness, not happiness itself. We may have
misunderstood that a promise of our founding fathers was
that this nation should be built on a principle of equality
of opportunity, not a promise of equal gain for all.
The consequence is what Columbia sociologist Robert
Nisbet has called this generation's dissatisfaction with
equality of opportunity and its demand, instead for absolute
equality regardless of individual merit and initiative.
Looking back only over the past 15 years or so, it is
clear to any objective observer that despite their good
intentions, programs of the Great Society Were doubly
flawed. First in their presumption that public generosity
could atone for personal inhumanities; and second, by
an unrealistic accounting of their costs and future escalations
of those costs and their consequences.
The tendency of Congress, as Stanford President Richard
Lyman has observed, has been "to legislate in haste and
repent at leisure."
One result is a growth in government spending that has
far exceeded the rate of expansion of our economy. For the
past 20 years, for example, annual Federal spending has
increased by 430 percent while our gross national product
has risen only 280 percent.
Another result has been a residue of cynicism and
disillusionment with government fed by society's overexpectations and government's under-performance.
In recent years, much of the growth in the Federal
budget has come from transfer programs — programs of benefits
designed to provide some degree of security and freedom from
want for our people.
While most of these programs are admirable in intention,
they have grown at a rate of over 13% per year during the
past twenty years. This is more than a tenfold increase in
two decades and such outlays now comprise over half of the
Federal budget. This rate of increase is simply not sustainable,
Even after allowing for inflation, such spending growth is
almost three times greater than the sustainable growth in

-8our economy and far exceeds any reasonable expansion of our
tax base. Both common sense and economic reality tell us
that we cannot continue the rate of rise in the cost of such
programs.
I have been amazed, during the time I have been in
Washington, by the growing reliance on the government for
solutions to what are essentially private industry problems.
And this being an election year, such pleas do not go
unheeded. We are hearing calls for still more government
spending —. for new programs of high cost but uncertain
benefit. Congress already has recommended raising President
Ford's proposed FY 1977 $395 billion Federal spending level
to $413 billion. This would increase the fiscal year deficit
to more than $50 billion — a blueprint for more Federal
spending, bigger Federal programs, higher taxes, higher
inflation and deeper debt. In essence, Congress is telling
Americans: We would rather spend your tax cut than let you
spend it yourself."
But in talking about how much we can afford to spend
from the Federal treasury, let's look at where the money
comes from as well as where it goes. How much can we raise
through taxes? How much can we safely borrow?
The Federal tax on the average household now is $4,150,
double what it was in 1968 and four times the 1956 tax.
Interest payments on the national debt now run to $38
billion a year, or one-tenth of all budgeted expenditures.
And in FY 1977, it will be $45 billion and will represent
the third largest expense in the Federal budget. There is
a point beyond which people cannot, or, in a political
democracy, will not be taxed. After all, the government
does not create wealth. It is the private sector which
ultimately is the source of economic well-being for all of
our people, and it is by healthy, sustained growth in the
private sector that resources will become available to meet
our social and economic needs.
We certainly are getting no nearer to the solutions of
these problems by increasing, rather than beginning to slow
down, the string of Federal Budget deficits that are unparalleled
in our history. in 16 of the last 17 years, the budget has
been in the red. And now, just when a balanced, healthy
economic recovery has begun, the advocates of big spending
would have us launch another round of reckless spending and
runaway inflation.

-9The performance of our economy over the past year tells
us in no uncertain terms that present policies are
working. The unemployment rate, at a height of almost 9
percent last March, has been dropping steadily and now
stands at 7.3 percent. More importantly, 87.7 million
Americans are now working, more than ever before in our
history. And the rate of inflation which had climbed to
13.5 percent as 1975 opened has been sharply reduced to an
underlying rate of approximately 5 to 6 percent. Leading
economic indicators testify to a continued strong business
recovery and a new prosperity.
So we have made considerable headway in the past 14
months and we will make even more in 1976 and 1977 if
consumers and businessmen remain confident that the government
will not apply excessive economic stimulus to gain political
advantages. But we still face serious long-term problems
and we cannot afford to be complacent. Unemployment is
still intolerably high, and inflation is by no means under
control.
Our desire for progress, in the form of improved
living standards and employment opportunities, will surely
be frustrated unless we better control the insidious inflation
which has destroyed economic stability by triggering a
costly series of booms and recessions. The tragic policy
errors of the past and our hopes for the future must force
us to recognize a basic reality: Inflation is the single
greatest threat to the sustained progress of our economy and
the ultimate survival of all of our basic institutions.
There is a clear record from the past: When inflation
distorts the economic system and destroys incentives for
real improvement the people no longer support that system
and society disintegrates. History is littered with the
wreckage of societies that have failed to deal with this
problem. I am convinced that even our uniquely creative and
productive society will collapse if we permit inflation to
dominate economic affairs. There is no tradeoff between the
goals of price stability and low unemployment as some critics
have erroneously claimed. To the contrary, the achievement
of both goals is interdependent. If we are to increase the
output of goods and services and reduce unemployment, we
must first make further progress in reducing inflation.
Because I feel so strongly about inflation some critics
have labeled me as obsessed. I readily accept that label if
it helps to communicate my deep concern although I am not so
much obsessed as I am downright antagonistic to the apologists
tor big spending who really want bigger government even

-10though bigger deficits would result from their fuzzy political
thinking. We must always remember that it is inflation that
causes the recessions that so cruelly waste our human and
material resources and the tragic unemployment that leaves
serious economic and psychological scars long after economic
recovery occurs. It is inflation which destroys the purchasing
power of our people. It is inflation that drives up the
cost of food, housing, clothing, transportation, medical
attention, education, recreation and cultural opportunities.
Inflation is not now, nor has it ever been, the grease that
enables the economic machine to progress. Instead, it is
the monkey wrench which disrupts the efficient functioning
of the system. Inflation should be identified for what it
is: The most vicious hoax ever perpetrated for the expedient
purposes of a few at the cost of many. There should be no
uncertainty about its devastating impact. Low-income families,
the elderly dependent upon accumulated financial resources
and the majority of working people who do not have the
political or economic leverage to beat the system by keeping
their incomes rising even more rapidly than inflation are
the hardest hit of all. When inflation takes over an economy
the people suffer and it is time that this basic point is
emphasized by every responsible citizen and the full brunt
is brought to bear on their elected officials. But let me
assure you that regardless of the rhetoric emanating
from Washington, D.C., the spend-spend, elect-elect syndrome
is alive and well, and it will continue to be until our
elected officials recognize that repeated votes for deficit
spending will mean early retirement from elective office.
The great 19th century historian Thomas Carlyle once
called political economics the "dismal science." On the
surface, it seems nothing more than a pile of charts and a
jumble of numbers so large as to be incomprehensible in
everyday terms. To put it mildly, economics seldom makes
"sexy" news stories. And yet the economy is the one thing
that affects every other aspect of American life — the food
we eat, the quality of our education, our mobility, our
freedom of choice in careers, services and merchandise, and
our material and personal sense of pride and independence.
The smallest shock to the economy is felt in every limb
of the body politic. And that is a big story, if only a
graphic, gripping way of telling it could be found.
I wish that there were some way for television cameras
to portray this story as vividly as they did the war in
Vietnam
or
theimportant.
raceless
riots
of earlier
while
the
visual
pressingimages
and
are
dramatic,
the years.
problem For,
is every
bit
as

-11I am convinced that all of us in government, leaders
in the academic and business world, and indeed, leaders in
all segments of our society must do a better job in getting
this message across to the American people.
We must erase the economic illiteracy that could
destroy the spirit of self-reliance that has supported the
creative and productive energies of our people. Someone
must tell the taxpayer the truth. There is no free lunch in
Washington. As one Washington wag has put it — and, yes,
one can still find a sense of humor in the Capital — "A
billion here, a billion there, and pretty soon it adds up to
real money." And the bill has to be paid, by us or by
future generations.
The truth is that the American economy is the most
successful the world has ever known not because of undisciplined
self indulgence but precisely because it is an essentially
humane creation of the people, by the people, and for the
people.
No other country — no other system — has achieved so
much for its people. Yet these tremendous achievements are
the product of the same free enterprise system that now
incredibly finds itself under attack.
Despite the growing influence of government over our
lives, the private sector produces the food we eat, the
goods we use, the clothes we wear, the homes we live in.
It is the source of five out of every six jobs in
America, and it provides directly and indirectly, almost all
the resources for the rest of the jobs in our all-toorapidly expanding public sector.
It is the foundation for defense security for ourselves
and most of the Free World.
It is the productive base that pays for government
spending to aid the elderly, the jobless, the poor, the
dependent and the disabled. Indeed, far from being the
anti-human caricature painted by political demagogues, the
American private sector is in reality the mightiest engine
for social progress and individual improvement ever created.
This, ladies and gentlemen, is the crucial theme that
must be communicated broadly and deeply into the national
consciousness: The American production and distribution

-12system is the very wellspring of our nation's strength —
the source of present abundance and the foundation of our
hopes for a better future. America can solve its pressing
problems if it preserves and continues to improve this
immensely productive system. And in this process, we'll
also be preserving the freedoms that made it all possible.
Let us make that our common resolve.
Thank you.

Contact: L.F. Potts
Extension 2951
June 17, 1976

FOR IMMEDIATE RELEASE

WITHHOLDING OF APPRAISEMENT ON
MELAMINE IN CRYSTAL FORM FROM JAPAN
The Treasury Department announced today a six-month
withholding of appraisement on the subject merchandise from
Japan, pending determination as to whether the subject
merchandise is being sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended. All or
virtually all exports of the subject merchandise from Japan
during the investigatory period were manufactured by Nissan
Chemical Industries, Ltd., of Tokyo, Japan. The investigation was therefore limited to this manufacturer.
This decision will appear in the Federal Register of
June 18, 1976.
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 decision in this case will be made on or before
September 18, 1976. Appraisement will be withheld for a
period not to exceed six months from the date of publication
of the "Withholding of Appraisement 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 U.S. International Trade 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.
Imports of the subject merchandise from Japan during
calendar year 1975 were valued at roughly $1.4 million.
*

WS-935

*

*

a treasury department staff study:

implications
of divestiture

(summary version]

June

1976

a treasury department staff study:

implications
of divestiture

(summary version]

June

1976

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220
SSISTANT SECRETARY

PREFACE

Divestiture, or separation of the petroleum
industry into its functionally segmented components,
has become a national and international issue.
Several divestiture bills are before the Congress.
Although these bills vary in scope, timing and
degree of separation, all seek to separate the
energy industry either vertically or horizontally
into independent operating units. All have the
stated purpose of increasing competition through
elimination of alleged anti-competitive practices.
The Treasury Department established a Staff
Task Force on Energy Industry Divestiture, headed
by Douglas L. McCullough, to evaluate the effects
of various divestiture proposals. The study
emphasizes the financial and economic effects, and
also analyzes the impact of divestiture on the
domestic and international petroleum industry and
our national energy objectives.
Any decision on divestiture should be based on
adequate data and analysis. In publishing the results
of this study, the Treasury Department hopes to focus
attention on some of the basic issues and provide
necessary information so that an objective decision
on divestiture can be reached.
Attached are an executive summary, introduction,
and summaries of each chapter of the complete study.
^Gerald L. Parsky
Assistant Secretary
June 1976

ff
*

SUMMARY VERSION
IMPLICATIONS
OF
DIVESTITURE

TABLE OF CONTENTS

PAGE

Executive Summary 1
Introduction 7
Expanded Summaries 14
The Structure of the Domestic Energy Industry 14
The Structure of the International Petroleum
Industry

19

Financial and Legal Issues of the Transition
Period

22

Long-Term Financial Effects 31
An Initial Assessment of Some Domestic Price
and Supply Effects of Legislated Divestiture 34
Effects on the General Economy 37
Effects on International Oil Markets 39
Effects on U.S. Energy Objectives 42

EXECUTIVE SUMMARY
Because the petroleum industry is unique in many respects,
its operation cannot be easily compared with other groups of
industries. Although the study does not definitively answer all
the difficult questions raised by the complex divestiture issue,
the analysis does provide the basis for making a number of judgments with reasonable confidence about some of the important
conditions and trends which would likely follow passage of
divestiture legislation.
The study concludes that divestiture would be contrary to
U.S. national interests and would handicap the achievement of
our national energy goals. It is likely that divestiture would
create upward pressure on domestic prices and cause domestic
enery investment to decrease and, hence, could endanger our
efforts to increase domestic energy supplies. In addition, the
study concludes that divestiture would increase our reliance on
imported oil, and increase the influence of OPEC over the international energy market. Finally, the disruption of the
domestic petroleum industry caused by divestiture could have
unfavorable transitional and long-term effects on the general
economy.
The following is a summary of the major topics considered
and major conclusions reached by the Task Force:
The Structure of the Domestic Energy Industry
The structures of the petroleum and non-petroleum segments
of the domestic energy industry are described. The nonpetroleum segment covers only the domestic coal and nuclear
fuel industries.
The present and historical structure of each of the four
major divisions of the domestic petroleum industry (i.e., exploration and production, manufacture-refining, transportation,
and marketing) is described in terms of the segment's role, number of participating firms, concentration levels, and possible
barriers to entry.
During the last 15 years, a number of U.S. petroleum companies have acquired reserves of coal and uranium within the
non-oil domestic energy industry. Several have also acquired or
formed domestic coal and uranium producing operations. Both
present and historical concentration levels are described.
Possible barriers to entry within the domestic coal and uranium
industries are discussed along with the historical and potential
participation of domestic petroleum companies within the domestic non-oil energy industry.
1

The Structure of the International Petroleum Industry
The structure of the petroleum industry outside the United
States is described. The inquiry is centered on the conduct and
role of the U.S. international oil companies in production,
marketing, refining and ocean transportation of crude.
The analysis illustrates that the past dominance of the
industry by the seven international majors and other United
States' integrated companies did not lead to reduced supplies
and higher prices, but rather was accompanied by an expansion
of crude supplies and stable prices. The take-over by OPEC
of the control, or access to crude, resulted in constricted
supplies, higher prices and discriminatory pricing policies.
No significant barriers of entry were found in the refining
industry. Competition in the world refinery industry is chiefly
in the form of utilization of large scale cost-saving technologies. Other than the cost of crude inputs, economics of scale,
which are inherent in the operations of extra large export
refineries, are the major determinant of the cost of U.S. imports
of fuel oils. As of now, U.S. firms have more than 50 percent
interest of the world's extra large export refining capacity.
However, OPEC is attempting to acquire a decisive share in this
refining capacity. If successful, this would give OPEC significant control of refined fuel prices.
Ocean transshipment of crude has been characterized by a free
market for shipping capacity. The present surplus of tankers aids
the OPEC plans to establish its own substantial fleet in very
large crude carriers. The economic competitiveness of the major
international companies' extra large export refineries is
predicated on their control of sufficient capacity in very large
crude carriers. The OPEC plans may represent an additional
threat in this respect.
During the last 25 years, the U.S. international oil companies
showed consistently a greater rate of return on investment outside the United States. Higher returns abroad represent a
powerful attraction for the U.S. risk capital.
No U.S. international oil company holds a dominant
position in foreign industries unrelated to oil or gas activities.
Financial and Legal Issues of the Transition Period
Capital requirements for the U.S. domestic petroleum industry
will approach $250 billion for the 1976-1985 period. The
industry's requirement for new external financing relative to
internal financing is expected to rise above historical levels
of about 28 percent of worldwide capital investment and working
capital. Consequently, the ability of petroleum companies to

2

raise additional external capital and to devote sufficient
internal capital to investment is of critical concern and could
be jeopardized by uncertainties resulting from divestiture.
0

Approximately 40 to 60 percent of the assets of the integrated
companies affected by vertical divestiture would have to be
disposed of through sale or corporate spin-off. Typically less
than 10 percent of total assets would have to be disposed of
under horizontal divestiture.

0

A number of administrative and legal problems which could
seriously complicate the implementation of divestiture can be
foreseen, such as:

—Challenges to the constitutionality of divestiture legislation and specific divestiture plans, which might delay, for
a number of years, the completion of such plans and
the final ascertainment of the corporate entities which
would emerge after divestiture.
—Attempted enforcement of acceleration rights by existing
creditors under loan indentures restricting the sale or
disposition of assets or use of those rights as leverage to
force renegotiation of such contracts on stricter terms and
conditions,,
—The treatment given foreign assets of U.S. companies and the
exercise of rights by foreign security holders in their own
courts and under their own laws, which could complicate the
transition period and work to the detriment of U.S. corporations, security holders, and other interests.
0

A transition period of 10 or more years could be required
before the legal and administrative difficulties of implementing divestiture may be fully resolved and the new corporate
entities established. The magnitude and complexity of the
envisaged divestiture scheme, especially as compared with
previous divestitures, virtually assure that the implementation difficulties and uncertainties will be magnified in this
instance.
Significant financial impacts are likely to occur during the
early stages of the transition period due to the uncertainties
associated with implementing divestiture.
—The cost of capital would rise for most companies.
--The capability of the affected firms to raise unsecured
external financing is likely to be impaired, although
certain amounts of secured financing may be available.

3

—External financing may well be more adversely affected by
vertical divestiture than by horizontal divestiture.
—Constraints on the incentive for and ability of companies to
make capital investments during the transition period will
develop.
—A potential adverse effect on the Federal Government could be
manifested by a loss of tax revenues, awards for claims of
damages, and pressure for Federal financial assistance to
and/or direct investments in the petroleum industry.
Long-Term Financial Effects
° Certain economies of scale in financing would be lost under
divestiture:
—The present integrated companies are likely to have a greater
capacity to raise external debt capital than the aggregate
debt capacity of the divested component companies.
—The cost of debt capital to affected firms would likely rise.
—Due to an increase in their cost of capital and lower
capacity to raise external debt financing, the affected
firms' long-run level of capital investment would likely be
reduced.
° The required levels of working capital will probably rise in
the case of vertical divestiture.
° In the case of horizontal divestiture, the divested non-oil
firms would lack the credit backing of their former parent
firms which could adversely affect their debt capacity, the
cost of external finance, and their level of capital investment.
° The size thresholds which would force divestiture by integrated firms not originally affected by vertical divestiture
legislation would tend to retard growth incentives of those
firms.
° Although a number of years may be required, it is likely that
a substantial portion of the capital investment shortfall
during the transition period for vertical or horizontal divestiture would eventually be made up.
An Initial Assessment of Some Domestic Price and Supply Effects
of Legislated Divestiture
~
~
o

The U.S., as a part of the world crude oil market, is a
price taker and is likely to remain so for some time.
Consequently, divestiture per se is unlikely to reduce prices
4

0

0

0

A reduction in domestic petroleum supplies and industry
operating efficiencies, and consequent pressures leading to
higher prices (and/or increased imports),are likely
outcomes of divestiture.
Whatever market power existed in the production, pipeline,
and refining segments prior to vertical divestiture would
likely persist afterward. In particular, market power
associated with pipelines would remain, and access to
pipeline transportation services would continue to be determined by the quantity and quality of regulation.
Effects of horizontal divestiture would be similar to
those of vertical divestiture, at least in the short-tointermediate run. Research and development on substitutes
would more likely be retarded than enhanced. Similarly,
growth of substitute supplies may be retarded by the exclusion of particularly effective new entrants.

Effects on International Oil Markets
Divested U.S. international firms could progressively lose
their ability to bargain with OPEC; and this result, together
with reduced development of domestic U.S. energy supplies,
would likely lead to an increase in OPEC's cartel power.
0
Divested U.S. international firms would be less likely to
develop non-OPEC foreign sources of oil than the firms operating under the present international energy industry structure.
0
Divested
U.S. international firms would probably operate at a
competitive disadvantage vis a vis other firms in the international arena, where increased vertical integration is being
pursued*
0
A divested U.S. international energy industry would probably be
less able to help other consumer countries and the U.S. meet
supply emergencies than under the present structure.
Effects on the General Economy

The disruption of the domestic petroleum industry, a major
industry, will have unfavorable transitional and long-term
effects on the general economy—through delays in meeting our
energy goals; upward pressure on energy pricen and prices in
general; and significant adjustments in our international
transactions.
Economic growth could slow particularly during the lenathy
transition period.
° ^l3^1' the P°tential costs in terms of national economic
efficiency are high, while eventual gains, if realized at all,
appear to be small.

5

Effects on TJ.S. Energy Objectives
° Divestiture will delay industry's progress in meeting the
President's national energy objectives because:
—Investor uncertainty will dampen the inflow and raise the
cost of capital resources to the affected companies until
such time as those uncertainties have cleared; and
—During the lengthy transition period, management's attention
will be more concerned with preserving values of the divested
segments instead of vigorously developing new supplies of
energy.
° In the long term, marginal investments in new energy sources
may be delayed indefinitely or dropped altogether due to
changes in the reoriented, restructured companies.
° Divestiture in general, and horizontal divestiture in particular, will tend to reduce the availability of financial
resources for R&D support of alternate energy sources, such as
shale oil, geothermal, and coal gasification. Financial
support of technical R&D programs already underway is likely to
be interrupted.
0
By the time the transitional effects of divestiture have subsided, in the mid or late 1980s, the production of domestic
oil and gas will have peaked. If the newly divested oil companies are barred from going into other energy areas and are
also faced with decJ.ining prospects in oil and gas production,
they may shift their emphasis into entirely new business areas.

6

INTRODUCTION
Background of the Issue
Divestiture of the petroleum industry, or separation of
corporate structure into its functionally segmented componentsf
has been made a national issue through two separate
approaches—one through antitrust procedures and the other by
the introduction of legislation to effect separation of the
functional segments.
Recent investigations of the oil industry by the Federal
Trade Commission have resulted in an antitrust complaint being
issued against the eight largest oil companies with marketing
activities in the East and Gulf Coasts of the United States.
The complaint focuses on alleged antitrust violations in the
industry itself. However, no such complaints have been issued
involving the other integrated oil companies. And, of course,
proof of the allegations in the Federal Trade Commission
complaint has yet to be established in an adversary proceeding.
The Congress is now considering whether new laws are
needed as a special remedy for changing the structure and/or
regulating the conduct of the oil industry. Accordingly, there
have been a number of bills introduced in Congress which would
separate the financial interests and operations of the major oil
companies into various
functional segments. These bills vary
in scope, in timing, and in degree of separation; but the central
thrust of divestiture is to separate the major oil companies into
independent operating units. The stated purposes of the divestiture bills are to increase competition and eliminate monopolistic practices.
Basic Arguments of Divestiture Proponents
The oil industry maintains that it is highly competitive
and innocent of any antitrust violations. Nonetheless, there
are persistent feelings on the part of some that monopolistic
and anticompetitive conditions do exist. This feeling has been
aggravated by the rapid rise in world oil prices following the
Arab oil embargo of 1973.

The proponents of vertical divestiture allege that free and
competitive oil markets do not exist within the United States
and that the major international oil companies act as either
voluntary or involuntary agents of OPEC. The inference is that
the large international oil companies allegedly cooperate with
OPEC in maintaining monopolistic world prices that are not
related to either the cost of production or normal market forces.
The theory behind such argument is that by maintaining high
world prices, the major companies increase the value of their
domestic reserves and thus directly benefit. While domestic
price controls have kept U.S. crude oil prices below world ..prices,
uncontrolled "new" crude oil rose to levels consistent with the
world price. Further, since domestic demand for crude oil exceeds available supply, the world price determines the price at
which U.S. crude oil would sell in the absence of U.S. price
controls. Proponents of vertical divestiture thus argue that
divestiture"T~by eliminating the benefits that now accrue to "a
major integrated oil company from high world petroleum prices,
will helo reduce future oil prices.
The proponents of vertical divestiture also allege that the
integrated form of the major companies in the industry allows
these companies to squeeze out independents and, thus, reduce
competition. These proponents cite the difficulty the independent refiners had in obtaining adequate crude oil feedstocks
from 1970 to mid-1973 ( from the time that oil production in Texas
and Louisiana peaked in the early 1970s until the U.S. import
regulations were revised in April 1973) as proof that integrated
companies can and do use their control of domestic crude supplies
to squeeze out independent refiners. They further cite the problems that independent marketers had in obtaining petroleum
products during 1973 (when there was little surplus domestic
refinery capacity available) as proof that large companies can
and do utilize their integrated structure to eliminate independent marketers. The proponents of vertical divestiture thus
claim that, by making it unlawful for a major oil company to
conduct business in multiple segments of the industry^" it will
create a free commodity market (rather than a controlled market)
for crude oil and petroleum products, putting all companies in
any particular segment of the industry on an equal footing, and
thereby increasing competition.
In recent years the major firms in the oil industry have
entered other energy fields (horizontally integrated), investing
heavily in uranium, coal, oil shale, and other energy sources.
Such expansion normally followed a growing realization by oil
industry executives that (1) oil and gas reserves are finite *nd (2)
if their companies wished to continue to grow over a long-term
period, they would have to enter other energy fields. .'n effect,
the managements of most oil companies
decided they were in the
8

energy business, not the oil business. However, since oil and
gas have been our dominant energy sources during the past several
decades, the major oil companies grew in size until they dwarfed
most coal companies, mining companies, or other companies
interested in other energy fields. Consequently, the oil companies were able to buy into, or otherwise enter, other sectors of
the energy industry quite successfully.
As a result of such entry into other energy areas, it has
been alleged, by proponents of horizontal divestiture, that the
industry has entered other energy fields in order to control and
reduce interfuel competition. The principal argument is that
oil companies controlling other energy sources will not compete
with themselves and will delay development of such alternative
energy sources as long as they can produce ample domestic oil and
gas reserves, or import oil from foreign reserves in which they have
an interest. Proponents of horizontal divestiture thus argue
that making it unlawful for any firm to conduct business in more
than one energy area will increase interfuel competition.
Types of Divestiture
Under the present situation, the integrated oil companies
participate through ownership or contract in various industry
functions starting with the production of crude oil and ending
with the sale of refined products. This series of interrelated
functions, i.e., the production of raw materials, manufacturing
or processing, transportation and marketing, is known as
vertical integration. Vertical divestiture would undo existing
vertical integration by separating the integrated components
of the oil industry into separate and independent components,
e.g., production, transportation, and refining and marketing
components.
As previously indicated a number of major oil companies,
recognizing that oil reserves are finite, have also expanded
their interests to other energy fields. Other major oil companies have made investments in non-energy fields such as real
estate, minerals, chemical plants, etc. Those groups of companies, which in some cases resemble typical conglomerates, have
expanded horizontally. Horizontal divestiture would have the
effect of separating the operation (and controlling interest) of
oil companies from those businesses engaged in other types of
energy production. Thus, major producers and refiners of petroleum could be required to divest themselves of interests in coal,
uranium, geothermal or solar energy production.
Purpose
The purpose of this study is to examine carefully and to
evaluate the financial and economic effects of proposed vertical and horizontal divestiture including the effects on the

9

domestic and international petroleum industry, our national
energy objectives and the general economy. In doing so, we seek
to provide information and discussion to the public and to the
Congress that will assist in deciding this important issue, and
help to insure that the ultimate decision on divestiture will be
in the best interests of the American people.
Scope of the Study
It is necessary to look at the major divestiture bills in
order to get some idea of the nature, extent and timing of the
divestiture proposals. Two major pieces of divestiture legislation which have been introduced for consideration are the
vertical divestiture bill, S. 2387, the "Petroleum Industry
Competition Act of 1975," and the horizontal divestiture bill,
S. 489, the "Interfuel Competition Act of 1975."
These two bills seem to be representative of the types of
divestiture which could be expected to be implemented in divestiture proceedings. The key to the application of these bills
depends on the definitions of major producers, refiners, transporters or marketers. It is, therefore, helpful to outline these
definitions as used in the major divestiture bills (see Table 1).
Based on the provisions in the referenced bills, the following premises are used as the basis for subsequent analysis:
° Divestiture legislation would require major U. S.
petroleum producers, pipelines and refiners/marketers
to operate independently as separate legal entities
free from ownership, control or influence by any of
the other entities within five years after enactment.
Refinery and existing marketing assets may continue
to be operated as a single entity.
° Other transportation systems, such as barges, tankers,
tank trucks, tank cars, and foreign pipelines of U.S.
companies could still be owned and operated by either
the production or refiner/marketers segment.
° Old contracts or agreements for supply could not be
carried forward to the newly established segmented
companies but must be renegotiated.
° Under horizontal divestiture, petroleum refiners
and producers of petroleum or natural gas would be
prohibited from acquiring ownership or interests
in alternate energy operations such as coal, shale
oil, geothermal, uranium and solar. Further; any

10

Table 1
SUMMARY OF KEY DEFINITIONS AND PROVISIONS
IN THE MAJOR DIVESTITURE BILLS
Vertical
Divestiture

Horizontal
Divestiture

S.2387

S.489

Major
Producer

Anyone who produced in the
U.S. 36.5 million barrels
(bbls) annually during 1974
or later years.

Major
Refiner

Anyone who refined in the U.S.
110 million bbls/year of product in 1974 or later years.

Transporter

Anyone who transported crude
oil or products by pipeline in
the U.S.

Marketer

Anyone who sold or distributed
110 million bbls of products
in the U.S. during 1974 or
later years.

Control

Direct or indirect legal or
beneficial interest, or influence arising through ownership,
stock, directorates, contractual relations, loans, etc.
Separation of U.S. production,
pipeline, and refining and
marketing assets within 5 years,

Timing

Separation of foreign refining
and marketing assets from production assets within 5 years.
Proiiibits refiners from owning
and operating any additional
marketing assets acquired after
January 1, 1976. (This provision excepts replacement of
marketing assets on a one-forone basis.)
Exemption for assets valued at
$5 million or under in each
category, i.e. production,
transportation and marketing/
refining, that were acquired
prior to January 1, 1976.

11

Prohibits any person engaged
in the production and refining
of oil or natural gas or both
(1) to acquire interest in
coal, oil shale, uranium,
nuclear reactor, geothermal or
solar after enactment; or (2)
to own or control other energy
sources (listed above) 3 years
after enactment.

Same as S.2 387

Horizontal acquisition prohibited at enactment.
Horizontal disposition of currently owned interests in
other energy sources within 3
years.

existing ownership or interests must be disposed
of within three years.
° The definition of a major producer would be anyone
who produces annually 36.5 million barrels of
liquid petroleum condensate and natural gas liquids
within the United States.
° The definition of a major refiner would be anyone
whose refinery runs within the United States exceed
110 million barrels annually.
° The definition of a petroleum transporter would be
anyone conducting petroleum pipeline operations,
including field gathering, in the United States.
° The definition of a major marketer would be anyone
engaged in wholesale or retail sales or distribution of petroleum products within the United States
in excess of 110 million barrels annually.
In order to provide a reasonable assessment of the effects
of divestiture, additional premises need to be drawn regarding
the "state of the world" prior to the implementation of divestiture. Currently, there are two major distortions that affect
the function of U. S. energy markets: (1) OPEC and (2) the
direct federal regulation of prices, marketing channels, and
other economic aspects of the domestic oil industry.
The first of these distortions is imposed by forces outside
the U. S.; and while it is of uncertain duration, current expectations are that OPEC will be effective at least for the next
several years. The study will address the effects of divestiture
and its relationship to international oil markets.
The second major distortion is caused by U. S. controls on
the petroleum industry which are currently expected to expire
within 40 months (pursuant to enacted legislation, P.L. 94-163)
or in April 1979. Natural gas deregulation is much less clear.
As long as controls remain in effect, the operation of the free
market is impeded; and, therefore, certain effects of divestiture may not be entirely visible. In order to minimize the
distortion caused by controls, the study analyzes the effects of
divestiture, assuming that complete deregulation of oil prices
would occur prior to the implementation of divestiture.

12

Approach
In assessing the impact of divestiture, the following areas
will be reviewed in depth:
° The Structure of the Domestic Energy Industry
° The Structure of The International Petroleum Industry
° Finanical and Legal Issues of the Transition Period
° Long-Term Financial Effects
° Some Implications for Domestic Price and Supply
° Effects on the General Economy
° Effects on International Oil Markets
° Effects on U.S. Energy Objectives

13

EXPANDED SUMMARIES

THE STRUCTURE OF THE
DOMESTIC ENERGY INDUSTRY

Introduction
This section describes the structure of the domestic energy
industry. The discussion is divided into petroleum and nonpetroleum segments of the domestic energy industry. The nonpetroleum segment covers only the domestic coal and nuclear fuel
industries.
The Petroleum Industry
The domestic petroleum industry falls naturally into four
divisions: exploration and production, manufacture (refining),
transportation and marketing. To assure continued operations
producers need an outlet for their crude. Marketers need to
secure product supplies. Refiners need both supplies of crudes
and markets for their refined products. All segments need to
ensure adequate transport and storage facilities. These needs,
together with the interrelated problems of coordination and
timing, have led to a significant measure of integration in
the large oil companies. Producers have integrated forward into refining and marketing. Marketers have integrated backwards
into refining and production. And refiners have integrated
both ways.
By no means, however, is the whole industry vertically
integrated. There are many smaller, independent organizations
which play a large and important role in the domestic petroleum industry. In addition to some thirty large vertically
integrated oil companies, there are several thousand smaller
producers and many independent refiners, transporters, and
marketers. Such a mixture of both integrated and non-integrated
firms has existed throughout all but the earliest history of
the petroleum industry.
Production Exploration for and production of crude oil
and natural gas are the first steps in the processes that end
in finished petroleum products for public consumption. Whether
the public demand for petroleum is adequately met depends
directly and inevitably upon the success of exploration and
development efforts.

14

This section identifies the approximate number of firms
participating in the producing segment of the domestic petroleum
industry, the present and historical production concentration
levels of the segment, and possible future coricentration trends
in both crude oil production and ownership of proven domestic
oil reserves.
Over 10,000 companies compete domestically in oil and gas
exploration and production. The top four crude producers in
1974 accounted for approximately 2 6 percent of total U.S. crude
oil and natural gas liquids production. The top eight and
twenty firms accounted for approximately 41 and 60 percent of
production, respectively. Concentration ratios in domestic
crude oil production have increased between 1955 and the present.
The section also contains a discussion of possible production entry barriers and a listing of the domestic producers
subject to divestiture under currently pending legislation.
Refining Petroleum refining involves the transformation
of crude oil into various petroleum products. As of January 1,
1975, there were 133 U.S. refining companies operating 264
refineries with a total capacity of 15.8 million barrels per
calendar day. U.S. petroleum refining shows slightly higher
concentration than does the domestic production segment. As of
January 1, 197 5, the top four, eight, and twenty refining
companies, respectively, controlled approximately 29, 51, and 80
percent of U.S. refining capacity. Though the share of the
eight and twenty largest firms increased slightly between 1951
and 1970, the share of the four, eight, and twenty largest
firms decreased between 1970 and 1975.
The refining section identifies and discusses potential
entry barriers to refining and lists those firms subject to
divestiture under currently pending legislation. The section
also notes that vertical integration extends to domestic
refiners smaller in capacity than the largest 20 firms and
identifies those U.S. refiners, with between 20,000 and 200,000
barrels per day of capacity, who also: (1) produce crude oil;
(2) own crude oil pipelines; (3) own refined product pipelines;
and (4) market branded gasoline.
Transportation Transportation is vitally important to the
petroleum industry because most petroleum is produced far from
the centers of consumption. Overland transportation of crude
oil and refined petroleum products is provided by truck, rail,
and pipeline. Waterborn transportation is provided by tanker
15

and barge. Pipelines are by far the lowest cost method of
transporting petroleum overland, and the. tanker the lowest cost
method of transporting petroleum over water.
Oil transportation is primarily provided via pipelines within the United States and via tanker from abroad to the United
States. From 1951 to 1972, the number of interstate oil pipeline companies increased from 7 0 to 98. The number of firms
owning interstate oil pipelines increased from 65 in 1951 to
about 90 in 1972. In 1972, the top four -Firms accounted for
about 34 percent, the top eight about 56 percent, and the top
twenty about 87 percent of trunkline throughout. Pipeline
concentration levels have declined between 1951. and 1972.
Corresponding concentration levels for 1951 were approximately
44, 71, and 97 percent. In addition, five firms not among the
top twenty firms in 1951 were among the top twenty in 1972.
The international oil tanker market contains a large
number of non-U.S. firms servicing both U.S. and foreign oil
firms and markets. The leading tanker firms of 1953 have lost
market share over the period 1953 - 1972. The market share of
the top four U.S. firms fell from 22.4 to 14.3 percent during
the period. The market share of the eight largest fell from
30.0 to 2 0.5 percent. The market share of the twenty largest
fell from 36.7 to 25.3 percent. In 1972, no U.S. firm owned or
managed over
5 percent of this tanker tonnage.
Marketing There are some 15,000 wholesale oil jobbers,
about 18,000 companies dealing in fuel oil and liquified
petroleum gas, and about 300,000 retail dealers of petroleum
products. Gasoline marketing, the mos: competitive area of the
petroleum industry, has the largest number of independent
companies.
The market share of the top four gasoline marketing firms
has decreased slightly from 30.7 percent in 1970 to 29.8 percent in 1974. Likewise, the market shares of the top eight
firms and twenty firms have decreased from 55.0 and 7 9.0 percent in 1970 to 51.8 and 73.6 percent, respectively in 1974.
More than any other domestic sector, marketing has been
and is the domain of small business. In no other sector is it
easier for new operators to enter or exit.

16

The Non-Oil Energy Industry
During the last fifteen years, a number of U.S. petroleum
companies have acquired.reserves of coal and uranium. Several
have also acauired or formed domestic coal and uranium
producing operations. Approximately twenty petroleum firms are
known to hold coal reserves and at least seven were producing
at the end of 1973, fifteen petroleum firms held uranium ore
reserves while five were producing and milling uranium ore,
with two other planning to enter during 1976.
Coal Industry Trends The United States is rich in coal
reserves. According to the Bureau of Mines, there were about
434 billion short tons of economically recoverable coal reserves
in the U.S. as of January 1, 1974. Coal, which had supplied
43.5 percent of U'.S. energy needs in 1947, declined to 21.5
percent of the nation's fuel supply in 1971, and 18 percent
currently. This market share decline occurred as large coal
consumers substituted oil and natural gas because they were
cleaner, more convenient, and cheaper. Coal production began
a gradual recovery, however, during the 1960s, due largely to
increasing electrical energy consumption.
In recent years, there have been a number of mergers
between U.S. coal producers and non-coal corporations from other
industries. In 197 0, coal companies owned by major oil firms
and ranking among the top twenty coal groups accounted for
18.7 percent of national coal production. By 197 5, major oil
firms accounted for 19.7 percent of U.S. coal production. Three
of the top four coal producing companies are wholly or partially
owned by major U.S. oil companies, and four of the top eight,
and six of the top twenty, coal producing companies are wholly
or partially owned by major U.S. oil companies. Adequate coal
reserve ownership data are not presently publicly available.
The Federal Trade Commission's Staff Report on Concentration
Levels and Trends in the Energy Sector of the U.S. Economy
concluded that producer concentration in coal, like that in
other fossil fuels, is relatively low, although it has risen
substantially since 1955 (i.e., 1970 vs. 1955). Between 1970
and 1975, coal concentration levels have fallen. The
President's Council on Wage and Price Stability found no
evidence of excessive concentration which would permit coal
producers to exert power over the price of coal.

17

Nuclear Industry Trends
Today, there is only one
significant commercial use for nuclear fuel, a source of power
in electrical generation. During 197 5, operable nuclear plants
accounted for eight percent of U.S. electrical generating
capacity and 2.5 percent of gross consumption of energy in the
United States. The Federal Energy Administration's recent
National Energy Outlook (February, 1976) states that nuclear
power could provide 25 percent of U.S. generated electricity by
1985.
There are fewer firms mining uranium in the United States
than there are exploring for and developing fossil fuel resources. Approximately 100 firms mine uranium, and the majority
of them are quite small. In 197 0, the top four', eight, and
twenty firms milling uranium oxide represented 55.3, 80.0, and
approximately 100 percent of U.S. uranium oxide milling production. Because these figures are good proxies for 1970
uranium ore production, it can be said that uranium concentration levels in the U.S. are far higher than those of other
major fuels.
In recent years, oil companies have increased their interest
and participation in the U.S. uranium industry. As of December,
197 3, fifteen petroleum firms held at least some uranium ore
reserves, and five produced uranium ore and milled it into
uranium oxide. Two others planned to enter the industry during
1976. However, the largest share of oil industry uranium production in the U.S. is being achieved by Kerr-McGee Corporation,
a relatively small U.S. oil company.
In recent years, uranium owning petroleum companies have
increased their domestic uranium production relative to nonpetroleum owners of these resources. Although available data
indicate an increasing role of oil companies in U.S. uranium
ore production capacity, the staff of the Federal Trade
Commission concludes that the Nuclear Regulatory Commission,
more than any other influence, will have a great impact on
future uranium industry growth and concentration levels.

18

THE STRUCTURE OF THE
INTERNATIONAL PETROLEUM INDUSTRY
Introduction
The market structure of the International Petroleum Industry
outside the U.S. is described. The purpose is to inquire into
the market share of the seven international majors and other U.S.
integrated oil companies to determine to what degree their conduct and performance affected competition, economic efficiencies,
price, and output of crude and refined products. Areas of potential implications of divestiture on the international petroleum
industry and the objectives of divestiture are identified and
examined.
Production
The international petroleum industry underwent a fundamental
structural change in the last few years. The change is reflected
primarily in a decisive shift of control over production, ownership and pricing of lifted crude from the major U.S. and other
international oil companies to the national oil companies of producing states.
In 1970, the five major U.S. oil companies, Exxon, Texaco,
Gulf, Standard Oil of California and Mobil, produced, owned and
controlled about 43 percent of all Free World crude oil lifted
outside of the United States. By the end of 1974, the share of
all U.S. oil companies (engaged in international activities) in
ownership and control over crude oil produced outside of the U.S.
declined to 29 percent.
If the nationalization of petroleum resources in the main
producing countries of the Free World continues, the share of
U.S. and other international oil companies in direct ownership
and control over crude production can be expected to decline
still further during the next decade, possibly to 15 percent of
all Free World crude oil production outside of the United States.
More than 90 percent of the Free World (including the U.S.)
proven reserves of crude (as of January 1, 1975) were in OPEC.
Marketing
As a result of an almost complete control over the major
production and reserves of crude oil in the Free World, OPEC now
unilaterally determines the access costs to oil (the so-called
equity oil) produced by international companies as well as the
prices for all other crude transfers and sales.

19

Refining
The largest single investment of the petroleum industry
(outside production) is in refining facilities. Those in Western
Europe and Far East (chiefly Japan) accounted for approximately
67 percent of the total refining capacity available in the Free
World (excluding the U.S.) in 1975. Up to 1972, when the U.S.
major and other international oil companies controlled over 55
percent of the refining capacity in the Free World, their own
production of crude oil made their refining facilities selfsufficient. Since then, however, an increasing portion of their
refining capacities and, in turn, their profitable operation
depends on stable flows and prices of supplies controlled by
OPEC.
Transportation
Availability and control over large crude carriers (LCC)
with carrying capacity above 175,000 deadweight tons (dwt) is
of strategic significance for the least-cost regional transshipment of crude supplies. As of mid-1975, the U.S. majors and
other international oil companies owned about 50 percent of the
LCC capacity. At the same time, the market surplus in tankers
reached 100 million dwt. This facilitates plans of the OPEC
nations to acquire such a tanker fleet that would permit them to
transship a greater portion of crude in their own tankers. As of
mid-1975, OPEC nations owned and had on order in the LCC class
less than 2 percent of the Free World tanker capacity. An OPEC
20 percent share of tanker capacity, notably,in the LCC class,
would be a definite danger to an efficient international market
in crude and refined products.
Territorial Distribution of The Petroleum Industry Financial
Operations and Results
Out of the total foreign investments of a group of 30
international companies (4 foreign and 26 U.S.), about one-third
of the investments is placed in production and another third in
refining facilities. The capital expenditures on tankers have
increased greatly during the past few years, while those in
marketing facilities have decreased. Outside the U.S., the
largest part of this group's assets is placed in Western Europe
and Canada. Investment in the Pacific Asia has been accelerating.
Annual rates of return on average invested capital of the
group of 30 have been consistently higher on investment abroad
than in the U.S. In 1973, the profit rate (after tax) reached
20.5 percent, and in 1974 it was 23.9 percent, as compared to
their profit rates in the U.S. of 10.5 percent and 9.6 percent,
respectively. If these rates persist, it would represent a
powerful attraction for the U.S. risk capital.
20

Tne Role of International Oil Companies in Non-oil and NonEnergy Foreign Industries.
Outside the petroleum sector, the U.S. oil companies do
not occupy a dominant position in any foreign energy or other
industry, although their holdings in chemical industries related
to petroleum feedstock are of some significance.

21

FINANCIAL AND LEGAL ISSUES
OF THE TRANSITION PERIOD
Introduction
Various financial and legal issues which would arise during
the transition period for implementing vertical or horizontal
divestiture are considered in this chapter. The many uncertainties and imponderables involved in a fundamental restructuring
of the nation's largest industry preclude definitive statements on some issues. However, the judgments reached indicate
that significant legal, financial, and capital formation problems are likely to arise during the transition period, particularly in the event of vertical divestiture.
I. Future Capital Investment and External Financing Requirements of the Domestic Petroleum Industry
Forecasted capital requirements for the U.S. domestic petroleum industry for the 1976-1985 period approach $250
billion (in 1974 dollars).
It is clear that substantial amounts of external financing
will be required if that overall level of capital investment is to be achieved. For example, between 1965-1974,
a group of 30 large petroleum companies producing oil and
gas in the United States raised new external financing of
$38.3 billion (of which $35.1 billion was long term debt).
This external financing represents approximately 28 percent of those companies' $139 billion in world-wide capital expenditures, investments, and increases in working
capital.
The impact of vertical divestiture on the ability of
affected petroleum companies to raise new external capital is thus of critical concern, especially since the
industry's future proportion of external financing is expected to rise even higher than the historical level due
to the need for sharply higher amounts of capital investments.
II. Implementation of Divestiture
The leading vertical divestiture bill (S.2387) requires
affected companies to submit divestiture plans to

22

the Federal Trade Commission for examination, comment, and
approval in accordance with applicable requirements of the
Administrative Procedures Act, and to complete necessary
divestments within 5 years. Any legal claims arising
from divestiture could be litigated in a special Petroleum
Industry Divestiture Court. Under the leading horizontal
divestiture bill, companies would develop plans to divest
prohibited assets within 3 years. Wrongful retention of
assets after that time would subject companies to enforcement suits by the Justice Department.
A. Options Regarding Retention or Divestment of Assets
Under vertical divestiture, 18 affected companies would
be allowed to continue operating in only one of the following sectors of the petroleum industry worldwide: production, transportation (by domestic pipeline), or refining/
marketing. Analysis of the breakdown of investment by
these companies in each area indicates that typically 40
percent to 60 percent of their assets would have to be
divested.
Under horizontal divestiture, all petroleum companies
would be required either to divest all assets in coal, oil
shale, solar, geothermal, or nuclear energy development,
or to retain those assets and divest all petroleum assets.
With one notable exception, this type of divestiture would
involve less than 10 percent of the assets of the major
petroleum companies analyzed.
B. Alternative Mechanisms for Divesting Assets
1. Sale of Assets
Divestiture could be implemented by outright sales of
assets. A large number of potential foreign and domestic
buyers within and without the petroleum industry can be
envisaged; however, it is doubtful that the sale of assets
alternative would be used extensively because of (1) the
large volume of assets to be divested ($70-80 billion),
which may drive down the values received upon sale, and
(2) questions about the availability of buyers capable
of purchasing the assets for cash and their acceptability
from an antitrust and national interest standpoint. Sales
where the divesting company receives partial payment in
debt securities cf the new" company may run afoul of the
legislation's proscription against control of another
entity operating in another sector of the petroleum
industry.
23

2.

Corporate Spin-Offs

Divestiture could also be implemented by spin-offs — the
transfer of assets and possibly some part of the liabilities
to a new corporate entity owned by existing stockholders.
However, spin-offs, because they dispose of assets without
direct return of value, reduce the assets and earning power
backing for the divesting company's outstanding debt. Thus,
lenders who are relying on the company's overall creditworthiness as security for their investments would be
adversely affected and might litigate or attempt to enforce
their rights under existing loan agreements which generally
place restrictions on the sale or spin-off of assets.
Critical Legal and Administrative Problems in Implementing
Divestiture
A. Constitutional Challenges to Divestiture Legislation
and Specific Divestiture Plans
Although the leading divestiture bills call for a transition
period of 5 years for vertical divestiture and 3 years for
horizontal divestiture, legal challenges to the constitutionality of the legislation and to the fairness of specific
divestiture plans will ensue, and, whatever their merit,
could suspend or impede full implementation of divestiture
until the legal issues are resolved. The transition period
could thus extend to 10 or more years.
One constitutional challenge would likely spring from
grounds of deprivation of property without just compensation,
in violation of the Fifth Amendment's proscription against
the taking of property without due process of law. On the
basis of experience with the Public Utility Holding Company
Act and the Rail Reorganization Act, it appears unlikely
that a challenge to the constitutionality of a divestiture
statute on this basis would be successful. However, there
is a greater possibility that specific divestiture plans
would be overturned if they can be shown not to be "fair
and equitable" to the various interested parties.
In addition, the proposed vertical divestiture legislation
would permit unaffected companies, both foreign and domestic,
to vertically integrate up to given thresholds of output
in each industry sector, but would not permit affected
companies to remain vertically integrated by reducing their
size to a point below those thresholds. If this differing
treatment is found to be unjustifiable, a constitutional
challenge could be mounted based on Fifth Amendment due
process concepts.
24

B.

Litigation of Lenders' Rights

For some companies, divestiture of a major portion of assets
will clearly violate existing loan covenants and indenture
agreements. For other companies, the question of whether
loan covenants and indenture agreements are actually
violated by proposed divestiture will undoubtedly be the
subject of extensive litigation. In those situations where
the affected companies are found to be in violation of
loan covenants, creditors would be in a position to threaten
to accelerate the repayment of the outstanding debt.
However, lenders are generally reluctant to fully accelerate debt, especially where it might precipitate bankruptcy; thus, in many cases lenders may use the threat
of acceleration as leverage to renegotiate the terms
and conditions of the loans, perhaps with higher interest
rates, shorter repayment schedules, and security against
certain of the corporation's assets.
In some situations, negotiations with lenders might solve
such problems by allocating the outstanding debt among
the divested companies. In other situations, negotiated
solutions might be achieved by use of cross-guarantees,
under which each entity created from the former corporation
would guarantee the full amount of the outstanding debt.
However, that approach poses several legal and practical
problems with respect to enforceability of cross-guarantees
and may even be prohibited as constituting a form of
"control" not permitted under the legislation. Finally,
in some situations, indenture trustees may prefer to assert
default and acceleration and seek court resolution of the
matter. By so doing, the trustee would gain protection
from suits questioning his fiduciary performance and
insulation from financial liability if some portion of
the debt should ultimately be defaulted upon.
Current vertical divestiture legislation is ambiguous as
to whether rights of acceleration could be enforced by
creditors (subject to the limitations of bankruptcy
proceedings) or reformed in the FTC's discretion, even for
solvent companies, to facilitate divestiture. The former
would create the lesser disturbance of contract rights;
the latter might facilitate implementation of divestiture
at the expense of such rights, with attendant effects upon
future debt financing.
c
- Differing Treatment of Foreign Assets
Foreign governments or entities whose interests are harmed
by divestiture could bring legal proceedings under their
own laws and courts and thus possibly enforce their claims
and execute judgments against assets located outside the
United States before divestiture is actually implemented.
25

Laws in many countries requiring the government's approval
of foreign investments may operate to prevent certain
planned dispositions of foreign assets or, by limiting
potential purchasers, to deny U.S. sellers the highest
market value for the assets being sold. Analysis of the
location of the assets and liabilities of the major international petroleum companies indicates that these problems
are potentially very significant for some firms and are
largely beyond the legislation's and the United States'
control.
D. Substantial Differences From Previous Divestiture
Experience
The foregoing discussion indicates a number of significant
legal and administrative problems in implementing divestiture. The types of problems encountered have been faced
before in other divestitures, both judicial and legislative, as well as in voluntary corporate spin-offs. However, there are substantial differences between the
proposed vertical divestiture and previous divestiture
experiences.
First, many judicially-ordered prior divestitures have occurred in Clayton Act anti-merger cases, where divestiture is
easier since the divested components are already relatively
independent. Legislated divestitures in the banking and
public utility industries have also involved largely
functionally independent operations, (e.g., the Glass-Steagall
Act, mandating separation of commercial and investment banking;
the Bank Holding Company Act of 1956, requiring bank holding
companies to divest non-banking operations; and the Public Utility Holding Company Act of 193 5, which broke up utility holding
companies). Moreover, these divestitures have typically been
accomplished over considerably longer periods of time, in some
cases pursuant to express Congressional recognition of the need
for more time to implement divestiture. Vertical divestiture of
the functional components of an integrated company is a substantially different and more difficult proposition than the above
cases since the independent economic and financial viability of
Second, as contrasted to the proposed vertical divestiture,
some divested components is less certain.
the amount of assets divested in prior situations has
frequently been quite small relative to the assets of the
ongoing corporations, thus reducing the problems in
negotiating satisfactory agreements with existing lenders
and attracting new external financing during the transition period.
Third, in no previous divestiture case have problems even
approached the ones created by the proposed vertical
divestiture with respect to the treatment of foreign
26

assets and liabilities, as well as the competitive position
of divested companies via-a-vis strong foreign competitors.
Fourth, the absolute size of the undertaking in terms of
the amount of assets to be divested ($70-80 billion) substantially exceeds that of previous divestitures, including
the Public Utility Holding Company Act which required the
divestiture of assets valued, in current dollars, at about
one half that involved in the proposed divestiture. Divestment of such a large amount of similar assets over a
relatively short period of time creates significant problems in finding acceptable buyers at reasonable prices.
The above problems, together with the probability of extended litigation, will create substantial uncertainty in
the minds of existing and potential investors.
Financial Impacts During the Transition Period
A. Impact on Ability of Affected Companies to Raise
External Capital During the Transition Period:
Vertical Divestiture
When assessing the ability of the affected companies to
raise external financing during the transition period,
three important factors must be weighed and balanced.
First, many, although not all, of the affected companies
are among the largest and most creditworthy firms in the
nation. Such firms must be assumed to have a considerable
capacity to adjust to and cope with the problems created
by divestiture-. Second, both existing and potential investors will face a situation in which the company they
have or might invest in will undergo a radical alteration
and they would, in many cases, end up with smaller investments in several new companies. Third, the great bulk
of external financing is debt financing provided by
a number of financial institutions such as commercial
banks, life insurance companies, pension funds, ana the
like, which, as a matter of policy or as required by law,
generally follow conservative investment practices.
In the normal course of business operations, both equity
and debt investors are accustomed to assuming certain
risks. However, with vertical divestiture—particularly
in the early stages of the transition period—investors
will be faced with a multitude of uncertainties for which
the ultimate resolution is essentially unpredictable.
With a significant increase in uncertainty, it can be
expected that the cost of new external financing would
rise, and in certain cases, suppliers of capital would
discontinue making investments until the divestiture
27
uncertainties are resolved.

Specifically the following judgments are put forward:
—

There is doubt as to whether the sale of new unsecured
long-term debt issues, including the refinancing of
maturing issues, would be possible until lenders could
ascertain what corporate entity would be responsible
for debt repayment. Under current bills, this hiatus
could run 1 - 1-h years, or longer if legal delays are
encountered. In addition, should the FTC or some other
body be given the power to rewrite loan covenants, problems
in attracting significant amounts of new debt investments
could persist for many years unless such investments
were exempted from FTC reformation, and thus possibly
given a preferred position over existing creditors'
rights.
— Some amount of secured long-term debt, such as mortgages
on specific buildings, may be possible since the basic
security of the loans would be the asset rather than
the creditworthiness of the parent company. However, the
potential volume of such financing, with the possible
exception of loans secured by future oil production,
would be limited by the specialized nature of many
of the oil companies' assets.
— It is unclear what the impact on the availability of
unsecured short-term seasonal loans would be. However,
such short-term lenders would have many of the same
concerns as long-term lenders if it appeared that their
loans might not be repaid prior to actual divestiture.
Some amount of short-term credit secured by accounts
receivables and/or inventories probably could be arranged
during the transition period. However*existing long-term
and short-term lenders may have legitimate reasons to
attempt to take action to block secured financings,
particularly if their existing investment were not given
equal security.
-- Judgments about the availability of new equity capital
during the transition period are particularly
speculative. However, it is likely that the huge uncertainties prevailing during that period will have a
temporary freezing effect on equity investors.
On balance, it appears that for some period of time uncertainties associated with implementing divestiture would
raise the cost of capital for most companies and seriously
affect the ability of some to attract external capital.

28

B. Impact on Incentive and Ability of Companies to Make
Capital Investments: Vertical Divestiture
The affected companies' willingness to make needed capital
investments during the transition period depends in part
on the availability of external financing, in part on the
companies' ability to generate and use internal funds for
such purposes, and in a larger part on their incentive to
make new capital investments. The following judgments
are put forward concerning the general ability and incentive of affected companies to make capital investments
during the early stages of the transition period.
— New investments in many areas would tend to be curtailed
because of increases in the cost of capital, difficulties
in raising new external financing including the refinancing of maturing issues, the possibility of shortened
repayment schedules on outstanding debt, uncertainties
about the amounts to be received from sale of assets,
uncertainties regarding the treatment of foreign assets
and liabilities, and uncertainties about, the profitability of certain companies following divestiture.
No offsetting factors tending to cause capital investment levels for affected companies to increase are
apparent. Forecasting the size of the shortfall in
capital investments is particularly difficult since it
is contingent on many unknowns. Nevertheless, given all
of the above factors, the potential magnitude of such a
shortfall would seem to be large.
— Investments in partially completed facilities would
likely be completed, especially for those in an advanced
stage of construction, since abandoning such facilities
would result in large losses.
— The cut back in the level of capital investment by
divested firms could create profitable investment
opportunities for other unaffected petroleum companies
which might increase their level of new investment to
some extent.
C. Impact on External Financing Possibilities and Investment Incentives: Horizontal Divestiture
Horizontal divestiture would seem likely to have only a
minimal impact on the ability and incentive of affected
companies to raise capital externally and make capital investments in their ongoing oil and gas operations. However, with respect to non-oil operations, subsidiaries
targeted for divestiture would probably receive low
priority for all but maintenance investments.
In addition, following spin-off or sale, these smaller non-oil
operations could have a higher cost of capital and/or
difficulties in raising external financing; particularly
in the area of synthetic fuels where the economics are
marginally attractive at best.
29

D.

Potential Financial Impacts of Divestiture on the
Federal Government

The Federal Government, and thus general taxpayers, could
be affected by divestiture in the following ways:
-- Tax revenues would be affected by changes in industry
profitability and possibly capital gains and losses
on the sale of assets.
— If creditors, stockholders, or other parties with an
interest in the affected companies win judgments in
court that they have not received "just compensation"
under specific reorganization plans, they may be able
to recover monetary losses from the United States
under the Tucker Act of 1906 governing claims against
the U.S. based on the Constitution or an Act of Congress.
— Given the nation's energy independence goals and the financial problems associated with the transition period—
which would likely have a significant adverse impact on
affected companies' level of capital investment — it
is probable that divestiture would lead to proposals
for Federal financial assistance to or direct investments in the petroleum industry. This outcome would
place significant financial burdens on general taxpayers and substantially increase the Federal Government's involvement in the private sector of the
economy.

30

LONG-TERM FINANCIAL EFFECTS
Introduction
This section focuses on the longer-term financial effects
of divestiture as opposed to the previous transition period
analysis. Considered in turn are the relative efficiency
of capital formation in an integrated versus nonintegrated
industry, the implication for energy sector investments, and
the financial impacts external to the affected companies.
In several areas the uncertainties and imponderables associated with such a fundamental restructuring of the nation's
largest industry preclude definitive conclusions..
Relative Effeciency of Capital Formation
There would seem to be no a priori reason to believe that
divestiture would significantly increase the efficiency with
which capital is allocated to the various segments of the
industry.
There are certain economies of scale in financing which
would be lost under divestiture. In particular, the integrated companies would likely be able to attract larger
amounts of external debt financing than could be attracted in
aggregate by the divested component companies at the same
cost. This greater debt capacity results from the expectation
that an integrated company will have a relatively more stable
cash flow than that of the divested component companies,
and thus there is a smaller likelihood that principal and
interest payments on debt will not be met. Empirical analysis
of integrated international, domestic integrated, and
relatively independent refining and crude producing companies
indicates that historically integrated companies have had
more stable cash flow levels.
A review of the financial literature on bond rating
analysis together with regression and rank correlation
analysis performed on financial data for various petroleum
companies indicates that a company's debt-to-equity ratio,
size, and average level and stability of debt service coverage

31

are all significant factors in determining bond ratings.
Although it is possible that under vertical divestiture some
of the resulting companies would not suffer declines in bond
ratings, relative to the ratings of their former parent
companies, the general impact of divestiture would likely be
to reduce the bond ratings of affected companies by breaking
them into smaller components, and adversely affecting the
stability of their earnings and debt service coverage. Such
declines would tend to reduce the aggregate debt capacity of
and increase the cost of capital to affected companies.
In the case of vertical divestiture the required levels of
working capital for the divested component companies in aggregate
would also rise due to the inability to transfer quickly between
sectors to meet short term cash requirements, and possibly increased investment in inventories.
Because of debt investors' preference for stability in
earnings and debt service coverage, allowing long term
contractual relationships between the divested segments of
the industry would be of great assistance, if not essential,
to financing many projects such as large pipelines and
refineries.
Long-Term Effects on Energy Investment
After the anticipated lengthy transition period for
implementing divestiture, if not impeded by other legislative
or regulatory barriers, or by foreign competitive forces, the
tendency will be for market forces to produce viable domestic
petroleum production, transportation, and refining and marketing companies. If, however, the increased costs due to
the loss of any efficiencies provided by vertical integration
cannot be fully passed on to consumers, these companies
would experience some reduction in profitability. Any such
reductions in aggregate profits would both reduce the
companies' level of internally generated cash flow and to
some extent adversely affect any efforts to raise external
equity capital. However at this time it has not been possible
to estimate the magnitude of any longer-term impact of
divestiture on corporate profitability.
Although it is likely that a number of years would be
required, it is very difficult to predict accurately the
time required to make-up for the expected shortfall in capital
investments during the transition period while divestiture
is being implemented. Eventually, most but probably not all,
of the transition period shortfall would be made up. T^his
longer term shortfall in the level of capital investment would
32

result both from lost economic efficiencies and the reduced
external financing capacity and higher cost of capital of
the affected companies.
If the integrated oil companies are required to divest
their non-oil energy operations, after a transition period,
other investors will eventually be attracted to these investments if they are economically viable. But without the
credit backing of their former parent firms the debt capacity
of these divested companies will likely be lower and their
external financing costs higher. Also, R&D expenditures
devoted to the development of alternative energy sources
would likely be less as a result of horizontal divestiture.
These factors would have an adverse affect on capital investments in these companies over the longer run relative to
what would have been the case in the absence of divestiture.
External Capital Market Effects
Existing equity and debt investors would very well
suffer significant short term declines in the market value
of their securities in the confusion and turmoil following
passage of vertical divestiture legislation. In the longer
term it is very difficult to predict what impact divestiture
would have on affected companies' costs and their ability
to pass any cost increase through to consumers. However
due to the expected decline in the creditworthiness of
affected companies, bondholders would likely suffer market
value declines unless they were paid off or could renegotiate
the terms, conditions, and interest rates on their investments .
Should the capital markets interpret legislated divestiture
of the major petroleum companies as the forerunner of a wave
of anti-business actions by the Federal Government, a more
general adverse impact on security prices and the cost and
availability of external financing for some non-petroleum
industry firms could occur.

33

AN INITIAL ASSESSMENT OF
SOME DOMESTIC PRICE AND SUPPLY EFFECTS
OF LEGISLATED DIVESTITURE
Introduction
This section qualitatively examines the likelihood that
vertical and/or horizontal divestiture would produce an industry whose structure, conduct, and efficiency would result in
greater supply and consequently in tendencies for lower price.
In doing so, it concentrates primarily on vertical divestiture
and abstracts from any effects occurring during the transition
period and from any detailed discussion of financial effects.
These are treated elsewhere in the report. Additionally, this
section does not attempt to assess the current degree of industry competition. In order to focus on the underlying price
tendencies, the section leaves aside the relationship between
the U.S. oil and product market and the world market dominated
by OPEC. As the section notes, however, the U.S. might continue
being a price taker for some time; consequently, divestiture
per se is unlikely to reduce prices.1
Vertical Divestiture Vertical divestiture is examined in terms
of its effects on the relationship between integrated and
independent companies, with emphasis on crude oil exchange
agreements and pipelines. These are often cited as examples of
areas where barriers to entry may exist and, hence, where supply
in the petroleum industry may be constrained. Little positive
affect on industry price and supply is likely to result from
changes in integrated-independent relationships. To the extent
that market power presently exists in domestic crude oil production, pipelines, or refining-marketing, it will not necessarily be directly altered through vertical divestiture.
•Unless, as is argued by some of its proponents, vertical divestiture would cause the OPEC cartel to collapse. This
proposition is discussed in the section on international oil
marke t s.
Indirectly, horizontal market power could be altered if oil
companies affected by divestiture, on their own initiative,
decided to fragment the assets which they were forced to sell
or spin off. A priori, we have no reason to expect this
outcome.
34

While control over pipelines will be separated from production
and refining-marketing units, this separation is unlikely to
substantially alter the market power inherent in pipelines
themselves. Interstate pipelines are regulated ICC common
carriers and some intrastate pipelines are state regulated.
Thus, the quantity and quality of such regulation would need to
be directly affected by vertical divestiture in order for exercise of the inherent market power to be altered. We do not
have sufficient reason to believe that this would likely occur.
Crude oil exchange agreements will likely cease to be an industry-wide practice since the production and refining link would
be severed. However, to the extent such flows reflect underlying transportation and refining efficiencies, existing patterns of flow would tend to persist through explicit market
transactions. Depletion allowance provisions,which have been
alleged to produce incentives for some integrated firms to withhold crude from the market and/or to seek higher crude prices,
are no longer relevant since they do not now apply to large
integrated firms.
Vertical divestiture could impact on industry efficiency.
While the magnitude cannot be specified, the general direction
seems clear. Refining crude oil supply risks would increase
and thereby tend to result in increased inventories being held.
New refineries would tend to be more costly since they would
be designed to process a wider variety of crudes. Some retrofitting of existing refineries could be expected to occur. To
the extent constraints on pipelines precluded movement to
larger diameter pipelines, significant savings associated with
economies of scale would be lost.
Horizontal Divestiture
The purpose of horizontal divestiture in energy appears to
be predicated on an assumption that the petroleum industry seeks
to, and is fully capable of, extending an assumed pattern of
market power to alternative energy sources. Present information, while admittedly incomplete, does not support such a
general likelihood. Horizontal divestiture in energy, however,
could impact adversely on the price and supply of non-petroleum/natural gas energy sources by precluding entry and hence
industry investment (including research and development) by a
capable set of participants.
Conclusions
13
difficult to see how either vertical or horizontal
Hl.„ l^
divestiture would increase supply and thereby tend to reduce

35

prices. In general, whatever market power existed in the production, pipeline, and refining-marketing segments prior to
vertical divestiture would likely remain afterward. Operating
efficiency losses, on the other hand, could be significant.
Thus, on balance, divestiture is likely to result in greater
costs and lower quantities.

36

EFFECTS ON THE GENERAL ECONOMY
Introduction
The petroleum industry is unquestionably an exceedingly
important component of the United States economy. Not only is
fuel an important item directly, but it also figures indirectly
in the production and distribution of most output and its price
implications correspondingly have broad significance for the
general economy as well. To understand the full potential
impact of divestiture on the economy, it is necessary to analyze
the problem in terms of two phases — the transition phase at
the inception of divestiture, and the long-term phase after the
initial adjustments have been made.
Impact on Demand
Total aggregate demand could be influenced by divestiture in
numerous ways. Consumption spending might be depressed by the
introduction of consumer uncertainty concerning the outlook for
the general economy, which in past experiences has made consumers
very conservative about purchases of large durable items.
Investment demand could also be unfavorably influenced by financial market disruptions, problems of future energy availability
and price, and again, the psychological effect of uncertainty
concerning the future behavior of the general economy. The
implications of divestiture for government would be antithetical
to those for the private sector, i.e., the government might well
have to shift policies toward less restraint or greater
stimulation.
The Impact on Supply
Supply problems would also be inherent in divestiture.
Domestic energy supplies would probably be curtailed to some
extent by the disruptions of the transition process. Total
economic production could remain unaffected if an increase in
fuel efficiency is realized, but this does not appear likely. An
alternative response might be for producers to shift away from
energy intensive items, but such a move would require extensive
reorientation of consumer preferences. The most likely short
term adjustment to divestiture would appear to be an increase in
imports. In short, for both supply and demand reasons, the
impact of divestiture on GNP appears quite likely to be
unfavorable.

37

The Impact on Prices
The price consequences are difficult to determine with much
precision, but the prospects for unfavorable effects appear to be
great. The increased reliance on imported petroleum would
constitute an invitation to import price increases larger than
would otherwise occur. Domestic prices for non-petroleum energy
might also tend to edge upward as a consequence of the reduced
price competitiveness of oil and the generally higher costs of
the alternatives. Again, energy price changes would involve many
secondary effects because of their importance to production and
transportation, and in addition, the potential would exist for
divestiture to intensify the struggle over income shares.
The Impact on International Transactions
The international impact of divestiture largely depends upon
the strategy followed by the oil companies, both foreign and
domestic. It is possible that domestic companies might choose to
curtail their domestic operations and shift into other lines of
business or permissible foreign operations. Petroleum investment
flows (after a possible initial inflow to purchase divested
assets) might also be influenced unfavorably.
The Long Run Impact
In the long-run, the post-transition effects would be
extensive. The shift to alternative energy sources would be
expensive and would take time. Increased pressures for the shift
would have direct and unfavorable implications for pursuit of our
environmental objectives, energy independence, and growth. Longrun international transactions flows would not only be affected
by the new pattern of ownership in the petroleum industry, but
also by changes in the comparative advantages of specific items
resulting from the different energy price and supply circumstances within the United States.
Conclusions
In conclusion, the disruption of domestic petroleum industry
from vertical and horizontal divestiture would have
numerous unfavorable transitional and long-term effects on the
general economy. These would include lower aggregate output,
upward pressure on price levels, and significant adjustment
problems in our international transactions. Further, the higher
capital formation requirements of the energy sector after the
transition period would place an additional strain on the capital
formation capacity of the economy for some time, with unfavorable
implications for economic growth. There would also be a significant
danger of increased reliance upon foreign petroleum sources.
Overall, the costs in terms of economic efficiency are potentially high while the eventual gains — if ever realized at
all — appear to be too small to justify the risks of such an
experiment.
38

EFFECTS ON INTERNATIONAL OIL MARKETS

Introduction
The effects of divestiture on the structure and conduct of
international oil markets is discussed. An analysis is made of
how divestiture will affect the ability of the international oil
companies to serve the interests of the U.S. and its allies.
This subject is particularly important because while vertical
divestiture is under consideration in the U.S., other nations,
such as Japan, Canada, France, and Great Britian, are considering
vertical integration of their oil firms.
The analysis covers the negotiating power of divested
U.S. oil companies with respect to OPEC, the probability of
developing alternative non-OPEC foreign supplies, the ability
of the divested industry to help consuming nations (including
the U.S.) meet supply emergencies, and the competitive position
of U.S. companies vis-a-vis foreign integrated firms.
Effects on OPEC Market Power
The dominance* of the OPEC over the international market
is evident. The situation is a seller's market with the
OPEC setting the price and all companies acting as price
takers, unable to affect the price. Divestiture will not
alter this basic situation. Rather, by fragmenting some
of the vertically integrated purchasers of OPEC oil,
divestiture increases the number of alternatives for OPEC,
thereby increasing OPEC bargaining position.
Divestiture would also appear to have no effect on
OPEC's production rates. OPEC has no need for a formal production prorationing system. Its marker crude price system,
coupled with quality and locational differentials, provides a
sufficiently flexible system to allocate production as long
as certain members have little need for revenues and are
willing to produce well below their capacity.

39

Therefore, divestiture is not likely to subject the
oil exporting nations to increased competitive forces or
weaken their market power.
Industry's Ability to Develop Non-OPEC Foreign Alternative
Supplies After Divestiture
Ventures in unexplored areas could diversify supply
sources and reduce the industrialized world's dependence
upon unreliable supplies. Prohibiting divested refinermarketers from exploration and production ventures creates
legal entry barriers against those elements of the industry
most motivated to find alternative supply sources. Also,
divested producer companies choosing to stay in international
development might be unable to develop new areas, because such
efforts might jeopardize existing contracts in OPEC areas and
therefore access to immediate and continued production.
On balance, it appears tha-t, under divestiture, there
would be less development of non-OPEC foreign oil supplies
than under the present international structure.
Ability of Severed Companies to Help Consumer Countries
Meet Supply Emergencies
In each of the past supply emergencies, vertically
integrated companies have been useful instruments for
handling such emergencies. Under normal operating procedures,
companies generally diversify sources of supply geographically,
politically, and by grade. By blending their supply streams,
companies lower their vulnerability to sudden supply interruptions from a single source. Also, they diversify their
marketing operations to smooth out normal demand variations,
and in that way provide a flexible logistic system able to
adjust to short-term supply emergencies. A divested industry
would probably lack the same ability to coordinate and control
adjustments because they would lack a complete overview of the
supply system. Industrial nations have joined in an International Energy Program (IEP) to share supplies in an emergency. This
system depends heavily upon the international industry." If
divestiture were to increase the number of companies in the IEP
structure, the operation of this already complex system would
be complicated almost beyond workability.
Thus, divestiture would hinder efforts to protect against
supply cutoffs.

40

Competitive Positions of Divested U.S. Firms
Vis-A-Vis Foreign Firms
Divestiture could weaken the competitive position of
divested U.S. firms vis-a-vis foreign based vertically integrated firms. The U.S. firms may have to dispose of assets to
foreign competitors thereby increasing the strength of those
organizations. As the position of U.S. firms weakens,the U.S.
could become more dependent upon foreign firms for imported
supplies. A weakening of the competitive position of the U.S.
firms amplifies the problems in the other aspects of international markets which have been discussed. Weak firms would
be less effective in bargaining with exporting nations, looking
for alternative sources, or dealing with supply interruptions.

41

EFFECTS ON U.S. ENERGY OBJECTIVES
Introduction
This section identifies the U.S. energy objectives, reviews
corporate priorities during the divestiture process and discusses
the effects of divestiture on these energy objectives.
U.S. Energy Objectives
The broad U.S. energy objectives,as outlined by the
President in his message to Congress on February 26, 1976, are
(1) to halt dependence on imported oil, (2) to attain energy
independence by 1985, and (3) to mobilize our technology and
resources for the development of long-tern energy supplies.
Actions proposed by the President to accomplish these broad
objectives through 1985 will, for the most part, depend on existing technology to supply energy from conventional oil, gas and
coal resources. For the long-term, we must increasingly rely on
future technologies.
Timing Influences
The divestiture transition period will coincide with the
19 7 6-85 period in which the Nation is attempting to meet its midterm energy objectives. The effects of divestiture after the
transition period will probably not be as great as those during
transition, because business will ultimately adjust to the new
rules.
Corporate Priorities During the Transition Period
The priority objectives of corporations faced with divestiture are reviewed in some detail. These goals are examined as
they relate to expansion of energy supplies through the development of new resources.
Corporate priorities under divestiture are expected to be
concentrated on the preservation of stockholders' equity values

42

and the careful separation of assets and liabilities in such a
manner as to give the new firms reasonable prospects as viable
businesses.
Indebtedness is likely to restrict management's flexibility
in the division of corporate assets and liabilities. Renegotiation of the terms and conditions of such indebtedness or early
repayment schedule of corporate indebtedness would place
increased demands on the affected firms' available cash
resources. Internally-generated funds are expected to be the
greatest source of capital as the uncertainties associated with
implementing divestiture would raise the cost of capital for most
firms and seriously affect the ability of some to attract
external capital.
With a tendency to reduce borrowing, the availability of
investment capital to find and to develop new supplies of energy
would be reduced. New investments in many types of petroleum
projects would almost certainly be adversely affected. In addition, the flow of funds from integrated companies to alternate
sources of energy is likely to be reduced if the company is faced
with horizontal divestiture.
These conditions have the potential of seriously constraining the discovery and development of new sources of energy during
the transition period. Failure to allocate adequate financial
resources for development of new supplies of energy would seriously endanger reaching our national goal of increasing domestic
energy supplies and would, instead,increase our dependence on
imports.on Long-Range Energy Objectives
Effects
The long-range effects of divestiture on corporate research
and development programs in the development of new technologies
for alternate energy sources are considered. It is not likely
that companies subject to divestiture will continue to give
financial support to R&D programs which are not associated with
their primary businesses. As a result, support of technology for
coal gasification, oil shale development, geothermal, solar and
other synthetic energy sources is likely to be terminated or at
least interrupted. Oil industry research scientists now concentrating on these subjects would be shifted to other areas of
research. R&D programs may be resumed by either the divested
companies, if financially able, or the federal government. A
change of R&D management will cause interruptions—which in turn,
will cause delays in the commercial use of new technology for
alternate energy sources.
It is pointed out that the domestic production of oil and
gas is expected to decline after 1985. Some divested production
43

companies will be faced with entering non-energy related fields
as a matter of survival in light of the diminishing prospects for
oil and gas production. This will shift their emphasis from the
energy business to other businesses.
The separation of vertically integrated oil into separate
components will tend to introduce inefficiencies in the steady
and reliable flow of petroleum from the well to the consumer.
These inefficiencies will be permanent in the divested system and
would tend to reduce the profitability of affected companies as
well as being reflected in higher costs to the consumer.
Conclusions on the Effects of Divestiture
For the mid-term:
Emphasis on the expansion of oil and gas resources
would diminish because companies will be forced to
devote increased effort and resources to divestiture.
o Constraints on borrowing during the divestiture
process would limit financial resources available
for expansion of energy sources.
o
Divestiture
would have little direct impact on
conservation, but these programs would be
impacted indirectly through higher prices to
consumers.
o
Horizontal
divestiture would tend to reduce R&D
support for alternate energy resources.
For the long-term:
° Efficiencies lost through vertical divestiture
would become permanent and would be reflected in
higher prices and/or lower profitability.
° The development of technology for alternate sources
of energy would be delayed due to interruptions in
R&D support.
° After a reasonable period following transition,
business would adjust, but interruptions due to
divestiture would delay attaining our energy
objectives.

44

NOTE TO CORRESPONDENTS:

June 16, 1976

Attached is the Administration position on The Tax Reform
Act of 1976 (H.R. 10612), as reported by the Senate Finance
Committee, June 15, 1976. This paper outlines each of the
provisions of the bill and the amendments, states the Administration position, and presents reasons for the conclusions
reached.

OOo

WS-936

ADMINISTRATION POSITION
THE TAX REFORM ACT OF 1976
H.R. 10612
(as Reported by the Senate Committee on Finance)
June 15, 1976

ADMINISTRATION POSITION
THE TAX REFORM ACT OF 1976
H.R. 10612
(as Reported by the Senate Committee on Finance)
June 15, 1976
TABLE OF CONTENTS
Page
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title
Title

I
II
III.
IV
V
VI
VII
VIII
..
IX
..
X
..
XI
..
XII
..
XIII
..
XIV
..
XV
..
XVI
..
XVII
..
[XIII] XIX... . .
XX
..
XXI
..

1
2
4
6
7
8
9
10
12
13
17
18
19
20
21
22
23
24
25
26

ADMINISTRATION POSITION
THE TAX REFORM ACT OF 1976
H.R. 10612
(as Reported by the Senate Committee on Finance)
June 15, 1976
TITLE I -- SHORT TITLE AND AMENDMENT OF 1954 CODE
Bill Administration
Section

Title of Section

Position

101 Short title
102
Amendment of 1954 Code
103
Technical and conforming changes
Discussion
Title I of the House Bill contained provisions reflecting
impact of the Administration's Limitation on Artificial Accounting Losses (LAL) proposal. The Senate Finance Committee deleted
LAL for two principal reasons: its alleged complexity and
adverse economic impact. The Finance Committee believes that
curbing the abuses of tax shelters with the minimum tax, maximum
tax and specific tax shelter provisions is a better approach
both in terms of simplicity and economic impact.
Since 1973, the Administration has supported LAL as an
effective vehicle to curb tax shelters which introduce substantial distortions into the income tax system. Under the proposal,
tax accounting rules would no longer be permitted to create from
a profitable enterprise an artificial tax loss to be deducted
against (and shelter from tax) other unrelated income. Artificial accounting losses limited by LAL would neither be permanently disallowed nor capitalized. Instead, they would be
suspended and carried forward to be deducted in full against
net related income in a future taxable year, thus more correctly
matching income with the expense of earning it.
The Administration continues to support LAL and does not
believe that it will have the drastic economic impact perceived
by the Finance Committee. However, because the existence of
government-imposed controls prevent market incentives from increasing domestic energy supplies, the Administration supports
the application of LAL to oil and gas activities only if effective upon complete deregulation of market prices.

- 2-

TITLE II -- AMENDMENTS RELATED TO TAX SHELTERS
Bill Administration
Section

Title of Section

Position

201 Recapture of depreciation on real property... Support
202
Limitations on deductions for expenses
Support w/mod.
203
Termination of additions to excess deductions accounts under section 1251
Support
204
Limitations on deductions in case of farming
syndicates and capitalization of certain
orchard and vineyard expenses
Support
205
Treatment of prepaid interest
Support w/mod.
207
Amortization of production cost of motion
pictures, books, records, and other
similar property
Support
208
Clarification of definition of produced film
rents
Support
209
Basis limitation for and recapture of depreciation on player contracts
Oppose
210
Certain partnership provisions
Support
211
Scope of waiver of statute of limitations in
case of activities not engaged in for
profit
Support
Discussion
Title II of the Finance Committee bill amends several sections of the Internal Revenue Code to curb abuses generated by
tax shelters principally by (1) tightening the recapture of depreciation rules (which prevent the conversion of ordinary income
into capital gains), (2) imposing limitations on the deduction
of expenses attributable to certain activities to the amount of
the taxpayer's capital "at risk," (3) tightening the rules with
respect to the deduction of prepaid interest, and (4) revising
certain partnership provisions.
By and large, the Administration supports most of the provisions related to tax shelters in Title II. The Administration,
however, urges the following modifications:
-- With respect to the "at risk" limitations
(section 202 of the bill), the Administration
opposes the application of these limitations
to oil and gas activities and equipment leasing

- 3transactions because, in the case of equipment
leasing where the leased property generally has
an established value, there is no economic
reason to distinguish between recourse and nonrecourse financing. In the case of oil and gas
activities, the Administration is opposed to
any restrictions on the tax incentives encouraging oil and gas exploration. On the other hand,
the Administration supports "at risk" limitations
in the case of motion picture films, livestock and
certain crops. In each of these cases, the "at
risk" limitations would be effective deterrents
to sham transactions which generally present difficult enforcement problems for the Internal
Revenue Service. The "at risk" limitations as
to certain farming.activities are generally supported by various farm representatives.
-- While the Administration supports the limitations imposed on the deductibility of prepaid
interest (section 205 of the bill), it urges
a de minimis rule for administrative convenience purposes (e.g., by adoption of a
$500 floor).
-- The Administration does not believe that
special recapture rules for player contracts
(section 209 of the bill) are warranted.

- 4 -

TITLE III T- MINIMUM TAX AND MAXIMUM TAX
Bill
Section

Title of Section

301 Minimum tax for individuals Support w/mod.
302
Maximum tax for individuals

Administration
Position
No objection

Discussion
This title revises the present law minimum tax as it applies
to individuals by (1) increasing the rate from 10 to 15 percent,
(2) providing an exemption of $5,000 or regular taxes paid if
greater, (3) retaining most present law items of tax preference,
and (4) adding new items of tax preference.
Since 1973, the Administration has consistently supported
LAL and a minimum taxable income (MTI) proposal as a dual mechanism
to deal with tax shelters and taxpayers who through a pyramiding
of exclusions and deductions do not pay their fair share of taxes.
The Administration has also consistently opposed the present law
minimum tax because its principal impact is on capital gains and,
as an additional tax, it merely imposes a "slap on the wrist"
toll charge for the use of preferences such as accelerated depreciation and percentage depletion.
As noted in connection with the discussion of Title I, the
Administration continues to support LAL as adopted by the House
with an effective date as to its application to oil and gas
activities coincident with the date of complete deregulation.
The Administration also continues to favor MTI as a sound approach to ensure that taxpayers bear their fair share of the
tax burden. An alternative tax, as recommended by the Administration, would be more progressive than either the House Bill
minimum tax or the Finance Committee version of the minimum tax.
Moreover, an alternative tax would be the first step towards the
long-range goal of a broad based income tax with a lower rate
structure.
Accordingly, whether or not LAL is adopted, the Administration strongly urges the adoption of an alternative tax. If LAL
is not adopted, the alternative tax should include in the expanded
base all the Finance Committee items of tax preference with one
modification. Under the Finance Committee bill, itemized deductions (other than medical expenses and casualty losses) in
excess of 60 percent of adjusted gross income are an item of
tax preference. The Administration believes that there should

- 5 -

be no impact on charitable giving and would, therefore, urge
that charitable contributions not be taken into account in
determining the amount of the excess of itemized deductions
over 60 percent of adjusted gross income.
Although the Administration does not favor the add-on
minimum tax, it would support, in the absence of an alternative
tax, a strengthening of the minimum tax along the lines of the
House Bill, i.e., with a $20,000 exemption for preference income
(phased out as preference income reaches $40,000) and an offset
for one-half of the regular taxes paid.
With respect to the maximum tax, the Administration does
not object to this provision since it may be viewed as a first
step toward a lowering of the top marginal rates of tax and as
an inducement to preclude taxpayers from devoting their energies
to seeking uneconomic tax shelter investments.

- 6 -

TITLE IV -- EXTENSIONS OF INDIVIDUAL INCOME TAX REDUCTIONS
Bill Administration
Section

Title of Section

Position

401 Extensions of individual income tax
reductions
402
Refunds of earned income credit disregarded in the administration of Federal
programs and federally assisted programs..
Discussion
The Administration is disappointed by the form, duration,
and extent of the tax cut extension provision in sections 401
and 402 of the Finance Committee bill. The Administration has
proposed permanent cuts which would exceed the Finance Committee's
cuts by approximately $10 billion in Fiscal 1977 and which would
be based upon a $1,000 personal exemption, a flat standard deduction and reduced rates. This program would be easier to understand, provide certainty through permanence and would, to a
greater degree, permit individuals, rather than the federal government, to decide how their money should be spent.

- 7TITLE V -- TAX SIMPLIFICATION IN THE INDIVIDUAL INCOME TAX
Bill
Section

Title of Section

Administration
Position

Revision of tax tables for individuals
Support
Limitation on deduction of State and
Support
local gasoline, etc., taxes
503
Deduction for alimony allowed in determinSupport
ing adjusted gross income
504
Support
Revision of retirement income credit
505
Oppose
Credit for child care expenses
506
Changes in exclusions for sick pay and
Support
certain
military,
etc.,
disability
507
Support
pensions
508
objection
Moving
expenses
509
objection
Tax revision study
No
Report by the Secretary of the Treasury
No
TheDiscussion
simplification provisions of this title are a step
in the right direction and with one exception, the Administration
supports all of the provisions. The Administration opposes conversion of the child care deduction to a credit because of the
substantial revenue costs involved.
501
502

- 8 TITLE VI -- BUSINESS RELATED INDIVIDUAL INCOME TAX PROVISIONS
Bill Administration
Section

Title of Section

Position

601 Deductions for expenses attributable to
business use of homes, rental of vacation
homes , etc
Support w/mod.
602
Deductions for attending foreign conventions
Support
603
Change in tax treatment of qualified stock
options
No objection
604
Legislators' travel expenses away from home. No objection
Discussion
This title contains rules with respect to the deductibility
of expenses attributable to business use of homes, rental of
vacation homes, and attendance at foreign conventions. The
Administration supports these changes but would urge one modification with respect to the rental of vacation homes. The
Finance Committee rule which limits the deduction to the amount
of gross income derived from business use if a vacation home is
used for personal purposes for more than 10 percent of the actual
business use should be changed to a two week rule (i.e., the
limitation applies if the personal use is for more than two
weeks).

- 9TITLE VII -- ACCUMULATION TRUSTS
BUI Administration
Section

Title of Section

Position

701 Accumulation trusts Support
Discussion
The Administration generally supports the changes made by
the Finance Committee bill with respect to the tax treatment of
accumulation trusts.

- 10 ' TITLE VIII -- CAPITAL FORMATION
Bill Administration
Section

Title of Section

Position

801 Extension of 10 percent credit and
$100,000 limitation on used property
Support
802
Refund on expiring investment tax credit
Support
803
Extension of expiring investment and
foreign tax credits
Oppose
804
Employee stock ownership plans
Oppose unless mod
805
Investment credit in the case of movie
and television films
Support
806
Investment credit in the case of certain
ships
Oppose
807
Eight-year carryover of net operating loss... Support w/mod.
Discussion
The provisions of this title deal generally with capital
formation. The Administration's position on the provisions of
this title is as follows:
1. Support extension of the 10 percent investment tax
credit and $100,000 limitation on used property.
2. Support refundability of expiring investment tax credits
provided that refundability is on prospective basis, i.e., effective with investments made after December 31, 1976.
3. Oppose extension of expiring investment and foreign tax
credits because the benefits would be allocated disproportionately
to the transportation sector, and it would be preferable, if
special aid for that sector, is deemed desirable, to provide on
budget appropriations targeting recipients more thoughtfully
than would be possible through a tax provision allocating benefits
on the basis of the accidental distribution of expiring investment credits.
4. Oppose the increased investment tax credit for employers
who adopt an ESOP unless coupled with a broadened stock ownership plan as a necessary complement so that participation in
benefits is not limited to corporate employees.
5. Oppose application of the investment credit to ships
constructed with funds withdrawn from Capital Construction Funds
(established under the Merchant Marine Act of 1970) eligible for

-li-

the investment tax credit. Such a provision would run afoul
of traditional notions of "basis" and the central concept of
"depreciable property." It would be preferable, if an additional
subsidy is to be provided to shipping, to use either "on budget"
annual appropriations or a clearer and more easily identifiable
tax subsidy rather than a complicated interaction of the investment credit and deductions for contributions to a capital construction fund. Moreover, the existing tax advantages for
shipping are equivalent to tax exemption and to expensing costs
of a qualified vessel; the commercial ship construction industry
appears quite healthy; and the proposed measure could eventually
result in a revenue loss of approximately $75 million annually.
6. Support the net operating loss carryover election, but
modify it to permit an annual election.

- 12 TITLE IX -- SMALL BUSINESS PROVISIONS
Bill Administration
Section

Title of Section

Position

901 Small business provisions Support
Discussion
The Administration supports the changes in Title IX which
would make permanent the increase of the surtax exemption and the
lowering of rates (20 percent on first $25,000; 22 percent on next
$25,000) for corporations.

- 13 -

TITLE X -- CHANGES IN THE TREATMENT OF FOREIGN INCOME
Part I -- Foreign Tax Provisions Affecting Individuals Abroad
Bill
Section

Title of Section

Administration
Position

Income earned abroad by United States
citizens living or residing abroad
Support w/mod
1012
Income tax treatment of nonresident alien
individuals who are married to citizens
or residents of the United States
Support
1013
Foreign trusts having one or more United
States beneficiaries to be taxed currently to grantor
Support
1014
Interest charge on accumulation distributions from foreign trusts
Support
1015
Excise tax on transfers of property to
foreign persons to avoid Federal income
tax
Support
Discussion
This part would modify the tax treatment of U.S. persons
receiving income from abroad and U.S. persons married to foreign
persons. The Administration generally supports the changes made
in the bill. However, the Administration opposes the provision
which would exclude from the foreign earned income exclusion income earned abroad which is received outside of the country in
which earned.
1011

Part -II -- Amendments Affecting Tax Treatment of Controlled Foreign
Corporations and Their Shareholders
1021 Amendment of provision relating to investment in United States property by controlled foreign corporations
1022
Repeal of exclusion for earnings of less
developed country corporations for purposes of section 1248
1023
Exclusion from subpart F of certain earnings of insurance companies
1024
Shipping profits of foreign corporations....
1025
Limitation on definition of foreign base
company sales income in the case of
certain agricultural products

Support

Support
No objection
No objection

No objection

- 14 Discussion
These provisions generally change the tax treatment of
U.S. shareholders owning stock in controlled foreign corporations. The Administration generally supports these provisions

Part III -- Amendments Affecting Treatment of Foreign Taxes
Bill
Section
1031

Title of Section

Administration
Position

Requirement that foreign tax credit be
determined on overall basis
No objection
1032
Recapture of foreign losses
Support
1033
Dividends from less developed country
corporations to be grossed up for purposes
of determining United States income and
1034
foreign tax credit against that income....
Support
Treatment of capital gains for purposes of
1035
foreign tax credit
Support
1036
Foreign oil and gas extraction income
No obj . w/mod.
1037
Underwriting income
No objection
Third tier foreign tax credit when section
951 applies
No objection
Discussion
These provisions would modify those provisions of the Code
which are applied in computing the amount of foreign taxes which
a U.S. person may credit against U.S. tax on foreign income.
The Administration generally supports these provisions. However,
the Administration opposes certain provisions of section 1035 of
the bill, which relate to foreign taxes on foreign oil and gas
extraction income. First, the Administration opposes the transitional rule for denying the creditability for foreign taxes
where there is no economic interest in the oil. Second, the
Administration opposes the provision which would permit a foreign
tax credit for amounts paid on production sharing contracts
which were signed before a certain date.

- 15 -

Part IV -- Money or Other Property Moving Out of or
Into the United States
Bill Administration
Section

Title of Section

Position

1041 Portfolio debt investments in United States
of nonresident aliens and foreign
corporations
Support
1042
Changes in ruling requirements under section 367; certain changes in section 1248.
Support
1043
Contiguous country branches of domestic
life insurance companies
No objection
1044
Transitional rule for bond, etc., losses
of foreign banks
No objection
Discussion
These provisions generally liberalize certain rules involving investments by foreign persons in the U.S. (the elimination
of withholding taxes on portfolio interest), the conditions
under which foreign transactions must receive advanced IRS
clearance, and the tax treatment of certain foreign life insurance branches. The Administration generally supports these
provisions and particularly supports the repeal of the withholding tax and the changes in the advance ruling requirements.
In the case of withholding taxes, the Administration strongly
prefers that these taxes be eliminated for all interest and
dividends paid to nonresident aliens.
Part V -- Special Categories of Foreign Tax Treatment
1051 Tax treatment of corporations conducting
trade or business in Puerto Rico and
possessions of the United States
1052
Western Hemisphere trade corporations
1053
Repeal of provisions relating to China
Trade Act corporations
Discussion

No objection
Support
Support

These provisions would curtail or phase out special tax
treatment given to certain U.S. corporations because of the place
in which they do business. The Administration generally supports
these provisions.

- 16 Part VI -- Denial of Certain Tax Benefits on
International Boycotts and BribeProduced Income
Bill
Section

Title of Section

Adminis tration
Position

Oppose
of foreign tax credit
Oppose
Denial of referral
Oppose
Denial of DISC benefits
Earned income from sources without the
Oppose
United States
Determinations by the Secretary as to
participation in, or cooperation with, an
Oppose
international boycott, and as to foreign
1066
Oppose
bribe-produced income
Effective date
Discussion
These provisions would deny certain benefits available under
U.S. tax law in the case of income received from a country which
imposes a boycott of another country as a condition of doing
business, and would deny these tax benefits in the case of income which is considered to be bribe-produced. The Administration
opposes both of these provisions. The boycott provision is opposed on the grounds that (1) it would be unadministrable, (2) it
would involve the Internal Revenue Service in areas outside of
their expertise, and (3) it would make more difficult a negotiated
settlement of that issue. The bribe provision is opposed on the
grounds that (1) it is not a proper use of Internal Revenue Service
personnel to investigate foreign bribes, (2) the bill is technically deficient in that it is very difficult administratively to
determine the amount of bribe-related income, and (3) no changes
should be made in this area of the tax law until the Richardson
Committee has studied the matter and prepared a report and until
other legislative approaches are considered.

1061
Denial
1062
1063
1064
1065

- 17 TITLE XI -- AMENDMENTS AFFECTING DISC
Bill
Section

Title of Section

Administration
Position

1101 Amendments affecting DISC Oppose
Discussion
This provision would change the current tax treatment of
Domestic International Sales Corporations (DISCs) by permitting
the DISC deferral only to the extent that the sales are incremental and by denying DISC for certain military property. The
Administration opposes any changes in DISC at this time.

- 18 TITLE XII -- ADMINISTRATIVE PROVISIONS
Bill
Section

Title of Section

Administration
Position

Public inspection of written determinations
by Internal Revenue Service
Support
1202
Confidentiality and disclosure of returns
by Internal Revenue Service
Support
1203
Income tax return preparers
Support
1204
Jeopardy and termination assessments
.
Support
1205
Administrative summons
Support
1206
Assessments in case of mathematical or
1207
clerical errors
Support
1208
Withholding
Support
1209
State-conducted lotteries
Support
1210
Minimum exemption from levy for wages-,
1211
salary, and other income
Support
Joint Committee refund cases
Support
Discussion
Social Security account numbers
No objection
The provisions of this title deal with certain administrative aspects of the Internal Revenue Service collection
efforts and are generally supported by the Administration.
1201

- 19 TITLE XIII -- MISCELLANEOUS PROVISIONS
Bill Administration
Section

Description

1301 Tax treatment of certain housing
associations
1302
Treatment of certain disaster payments
1303
Tax treatment of certain 1972 disaster
losses
1304
Tax treatment of certain debts owed by
political parties, etc., to accrual
basis taxpayers
1305
Regulations relating to tax treatment of
certain prepublication expenditures of
authors and publishers
1306
Tax-exempt bonds for student loans
1307
Interest of original issue discount on
certain obligations
1308
Personal holding company income amendments.
1309
Work incentive program expenses
1310
Repeal of excise tax on light-duty truck
parts
1311
Franchise transfers
1312
Employers' duties in connection with the
recording and reporting of tips
1313
Treatment of certain pollution control
facilities
1314
Clarification of status of certain fishmen ' s organizations
1315
Changes to subchapter S shareholder rules..
1316
Application of section 6013(e) to the
Internal Revenue Code of 1954
1317
Amendments to rules relating to limitation
on percentage depletion in case of oil
and gas wells
1318
Implementation of Federal-State Tax Collection Act of 1972
1319
Cancellation of certain student loans
1320
Treatment of gain or loss on sales or
exchanges in connection with simultaneous
liquidation of a parent and subsidiary
corporation
1321
Taxation of certain barges prohibited
1322
Contributions in aid of construction for
certain utilities
1323
Prohibition of discriminatory State taxes
i
1325
1.324
01/
Allowance
Reports
on
architectural
electricity
production
of deduction
barriers
and consumption
for
foreliminating
theof
handicapped

Position
Support
Support
No objection

Support

Oppose
Oppose
No objection
No objection
Oppose
No obj ection
No objection
Oppose
Support w/mod.
No obj ection
Support
Oppose

Support
No obj . w/mod.
No objection

No obj ection
Support
Oppose
No
NoOppose
obj
objection
ection

- 20 -

TITLE XIV -- CAPITAL GAINS
Bill
Section

Title of Section

Allowance of eight-year capital loss
carryover in case of regulated investment companies
Discussion

Administration
Position

1401

Support

This Administration supports the sole provision of this
title which deals with the allowance of an eight-year capital
loss carryover for regulated investment companies.
The Administration also supports the House Bill provisions
which (1) extended the holding period requirement and (2) increased from $1,000 to $4,000 the amount of ordinary income
which may be offset by capital losses.
The Administration also strongly supports the sliding-scale
proposal which will be presented as a Committee amendment.

- 21 TITLE XV -- PENSION AND INSURANCE TAXATION
Bill Administration
Section

Title of Section

Position

1501 Retirement savings for certain married
individuals
No objection
1502
Limitation on contributions to certain
pension, etc. plans
No objection
1503
Participation by Government employees in
individual retirement accounts, etc
No objection
1504
Participation by members of reserves or
national guard in individual retirement
accounts, etc
Support
1505
Certain investments by annuity plans
No objection
1506
Segregated asset accounts
No objection
1507
Study of salary reduction pension plans.... No objection
1508
Consolidated returns for life and other
insurance companies
No objection
1509
Restoration of certain amounts distributed
by insurance companies
No objection
1510
Treatment of certain life insurance
constracts guaranteed renewable
No objection
Discussion
The provisions of this title deal primarily with individual
retirement accounts and certain of the Code provisions affecting
the tax treatment of life insurance companies. Except as noted
above, the Administration does not object to these provisions.

- 22 TITLE XVI -- REAL ESTATE INVESTMENT TRUSTS
Administration
Title of Section
1601
1602

Position

Deficiency dividend procedure
Support
Trust not disqualified in certain cases
where income tests were not met
Support
1603
Treatment of property held for sale to
customers
Support
1604
Other changes in limitations and requirements
Support
1605
Excise tax
Support
1606
Allowance of net operating loss carryover.. Support
1607
Alternative tax in case of capital gains... Support
1608
Effective date for title
Support
Discussion
The Administration supports the provisions of this title.

- 23 TITLE XVII • -- RAILROAD PROVISIONS
Bill Administration
Section

Title of Section

Position

1701 Certain provisions relating to railroads... Oppose
1702
Amortization over 50-year period of railroad grading and tunnel bores placed in
service before 1969
Support
Discussion
Section 1701 of the bill provides special treatment for
railroads (amortization of track accounts, treatment of certain
railroad ties, and changes as to the investment credit for certain railroad property). The Administration is opposed to
special treatment and unsound tax accounting rules for railroads
that would simply establish an undesirable precedent for bailing
out other industries that may get into economic difficulty.

- 24 TITLE [XIII] -- REPEAL AND REVISION OF OBSOLETE RARELY USED,
XIX
ETC., PROVISIONS OF INTERNAL REVENUE CODE OF
1954
Subtitle A -- Amendments of Internal Revenue Code Generally
Bill Administration
Section

Title of Section

Position

1300 Amendment of 1954 Code Support
1301
Amendments of subtitle A; income taxes
Support
1302
Amendments of subtitle B; estate and gift
taxes
Support
1303
Amendments of subtitle C; employment taxes.
Support
1304
Amendments of subtitle D; miscellaneous
excise taxes
Support
1305
Amendments of subtitle E; alcohol, tobacco,
and certain other excise taxes
Support
1306
Amendments of subtitle F; procedure and
administration
Support
1307
Amendments of subtitle G; the Joint
Committee on Internal Revenue Taxation....
Support
Subtitle B -- Amendments of Code Provisions with Limited Current
Application: Repeals and Savings Provisions
1351 Provisions of subtitle A Support
1352
Provisions of subchapter D of chapter 39;
cotton futures
Support
Discussion
The Administration has long supported the Deadwood Bill.

- 25 TITLE XX -- ENERGY RELATED PROVISIONS
Bill Administration
Section
Title of Section

Position

2001 Insulation of residence Support w/mod.
2002 Residential solar and geothermal energy
equipment
Oppose
2003
Investment tax credit changes relating to
energy conservation and production
Oppose
[2004] [Geothermal energy development]
Oppose
2005 Changes in investment credit relating to
air-conditioning and space heaters
Oppose
2006 Credit for purchases of matter which can
be recycled
Oppose
2007 Repeal of excise tax on buses and bus parts..
Oppose
2008 Rerefined lubricating oil
Oppose
2009 Nonhighway use of special motor fuels
Oppose
2010 Duty-free exchange of crude oil
Oppose
Discussion
Except for a modification of the home insulation credit
(nonrefundable, applicable only to used homes, maximum of $150),
the Administration opposes the energy provisions of this title
on the grounds that (1) a free market system will provide adequate
incentives and (2) selective tax credits are undesirable and only
lead others to seek equal treatment.
With respect to geothermal energy development, the Administration supports an elective five-year amortization of reserach
and experimental expenses for a limited period (10 years).

- 26 -

TITLE XXI -- TAX EXEMPT ORGANIZATIONS
Bill
Section

Title of Section

2101

Administration
Position

Disposition of private foundation property
under transition rules of Tax Reform
Act of 1969
No objection
2102
New private foundations set-asides
No objection
2103
Minimum distribution amount for private
foundations
Support
2104
Extension of time to amend charitable
remainder trust governing instrument
No objection
2105
Reduction of private foundation investment
income excise tax
Support
2106
Unrelated trade or business income of trade
shows. State fairs, etc
No objection
2107
Declaratory judgments with respect to
section 501(c)(3) status and classification
Support
Discussion
The changes made by this title generally affect the tax
treatment of private foundations and other charitable organizations. As noted above, the Administration either supports or
does not object to the provisions of this title.

# # #

Contact: Peter 0. Suchman
Extension: 5538
FOR IMMEDIATE RELEASE
June 17, 1976
TREASURY ANNOUNCES FINAL COUNTERVAILING DUTY
DETERMINATION ON CHEESE
FROM FINLAND
Assistant Secretary of the Treasury David R. Macdonald
announced today the issuance of a final determination in
the countervailing duty investigation of cheese from Finland.
It was determined that bounties or grants exist with regard
to cheese from Finland. Such bounties or grants applicable
to emmenthaler, which constitutes 70 percent of total
Finnish cheese exported to the U.S., have been substantially
reduced. This reduction was accomplished by virtue of the
significant lowering of payments made by the Finnish Government on the export of emmenthaler cheese. Additional duties
on Finnish cheese are therefore being waived under the
provisions of the Trade Act of 1974. Notice of this action
will be published in the Federal Register of June 18, 1976.
On December 16, 1975 a preliminary affirmative determination on cheese from Finland was published in the
Federal Register. Interested persons were given an opportunity to submit written comments on the preliminary
determination. No information was received to change the
basis for the preliminary determination that the consumer
subsidy, basic support subsidy, and freight subsidy constitute bounties or grants.
Accordingly, this final determination indicates that
bounties or grants within the meaning of the Countervailing
Duty Law, are being paid or bestowed on the manufacture,
production or exportation of cheese from Finland. Based
on the price adjustment made on emmenthaler cheese and
on the condition that imports of other cheeses not exceed
historic marketing levels, a temporary waiver of countervailing duties under section 331 of the Trade Act of
1974 has been issued for cheese.
In 1975, imports of cheese from Finland were valued
at approximately $10.1 million.
*WS-937
* *

June 17, 1976
MEETING BETWEEN SECRETARY OF THE TREASURY
WILLIAM E. SIMON AND ARGENTINE MINISTER OF ECONOMY
JOSE ALFREDO MARTINEZ DE HOZ
Secretary of the Treasury William E. Simon and Argentine
Minister of Economy Martinez de Hoz met at the Treasury
Department on June 16 for a wide-ranging discussion of the
new economic program adopted by the Government of Argentina.
They discussed relations between Argentina and United States
financial institutions. They emphasized the contribution
that foreign investment could make to Argentina's economic
growth and discussed the policies in both countries that
would enhance the climate for such investment. The Minister
was accompanied by the President of Argentina's Central Bank,
AdolfoCesar Diz, Ambassador-Designate to the U.S., Arnaldo
Tomas Musich, and other senior Argentine officials. Assistant
Secretary Gerald L. Parsky and Deputy Assistant Secretary
John A. Bushnell also participated for the United States. Minister
Martinez de Hoz was also the guest of honor at a luncheon
hosted today by Assistant Secretary Parsky at the Treasury
Department.
In the meeting with Secretary Simon, Minister Martinez
de Hoz reviewed the program Argentina has adopted to restore
equilibrium to the Argentine economy, to bring about a major
improvement in Argentina's external payments position, and
to reduce inflation. He indicated that the program incorporated a broad range of economic policies including measures
to increase agricultural production, improve tax collection,
establish a realistic exchange rate, reduce excessive liquidity
and attract foreign investment. The Minister informed Secretary
Simon that the actions the government instituted beginning in
March 1976 have already begun to take effect. He noted that so
far this year Argentina's gross foreign exchange reserves have
nearly doubled to $1.2 billion. The Minister also noted the
rate of inflation which had reached a peak of 38 percent a month in
March 1976 and has dropped sharply to 13 percent a month in May.
Minister Martinez de Hoz indicated that major progress had
WS-938
also been made in reducing the budget deficit which prior to
the stabilization
program was equal to 13 percent of Argentina's
gross
domestic product.

- 2Minister Martinez de Hoz informed Secretary Simon that
missions from the IMF and the World Bank have been in
Argentina assessing the economic situation and that he was
looking forward to meeting with IMF officials in Washington
later this week to discuss arrangements with the IMF in
support of Argentina's economic program.
Secretary Simon welcomed the major efforts that Minister
Martinez de Hoz and the Argentine Government have taken to
stabilize and strengthen Argentina's economy. He indicated
that this bold program merited support. Although such a
major restructuring of an economy takes time, the recent
data demonstrate that the program is working. The Secretary
and the Minister agreed that their officials will remain in
close contact both in Washington and in Buenos Aires to follow
the progress under Argentina's stabilization efforts.
o 0o

nDepartmentoftheTREASURY
INGTON, D.C. 20220

TELEPHONE 964-2041

FOR RELEASE AT 4:00 P.M.

June 17, 1976

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for $2,591 million, or thereabouts, of 364-day Treasury bills to be dated
June 29, 1976, and to mature June 28, 1977 (CUSIP No. 912793 D6 0 ) . The bills
will be issued for cash and in exchange for Treasury bills maturing June 29, 1976.
This issue will not provide new money for the Treasury as the maturing
issue is outstanding in the amount of $2,591 million, of which $1,341 million
is held by the public and $1,250 million is held by Government accounts and
the Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities.

Additional amounts of the bills may be issued to Federal

Reserve Banks as agents of foreign and international monetary authorities.
Tenders from Government accounts and the Federal Reserve Banks for themselves
and as agents of foreign and international monetary authorities will be accepted
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 Daylight Saving time, Wednesday, June 23, 1976.
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 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)

WS-9 39

-2deposit 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 $500,000

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

June 29. 1976,

in

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

June 29, 1976.

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 capit.-l 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, wbtrt'^r or; original Issue
or on subsequent purchase, and the amount actually receive 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.

oOo

FOR IMMEDIATE RELEASE

REMARKS BY THE HONORABLE EDWIN H. YEO, III
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE NEW YORK ASSOCIATION OF BUSINESS ECONOMISTS
AT THE PRINCETON CLUB, NEW YORK, NEW YORK
WEDNESDAY, JUNE 16, 1976
It gives me great pleasure to be here to speak to
so many members of the New York economic and financial
community.
I thought it would be interesting if we talked a
little about our international monetary system, perhaps
about recent developments, particularly developments since
Rambouillet and Jamaica.
The Role of Exchange Markets
The negotiations at Rambouillet and Jamaica, which made
possible the amendments of the IMF Articles, were in large
part due to lessons taught to all of us by the exchange market
itself. The past few years have seen the emergence of a
profound change in international attitudes toward the exchange
market from those prevailing under the earlier par value
system.
An obvious lesson is that attempts to maintain a given
level for an exchange rate can be very costly, when the
exchange market does not regard that level or range of
exchange rates as viable. Under such circumstances we have
seen on numerous occasions that massive amounts of funds have
moved quickly from one currency to another. Countries have
found that continued resistance to one-way market pressures
can result in heavy losses of reserves or large-scale
borrowings for deficit countries. The cost of servicing
borrowings, the exhausting of sources of credit, or the
depletion of reserves has often led to the abandonment of
unlimited intervention.

WS-940

- 2On the other hand, surplus countries have encountered
problems of a different nature in intervening to prevent
market pressures from raising the value of their currencies.
The absorption of incoming funds on a large scale has made
it difficult for monetary authorities to follow restrictive
monetary policies designed to restrain inflation. Progressively
stronger measures have had to be taken to limit or sterilize
the effects of such flows on the supply of domestic money. In
some cases this dilemma has led countries to restrict their
intervention and allow their exchange rates to respond to
market pressures by appreciating.
But in a more fundamental sense, a second lesson has also
been taught by the experience of recent years. This is that
instability of exchange rates, as evidenced by market pressures,
tends to reflect divergent movements of underlying economic
and financial factors in individual countries. On the other
hand, stability of exchange rates is likely to be compatible
with a truly floating exchange rate, with minimal or no
official intervention, during periods when the exchange market
considers that these underlying conditions will not be diverging.
Moreover, without such a market judgment, under any type of
exchange system, there is likely to bn persistent or recurrent
one-way pressure in the exchange market.
Rambouillet and International Cooperation
The Rambouillet meeting, in the light of this second
lesson, concluded that the path to international monetary
stability is to be found in pursuing underlying conditions
that converge toward stability rather than diverging toward
instability. One of the ways to pursue this objective was
to evolve an improved consultation process among the senior
officials in finance Ministries and central banks, covering
both exchange market developments and more basic economic
facts.
The United States does not envision this continuous
consultation process as a means of establishing specific
exchange rate relationships involving the dollar. In
principle, the dollar and other currencies should be allowed
to move in response to underlying economic and financial
conditions„ These consultations are therefore not aimed at
setting specific targets or ranges for exchange rates. Nor

- 3do they imply any agreement that central bank intervention
in the exchange market is called for, except to correct
disorderly market conditions. This understanding with
respect to intervention has sometimes been referred to as
interim to reduce "erratic fluctuations." But the concept
of "erratic fluctuations" is an "ex post" concept. One
cannot determine until well after the fact whether any
particular exchange rate movement constitutes an erratic
fluctuation. As a working guide -- as an operating rule -the determining factor is whether markets are disorderly.
Thus the consultations are aimed, not at exchange rates
specifically, but at better mutual understanding of the
underlying conditions and at cooperation in dealing with
their consequences.
Objections to "Target" or "Right" Rates
This approach does not imply a "target" or "right"
exchange rate calculated on the basis of some more or less
complex comparison of statistical data on prices or costs
in different countries, or fixed by reference to an econometric
model based on past data and relationships., Nor does it adopt
guidelines that are measured in terms of rates of change in
single exchange rates, or in the average exchange rates of a
group of trading partners, to which weights have been applied.
There are, in our judgment, many difficulties in such
an approach. Without attempting to dwell on them, let me
mention some of them.
One problem is that international price and cost
comparisons are not as comprehensive as is the exchange
market itself. They tend to concentrate on measuring the
impact of exchange rates on trade and on competitive trading
positions. This is, of course, important, but it is not
the whole story. Movements of capital constitute a large,
highly variable and very sensitive element in the exchange
market.
Also, statistical comparisons of costs and prices, in
addition to being less than comprehensive reflections of all
international transactions, yield quite different results
depending on the data used, the base periods chosen as normal,
and other statistical techniques utilized.

- 4Another difficulty is that international agreement on
any target rate for a currency would become a matter of very
difficult international negotiation, with the national
authorities of the countries affected by the rate being
subject to pressures from exporters, importers, investors and
other groups. Nor are national governments likely to be receptive
to the idea of determination of the "right" or "target" rates
by an international institution. These considerations suggest
that the impersonal and relatively impartial judgment of the
exchange market, based on its interpretation of underlying
conditions, may be more acceptable, in practice, than either
an attempt to arrive at a negotiated rate, or a rate that is
econometrically determined.
For our part, we believe that the exchange market itself
will, if it is permitted to do so, recognize the underlying
economic conditions that will ultimately determine the exchange
rates that are viable. Faced with abrupt changes in these
conditions, such as the quadrupling of oil prices, it may
take some time for markets to reach a lasting consensus, and
initial judgments may be revised later. But we have no reason
to believe that monetary authorities would make a better
judgment. In fact, the history of official intervention over
the past decade suggests that intervention losses have on the
whole exceeded intervention gains by a wide margin. This
indicates that in mnay cases the authorities eventually
followed the lead of the market.
IV. The Role of the Fund
In this new and modernized system the International
Monetary Fund, has, I believe, several very important functions.
The shift of emphasis from par values and from the narrower
aspects of exchange rate intervention to a broader perspective
by no means implies that the role of the Fund is diminished.
It does mean that it should think more in terms of its
influence on national policies, and less in terms of attempts
to establish and police formal rules concerning the level and
movements of exchange rates and the extent and form of
official intervention. The Fund should, in effect, recognize
that its success may depend upon its ability to practice
effective international diplomacy, and not on such formal rules.

- 5 Let me touch very briefly on some opportunities for the
Fund as a participant in and overseer of the modernized
international monetary system.
First, the Fund has been and will be a lender of last
resort to its member countries. By this phrase I mean that
it can supply moderate amounts of medium-term credit on a
repayable basis to countries that have largely or completely
exhausted their reserves and their access to generalized
financing of imports. The distribution of payments imbalances
seems likely to be such that some members, most of the time,
will have need for such resort to the Fund.
This type of financing needs to be associated with the
Fund's best techniques for helping countries bring their
payments situations into a viable situation, one that
stabilizes their reserve positions without relying on
intensified restrictions on trade and payments. Conditions
and performance criteria need to be applied to domestic fiscal
and monetary policies, realistic exchange rates encouraged,
and removal of restrictions required. That is, the Fund can
make most effective use of its resources in dealing with these
maladjusted deficit countries in this manner. In so doing
it will not only help them to restore domestic stability,
but it will guard the entire system from the danger of a
contagious spread of restrictions to other members of the Fund.
The Fund has a well-established reputation for emphasis
on restraint of inflation. As a monetary institution, it is
and should be concerned to avoid the erosion of purchasing
power of all member currencies. Where its own resources are
being utilized, it can exercise a strong direct influence on
member countries. With other members its influence is moral
and intellectual, but still highly valuable.
In many ways the most difficult task for the Fund, and
for member countries, remains the adjustment of persistent
imbalances that tend to promote instability of the international
monetary system. One step that may facilitate such adjustment
is to allow the exchange market to move exchange rates upward
for many persistent surplus countries, and downward for deficit
countries. This generally helps to dampen inflation in persistent surplus countries, while encouraging output of
internationally competitive goods in persistent deficit
countries. In developing over time some principles for its

- 6 oversight of the international monetary system, the Fund may
wish to consider this first step toward international
adjustment. Beyond this, international monetary diplomacy
should pursue the essential objective of convergence of
national policies toward stability, as a means of attaining
a durable and viable stability of both economies and exchange
rate relationships.
These, then, are some of the responsibilities that we
visualize for the Fund under the Second Amendment to the
Articles of Agreement of the Fund.
V. No Substitute for Sound Underlying National Policies
No claim has been made that the Rambouillet and Jamaica
understandings can or should produce exchange stability promptly.
Underlying economic and financial conditions throughout the
world are not stable -- far from it. Growth rates differ
substantially among major nations and there is a wide divergence
in rates of inflation. The Administration's economic projections for the United States in 1976 originally called for
strong output gains of about 6 percent in real terms, inflation
to remain in the 6 percent zone, the unemployment rate to
gradually decline to under 7-1/2 percent by yearend and the
large current account surplus to decline significantly as the
strong U.S. domestic expansion increases our imports more
rapidly than the foreign demand for our exports. These estimates
are currently being revised to reflect the favorable developments during the last few months. When this analysis is
complete it will likely indicate that real output will be
substantially higher, the inflation rate for the entire year
somewhat lower and the unemployment rate may be down to 7 percent by yearend. Although the first quarter output figure is
above the likely future pace and the inflation figure is lower
than the probable underlying rate of inflation, it is clear
that an impressive economic recovery has been underway for
fifteen months and that continued expansion beyond 1976 is
likely.
Nevertheless, an inflation rate of 6 percent still distorts
economic decisions; food, fuel and industrial commodity price
movements can create serious risks as the economic expansion
continues; unemployment in excess of 7 percent wastes human
resources and curtails economic progress; several important
labor contract negotiations must be settled; and there is
the perennial concern about the weather and potential harvests.
Nevertheless, we can be guardedly optimistic about America's
near-term economic prospects if excessive fiscal and monetary
stimulus is avoided at this time.

- 7Outside the United States, the economies of a number of
other industrial countries are now accelerating much more
rapidly than had been generally anticipated. Economic
indicators for the last few months lead to the conclusion
that the upswing in most of the major industrial countries
is already well launched and firmly based: Aggregate
industrial production in the major countries has been
steadily increasing since last May and is more than 10 percent
up from the trough; new orders are on the rise; trade volumes
and picking up and are now expected to grow 10 percent during
the year; the amount of over-time work is on the rise; savings
rates have declined to more normal levels; business and
consumer confidence is strengthening and consumer spending
is leading the expansion in a number of major economies.
Just this week preliminary statistics were released
showing that the Japanese economy registered real growth at
an annual rate of 14.8 percent during the first quarter -double that expected a short while ago. German industrial
production continued expanding by posting a strong 2 percent
rise in April and real growth is now expected to be on the
order of 5-1/2 - 6 percent during 1976 -- revised upward
from the 4 percent hoped for at the first of the year.
The 1974-76 cyclical swing has been, to an unusual
degree, characterized by rapid changes in inventory decumulation
or accumulation. To date, the recovery has depended very
heavily on this feature, second only to a renewal of consumer
demand. This, in turn has been assisted by moderate expansionary fiscal stimulus in a number of countries. Fixed domestic
investment has played a fairly limited role thus far in most
countries, and will need to replace inventory rebuilding to
continue the momentum of recovery, particularly in the
countries with strong currencies. For countries with weak
currencies, priority will need to be given to increasing the
output of internationally competitive goods, in order to
provide employment, but at the same time to improve the
international payments position.
The recovery from the recession is bringing with it an
expansion of imports from the depressed levels of 1975 in
most advanced countries. An important part of this expansion
in imports should provide earned receipts to developing
countries, and thus help their payments positions.

- 8 In the non-oil-producing developing countries, very
large payments deficits resulted from the conjunction of
higher costs of oil and recession in the industrialized world.
Some adjustments to the high rates of growth made possible
by boom conditions have been occurring. More recently, however, the exports of these countries have begun to improve in
response to the rebuilding of inventories and the recovery
of production in the industrial world. For 1976, the net
flow of capital to these countries to finance payments
deficits is expected to decrease moderately.
More broadly, world prices of primary commodities have
been moving up rapidly, bringing improvement in the terms of
trade of many developing countries. Though these prices, in
terms of dollars, are still below the peaks reached during
the extreme boom conditions of 1973-74, by the end of May
they had reached a level that was only about 3 percent below
the peak, according to one index of commodity prices compiled
by the London Economist.
While these developments are broadly encouraging, the
persistence of high inflation rates and of very large
differences in rates of inflation is a source of instability.
Another source of instability is that financing of
international deficits and surpluses still relies heavily
on short and medium-term lending. This reflects the continuing
uncertainties that have inhibited longer-term placements of
capital, and have contributed to the international pool of
restless and nervous capital - - a pool of enormous magnitude.
Neither the present exchange rate system nor the earlier
par value system can assure that sovereign governments will
follow convergent fiscal, monetary and other policies that
promote stability. Nevertheless, the emphasis on these
underlying conditions and policies, rather than on maintenance
of par values, is a meaningful step toward realism. And,
where convergence proves to be a slow process, the movement
of exchange rates can help to dampen excessive movements of
funds from one currency to another.

- 9 VI.

The Task Ahead

The current recovery of the world economy from severe
recession and gradual progress on international monetary and
trade relations are positive signals. However, any realistic
analysis indicates that serious problems persist. Inflation
and unemployment are too high almost everywhere. Capital formation required for meaningful development is restricted by
economic and political uncertainties. Specific protectionist
pressures continue despite the acknowledged net advantages of
free trade. Balance of payments problems in some countries
are ominous even though the private financial system and
international institutions have effectively financed the
massive current account deficits caused by trade distortions
and capital flows.
I think it is quite clear that what we have ahead of
us is the need to adjust. We are approaching the limits,
though we're not there yet, of our capacity to finance
structural disequilibrium. And as we approach those limits
we are going to want to adjust. Structural disequilibrium
can take a myriad of forms that can be broken into two general
categories: 1) those countries that have a structural surplus,
and 2) those countries that have a structural deficit. If
we are to get the full potential out of our monetary system,
we are going to have to address ourselves to efforts to
correct disequilibrium, particularly when it is of a structural
nature.
In short, considerable progress has been made but the
complex challenges of sustaining economic expansion and
creating a more open world economy still confront us. The
United States has a special responsibility to provide positive
leadership.
-- First, we must continue to follow responsible
fiscal and monetary policies to create a strong
and stable domestic economy, and thus to help
stabilize the world economy. Unfortunately, in
the United States our policies have not provided
the necessary stability over the last decade.
Stop-and-go decisions have led to recurring booms
and recessions marked by excessive inflation and
unemployment. Although in the United States we
are in the second year of a relatively strong
economic expansion the need for more responsible
economic policies has never been greater.

- 10 —

Second, in shaping our international economic
policies we must emphasize the same principles
of open markets and competition that have served
both our nations so well. We should promote fair
competition, the reduction of tariffs and
non-tariff barriers, equitable trading rules and
open access to markets and raw materials.
In the final analysis there is little or no difference
between domestic and international economic goals. If the
nations rely on the traditional principles of open markets,
minimal government controls, fair competition and personal
freedom, and follow appropriate fiscal and monetary policies,
then economic progress will occur in both sectors.
But, if we are to sustain the output of goods and services
and strengthen weak currencies, we must control inflation.
There is no substitute for this. It is a necessary condition
for the exchange stability in the broad sense that the world
so greatly desires.

oo 00 oo

FOR IMMEDIATE RELEASE

Contact:

J. P. Smith
x8431

TREASURY, LABOR AND SAUDI ARABIA
SIGNED MANPOWER TRAINING AND DEVELOPMENT AGREEMENT

Representatives of the U.S. Treasury and Labor
Departments have signed a multi-year manpower training
and development agreement with the Saudi Arabian Ministry
of Finance and National Economy and the Ministry of Labor
and Social Affairs.
Treasury Assistant Secretary Gerald L. Parsky, whose
office was responsible in conjunction with the Labor Department for negotiating this Agreement, stressed the significance
of this Joint Commission project. Assistant Secretary Parsky
said, "This agreement adds another very positive dimension to
U.S. - Saudi cooperation in the economic field. Rapid progress
in manpower training and development is a central ingredient
in Saudi Arabia's Five Year Development Plan. This Project
Agreement will enable the United States and Saudi Arabia to
work closely as Saudi Arabia implements this important component
of its Development Plan."
The Agreement is the sixth in a series of major technical
cooperation projects under the U.S. - Saudi Arabian Joint
Economic Commission.
Under the initial phase of this agreement, the Labor
Department will provide a wide range of training advisory
services to include the assignment of a group of long term
specialists to the Saudi Ministry of Labor and Social Affairs.
Additionally, the two Governments will cooperate in planning
and monitoring the construction and equipping of a series of
Suadi vocational traininq centers.
The cost estimate for the initial one-year phase of the
project is $23 million. All project expenses will be borne by
the Saudi Arabian Government.
WS-941

OoO

FOR RELEASE AT 12:00 NOON

JUNE 18, 1976

TREASURY TO AUCTION $2,500 MILLION OF 5-YEAR NOTES
The Department of the Treasury will auction $2,500
million of 5-year 1-month notes to raise new cash. Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international
monetary authorities at the average price of accepted
tenders.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.
Attachment
oOo

WS-942

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR NOTES

FOR RELEASE 12:00 NOON JUNE 18
'

Amount Offered;
To the public

•

$2,500 million

Description of Security:
Type of security

, Notes

Maturity date. -..'.'

August 15, 1981

Call date

No provision

Term

5-years, 1-month

Interest coupon rate « .

To be determined at auction based on the
average of accepted bids

Investment yield

To be determined at auction

Premium or discount

To be determined after auction

Interest payment dates

February 15 and August 15 (first payment
on February 15, 1977)

Minimum denomination available

$1,000

Terms of Sale:
Method of sale. . .

Yield auction
»

Payment by subscriber of accrued
interest

None

Preferred allotment.

Non-competitive bids for $500,000 or les

Deposit requirements

5% of face amount with tenders

Guarantee of deposit

Acceptable

Key Dates:
Deadline for receipt of tenders....

Tuesday, June 29, 1976 by 1:30 pm EDST

Settlement date (final payment due)

Friday, July 9, 1976

Delivery date for definitive
securities

Wednesday, July 14/ 1976

ep
epartmentoftheTREASURY
, D.C. 20220

TELEPHONE 964-2041

For information on submitting tenders in the Washington, D. C. area:

PHONE W04-2604

FOR RELEASE AT 12:00 NOON June 18, 1976
TREASURY TO AUCTION $2,500 MILLION OF 5-YEAR NOTES
The Department of the Treasury will auction $2,500 million of 5-year notes
to raise new cash. Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities at the
average price of accepted tenders.
The notes now being offered will be Treasury Notes of Series F-1981 dated
July 9, 1976, due August 15, 1981 (CUSIP No. 912827 FT 4) with interest payable
on February 15 and August 15, 1977, and thereafter on February 15 and August 15.
The coupon rate will be determined after tenders are allotted. 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 and they will be available for issue in book-entry form to
designated bidders.
Payment for the notes must be made on July 9, 1976. Payment may not be made
through tax and loan accounts. Definitive notes in bearer form will not be available
on July 9, but will be delivered on or about July 1 4 , 1976. Purchasers of bearer
notes may elect to receive interim certificates on July 9, 1976, which shall be bearer
securities exchangeable at face value for Treasury Notes of Series F-1981 when available
Tenders will be received up to 1:30 p.m., Eastern Daylight Saving time, Tuesday,
June 29, 1976, 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 June 28. Tenders must be in the amount of $1,000 or a multiple thereof,
and all tenders must state the yield desired, if a competitive tender, or the term
^noncompetitive", if a noncompetitive tender. Fractions may not be used in tenders.
The notation "TENDER FOR TREASURY NOTES" should be printed at the bottom of envelopes
n which tenders are submitted.
Competitive tenders must be expressed in terms of annual yield in two decimal
laces, e.g., 7.11, and not in terms of a price. Tenders at the lowest yields,
nd noncompetitive tenders, will be accepted to the extent required to attain the
mount offered. After a determination is made as to which tenders are accepted, a
°upon rate will be determined at a 1/8 of one percent increment that translates
nto an average accepted price close to 100.000 and a lowest accepted price above
•/50. That rate of interest will be paid on all of the notes. Based on such
erest rate, the price on each competitive tender allotted will be determined and
S C essful
p ?
competitive bidder will pay the price corresponding to the yield
Ld
• Price calculations will be carried to three decimal places on the basis of
ice per hundred, e.g., 99.923, and the determinations of the Secretary of the
ice^f i ? 1 1 ^ f i n a 1 ' Nonc °mpetitive bidders will be required to pay the average
Nmroc of^L * c c e p t e d competitive tenders. BIDDERS SUBMITTING NONCOMPETITIVE
WHTrn n ? S J ^ f I Z E ™ T I T I S POSSIBLE THAT THE AVERAGE PRICE MAY BE ABOVE PAR,
WHICH CASE THEY WOULD HAVE TO PAY MORE THAN THE FACE VALUE FOR THE NOTES.

-2-

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 $500,000 or
less, and all tenders from Government accounts and the Federal Reserve Bank
for themselves and as agents of foreign and international monetary authorities,
will be accepted in full at the average price of accepted 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 Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth therein. 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, foreign central banks and foreign States, dealers who make
primary markets in Government securities and report daily to the Federal Reserve
Bank of New York their positions with respect to Government securities and
borrowings thereon, 'Federal Reserve Banks, and Government accounts. Tenders from
others must be accompanied by payment of 5 percent of the face amount of notes
applied for. 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 with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Friday, July 9, 1976.
Payment must be in cash, in other funds immediately available to the Treasury by
the payment date, 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, July 2, 1976, 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) Wednesday, June 30, 1976, if the check is
drawn on a bank in another district. Checks received after the dates set forth in
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 will be
canceled and the deposit with the tender up to 5 percent of the amount of notes
allotted will be subject to forfeiture to the United States.

oOo

FOR RELEASE UPON DELIVERY
Statement of the Honorable Edwin H. Yeo III
Under Secretary of the Treasury for Monetary Affairs
Before the Committee on Foreign Relations
United States Senate
on IMF Amendment and Quota Increase
June 22, 1976,10:30 AM

Mr. Chairman and Members of the Committee:
The attainment of America's traditional foreign relations
objectives, our political and military as well as our international economic objectives, depends in large measure on
our success in maintaining a strong and healthy world economy —
and that in turn requires a sound, smoothly functioning and
equitable international monetary system.
The legislation before the Committee this morning
proposes major reforms for our international monetary system —
the first extensive revision of these arrangements since they
were established at Bretton Woods in 1944. The need for
reform, which began to be widely debated in the 1960's as
the inadequacies of the Bretton Woods par value system became
apparent, grew more urgent with the breakdown of that system
in 1971. Subsequently, with international exchange arrangements of necessity operating outside the rule of law, there
followed a period of five years of debate, negotiation, and
experimentation. The culmination of that process, reached
in Jamaica, was international consensus on the elements of
a new international monetary system, embodied in this legislation. That new system will provide for the greater flexibility, resilience and increased reliance on market mechanisms
which today's monetary relationships require, replacing the
exchange rate rigidity and gold emphasis of the Bretton Woods
system which led to its breakdown. It represents a major
structural improvement in our international trade and payments
order, and will, I am confident, help create an environment
in which all nations can benefit more fully from the free
flow of goods and investment.
WS-944

- 2 Specifically, the legislation before you would authorize
two related actions: United States acceptance of an extensive amendment of the Articles of Agreement of the International
Monetary Fund, and United States consent to a proposed increase
in its quota in the Fund. My purpose today is to discuss
the concepts of the new system and the thinking on which it
is based; to tell you why I regard its introduction as
essential to the interests of the United States; and to
urge that you give your strong support to the legislation
authorizing its adoption, in order that we can move promptly
to restore an effective legal framework to our monetary
arrangements and reduce the risk that nations will pursue
selfish policies which pay too little regard to the effects
on others.
Reaffirmation of IMF Role and Bretton Woods Objectives
The new monetary system — the main lines of which were
formulated in Jamaica last January — differs fundamentally,
in philosophy and in operation, from the Bretton Woods
system. But it will retain and build on two important basic
features of the Bretton Woods framework:
— First, the central pivotal role of the International
Monetary Fund as the institutional heart and monitor of the
system will be continued, and indeed strengthened.
— Second, the essential aims of Bretton Woods, which
give cohesion and direction to the monetary system, will be
reaffirmed. Those aims, identified in Article I of the
present IMF charter, include: fostering international
monetary cooperation and the balanced growth of trade;
promoting exchange stability and the elimination of exchange restrictions; and providing temporary balance-ofpayments financing to allow members an opportunity to correct
maladjustments without resorting to measures destructive of
national or international prosperity.
Taken as a whole, these purposes represent a solemn
commitment to the philosophy of a liberal world monetary
order. The decision by the international community in 1944
to dedicate itself to these aims marked a turning point —
from the selfishness and destructiveness of the 1930's, when
each nation sought to lift itself from the morass of world
depression at the expense of its neighbors, to the cooperative
approach to international monetary problems which has since
prevailed.

- 3 That is the guiding spirit of Bretton Woods and a
part we must not lose: The commitment to international
cooperation and responsible international behavior. The
continued validity of, and need for, the Bretton Woods
objectives are not questioned, and IMF Article I is accordingly being reaffirmed.
Conceptual Framework of the New System
But while the new system provides the same aims as the
Bretton Woods system and continues to rely primarily on the
IMF as the institution for achieving its purposes, it differs
in other critical respects.
The Bretton Woods system was created against the backdrop of a different world — the world of the 1930's and 40's,
in which levels of international trade were very low; in
which capital flows had virtually dried up and the value
of international investment to international prosperity was
not recognized; in which reliance on direct controls was
widespread; in which interest rate and monetary policy instruments had fallen into relative disuse; in which the
attention of policy officials was directed single-mindedly
toward jobs and employment goals. Structurally the world
of Bretton Woods was very different because the number of
sovereign nations participating in the international system
was perhaps one-third the present number; and because there
was a sigle strong currency — the dollar — and a dominant
economy — the United States — which could absorb the combined impact of adjustment policies and reserve changes of
the rest of the world..
It is understandable that features of a monetary system
designed to meet the problems of that world could become
obsolete and anachronistic in the conditions of today, where
the structure of the world economy has changed and the problems have changed — where nations are struggling to get
below double digit inflation, and are living with levels
of unemployment far in excess of those prevailing in the
early postwar years.
The proposed new system differs most importantly on how
best to bring stability to the international monetary system.
As it actually functioned, Bretton Woods sought to impose
stability on countries from without, through the operation
of international monetary mechanisms; the new system seeks
to develop stability from within, through attention to
responsible management of underlying economic and financial
policies in individual member countries.

- 4Bretton Woods was based on the idea that stability
could be imposed on a heterogeneous world by a structure
of par values, supported by financing from the Fund. That
system, developed at a time when the competitive depreciations of the 1930's were fresh in mind, recognized as
legitimate only one exchange rate practice — par values.
It assumed that if countries were required to adhere to
fixed exchange rates, to be altered only after fundamental
economic changes had occurred, and were supplied with moderate
amounts of Fund credit, that arrangement would provide
adequate leverage — at least on deficit members — to
encourage stable economic policies. But as this Committee
well knows, it proved incapable of dealing with the changed
world of the 1960's and 1970's, when external shocks of
unprecedented magnitude, widely diverging inflation rates,
extreme variations among nations' economic policies, and
the capacity for massive capital flows relative to limited
Fund resources led ultimately to breakdown of the par
value system.
The new system takes a different approach. It does
not rely on the system to force stability on member countries,
but looks to the policies of member countries to bring
stability to the system. In the exchange markets, the new
system does not seek to forestall change by imposing rate
rigidity, but recognizes that countries* competitive positions
do and will change, and that it is far less destabilizing
to permit rates to move in response to market forces than
to hold out until the abandonment of costly large financing
efforts brings abrupt jumps. It recognizes that the only
valid path to international monetary stability is the pursuit
of policies in the member countries that converge toward
stability rather than diverge into instability. It acknowledges that we can never assure lasting stability in exchange
rates between the dollar and yen, or mark, for example, if
the underlying trends in the economies of the U.S. and Japan,
or Germany, differ sharply in pace or direction.
This is much truer today than 30 years ago, because we
have made great progress in liberalizing the world economy
and expanding economic interdependence. The move to a
liberal and integrated world economy has brought greater
prosperity and benefits to all nations. But allowing greater
freedom for international commerce also means greater potential for disruption from that commerce. With expanded trade
and capital flows, market responses to changing conditions
canbasic
be
swift
andso
massive.
In
today's
world
challenge
have
economy,
to
learned
market
action
it do
this
to
forces
lesson
manage
at their
will
time
or
peril.
fail.
fix
andexchange
again,
In integrated
recent
and
rates
years,
those
in
contradiction
who
nations

- 5 The new monetary system is therefore a more flexible,
pragmatic, market-oriented system, better suited to the
highly integrated world economy of the present. It recognizes that countries cannot define their obligations in
terms of measures to be adopted only after the strains
occur. It looks to prevention whereas the old system
applied only cures, often too late and with ineffective
doses.
It concentrates on the real determinants of
monetary stability — stability in underlying economic
and financial conditions — rather than on the exchange
rate consequences which were the focus of Bretton Woods.
Obligations Regarding Exchange Arrangements
That philosophy underlies the new Article IV, "Obligations Regarding Exchange Arrangements." This critical part
of the Articles provides the legal framework and nucleus of
a new system. It contains five major provisions:
One, the Article provides for specific obligations of
each member to promote underlying stability. In the words
of the Article, each member must, with due regard to its
circumstances, "endeavor to direct its economic and financial policies toward the objective of fostering orderly
economic growth with reasonable price stability," and "sefek
to promote stability by fostering orderly underlying economic
and financial conditions."
Two, the Article provides wide latitude for a member
country to adopt specific exchange arrangements of its
choice. Each member must collaborate with the Fund and
with other members to assure orderly exchange arrangements,
but the Article does not insist on par values or any particular exchange rate regime. It permits a range of exchange
rate practices — including floating; EC snake-type arrangements; and pegging to another currency, to a basket of
currencies, or to the SDR.
Three, the Article requires that members avoid manipulating exchange rates or, more generally, the international
monetary system, to prevent effective balance-of-payments
adjustment or to gain an unfair competitive advantage. This
requirement is aimed at promoting responsible exchange rate
behavior, the avoidance of competitive undervaluation and
"beggar thy neighbor" policies. It can moreover yieLd a
major improvement over Bretton Woods, in providing for
symmetrical Fund examination of surplus as well as deficit
countries — since a surplus country which refused to allow
would
ment.
its currency
"be "preventing
to appreciate
effective
and balance-of-payments
accumulated excessive
adjustreserves

- 6Four, the Article provides authority for the IMF to
oversee the compliance of each member with its obligations —
the undertakings to promote stability, to avoid manipulation
that prevents adjustment or gives an unfair advantage and
to collaborate with the Fund and with other members to assure
orderly exchange arrangements. This authority for Fund
surveillance gives the Fund the task of applying a global
perspective to actions of those members that cause adjustment or other problems for other members.
Five, the Article provides the means, with high
majority vote, for future evolution of the system, if
modification is called for to meet future needs.
In summary, the new Article IV contains the essential
elements of a balanced, realistic and workable system,
monitored by the IMF. Member countries have freedom to
pursue exchange practices of their choice — individual
floating, or joint floating, or tied to a currency, or
otherwise — but undertake important commitments for
responsible international behavior — to follow stable
economic and financial policies; and to avoid actions that
distort world production, trade and investment to the harm
of others. The IMF for its part will pay less attention to
such procedural questions as whether a currency is floating
or fixed, but will have broad new authority to oversee
the system to promote its effective operation and to oversee
the compliance of members with their obligations. These
obligations are designed to minimize international tensions
in exchange matters, while at the same time giving member
countries greater freedom to choose the exchange procedure
they wish to utilize.
The IMF is in a very real sense the focal point, the
core of the system. Members are obliged to provide the
Fund with the information necessary for intelligent surveillance of their exchange rate policies. In addition,
the Fund is called upon to adopt "specific principles"
for the guidance of members with respect to those exchange
rate policies to assure that manipulative practices are
avoided. In the Bretton Woods system the Fund's attention
was more likely to be directed toward a member in times of
crisis, and under the new system, Fund consultations with
members are likely to be more continuous, more broadly
based, more concerned with the real international impact of
a country's actions, and directed to all countries, not
just those in deficit.

- 7Fund surveillance and oversight of members' exchange
rate policies does not mean that the Fund can determine
the policies of sovereign countries. This would be impractical, and unacceptable to the United States and all Fund
members. But one member's behavior should not be at the
expense of other members' well being. Within that context,
the Fund can develop general principles interacting with
a type of common law based on application of these principles to individual cases, aimed at assuring that members'
exchange policies promote stability and adjustment and are
not designed to gain an unfair competitive advantage.
In developing specific principles, the Fund will need
to proceed cautiously. Such principles must have very
broad acceptance by Fund members. Their development cannot
be forced, but they can be expected to emerge over time in
the light of general and specific consultations with members.
In this way, the general principles of acceptable behavior
will evolve, grounded on the agreed objectives and obligations
of Article IV.
Fund surveillance of members' policies should not be
aimed at trying to calculate a zone, or target, or "right
rate" for individual currencies toward which exchange rate
policies should be directed. Such an approach is, in my
view, inconsistent with the new Article IV, and is neither
conceptually sound nor technically feasible. It suffers
from the same basic flaw as the par value system — it
assumes that we know, or can determine, what should be at
least approximately the equilibrium rate for each currency.
It is, in attenuated form, a throwback to Bretton Woods, a
fixed rate psychology, a search for "fundamental equilibrium."
Even in theory there is no single "right rate" in a world
of large capital flows in which inflation rates, domestic
objectives, monetary and fiscal policies, to name but a few
influences, not only differ among countries but can change
rather rapidly.
The technical difficulties of calculating a proper exchange
rate zone or "right rate" are so formidable as to render this
approach impractical as a guide to policy. The approach
assumes that we can compare one country's inflation rate
against other countries', and thereby determine what its exchange rate should be. There are problems of obtaining the
right indices — knowing what weights and base periods to
use; problems of measuring price and income elasticities.
Perhaps more importantly, these calculations look only at
the
impact of
merchandise
trade
on
exchange
rates,
and
pay
no
determining
theaccount
present
to
the
state
capital
exchange
of the
movements,
rates
art,
such
of
which
so
attempts
many
loom
currencies.
on
so the
large
part
inWith
of

- 8monetary authorities to calculate the "right rate" and then
use the results as the basis for exchange rate policy are
tantamount to a daily renegotiation of a par value system
on the basis of limited and inadequate data underpinned by
flawed concepts. Moreover, the data used all relate to
past periods, and are entirely backward-looking, whereas
exchange rates are partly forward and partly backward looking,
anticipating future economic and financial trends as well
as recording past developments.
The reaction to the exchange arrangements in the new
Article IV by the general public, industry, and the academic
community, has been by and large favorable. Some who may
feel that amendment is of little urgency because present
de facto exchange arrangements have worked satisfactorily
should perhaps reflect on the dangerous consequences for all
nations if, in present extra-legal circumstances, there
should be substantial moves toward exchange rate manipulation.
And those who have expressed concern that the new arrangement
lacks the elements of a "system" have perhaps paid inadequate
attention to the obligations of Article IV, and the importance
of those obligations to the structure of the new system.
Certainly the new arrangements are less of a grand design
than Bretton Woods — and appropriately so. The Bretton
Woods system was created when war had destroyed all vestiges
of an international monetary order, and a universal, complete
new structure had to be developed. But much of the Bretton
Woods system remains valid — I stressed earlier that the
objectives would be reaffirmed — and those parts have been
retained as a foundation.
The allowance for possible future evolution of the exchange
system is a noteworthy provision. The experience of Bretton
Woods shows the difficulty of trying to foresee just what
exchange arrangements may be required to meet the needs of a
world fifteen or twenty years ahead. The new Article IV
provides that with broad consensus the system can be adapted.
The Fund can decide, by 85 percent majority, to establish
general exchange arrangements which might be appropriate to
evolving circumstances, or to introduce a system based on
"stable but adjustable" par values. But any introduction of
a general par value system under the amended Articles would
require a determination that certain specified conditions
existed to assure that such a system would be workable —
conditions related to the existence of stability in the world
economy, effective balance-of-payments adjustment arrangements,
sources of liquidity, and other factors. It is further provided that if a new par value system were established it would
be more flexible than the Bretton Woods arrangements in certain
important respects: individual countries would not be required
ments;
to establish
a country
par having
values but
adopted
could
a par
adopt
value
other
could
exchange
terminate
arrangeit

- 9 and re-establish it under certain conditions; par values
could be changed more readily; and provision would be made
for wider margins and for decisions to change margins.
Since future adaptation of the system, either to general
exchange arrangements or to general par values, requires an
85 percent majority vote, the United States, with about 20
percent, will have a controlling vote. In any event, the
United States cannot be required to establish or maintain
a par value for the dollar.
The amended Articles will terminate for IMF purposes
existing par values of all IMF members. The legislation
before you would repeal the par value of the dollar. Prior
Congressional approval would be required to authorize any
future establishment of a par value for the dollar in the
Fund, and to authorize any change in the par value if one
were established.
The legal standard for the dollar of $42.22 per fine
troy ounce of gold would be retained solely with respect
to gold certificates held by the Federal Reserve System —
the only domestic purpose for which a value of the dollar
in terms of gold is needed. Approximately $11-1/2 billion
of these certificates are now outstanding, and are being
retired by the Treasury as its gold holdings are sold.
This Committee knows well the importance to the United
States of safeguards with respect to future modification of
the international monetary system. You are well aware of
the difficulties which arose under the Bretton Woods arrangements when the dollar was pinned down at the center of the
system and could not adequately move in response to underlying market forces. The results, in the late 19 60's and
early 1970's, were severely adverse for the United States
economy — not just in increased debts, but in the loss of
jobs, productive capacity, and the transfer of our industry
abroad. We must be able to avoid any such situation in the
future. It is not just a matter of academic theory, it is
a matter critical to the strength of our economy and prosperity
of our citizens.
Rambouillet and Recent Market Developments
Let me comment for a moment on market developments
in recent months, in the light of the proposals for the new
monetary system, and the related understandings reached by
the United States and other major industrial nations at the
Rambouillet meeting last November.

- 10 At Rambouillet broad understandings were reached on
structural reform — these understandings were reflected in
the proposed new Article IV which I have just described.
Understandings were also reached on more immediate operational
issues to further and to implement the concept that stability
of underlying economic conditions is a prerequisite to exchange stability. As a product of the understandings, the
United States and others agreed to improved consultations —
deepened, broadened, more frequent consultations — a m o n g
Treasuries and among central banks. These consultations
are an indispensible element of the understandings. It is
only through such consultations, by the responsible senior
policy officers in Treasuries and central banks, that we can
gain the comprehensive knowledge needed for a valid assessment of trends and policy moves, and for a better understanding
of both the underlying causes of instability and the exchange
market manifestations of that instability.
Since Rambouillet there have indeed been large movements in the exchange rates of some of the participants.
The mark and the French franc have diverged, and the pound
and the lira have from time to time been subject to sharp
downward pressures. Some have asked whether that meant we
had failed, and that the "Spirit of Rambouillet" was dead.
No one should be misled — Rambouillet never promised
that stability in exchange rates would come instantly or
easily. Quite the contrary. The premise of Rambouillet,
fully reflected in the proposed Article IV^, is that exchange
stability depends not on market intervention but on stability
of underlying conditions. The market experience of the
past months is confirmation of that premise — intervention,
sometimes very heavy, has failed to assure rate stability in
the absence of stability in underlying economic and financial
conditions, and plainly that required underlying stability
has not yet been achieved.
There has also been some misunderstanding about the recent $5.3 billion support package for the U.K. — and questions
about whether this meant an attempted return to the fixed rate
psychology of the 1960's. I assure you no such inference can
be drawn. The U.K. was faced with disorderly market conditions for sterling, and requested temporary financing to
counter those market conditions. It is important to note
that the British have agreed that they will repay in six months
any of these funds drawn — and that they will borrow from
the IMF if necessary to meet that deadline. This is an important commitment — it means the U.K. is prepared if necessary
to adopt the kind of fiscal and monetary policies which the
IMF would require of a borrower in the higher tranches.

- 11 I can report that in an institutional as well as
substantive sense, the spirit of Rambouillet is not only
alive but thriving. Consultations have become far more
frequent, more comprehensive, and certainly more candid.
Analysis has become more thorough. I am convinced that the
resulting increased knowledge and improved understanding
we have of each other's problems have already proved helpful, in that the instabilities which have appeared in recent
months would have been far more dangerous. Such consultations
undoubtedly will facilitate our dealing with these problems
in the future. This is one of the most encouraging results
of Rambouillet, and the framework on which we must build.
Reducing the Role of Gold and Expanding the Role of the SDR
Complementing the move to new exchange arrangements,
and the shift away from par values, is a shift away from gold,
which was intended to serve as the link for holding together
the par value system. In theory, gold was the base of the
Bretton Woods monetary system, the ultimate reserve asset,
the creator and regulator of international liquidity, the
basic unit of account, the linchpin supporting convertibility
and enforcing discipline. But, in fact, gold never fully
performed these international monetary functions, and over
time it became increasingly apparent that gold was unsuitable
for them — just as it had earlier proved unsuitable as a
base for U.S. and other domestic monetary systems. With new
gold production strictly limited, and industrial demand
growing rapidly, residual supplies available for monetary
use were both inadequate for and unrelated to the liquidity
needs of an expanding world economy. Pressures and price
differences inevitably emerged between the controlled official
market and the highly volatile private market, leading to
concerted official efforts to alleviate or suppress the
pressures by sales of gold on private markets — further
reducing monetary stocks — and to widespread speculation
and pressures for change in the official price which would
have had a capricious and destabilizing effect on the monetary system. With monetary gold stocks so limited, the world
became dependent on and promoted U.S. balance-of-payments
deficits to meet increasing liquidity needs. The result was
that gold convertibility of the dollar grew less and less
credible and in 1971 was suspended.
In recognition of these inadequacies, the new system promotes
a reduction in gold's monetary role in three ways:
First, gold's legal position is changed. Under the
amended Articles, gold will no longer have an official price.
It will no longer be the unit of account for expressing the
value
ofcalculating
currencies,rights
for determining
the value
of Fund.
the SDR,
and for
and obligations
in the

- 12 Second, the required use of gold in IMF transactions
will be eliminated, for example, in quota subscriptions
and in payment of charges. In fact, the Fund will be
prohibited from accepting gold except by specific
decision, by an 85 percent vote0
Third, the Fund will be empowered to dispose of its
remaining gold holdings, in a variety of ways and by an
85 percent vote in each case.
Agreement has already been reached -- prior to the
amendment, under the authority of the existing Articles -for the disposal of one-third of the Fund's gold, or
50 million ounces. Of that amount, 25 million ounces will
be "restituted" or sold back to IMF members in proportion
to IMF quotas and at the official price of 35 SDR or
approximately $42 per ounce. The other 25 million ounces
is to be used for the benefit of developing countries,
through gold auctions with the profits accruing to a
new Trust Fund.
This Trust Fund, recently established at U.S. initiative,
meets two objectives: helping to phase gold out of the
system, and using some of the profits on gold sales to
help finance the severe balance-of-payments problems
currently facing some of the poorest developing country
members of the IMFU This is an appropriate use by the
IMF of its gold. The technique used -- whereby the IMF
exchanges gold to replenish its holdings of usable
currencies -- is familiar and well precedented in IMF
experience0 Just how much the Trust Fund will receive
from these gold sales cannot be forecast -- that's one
of the problems of using gold as a monetary asset. The
purpose of the Trust Fund s gold sales is not to obtain
a predetermined sum, or to affect the price of gold one way
or another, but rather to dispose of the gold, to convert
it into usable currencies for the benefit of developing
countries0
Establishment of the Trust Fund does not mean the
IMF is becoming an "aid agency". The Trust Fund will
be an entirely separate entity, in no way subjecting the
IMF to liability, but controlled and managed by the IMF, thus
taking advantage of the technical expertise and sound
practices of the institutionu The Trust Fund will provide
the same kind of financing as the IMF -- balance-of-payments

- 13 loans -- though the Trust Fund's credit terms will be
more concessional than those of the IMF, as appropriate
to the present needs of the Trust Fund recipients. Loans
will be subject to standard IMF requirements that the
recipient has a legitimate need, based on assessment of
its balance of payments and reserve position. To qualify,
a borrower must also meet conditionality requirements of a
first credit tranche drawing in the IMF regular facilities -that is, it must have a program by which the Fund deems the
member is making a reasonable effort to resolve its
payments difficulties„ Thus, there is much that is similar
to regular IMF procedures. The Trust Fund provides an
appropriate and sensible way to mobilize what essentially
has become a sterile asset of the IMF. It does not represent
a subversion of the IMF's monetary character. It represents
instead an important and innovative way to meet a critical
need on the part of a particular segment of the IMF's
membership.
Apart from the 50 million ounces of gold for which
disposal has already been agreed, under the amended Articles,
the Fund will be able by 85 percent vote, to dispose of any
part of its remaining 100 million ounces in any of three ways:
-- sales at market related prices;
-- sales at the book value of approximately $42 per
ounce to present Fund members in relation to quotas;
-- sales at the book value to developing country
members.
The profits from any sales at market-related prices can
be used in any of four ways:
-- They may be transferred back to the Fund's
ganeral resources and "capitalized" with
members' Fund quotas being increased commensurately;
-- They may be placed in the IMF's investment account;
-- They may be used for operations not expressly
authorized by the Articles but consistent with
the Fund's purposes, such as the Trust Fund;
-- They may be distributed to developing country
members.

- 14 All but the first of these four uses — transferring
the proceeds back to the IMF's general resources -- require
an 85 percent vote. In all its gold dealings, the Fund is
required to avoid the management of the price or establishment
of a fixed price for gold.
Views have been expressed in the Congress that the
Congress should participate in any U.S. decision to support
further disposal of IMF gold„ I recognize the Congress'
interest in this matter. I agree that the&e
should be full and close consultations with the Congress in
this sphere. While it would seem unnecessary and inappropriate
to consult if the Fund were merely exchanging its gold at
market price for currency to be used in its regular operations,
it would seem not only appropriate but desirable to consult
about proposals to use the IMF's gold or gold profits in
such ways as the Trust Fund which benefit a particular
group of countries. I am certainly prepared to consult
in this way, in a complete and timely manner, in order that
the Congress has an opportunity to make known its views.
With dismantling of many IMF rules and restraints
on official gold transactions, important side arrangements
have been agreed among the Group of Ten -- the major gold
holding nations -- to assure that gold does not re-emerge
as a major international monetary asset. This understanding,
which is not part of the amended Articles, but is consistent
with and supportive of the policies of the amended Articles,
provides that participating nations:
-- will not act to peg the price of gold;
-- will agree not to increase the total stock of
monetary gold;
-- will respect any further conditions governing gold
trading to which their central banks may agree; and
-- will report regularly on gold sales and purchases.
The arrangement took effect February 1, 1976, and will
be reviewed after two years, and then continued,modified,
or terminated. It is in our view an important and necessary
safeguard during this transitional period, although I am
firmly convinced that in any case gold's role in the monetary
system will continue progressively to decline.

_ 15 _
In parallel with phasing down gold's monetary role,
the new system provides an expanded role for the Special
Drawing Right, and modifies certain of the rules governing
that new asset.
When the SDR was originally created in 1968, its
value was established in terms of gold, and linked to
currencies through their par values, essentially through
the par value of the dollar. With the suspension of gold
convertibility of the dollar, and the widespread move
away from par values to floating, it became unrealistic
to value the SDR in terms of par values, and difficult
to determine the rates to be used in IMF transactions.
To overcome this problem, agreement was reached on an
interim basis to value the SDR in terms of a weighted
basket of the market exchange rates of 16 major currencies, with
the dollar representing approximately one-third of the
basket., Such a basket valuation technique is particularly
well-suited to a world of widespread floating of exchange rates,
and the Fund has subsequently operated without difficulty.
Under the amended Articles, the link between the SDR
and gold is severed. The SDR replaces gold as the common
denominator of the system, and is the unit for measuring
IMF rights and obligations.. The SDR's value will continue
to be determined by the present basket technique. The
possibility is provided for future modification in the
valuation technique in the event there is a widespread view
that a different technique is needed. A majority of 85 percent is required for a change in the valuation principle or a
fundamental change in the application of the valuation principle.
Other, non-fundamental or technical changes, require a 70 percent vote. Such an ability to modify the SDR valuation technique
is needed, because the present basket was introduced on an
interim, somewhat experimental basis, and because an evolution
in exchange arrangements could make it appropriate to shift
to a different valuation technique.
The SDR is expected to take on an increasingly important
role, not only as a unit of account used in measurements,
but also as an asset used in transactions. With respect
to its asset use, there is an obligation on members to
collaborate with the Fund toward the objective of making
the SDR the principal reserve asset of the international
monetary system. Also the SDR takes over from gold the
preferred status as asset to be received by the Fund in
payment of charges, in meeting repurchase obligations,
and to be accepted
by members in exchange for currencies
replenished
by the Fund.

- 16 A number of technical steps have been taken to
improve the SDR's quality and usability so that it may
better fulfill its purposes. Thus countries will have
greater freedom to enter into SDR transactions with each
other on a voluntary basis; the possible uses have been
expanded; and the Fund may broaden the categories of
holders -- though not beyond official entities -- and
the operations in which they engage. Also, the decisions
for altering certain policies governing SDRs are made
easier -- such as the terms and conditions governing
approved transactions, and the rules that require countries
to "reconstitute" or buy back after a certain period
some of the SDRs they have spent.
At the same time these rules governing use of the
SDRs are being eased, important safeguards have been
retained which help assure that the SDR will remain a
widely accepted and valued asset. Thus, the limit on
members' obligation to accept SDR is retained, and IMF
quotas remain the basis for new SDR allocations»
The reduction in the monetary role of gold in these
agreements represents real progress toward an objective
held for many years by the United States and many other
countries
Gold is a valued commodity, but clearly not a
sound basis for an international monetary system. The
provisions in the new system reducing gold's role and
expanding that of the SDR represent a move toward realism
and stability.
IMF Quotas and the Provision of Fund Credit
The legislation before the Committee would
authorize United States consent to an increase equal to
SDR 1,705 million in the U.S. quota in the Fund. A
member's quota determines its obligation to provide resources
to the Fund, its ability to draw resources from the Fund,
its share of SDR allocations, and its voting rights. The
quota increase proposed for the United States represents
our negotiated portion of the general quota increase agreed
to in a regular periodic review required under the Articles.
The quota increase would take effect after the amended
Articles take effect. It will have no effect on the budget:
in keeping with the recommendation of the Commission on Budget
Concepts, the transaction will be effected through an exchange
of assets, and the U.S. will receive a reserve position in

- 17 the Fund --an automatic drawing right akin to a bank deposit -for dollars drawn down by the Fund to lend to other members.
Congressional approval is required for consent to this change
in the U.S. quota -- and in fact for any change in the U.S.
quota, other than that which might result from a "capitalized"
increase in quotas which could result from and be financed
by a future sale of IMF gold at market prices, and for which
no payment would be required from the United States.
When Bretton Woods was established in the mid 1940's
and international banking was at a rudimentary stage of
development, the ratio of potential IMF credit to the levels
of international trade and investment may have seemed
impressive. Today it is far, far less so. As the monetary
system has developed, it has become increasingly clear that
while IMF resources can finance deficits and help bring about
orderly economic adjustment, the Fund cannot be the only device.
There has been a much more rapid, increase in use of private
credit for financing payments deficits, and also a move
toward more flexible exchange rates and other means of
adjusting for imbalances.
While member countries will and should continue to
rely mainly on credit from private capital markets for
financing needs, the IMF has a unique and indispensable
function. It provides balance-of-payments credit under
clearly specified conditions, whereby borrowing countries
undertake sound economic programs of corrective measures -fiscal, monetary and exchange measures -- designed to
bring about the necessary adjustments, eliminate the problems
which caused the need for borrowing, and enable the debts
incurred to be serviced.
IMF credit expands the availability of private credit
very significantly. Markets are more willing to lend in
the knowledge that in the event of difficulty in a borrowing
country the IMF can be counted on, not just to provide
supplementary resources, but more importantly, to provide
those resources in association with soundly based corrective
programs.
The disciplines of the private market can be harsh and
abrupt. A country that gets into difficulty, whose credit
worthiness becomes suspect, can find that private financing
dries up overnight. Such a country will adjust -- it must
adjust. But the choice may be between an adjustment that

-18 is internationally harmful and one that is internationally
constructive — that is, an adjustment involving restrictions
on others' exports, or exchange and capital controls, versus
an adjustment based on Fund financing and an associated Fund
program keyed to corrective fiscal and monetary measures.
The Fund can encourage those forces in deficit countries
which favor adjustment via internationally responsible means,
and it can provide a forum where those affected by a
country's actions can be heard. In dealing with these cases
the Fund can perform a crucial role that no other institution
can carry out. It can help to prevent a gradual erosion of
the entire payments system through the distortions to world
trade and investment that result from restrictions on trade
and payments imposed by these deficit countries. Action
by the Fund to isolate and assist such countries can help
to secure the entire system, by halting the, contagion of
restrictionism. This aspect of the Fund's responsibilities
for the monetary system is a crucial one. The Fund's record
in helping to bring about adjustments through its conditional
financing is good, and its repayment record is unblemished.
The U.S. quota increase would be part of a proposed
increase in overall IMF quotas of 33.6 percent. In assessing
this overall increase in quotas of about one-third it is
worth noting that since 1970, when IMF quotas were last
increased, world trade has approximately trebled, inflation
has eroded the real value of Fund resources, and the
imbalance in world payments has multiplied as a result of
oil price increases and other problems. I think the increase
proposed for the United States and for the general IMF
membership is fully justified.
Reaching agreement on sharing the quota increase among
countries was difficult. It was generally acknowledged
that the oil exporting countries should have a larger share,
reflecting their increased role in the world economy, and
their combined share was doubled, from almost 5 percent to
almost 10 percent. It was also agreed that the non-oil
developing members should not suffer a reduction of their f
combined share. Thus, the full impact of the oil exporters
increase had to be shared by the developed countries. The
U.S. quota share will decline from 22.93 to 21.53 percent of
total, and our voting share will drop from 20.75 to 19.96
percent of total. Since the U.S. vote is dropping below 20
percent, the United States accepted this reduction within the
framework of an increase from 80 to 85 percent in the
vote needed for major Fimd decisions.

- 19 Updating IMF Operations and Organization
The negotiation of a comprehensive amendment of the
IMF Articles provided an opportunity for introducing
needed operational changes„ The original Articles were
heavily focused on the mechanics of the monetary system -on the trappings of convertibility and par values. The
Articles were more like a contract than a constitution.
They contained detailed rules and regulations -- many of
which became obsolete with the passage of time -- and did
not contain either scope for flexibility in day-to-day
operations or scope for adaption over time.
In light of these problems, a large number of changes
are proposed affecting IMF operations. These modifications
are described in the Special Report of the National Advisory
Council and the Report of the IMF Executive Directors
submitted to the Congress in April. The purpose is to
modify obsolete provisions, to simplify operations and
introduce needed flexibility to remedy past anomalies,
and to adopt structural changes. Among the modifications
are the following:
-- Usability of currencies is assured. The United States
has consistently argued that all member countries should
permit the IMF to use its holdings of their currencies to
provide balance-of-payments financing to other members,
which is a basic purpose of quota subscriptions. But under
the present Articles, regardless of the strength of their
external positions, countries can effectively prevent the
Fund's use of their currencies for loans to others.
Agreement to the usability of IMF currency holdings was
considered essential, in part because quota subscriptions
can be paid in full in national currencies under the amended
Articles — and there is no reason for the IMF to accumulate
more of a country's currency if it is not permitted to use
that currency. Under the amended Articles, there are
provisions to ensure that the Fund's holdings of all
currencies will be usable by the Fund in accordance with
its policies. Similarly, members will be required to provide
their currency to other members when that currency has been
specified by the Fund for repurchase. This agreement will
add substantially to the Fund's usable resources at present
and in the future and will strengthen its ability to provide
balance-of-payments assistance to members.

- 20 -- The Fund's authority to invest is made explicit.
Currencies, not in excess of the Fund's reserves (presently
about $800 million), can be invested in income-producing
and marketable obligations of international financial
organizations or of the members whose currencies are used
for investment. Investment can be made only if authorized by
70 percent majority and only with the concurrence of the
members whose currency is used for the investment. No
maintenance of value obligations would apply to invested
funds.
-- The Fund's policy on repurchases is modified.
The provisions in the present Articles were obsolete and
cumbersome, based on a detailed formula and on a calculation
of "monetary reserves" more appropriate to a par value
system than to present arrangements. The amendment provides
that tne Fund be given authority to establish policies on
repurchases appropriate to the needs of the system.
In addition to such operational changes, organizational
changes are also proposed. Most importantly, there is an
enabling provision which would permit by 85 percent majority
vote the establishment of a Council, with decision-making
power, to replace the present Interim Committee, which is
an advisory body. As in the Interim Committee, the U.S.
Governor to the IMF would serve as the U.S. representative.
The Council would be charged with supervising the management
and adaptation of the international monetary system,
including the continuing operation of the adjustment process,
and developments in global liquidity. These provisions are
also described in the special report of the National Advisory
Council.
Summary Comment
Mr. Chairman, the/Committee has before it the single
most important piece of legislation in the international
monetary sphere since the Bretton Woods legislation itself.
The world monetary system has been without legal form since
the Bretton Woods system fell apart five years ago. To many people,
international finance has been regarded as an arcane and abstract
subject, but with the experience of the past decade, the relevance of a smoothly functioning international monetary system
to American jobs, production, and growth is plainly seen. This
Committee knows the necessity of having an effective legal
structure, and knows the importance of having our international

- 21 rules attuned to the realities of the day. Without agreed
rules, the temptations are strong for governments, deluged
daily by the demands of interest groups, to follow narrow
national interests at the expense of others and to pay
inadequate regard, or even to abandon, the broad view of
international interdependence which has so successfully
guided the world community since World War II. As the
world's main trading nation and a prime architect of a
liberal world trade and monetary order, we should move
promptly to show to the world that we remain committed to
th rule of law and reason among nations.
Let me conclude on a broader theme. In the 1970's
international economic relations have moved to the center
of the foreign policy arena. There are many opportunities
for international disputes and conflict, and issues that
could pit East vs. West, North vs. South. The challenge
we face in shaping America's foreign policy is to resolve
the conflicting demands of competing countries and groups
so that integration and interdependence come to denote
increased prosperity for all and not confrontation. The
task is great and will hold our attention for many years.
But of one thing, I am certain — the legislation before
you today will make a major contribution to the attainment
of harmonious economic relations and improved prospects for
stable growth which we all so strongly desire. The monetary system is the foundation for trade and capital flows
which improve the efficiency and the prosperity of the
world economy. For too many years now, that monetary basis
has been in flux and dependent on the good habits and sound
practice of governments. I urge this committee to move
promptly and favorably on this bill in order to codify the
gains we have made and prepare the way for future efforts
to improve our economic outlook through continued international
cooperation.
oo 00 oo

FOR IMMEDIATE RELEASE

June 21, 19 76

COMMENTS OF SECRETARY OF THE TREASURY WILLIAM E. SIMON
ON THE RESIGNATION OF JAMES E. SMITH AS COMPTROLLER OF
THE CURRENCY
I am sorry that Jim Smith will be unable to complete
the remainder of his term as Comptroller of the Currency.
I understand and respect the personal reasons which have
compelled his resignation and am pleased that he has
agreed to delay his departure until a decision has been
reached on the choice of a successor.
Jim Smith has provided skillful leadership to the
Comptroller's office during a period of recession and
economic uncertainty. The fact that public trust and
confidence in the banking system has remained strong is
testimony to his effective performance.
Jim Smith has undertaken major initiatives to modernize the regulatory and supervisory process for National
banks. Immediately after being sworn in he commissioned
an intensive independent review of the procedures, organization, and effectiveness of the Office. The results
of that review are now being implemented.
We will all miss his talent, insight, and leadership.
The programs and improvements which he initiated will continue, however. I am confident that Jim Smith's term of
office will be recalled as a turning point in the interest
of modern and effective commercial banking regulation.
0O0

WS-945

TREASURY
NGTON, D.C. 20220

TELEPHONE 964-2041

June 21, 1976

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,100 million of 13-week Treasury bills and for $3,100 million
of 26-week Treasury bills, both series to be issued on June 24, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
26-week
bills
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing September 23, 1976
Price

Discount
Rate

Investment
Rate 1/

High
98.654a/ 5.325%
5.47%
Low
98.642
5.372%
5.52%
Average
98.646
5.356%
5.51%
a/ Excepting 2 tenders totaling $775,000
b/ Excepting 1 tender of $80,000

maturing December 23, 1976
Discount
Price
Rate
97.121b/ 5.695%
97.101
5.734%
97.107
5.722%

Investment
Rate 1/
5.94%
5.99%
5.97%

Tenders at the low price for the 13-week bills were allotted 9%.
Tenders at the low prices for the 26-week bills were allotted 92%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District

Received

|

Boston
$
36,230,000
New York
3,366,045,000
Philadelphia
74,680,000
Cleveland
35,075,000
Richmond
32,315,000
Atlanta
32,760,000
Chicago
336,895,000
St. Louis
44,090,000
Minneapolis
37,240,000
Kansas City
26,915,000
Dallas
20,995,000
San Francisco 328,845,000

TOTALS$4,372,085,000

Accepted

Received

\

Accepted

15,760,000
$
21,960,000 : $
:
4,555,730,000'
1,666,015,000 :
5,515,000
74,680,000 ::
111,640,000
35,075,000 ::
14,295,000
29,315,000 *:
:
14,865,000
30,900,000 :
443,535,000
72,685,000 ':
40,820,000
27,450,000 '.
:
57,410,000
32,240,000 :
23,155,000
26,915,000 •;
14,895,000
10,995,000 :
:
223,550,000
73,390,000 :

$
7,760,000
2,662,630,000
5,515,000
21,640,000
10,295,000
14,865,000
211,035,000
22,820,000
39,010,000
21,535,000
6,895,000
77,050,000

$2,101,620,000 c/$5,521,170,000

$3,101,050,000 d/

^/includes $ 327,125,000 noncompetitive tenders from the public.
1' Includes $ 161,105,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.

WS-946

DATE:

Jime 21, 1976

TREASURY BILL RATES
15-WEEK

26-WEEK

s.A\h£y°
>f* 3*Tl» % S-7r>7"

LAST WEEK: sf. $ OO %

TODAY:
HIGHEST SINCE

S.iLtr

fa-7-74
LOWEST SINCE

4zJ^r^L^

fr*fo 7»

FOR RELEASE AT 4:00 P.M.

June 22, 1976
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 $5,700 million , or
thereabouts, to be issued

July 1, 1976,

as follows:

91-day bills (to maturity date) in the amount of $2,300 million, or
thereabouts, representing an additional amount of bills dated

April 1, 1976,

and to mature September 30, 1976 (CUSIP No. 912793 B3 9 ) , originally issued in
the amount of $3,401 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,400 million, or thereabouts, to be dated July 1, 1976,
and to mature December 30, 1976

(CUSIP No. 912793 D7 8) .

The bills will be issued for cash and in exchange for Treasury bills maturing
July 1, 1976,

outstanding in the amount of $5,904 million, of which

Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,749 million.
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 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 Daylight Saving time, Monday, June 28, 1976.
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
WS-947

(OVER)

-2securities and report daily to the Federal Reserve Bank of New York their positid
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 b^ 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,eand his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $500,000 or less
without stated price from any one bidder will be accepted in full at the verige
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

July 1, 1976,

in cash or

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

July 1, 1976.

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 th
amount of discount at which bills issued hereunder are solo is considered to
accrue when the bills are sold, redeemed or otherwise disoo=
are excluded from consideration as capital assets.

of, and the bili*

Accordingly, the owner of

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

return, as ordinary gain or loss, the difference between

the price paid for the bills, whether on original issu-j 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 r-vision) and this n«.;
prescribe the terms of the Treasury bills and govern the conditions of their
issue.

Copies of the circular may be obtained from any Federal R - a v e har.k "

Branch.
oOu

1

FOR IMMEDIATE RELEASE June 21, 1976
RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted $2,502 million of $4,160 million of
tenders received from the public for the 2-year notes, Series N-1978,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.96% 1/
Highest yield
Average yield

7.01%
6.99%

The interest rate on the notes will be 6-7/8%. At the 6-7/8% rate,
the above yields result in the following prices:
Low-yield price 99.844
High-yield price
Average-yield price

99.752
99.789

The $2,502 million of accepted tenders includes 27% of the amount of
notes bid for at the highest yield and $ 496 million of noncompetitive
tenders accepted at the average yield.
In addition, $812 million of tenders were accepted at the average-yield
price from Government Accounts and Federal Reserve Banks for their own
account in exchange for notes maturing June 30, 1976 ($692 million), and
from Federal Reserve Banks as agents for foreign and international monetary
authorities for new cash ($120 million).
1/Excepting 2 tenders totaling $4,500,000

WS-948

t

wtmento

INGTON, D.C. 20220

FOR IMMEDIATE RELEASE

June 22, 1976

STATEMENT OF THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
OF THE UNITED STATES
AT THE OECD MINISTERIAL MEETING IN PARIS
JUNE 22, 1976
As we meet today to strengthen the spirit of cooperation
and consultation, we do so with heightened confidence. We
can reflect with satisfaction on the improved pattern of
growth and employment within the industrial world. The
strong economic recovery in the United States and other
industrial nations is beginning to improve worldwide economic
prospects as trade increases. We have also reached agreement
on the main elements of a new international monetary system
which, when ratified by our Parliaments, will provide the
legal structure for flexible and resilent arrangements
patterned to the needs of today's world.
Yet the tasks before us remain formidable:
First, we must seek to convert the current recovery
into sustainable economic expansion. The industrial countries
have recovered from the worst recession in forty years. Our
challenge now is to achieve sustained growth through the
implementation of prudent economic and financial policies
aimed at reducing inflation. Because conditions vary from
country to country, different, though compatible strategies
will be required.
Second, we must achieve a pattern of international
payments which reflects the realities of the exchange market.
There can be no stability in exchange rates or in international payments patterns, until stability has been restored
in underlying economic and financial conditions. Substantial
and in some cases difficult adjustments are required for
both deficit and surplus countries.
Third, we must adopt policies that will assure a free
and open world trade and investment order
'.
Fourth, we must realistically address the legitimate
concerns of the developing world. But, we must avoid
^ i S ^ g . W h a r c a n n o t b e delivered and reject policies which
P r P e r functi
WS-949
°rt ^
°
° n i n g of our market-oriented

-2economic system.
We must face these challenges together. History has
taught us that no country or group of nations can solve
economic problems in isolation. Economic progress and
prosperity cannot be achieved if countries seek to exact
an exorbitant price from others or export their economic
difficulties. Our future depends on our willingness to
cooperate and our ability to lead.
Let us examine in more detail the tasks before us.
The Prerequisite to Sustained Expansion
We are in the midst of a healthy and balanced recovery.
However, we must exercise caution, for we have left the
deepest of post-war recessions with inflation rates that
remain high in historical terms and unacceptable over any
extended period. Sustained expansion requires a further
reduction in inflation.
In the United States the recovery is now well into the
second year of a relatively strong and balanced expansion:
real output has increased 7.1 percent over the last four
quarters while inflation has declined to an average annual
rate of 5.5 percent; employment has risen sharply by 3.6
million workers and the unemployment rate has dropped from
almost 9 percent to 7.3 percent in May; and our trade balance
has declined from record surplus to deficit as the pace of
economic expansion and the end of the inventory adjustment
increases our demand for imports. While personal consumption
provided the basic thrust for the recovery, more recently
business spending for inventories and a gradual turnaround
in the housing sector have added momentum. Business spending
for plant and equipment which appeared to bottom out late last
year is accelerating and it now appears that the improvement
now expected to begin by late 1976 and early 1977 will occur
on schedule.
There are, of course, problem areas which we are closely
monitoring: (1) the behavior of raw material prices which
can be expected to rise as the expansion continues; (2) the
major labor contract negotiations scheduled for this year;
and (3) the perennial concern about the impact of weather on
the crop harvests. Fortunately, wholesale industrial commodity
price increases have remained relatively moderate to date with
such prices rising at an annual rate of 3.7 percent during the
last six months. Average compensation gains have been rising

-3at an 8 percent annual rate and most contract settlements have
continued the process of slowly reducing cost pressures. With
productivity gains somewhat above the historical average at
this stage of the cycle, the increase in unit labor costs is
moderate. Finally, the crop situation looks relatively
favorable.
Our economic projections for 1976 have been revised. Our
new projections anticipate output near 7 percent, well above
the original estimate of 6 percent; the inflation rate near 5
percent, well below the original estimate of 6 percent; and
the unemployment rate to decline below 7 percent by year-end.
Moreover, we are confident that the expansion can be sustained
well beyond 1976.
Virtually all of the economies of the OECD area are
either experiencing recovery or, like the United States,
have moved beyond the recovery stage to solid expansion. The
concern today is no longer one of recovery but of sustaining
our growth. Some believe that demand will not be strong
enough to support further expansion. I do not see major nearterm distortions in the continued expansion from the demand
side. To the contrary, the greatest threat to the sustained
expansion is the risk of a resurgence of inflation.
On the basis of present policies, the OECD Secretariat
expects an average inflation rate in OECD countries of 8.2
percent in 1976. In some countries prices are expected to
increase 15 percent or more. Unless these inflation rates
are significantly reduced we cannot achieve a lasting worldwide expansion.
The policy errors of the past and our hopes for the
future force us to recognize a basic reality; inflation is
the greatest threat to sustained economic development and
the ultimate survival of all of our basic institutions. The
lessons of history clearly indicate that when inflation distorts
the economic system and destroys incentives the people will no
longer support that system and society disintegrates. Our
uniquely creative and productive societies will be severely
damaged if inflation continues to dominate economic affairs.
Our recent experience demonstrates the fallibility of the old
conventional wisdom that a tradeoff exists between the goals of
price stability and low unemployment. To the contrary, the
achievement of both goals is interdependent. If we are to
sustain the output of goods and services and reduce unemployment,
we must first control inflation. Inflation restricts the
nousing industry by increasing the prices of homes and interest
costs on mortgage loans, it is inflation which undermines
the purchasing
power
of our—people
as they
strive
too
orten
in a losing
struggle
to provide
the
basic —necessities

-4of food, housing, clothing, transportation and medical
attention. Inflation erodes the pace of new business
investment in plant and equipment needed to create additional
jobs. Inflation is also the greatest enemy of savings and
investment.
We want to avoid the recessions that so cruelly waste
human and material resources and the tragic unemployment
that leaves serious economic and psychological scars long
after economic recovery occurs, but we sometimes forget
that it is inflation which leads to those recessions. Inflation
should be identified for what it is: The cruelest hoax ever
perpetrated for the expedient purposes of a few at the cost
of many. There should be no uncertainty about its devastating
impact, particularly for low-income families, the elderly
dependent upon accumulated financial resources and pensions
and the majority of working people who do not have the political
or economic leverage to keep their incomes rising even more
rapidly than prices. When inflation dominates an economy the
people suffer. Leaders must recognize this basic fact.
We must do everything possible to build a public
understanding of the tragic effects of inflation. We must
create widespread support for the sound economic and financial
policies which offer the only path to lasting stability. We
must establish greater understanding that wage and price controls
cannot substitute for sound economic and financial policies in
eradicating or controlling inflation. Controls simply do not
solve underlying problems and their ultimate effect is to
disrupt economic progress.
We all desire high employment and improved personal
living standards. But these goals cannot be realized and
maintained over time unless there is adequate investment in
the plant and equipment needed to create job opportunities
and produce the goods and services a higher standard of
living requires. Needed investment cannot be achieved in a
climate of inflation. Industry must have adequate profitability to make investment worthwhile and to provide
resources to finance investment. There is vastly more promise
of higher employment and improved living standards for all in
the pursuit of increased total production than in a struggle
for income redistribution. J

-5The Need for Balance of Payments Adjustment
Inflation is also a threat to economic prosperity through
its impact on the trade and payments system. We have seen what
inflation has done to the currencies of some of our member states
and it has become glaringly obvious that there can be no
stability in exchange rates without reasonable stability
in domestic prices. The failure to control inflation will
damage not only the country which inflates, but ultimately
its trading partners as well. If there is no confidence in
a government's anti-inflation policies, the downward pressures
on rates of exchange may reach levels which tempt governments
to resort to restrictive actions.
In the effort to avoid — or to postpone — exchange
rate changes, countries may look for credits from abroad
to help finance their deficit, and pursue a policy of intervention to support their currencies artificially in exchange
markets. Lenders will become increasingly reluctant to finance
expanding current account deficits unless borrowing nations
make fundamental changes in their domestic economic policies.
The lesson we have learned — the fundamental concept
which the Jamaica agreement incorporates in the monetary
system — is the recognition that we must attack the causes
of our problems, instead of the results. When an industrial
country encounters difficulty in borrowing from the private
markets, it is a clear and unmistakable sign that more
fundamental measures are needed that will effectively deal with
the underlying economic conditions and that will eliminate the
need to rely on special external financing. The IMF and other
multilateral balance of payments lending institutions have
limited resources. The Financial Support Fund — for which
we are strongly urging affirmative Congressional action —
will hopefully soon be in a position to provide supplemental
financing in the present transitional period. But none of
these devices either can or should do more than provide a
kind of "bridge" financing to tide a country over the period
between the initiation of the necessary economic and
financial policies and the delayed impact on the payments
balance. If the open trade and payments system is to survive,
countries in a weak position must recognize the need to adjust
and put the necessary policies in place quickly — before they
find themselves in a crisis position from which there is no
escape other than restrictions. Countries may then be forced
to make political decisions which are not consistent with
sound economics.

-6Countries in a relatively strong position have an
equally important responsibility — to work toward the
elimination of inflation, to promote sustainable economic
expansion, to keep their markets open to imports, to allow
their exchange rates to appreciate in response to market forces
and to accept the decline in their current account positions
without which it is impossible for the weaker countries to
adjust. The economic health of the world depends on our
abilities to make these adjustments.
A Free and Fair Trading System
Two years ago when faced with the difficult task of
adjusting to rapidly increasing oil prices, we demonstrated
both courage and foresight by joining together in a cooperative
effort to refrain from adopting trade-distorting protectionist
measures which would have had disastrous consequences. We have
won that battle; but the war remains. Now that economic
expansion is well underway, we must renew our commitment to
avoid the adoption of any restrictive trade measures.
That is why I so strongly support the renewal of the trade
pledge we made two years ago and continued last year.
But it is not enough to agree on what we will not do —
important though this may be to help avoid slipping backward.
We should also agree on what positive steps we will take.
Only in a fully free and open world trading and investment
system can our individual national economies achieve our goal
of sustained non-inflationary growth. We need an open world
market to allocate the raw material and capital resources in
order to supply abundant goods and services to our people at
non-inflationary prices.
We have found that opening our markets to imports has
often restored healthy competition at home — to the longrun benefit of consumers and producers alike.
This competition, however, must be fair. There is no
inconsistency between free trade and fair trade, and the
assurance of the latter is what enables us to progress in
achieving the former. Unfair trade practices, such as
artificial export subsidies, are detrimental for several
reasons. First, they distort the market forces and interfere with the proper allocation of capital. Second, they
are an expensive use of limited government resources which
are transferred from the exporting nation to its trading
partners in the form of the export subsidy. Finally, the use
of export subsidies may force other nations to raise tariffs or
create quantitative limits to provide relief.

-7Let me assure you that the United States is as firm as ever
in its commitment to a free and fair trading system. I am
proud of our record over the past year — despite fears
from abroad that we were drifting towards a policy of
protectionism. Although there has been concern about recent
determinations of the International Trade Commission in favor
of import relief and specific countervailing duty and antidumping investigations, we have maintained, with minor
exceptions, an open market for imports from our trading
partners. The Treasury Department is required by law to
investigate all formal countervailing duty and anti-dumping
complaints. Industries in every nation are protected from
injury caused by international dumping of marginal or excess
production. Nor should domestic companies be required to
compete against government-subsidized imports. The antidumping and countervailing duty laws are designed to prevent
such abuses. The current number of investigations is the
result of procedural requirements that all pending cases
received over the past few years be completed within a very
short time frame under the Trade Act. But of the over eighty
petitioners whose cases have been processed under the
anti-dumping and countervailing duty laws in 1975, only
about 10 percent have been awarded relief. These facts
clearly refute any charges that /America is turning
protectionist.
On behalf of the United States, I renew our pledge to
pursue a liberal and fair trade policy. We will continue to
work to see that the spirit of free and open markets becomes an
integral and more permanent feature of the world trading system.
The fulfillment of these objectives will require the
cooperation of both industrial and developing nations. We
will strive in the MTN to reduce tariff and nontariff barriers
to trade in order to improve the international trading system.
We have agreed that these negotiations will be concluded
in 1977. Both in this organization and in the GATT the
United States will work for the complete liberalization of
trade for the benefit of all nations.
Progress on International Investment
Just as liberal trade is crucial to world economic
progress, so is a hospitable climate for international
investment. We must work together to dispel the impression
that multinational corporations are harmful. Such corporations,
and the investment they bring should be welcome because of the
positive contribution they make to economic prosperity. In
that regard, I am particularly pleased by our action yesterday
in approving the National Treatment and Incentives/Disincentives

-8agreements and the Guidelines for Multinational Enterprises
that have been negotiated over the past three years by the
OECD. In approving this package we have acknowledged our
dedication to the maintenance of a liberal climate for
international investment and thereby made a significant
contribution to its improvement.
Particularly helpful in improving the investment climate
is the fact that the package makes it clear that governments
have obligations toward investors just as investors have
obligations toward the countries in which they operate. In
particular, I was encouraged that the package recognizes the
fact that member countries should grant national treatment
consistent with international law to foreign investors and
that the Guidelines for Multinational Enterprises recognize
that member countries have the responsibility to treat
foreign investors equitably and in accordance with international
law and contractual obligations and to cooperate to resolve any
conflicting requirements that may be placed on international
investors.
Looking beyond this to the broader context of international investment, I think we should also undertake new
efforts to liberalize the international flow of capital.
Specifically, I propose that the Committee on Financial
Markets be charged with identifying the various impediments
to international flows of portfolio capital and establishing
a procedure for consultations with a view toward reducing
such impediments.
Regarding direct investment, I believe that it is
particularly important that we stem any erosion of public
confidence in multinational enterprises. The Guidelines we
have approved are an important step in that direction. MNE's
have mobilized capital on an unprecedented scale and have
channeled it together with new technology and management
know-how to countries where they operate. Their actions have
increased economic output and created employment in these
countries while their home countries have benefitted directly
from increased exports and a return flow of dividend and
royalty payments. As a result the whole international economy
has benefitted from the greater efficiency with which international resources are utilized. There are many factors
that contribute to economic progress, but in the final
analysis, capital investment is the source of increased
productivity and higher standards of living for all.

-9As we gain experience with implementation of the
Guidelines and with procedures for consultations within
the OECD, we should keep in mind that their success depends
on their voluntary acceptance by MNEs. Any temptation
to turn the consultation procedures into a complaint or
quasi-judicial procedure against multinational enterprises
must be avoided.
The Guidelines also incorporate a provision relating
to bribery and illegal political activities. Bribery is
not only ethically abhorrent, but it also distorts the
operations of markets, undermines the investment climate,
and threatens the free enterprise system. We are confident
that the vast majority of American businessmen have conducted
themselves properly. Nevertheless, the actions of a few
have clouded the conduct of business in general.
The provision on bribery in the Guidelines is an
important step in addressing this problem. However, this is
not enough. The United States has proposed the establishment
of a working group under the auspices of the United Nations
Economic and Social Council to develop an international
agreement to deal with this problem. I urge that governments
join us in building the consensus necessary for the early
negotiation of such an agreement.
Progress in Developing Countries
Finally, let us discuss the subject of relations with
developing countries. The dialogue between developed and
developing countries is now moving from highly political
and visible forums such as the Seventh Special Session and
UNCTAD IV to what we hope will be technical work in specialized
forums and the CIEC commissions. As Secretary Kissinger
emphasized yesterday, it is crucial that the Western developed
countries maintain unity as we consider concrete issues. I
would suggest several basic principles that should guide our
work.
First, we must be realistic. It does no good to raise
false expectations regarding what can be done. We must make
clear to the developing countries that their future ultimately
depends on their own efforts. We industrialized nations can,
through constructive policies on trade and technical and
financial assistance, help them to help themselves. But
what will ultimately determine their rate of development
is the degree to which they utilize their own human creativity
ana invest their resources, not one-time transfers of wealth.

-10Second, we must enlarge the world economic pie.
The strongest external stimulus to developing countries
will come through the economic resurgence of our own
economies. As OECD countries' industrial production rises
and as employment and personal incomes improve, our
economies will create renewed demand for the mineral,
agricultural and manufactured products of developing countries.
Third, we should not be hesitant about defending the
use of free markets to allocate resources, both domestically
and internationally. If we look at the developing country
economic success stories, Singapore, Brazil, Mexico, Hong Kong,
Taiwan and South Korea, we note that all have emphasized
their private sectors in achieving consumption and investment
goals. These same countries have also actively engaged in
world commerce. In a world of rapid technological change
and shifting consumer demand, national economies risk
obsolescence and stagnation if they insist on turning all
decision making over to government. On the international
level, we must resist the temptation to replace free markets
by decision-making through international bureaucracies or
government organizations. We want to help the developing
world but there are no instant solutions. Real progress
depends on maximizing the use of their human and natural
resources, through strengthening their private sector.
Fourth, in addressing the problems of the developing
countries, we must avoid simplistic generalizations. Each
developing country, each commodity, each industry is unique.
Ultimately the debt or balance of payments problem of a
developing country, the market structure of a specific
commodity, the establishment of a particular industry, must
be considered on a case-by-case basis.
It is on the basis of these principles that the United
States has made specific proposals of our own and responded
to the recommendations of others.
In order to improve the stability of export earnings
for countries particularly dependent on exports of raw
materials, we urged major changes in the IMF Compensatory
Financing Facility.
We also recommended a substantial increase in the
availability of IMF credit, the establishment of a trust
fund for the benefit of the poorest developing countries and
the substantial expansion of the World Bank's International
Finance Corporation. Many of these suggestions have already
been implemented. For instance, this year, through the end

-11of May, countries have drawn $815 million from the
liberalized compensatory finance facility, more than twice
drawings in any previous whole year. We are thus attacking
the root problem of disruption in development efforts
caused by fluctuations in export earnings while allowing
markets to continue their function of determining commodity
prices.
We also believe that the long-term answer to many of the
problems of the developing countries lies in foreign investment.
We have put forward proposals to increase such investment, such
as the International Resources Bank. We regret that other
countries refused to study this proposal because we believe
it would be beneficial to all countries. In this regard,
there may be some public misunderstanding about the Bank,
and it is important to understand what it would do and what
it would not do. The Bank is designed to reduce the noncommercial, or political risks, related to investment in
some developing countries. The market risk inherent in any
investment would remain. As such, it is an insurance vehicle
to protect against such occurrences as expropriation or
nationalization. It is not a lender of money, and would not
be a financing vehicle to substitute for the private sector.
Further, it is not intended to become involved in ongoing
investments but to encourage additional investment. Seen in
this way, we believe it can make an important contribution to
the need to increase investment in the developing world, and
Secretary Kissinger and I will continue to seek consideration
of such a concept.
We have also proposed that there should* be producerconsumer forums for all key commodities, so that where
problems exist, they can appropriately be addressed on a
case-by-case basis. In these forums, we will be proposing
and seeking constructive solutions based upon improvement
of markets and trade expansion, rather than restrictive
arrangements designed to fix prices. As such, we have
made clear our rejection of the proposal for a common fund
to finance and manage a series of buffer stock arrangements
which we believe is unnecessary, unworkable and not a
correct utilization of scarce resources.
We have also pursued policies in the United States
and made specific proposals in the trade area which would
benefit developing^countries. We have adopted a generalized
system of preferences that will greatly assist developing
countries to expand their exports. In the MTN we have
proposed a tariff cutting formula which would decrease
tariff escalation, and urged that special treatment be
provided
safeguards
for
and
developing
on subsidies
countries
and countervailing
in new-codes duties.
on

-12In these circumstances, the U.S. has agreed to give
quick and constructive consideration to requests from the
developing nations for the discussion of their debt status
in a multilateral framework. We have also agreed that common
features to be used in debt rescheduling procedures be
studied in an international forum.
There has been a good deal of publicity on the debt
problems of developing countries. Because of high oil
prices and slower activity in the OECD, the rate of debt
increase has been higher than in years of high commodity
prices and growing markets. This situation, however, is
now undergoing change, and we should be sure that the
solutions we seek are aimed at the problems that exist
today, not those that existed a year or two ago. The economic
upturn in the industrialized countries is bringing increased
income to the developing countries through greater export
volume and firming of export prices. As a result, the debt
burdens will diminish. Individual countries will continue
to face debt problems, but the answer does not lie in
generalized debt rescheduling. Such an approach is
unnecessary and would be inequitable, and harmful to the long
term interests of the recipients. It would call into question
the creditworthiness of the LDCs as a group, and would be
counterproductive to our efforts to encourage countries
to adopt appropriate economic policies. We will continue to
evaluate the merits of each debt reorganization proposal,
predicated on
the principle that countries should adhere
to scheduled terms of credit payments.
Finally, mindful of the need to strengthen the technological capacity of developing countries, the U.S. has
made a series of proposals to stimulate the development and
transfer of technology needed by developing countries.
Over the next few months the developed countries will
be participating in a dialogue with developing countries on
commodities, debt, transfer of technology, trade, and
multinational corporations. We must continue to respond to
the legitimate proposals of these countries and make our
own proposals as well. But we owe it to the developing
countries, as well as to ourselves, to assure that our
responses are not geared to short term political considerations,
but rather reflect what we believe is practicable, deliverable,
and will enhance the long-run economic interests of all nations.

-13Conclusion
Mr. Chairman, fellow Ministers, We have in the past
year made great strides in coping with the complex of
problems we face. If we look forward to as much progress
in the year ahead, we can indeed take an optimistic view.
But progress will only come if we can build a worldwide
framework of cooperation. As such, we need not distort
our economic system in order to satisfy one or two interests
at home or to appease a few abroad. Instead, we must avail
ourselves of a rare opportunity to fight for a policy which
is both principled and in the economic interest of the world.
Let us renew our commitment to continued vigilance and cooperative
effort, which is the road to the maintenance of an equitable,
free and prosperous world economy.
0O0

9> r-l

E *o
5 csi

dercd financing bank

JP s

WASHINGTON, D.C. 20220
June 22, 1976

FOR IMMEDIATE RELEASE
SUMMARY OF LENDING ACTIVITY
June 1 - June 15, 1976

Federal Financing Bank lending activity for the period
June 1 through June 15, 1976, was announced by Roland H. Cook,
Secretary:
On June 1, the Export-Import Bank made the following
borrowings:
Amount

Maturity

$ 97,000,000
400,000,000

6/1/84
6/1/78

Note
6
7

Interest Rate

8 125%
7.480

The proceeds of the loans were used to pay $337 million in
principal and $87 million in interest to the FFB and to repay
$63 million in borrowings from the Secretary of the Treasury.
The National Railroad Passenger Corporation (Amtrak)
made the following drawings from the FFB:
Date

Note No.

6/1
6/1
6/7

Amount

Maturity

Interest Rate

$1,500,000
1,500,000
6,000,000

6/29/76
6/14/76
6/14/76

5.811%
5.811%
5.724%

On June 14, Amtrak rolled over Note #7 in the amount
of $88 million. The loan matures September 13, 1976, and
bears interest at a rate of 5.630%. Amtrak borrowings
from the Bank are guaranteed by the Department of Transportation
On June 1, the Student Loan Marketing Association (SLMA)
borrowed $10 million against Note #35 which matures August
31, 1976. The interest rate is 5.861%.
On June 15, SLMA borrowed $40 million; $20 million against
a note maturing September 9, 1976; and $20 million against a
note maturing September 21, 1976. Both notes bear interest at
a rate of 5.655%. The proceeds of the loans were used to repay
$30 million in principal, $391,549.32 in interest due, and to
raise additional funds. SLMA borrowings are guaranteed by the
Department of Health, Education, and Welfare.
WS-950

- 2-

The FFB made the following loans to utility companies
guaranteed by the Rural Electrification Administration:
Interest
Date
Borrower
Amount
Maturity
Rate
6/1 Oglethorpe Electric
Membership Corp.

$3,397,000

12/31/10

8.316%

6/1 Associated Electric
Cooperative

4,000,000

12/31/10

8.3]6%

6/4 Allied Telephone Co.
of Arkansas

645,000

12/31/10

8.235%

6/7 East Ascension Telephone
Co.

420,000

12/31/10

8.221";

6/8 Boone County Telephone
Co.

265,000

12/31/10

8.1191;

4,400,000

12/31/10

8.191%

6/9 Colorado-Ute Electric
Association

6/10 Alabama Electric Coop. 4,281,000 12/31/10 8.215%
6/10 Seminole Electric
Coop.

7,750,000

12/31/10

8.215%

6/14 Central Iowa Power
Cooperative

5,112,000

12/31/10

8.179%

6/14 Tri-State Generation
and Transmission Assn. 5,289,000

12/31/10

8.179%

6/14 Cooperative Power
Association

12/31/10

8.1791.

6,000,000

6/15 United Power Assn. 3,500,000 12/31/10 8.171%
6/15 Continental Telephone
Company

2,800,000

12/31/10

Interest payments on the above REA loans are made on
a quarterly basis.

8.171%

- 3The Federal Financing Bank made the following advances
to borrowers guaranteed by the Department of Defense under the
Foreign Military Sales Act:
Interest
Date
Borrower
Amount
Maturity
Rate
6/3
Government of
$112,000.00
6/30/80 7.603%
Nicaragua
Government of
6/3
76,089.11China
12/31/82 7.823%
Government of
6/4
894,276.51
10/1/83 7.920%
Brazil
Government of
6/4
531,057.70
3/15/83 7.866%
Brazil
Government of
6/4
1,093,185.36
Jordan6/30/85 7.974%
6/7
Government of
593,415.24
6/30/83 7.816%
Uruguay
6/8
Government of
1,324,912.76
Jordan6/30/85 7.886%
6/9
Government of
240,000.00
6/30/80 7.493%
Nicaragua
6/15
Government of
17,462,448.03
Korea 12/31/83 7.835%
The General Services Administration made the following
borrowings from the FFB:
Interest
Date

Series

Amount

Maturity

Rate

6/4 M $568,235.92 7/31/03 8.314%
6/11 L 1,867,810.50 11/15/04 8.312%
Federal Financing Bank loans outstanding on June 15, 1976
totalled $23 billion.

oOo

STATEMENT OF J. ROBERT VASTINE
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TRADE AND RAW MATERIALS POLICY
SUBMITTED TO THE SUBCOMMITTEE ON INTERNATIONAL
RESOURCES, FOOD, AND ENERGY OF THE
HOUSE COMMITTEE ON INTERNATIONAL RELATIONS
THURSDAY, JUNE 24, 1976

I welcome the opportunity to submit this statement
on House Concurrent Resolution 393. We are in full accord
that food production and distribution should receive
particular attention at home and in the administration of
our foreign aid programs.
We strongly support the underlying objectives of
House Concurrent Resolution 393, that people everywhere
ought to have enough to eat.
Our reservation about the approach taken by the
Resolution is that it focuses on one aspect of human
needs and the development process, to the exclusion of
others. Such a limited focus can lead to a situation
in which the distribution of food becomes paramount,
rather than the complex process of food cultivation
and production in adequate amounts. Our objective
should be that societies everywhere develop in such a
way that people have adequate purchasing power with
which.to provide themselves with nutritionally adequate
diets.
At home, our basic policy is to provide the needy
with adequate food purchasing power through income
transfer and income maintenance programs. The Hood
Stamp Program is a central element of such programs %
Our experience with the Program has convinced the
Administration and many other observers that the Food
WS-951
Stamp Program must be reformed. Legislation that

- 2hopefully will provide adequate reform is now under
active consideration in the House.
In our overseas programs, it is difficult to isolate
better nutrition from the larger objective of improving
the fundamental condition of life for people through
economic development. It is encouraging that we have
successfully shaped development policy to increasingly
stress food production. It is now generally recognized
that agriculture can be neglected only at great peril
to the process of overall economic development.
This realization has been concretely reflected in
the stress which agriculture is receiving in many international organizations, in substantial part as a result
of creative Administration initiatives.
The developing countries, for their part, must
increase the amount of resources that they provide to
the agricultural sector and eliminate internal constraints on increased food production. Developed
countries and other countries in a financial position
to do so must increase the flow of external resources
for food production in the poorer developing countries.
The United States has more than doubled the amount
allocated for agriculture and rural development in our
aid program. It has risen from $306 million prior to
the World Food Conference to $672 million currently.
Further the United States has undertaken a number of
initiatives both to promote world food security and to
encourage increased food production in developing
countries. Nonetheless, there is much that remains to
be done in these areas.
The international financial institutions have also
shifted the emphasis of their development lending programs
to the agricultural sector so that total external resource
flows to developing countries for agricultural development
rose to approximately $5 billion this year, two and onehalf times the amount provided just three years ago. The

- 3International Bank for Reconstruction and Development
and the International Development Association increased
their lending to agricultural projects from 24 percent
in FY 1974 to 32 percent in FY 1975. Similarly, the
Inter-American Development Bank and the Asian Development
Bank have substantially raised the percentage of their
loans that go to the agricultural sector. U.S. funds
play a large role in these activities. Recently, the
Administration has requested from Congress a total of
$1.2 billion for FY 1977 to finance our contributions
to the international lending agencies.
Such international lending for food production is
not, however, intended to stimulate production of products
that are already in adequate supply. We believe that the
"purpose of such programs is primarily to provide for increased domestic food production to meet domestic food
needs. These programs are not, we believe, intended to
generate supplies primarily to compete with producers and
exporters in other countries.
While our government supports a substantial increase
in concessionary aid flows to the developing world, we do
not support the one percent of GNP target. In 1974,
official U.S. development assistance amounted to $3.4
billion or 0.25 percent of GNP. If we add the private
aid flows, the total would reach $5 billion or 0.36
percent of GNP. The one percent target for the U.S.,
which is expressed as a goal in House Concurrent
Resolution 393, would have required some $8.75 billion
more in public and private transfers that year. It is
unrealistic to expect such a level of combined funding
from the public and private sectors, and it would not be
credible policy for our government to proclaim this goal
unless we are certain it will be fulfilled.
It is important to note that this fiscal year the United
States expects to provide approximately six million tons of
food aid, almost two-thirds of the total amount of food aid
provided by all donor countries. However, we attempt to
ensure that our food aid does not act as a disincentive

- 4to local production in recipient countries. Accordingly,
our food aid program emphasizes self-help. It would be
cruel and economically self-defeating to supply food aid
in such amounts that domestic agricultural production in
recipient countries is discouraged. We are closely
monitoring the utilization of our PL-480 assistance to
avoid such a possibility.
Finally, I would like to note briefly the U.S.
Government's deep interest in providing a system of world
food security. Our concern with the disruptive effects
of grain shortages such as we experienced in 1974 led to
intensive efforts to develop a proposal on food grain
reserves. We have tabled such a proposal in international
negotiations which would establish an internationally
coordinated, but nationally held food grain reserve.
Different approaches and views are being discussed in
international organizations, but basic interests of both
exporting and importing countries are involved and progress
is necessarily slow. This effort to establish a grain
reserve cannot be allowed to reduce the emphasis on increasing food production in developing countries: a grain
reserve is only insurance against the advent of shortages
due to the uncertainty of nature in the form of weather
conducive to good crops.
I am pleased to have been allowed to present these
views to the Subcommittee.

0O0

FOR RELEASE ON DELIVERY
STATEMENT OF .THE HONORABLE ROBERT A. GERARD
ASSISTANT SECRETARY (CAPITAL MARKETS & DEBT MANAGEMENT)
BEFORE THE
SENATE COMMITTEE ON FINANCE
THURSDAY, JUNE 24, 1976, 10:00 A.M., E.D.T.
Mr. Chairman and Members of this Distinguished Committee:
As the Committee is aware, the temporary increase in
the public debt limit enacted in March will expire on June 30.
We are here this morning, therefore, to urge the Committee
to adopt H. R. 14114 as an appropriate vehicle for meeting
the financing needs of the Federal Government during the
Transition Quarter and fiscal year 1977.
There are two essential parts to H. R. 14114. First,
it establishes new dollar limits for the Transition Quarter and
for fiscal year 1977. It also provides an additional
$5 billion of authority to issue bonds without regard to the
4-1/4 percent ceiling.
H. R. 14114 would increase the temporary debt limit in
three stages. Specifically, it would establish a new ceiling
of $636 billion for the Transition Quarter; a ceiling of

WS-952

- 2 $682 billion for the period from October 1, 1976, through
March 31, 1977; and a ceiling of $700 billion for the balance
of fiscal year 1977, from April 1 through September 30, 1977.
The levels of the debt subject to limit reflect the
estimates of the Congressional Budget Office and are based,
we understand, on the budget totals contained in the First
Concurrent Resolution.

While these levels are considerably

lower than our own recommendations, there will be ample
opportunity in the next Congress to deal with any changes
in the amounts that may be necessary.
The First Concurrent Budget Resolution, adopted in May,
established the unified budget deficit for the Transition
Quarter at $16.2 billion and provided for an increase in
the temporary statutory debt limit of $20.2 billion to an
overall limitation of $647.2 billion.

The Resolution also

called for a budget resulting in a unified budget deficit
of $50.8 billion in fiscal year 1977 and an increase in the
temporary statutory debt limit of $65.9 billion over the
amount specified for the Transition Quarter; that is, a
$713 billion limit through September 30, 1977.
As a result of a reduction in the estimated debt at the end
of fiscal year 1976, however, the Congressional Budget Office has

- 3 reduced its estimates of the debt limit requirements for
the Transition Quarter and fiscal year 1977.

It is these

reduced estimates which provide the basis for the figures in
H. R. 14114.
Consistent with procedures of the Committee, we have
provided you with an array of tables relating to the debt limit
and the management of the public debt.

The tables, based

on the President's proposals as amended by subsequent legislation,
show the debt subject to limit by month through the end of
fiscal year 1977.

According to our calculations, we estimate

debt requirements -- with a $6 billion cash balance and a
$3 billion contingency allowance - - a t $711 billion at
September 30, 1977.

The peak need, however, would be $716 billion

at June 15, 1977.
I would like to turn now to the question of the debt
management tools I mentioned earlier: flexibility with respect
to the rate of interest payable on Savings Bonds and the
additional bond authority.
Savings Bonds
We have, as the Committee knows, several times recommended
that the Secretary, with the approval of the President, be
given full discretion to vary the terms and conditions applying
to Savings Bonds, including the rate of return.

For the record,

I want to repeat that recommendation, because I feel that flexibility

- 4 in altering the terms of Savings Bonds may, at times, be
important, not only for the continued success of the Savings
Bonds program, but for Treasury debt management in the broad
sense.
Given

the shortness of time before the expiration of

the existing temporary limit, I would urge that the Committee
recommend enactment of H. R. 14114 in the form passed by the
House.

However, knowing of the Committee's strong interest

in and much appreciated support for all possible improvements
in Treasury debt management authority, it would be most
helpful if the Committee could consider this matter at an
early date.
Bond Authority
The bill before you today provides for a $5 billion
increase in the exception to the 4-1/4 percent ceiling, from
$12 billion to $17 billion.
$1.5 billion

Presently, we have only about

of the existing $12 billion exemption remaining.

We have always been most appreciative of this Committee's
unanimous support for increases in the exemption from the
4-1/4 percent ceiling.

While I know that I need not repeat

at length all of the reasons that

argue for allowing the

Treasury reasonable access to all maturity sectors of the
market, I would like to include for the record the recent
recommendations of the Comptroller General.

- 5In his letter of transmittal with the report on the 4-1/4
percent ceiling, General Staats said:
"The inability to at least partially finance
these deficits with long-term debt means that
the Federal Government will become an increasingly
active participant, and a potentially disruptive
influence, in private capital markets and in the
short segment of the capital market."
I commend the report in its entirety to you.

Indeed,

I feel it is of such great importance that I would like to
set forth here the four interrelated conclusions reached by
the General Accounting Office along with the recommendations
suggested for consideration by the Congress.
"1.

Considering the apparent rationale for the original

legislation -- that is, to minimize the costs of Treasury
borrowing operations, given market conditions, in a national
emergency -- one cannot argue for either the current level or
the continued existence of the 4-1/4 percent interest limitation.
It no longer serves to reduce the cost of borrowing;

instead,

it simply keeps the Treasury from any further borrowing in
the long-term securities market."
"2.

The limitation (and the exhaustion of the $10 billion

exclusion) encourages a shortening of the maturity

- 6 of the national debt. . This shortening tendency may, in
turn, place the Treasury in a more vulnerable position with
respect to the interest rate terms that it accepts on borrowings . That is, the Treasury may find itself in the
unfavorable position (1) of having to refinance massive
amounts of short-term debt at very high interest rates and
(2) of being a potentially destabilizing influence on money
and capital markets."
"3.

Aside from an overriding concern with lengthening

the maturity of the public debt, there are three differing
philosophies regarding the objectives of debt management:
avoiding disruption through more systematized securities
flotations, stabilizing economic activity, and minimizing
interest costs.

Given contemporary and foreseeable levels

of interest rates, achieving any of these objectives will
not be possible as long as the 4-1/4-percent interest
limitation on long-term Treasury debt remains in effect."
"4.

A theoretical basis and some supporting practical

experience indicate that the limitation has at times distorted the term structure of interest rates, thus causing
a reallocation of credit among various sectors of the
economy and increased costs of servicing the Government
debt.

On the other hand, the relevant empirical evidence

- 7 suggests that neither the current existence nor the repeal
of the limitation causes, or would cause, much distortion
in the term structure of interest rates and, hence, would
not affect the relative costs of borrowing in various
maturity sectors. Weighing theory and the experience of
Treasury officials and market practitioners against the
available empirical evidence (and its shortcomings) , we can
reasonably conclude that (1) at worst, the ceiling should
be repealed because it may disrupt credit markets and raise
the costs of Government borrowing; (2) at best, it is
neither harmful nor beneficial to credit market stability
and borrowing costs and is therefore unnecessary, and
(3) it does not reduce the costs of Government borrowing
and may in fact raise those costs."
"MATTERS FOR CONSIDERATION BY THE CONGRESS
In view of our conclusions, the Congress should consider immediately repealing the 4-1/4 percent interest
limitation.

Alternatives which would have essentially the

same long-term effects are systematically phasing out the
limitation through
annual redefinition of the maximum maturity of
securities whose flotation is subject to the
ceiling and/or

- 8 —

annual increases in the dollar volume of longterm securities which may be floated without
regard to the ceiling."

SUMMARY
In conclusion, Mr.. Chairman, we recommend that the
Committee favorably report H.R. 14114 as adopted by the
House.

The limits provided, we believe will be adequate,

at least through the first part of calendar 1977, and the
increase in the exception to the 4-1/4 percent ceiling by
an additional $5 billion will give us, for the time being,
the tools that will allow us to do the most responsible
job possible of debt management, one that will contribute
to economic and financial stability.

o 0 o

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1976
Based on: Budget Receipts of $300 Billion,
Budget Outlays of $372 Billion,
Off-Budget Outlays of $9 Billion
($ Billions)
Operating
Cash
Balance
1975

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-Actual-

June 30

7.6

534.2

July 31

4.2

539.2

August 31

3.6

548.7

September 30

10.5

554.3

October 31

10.3

563.1

November 30

6.5

567.9

December 31

8.5

577.8

January 31

12.0

585.5

February 29

12.1

595.0

March 15

5.9

597.0

March 31

8.0

601.6

April 15

2.7

604.9

April 30

11.5

603.1

8.2

611.8

1976

May 31

-EstimatedJune
June 24, 1976

6

616

619

PUBLIC DEBT
SUBJECT TO LIMITATION
TRANSITION QUARTER
JULY-SEPTEMBER 1976
Based on: Budget Receipts of $82 Billion,
Budget Outlays of $99 Billion,
Off-Budget Outlays of $5 Billion
($ Billions)
Operating Public Debt With $3 Bi
Cash
Subject to
Margin f
1976
Balance
Limit
Contingen
-EstimatedJune 30

6

July 31

6 627

630

August 31

6 637

640

September 30

6 636

639

June 24, 1976

616

619

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1977
Based on: Budget Receipts of $352 Billion,
Budget Outlays of $397 Billion,
Off-Budget Outlays of $11 Billion
($ Billions)
Operating
Cash
Balance
1976

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-Estimated-

September 30

6

636

639

October 31

6

646

649

November 30

6

656

659

December 31

6

660

663

January 31

6

663

666

February 28

6

678

681

March 31

6

693

696

April 15

6

701

704

April 30

6

690

693

May 31

6

706

709

June 15 (peak)

6

713

716

June 30

6

696

699

July 31

6

701

704

August 31

6

706

709

September 30

6

708

711

1977

June 24, 1976

BUDGET RECEIPTS AND
OUTLAYS BY FUND GROUP
($ Billions)
Transition
Fiscal Year
1976 Estimated

Quarter
Actual

Receipts:
Federal Funds $201.0 $54.7 $230.9
Trust Funds 134.2 33.8 157.8
Interfund Transactions -35.6 -6.6 -37.2
Unified Budget 299.6 81.9 351.5

Outlays:
Federal Funds 275.7 71.0 288.6
Trust Funds 132.2 35.1 145.8
Interfund Transactions -35.6 -6.6 -37.2
Unified Budget 372.2 99.5 39772

Surplus or Deficit (-):
Federal Funds -74.7 -16.3 - 57.7
Trust Funds 2.0 -1.3 12.0
Unified Budget -12.1 -17.6 - 45.7
Detail may not add to total due to rounding.
June 24, 1976

Fiscal Year
1977 Estimated

UNIFIED BUDGET MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
Outlays

Surplus or
Deficit (-)

July $ 20.2

$ 31.2

$-11.1

August 23.6

30.6

- 7.0

. September 28.6

29.0

-

October, 19.3

32.4

-13.1

November 21.7

29.4

- 7.7

December 26.0

31.8

- 5.8

January 25.6

30.7

- 5.1

February 20-8

29.8

- 9.0

March 20.4

29.1

- 8.6

April 33.3

32.5

.9

Ma

28.4

- 5.7

Receipts
1975 -Actual-

.4

1976

Y 22.7

-EstimatedJune

37.2

37.2

Fiscal Year 1976 299.6

372.2

-72.6

Jul

34.9

-12.1

August 26.8

32.5

- 5.7

September 32.3

32.1

.3

Transition Quarter 81.9

99.5

-17.6

Y 22.8

Detail may not add to total due to rounding.
June 24, 1976

UNIFIED BUDGET MONTHLY
FISCAL YEAR 1977
($ Billions)
Receipts Outlays

Surplus or
Deficit (-)

1976
October $ 22.2 $ 35.7

$-13.5

November 25.2 33.7

- 8.5

December 28.1 33.8

- 5.7

1977
January 30.5 35.2

- 4-7

February 23.2 34.7

-11.5

March 20.9 34.2

-13.3

April 39.6 33.8

5.8

May 25.6 31.8

- 6.2

June 41.0 30.3

10.7

July 26.6 33.7

- 7.1

August 31.4 30.2

1.2

September 37.2 30.1

7.1

Fiscal Year 1977 351.5 397.2

-45.7

Detail may not add to total due to rounding.
June 24, 1976

FEDERAL FUNDS MONTHLY
FISCAL YEAR 1976 AND
TRANSITION QUARTER
($ Billions)
*

Receipts

Outlays

Surplus or
Deficit (-)

1975 -ActualJuly $ 13.4

$ 27.5

$-14.0

August 13.0

21.0

- 8.0

September 22.3

20.2

2.1

October, 13.6

21.6

- 8.1

November 13.4

20.0

- 6.6

December 19.8

27.2

- 7.4

January 18.6

20.5

- 1.9

February 10.8

21.0

-10.2

March 13.3

19.5

- 6.3

April 23.5

22.3

1.2

May 9.3

19.1

- 9.9

35.7

- 5.7

275.7

-74.7

July 15.2

27.0

-11.8

August 14.7

22.0

- 7.3

September 24 . 8

22.0

2.8

Transition Quarter 54.7

71.0

16.3

1976

-EstimatedJune 30.0
Fiscal Year 1976 201.0

Detail may not add to total due to rounding
June 24, 1976

FEDERAL FUNDS MONTHLY
FISCAL YEAR 1977
($ Billions)
Receipts Outlays

Surplus or
Deficit (-)

1976 -EstimatedOctober $ 15.6 $ 23.0

$- 7..4

November 15.3 23.0

- 7.,7

December 21.4 27.0

- 5.,6

1977
January 22.4 22.0 .4
February 11.2 22.0 -10.8
March 12.6 22.0 -9.4
April 27.9 25.0 2.9
May 9.8 2 3.1 -13.3
June 32.0 29.1 2.9
July 17.5 28.1 -10.6
August 16.6 22.1 - 5.5
September 28.5 22.1 6.4
Fiscal Year 1977 230.9 288.6 -57.7
Detail may not add to total due to rounding.
June 24, 1976

OFF-BUDGET AGENCY OUTLAYS MONTHLY
FISCAL YEAR 1976 AND
THE TRANSITION QUARTER
Federal
Financing
Bank 1/

Other 2/

Total

1975 -ActualJuly $.6 * $.6
August .7 $-1.0 - .3
September .1 .5 .5
October .5 .5 1.0
November .6 .3 .9
December .2 .6 .7
1976
January 1.3 .3 1.5
February .8 .2 1.0
March 1.2 * 1.2
April .2 .1 .3
May .2 .2 .4
-EstimatedJune .2 1.3 1.5
Fiscal Year 1976 6.6 3.0 9.3
July 1.8 - .2 1.6
August 1.1 .4 1.5
September .8 .7 1.5
Transition Quarter 377 79 ¥76

V The outlays of the Federal Financing Bank, in order to prevent double co
reflect only its purchase of Government-guaranteed obligations, not its purchases
of agency debt. Virtually all of the other off-budget activity is financed
through debt issued to the Federal Financing Bank.

2/ Export-Import Bank, Postal Service and Rural Electrification Administra
Detail may not -ad*-feertotal due to rounding.

June 24

'

1976

OFF-BUDGET AGENCY OUTLAYS MONTHLY
FISCAL YEAR 1977
($ Billions)
Federal
Financing
Bank 1/

Other 2/

Total

1976 -ActualOctober . $ .4 $-1.2 $- .8
November .7 .3 1.0
December .8 .3 1.1
1977
January .7 .3 1.0
February .8 .3 1.1
March .8 .3 1.1
April .7 .4 1.1
May .7 .4 1.1
June .7 .4 1.1
July .7 .4 1.1
August .7 .4 1.1
September .6 .5 1.1
Fiscal Year 1977 172 2.8 11.1
1/ The outlays of the Federal Financing Bank^ in order to prevent
double counting, reflect only its purchase of Government-guaranteed obligations, not its purchase of agency debt. Virtually
all of the other off-budget activity is financed through debt
issued to the Federal Financing Bank.
2:/ Postal Service, Energy Independence Authority and Rural
Electrification Administration.
Detail may not add to total due to rounding.
June 24, 1976

CONGRESSIONAL AND
EXECUTIVE ESTIMATES
TRANSITION QUARTER AND FISCAL YEAR 1977
-House- -Senate- -Concurrent Resolution- -ExecutiveT.Q. • FY77 ' Total
T.Q.
FY77
Total
T.Q.

FY77

Total

T.Q.

FY77

Total

MeceiDts ' 86.0 363.0 449.0 86.0 362.4 448.4 86.0 362.5 448.5 81.9 351.5 433.4
Outlays 101.2 413.6 514.8 102.2 412.6 514.8 102.2 413.3 515.5 99.5 397.2 496.7
Deficit -15.2 -50.6 -65.8 -16.2 -50.2 -66.4 -16.2 -50.8 -67.0 -17.6 -45.7 -63.3
Debt level 646.2 711.9 646.2 711.5 647.£/ 713.i/ 639 711
Change
I.. 19.2 65.7
84.9
19.2 65.3
84.5

20.2

65.9

86.1

13

72

85

Off-Budget 4.0 11.0 15.0 n.a. n.a. n.a. n.a. n.a. n.a. 4.6 11.1 15.7
I
Trust Surplus
or Deficit (-).. 2.5
4.0
6.5
n.a. n.a.
n.a.
n.a.
n.a.
n.a.
- 1.3 12.0
10.7
1/ The House Budget Committee advised the House Ways and Means Committee on June 4, 1976, that
the debt levels shown in the concurrent resolution were overstated, and that their latest estimates, consistent with the concurrent resolution, was for a debt level of $635 billion for the
Transition Quarter and $700 billion for Fiscal Year 1977.
June 24, 1976

Use of Bond Issuing Authority 1/
(dollars in millions)

Issue
Date

: Coupon
:
%

• Maturity : Issuing
•

:
:

yrs.mos.

: Yield
9
:

'
Holdings on
Ji
May 31, 1976
: Private
r r?3 .& GA

o

807

398

409

6.15

1,216

. 332

884

10-0

PAR

2/197 |

9-9

6.29

7

10-0

7.11

11/15/71

6-1/8

15-0

2/15/72

6-3/8

8/15/71

: Tocal
: Ar.ount
: Issued
$

1,653

1,049

505 )

5/15/72

6-3/8*

8/15/72

6-3/8

12-0

6.45

2,353

975

1,378

1/10/73

6-3/4

20-1

6.79

627

418

209

5A5/73

7

25-0

7.11

692

371

321

8/15/73

7-1/2

20-0

8.00

925 \

11A5/73

7-1/2*

19-9

7.35

438 /

701

1,-13

2A5/74

7-1/2*

19-6

7.46

551 /

5/15/74

8-1/2

25-0

8.23

587 \

8A5/74

8-1/2*

24-9

8.63

886 V

UA5/74

8-1/2*

24-6

8.21

941/

7-7/8

25-0

7.95

902 |

2/18/75

900

7-7/8*

23-9

8.19

4/07/75

8-1/4

15-0

8.31

1,247

5/15/75

8-1/4

30-0

8.30

1,604 |

1,365

4i),6

931

266

981
2/17/76

8-1/4*

29-3

8.09

617^

8 A 5/75

8-3/8

25-0

8.44

1,114 |
1,463

8.23

*

869 >

5A7/76

24-9
8-3/8*
11A7/75
TOTALS
Office of the Secretary of the Trcasuiy
Office of Government Financing

/

1,151 *
20,229

10,538

'. . '-'T

802
9T691
Junes 23, 1976

1/ The facQ amount of Treasury boirlr> h^ld v>y the public ith
v: intore-Jt r tes e r ^
~" 4-1/4% is limited to $12 billion accord'.TTT to 21 U.S.C . 752. At tho ^:.: ':• '^
1976 there was $1.5 billion of rer.nirvir- authority.

.-.a.«.*=«_ ruiuiidses o r

Bonas issued

under

$10 Billion

Authority

July 1974 to date
($millions)
Jtonth

Total 1/

7%

6 3/85

6 3/85

6 1/8%

7 1/23

6 3/43

Aug 81

Feb 82

Aug 84

Nov 86

Aug 88-93

Feb 93

May 93-98

3 1/2%

8 l/4»

7 7/8«

May 94-99

May 90

Feb 95-00

G 1/4%
May 00-05

8 2A
Aug 95-00

1974
July

+ 36

7

8

4

16

S.2D

+ 35

2

Oct
Nov
Dec

3

3

24

+ 25
+ 22

8
3

2

7
2

8
9

Aug

1975

Jan
Fob
Mar
Aor
May

+ 27
+ 82
+2C1
+1G5
+ 3
+109

June
u-_y
Aucr
Sept

t 47
+124

Oct
Nov
Dec

+ 244
+ 73

2
1
1
2

T_

15
18
15

1_

10
2

.

5
21
14

23
12
107
04

52

10

45

2
8

13

12
10

17
10

49
44
15
3
45
•5

2

5
24

17
2

23
191
34-

1976

Jan
*eb
Mar
Apr.

+
+
+
+

73
59
24
38

1
10

May
Office of the Secret^rv of the Trwasiuy
Office of Government Financing

Note: Figures may not add to totals due to rounding.

21
5
3
19

8
18
11
3

32
19
5
11

June 22, 1976

Net Change in Federal Reserve Holdin9S
of Treasury Securities
($ millions)
: Net Change" : Net Purchases : Net Change '
:
in
:
of Bonds
-:
in
: Holdings
Over 4-1/4%
: Other Securities
1975
Jcin.

844

28

8.16

Feb.

-258

82

-340

Mar.

332

201.

131

£pr.

6,428

165

6,263

-2,224

3

-2,227

Jun,

-873

109

-982

Jul,

-2,866

Aug.

663

47

616

Sep.

4,452

124

4,328

Cct.

186

Her/.

-2,047

244

-2,291

Etec.

2,797

73

2,724

.1976
Jan.

1,848

73

1,775

Feb.

-729

259

-988

Mar.

763

24

739

Apr.

2,061

38

2,023

85

-1,369

May

May

-1,284

Orf-if:;"! ci tlo :-Jcc\-ctary of lh-2 Trcc-sury

Offico oi: Govaii^.onl: Finccicirn

—

—

-2,866

186

June 10,

?*ew Offerings of Coupon Securities
January
- Jui*e
1976 1/
($ Billions)
Securities Offered

Length of
Issue

Issue
Date

$41.0

Total Offerings
Iwo Years and Under:
6-2/8% Note
6-5/3% ITote
6-3/4% Note
6-1/2% Note
7-3/3% Note
6-7/8% Note
Over 2 - 7 Years:
7-1/2$ Iv.yce
7-:/8% Note
To Note
8% Note
7-1/2% Note
7-3/8% Note
7-5/8% Note
Over 7 - 20 Years:
7-7/8% Note
ever 20 Years:
8-1/4% Bond
7-7/8% Bond

2/02/76
3/03/76
3/31/76
5/17/76
6/01/76
6/30/76

2 yrs.
lyr.
2 ^is.
2 yrs.
2 yrs.
2 yrs.

1/06/76
1/26/76
2/17/76
2A7/76
3/17/76
4/05/76
6/10/76

4
5
3
7
4
4
4

5/17/76

2/17/76
5A7/76

0 mos.
9 mos.
0 mos.
0 mos.
0 mos.
0 mos.

yrs. 0 mos.
yrs.
4 mos.
yrs.
0 mos.
yrs. 0 mos.
yrs. 0 mos.
yrs. 10-1/2 xtos.
1 mo.
yrs.

$14.1

$26.9

6.8

8.3_
T.3
2.6

2.1
1.2
1.5
2.0
4.2
1.4
2.8

10 yrs. - 0 mos,

2.5
2.5

29 yrs. - 3 mos,
23 yrs. - 9 mos.

.6
• .2
.4

Office of the Secretary of the Treasury
Office of Government Financing
1/ Excludes Federal Reserve and Government Accounts' transactions.
2/ Pro rata share in May refunding.
3/ Pro rata share in February refunding.

l"0 1/
1.0
.5
15.8
2.0
2.0 t
1.7 2/
3.3 2/
2.0
2.6
2.2

2.2 y

June 22, 1976

43/
A!/

Treasury Bill Offerings January 1976 to Date
($ Billions)
Date
1976

Jan.

2
8
13
15
22
29
31

Total J?JT7
Feb.
5
10
13
19
26
Total Feb.
Mar. 4
9
11
18
25
Total MarT
1
Apr.
6
8
15
22
29
Total Apr.

Issues
regular Bills
13 &
26 wk. : 52 wk.

Cash
Mjlltt.

6.2
6.5

3.1
6.4
6.4
6.6
32.1

XT

—

2.9

TT

6.5

—
6.5

3.1
6.1
5.6
5.5
23.7

3.1

""="

6.0

3.2
6.2
6.1
5.9
6.1
30.3

6.2
6.5
3.1
6.4
6.4
6.6
35.2

2.5

TT

2.5

5.7
6.0

2.0
5.9
5.9
5.9

*29"TT

2.0

2.9
7.0
6.4
6.6
29 .T

2.1
6.3
6.4
6.4
25.3

IX

6.0
3.2
8.7
6.1
5.9
6.1
36.0

—

2.1
6.1
5.6
5.5
23.6

2.1

0.5
0.5

1.1
0.5
0.5
0.7

IT

4.5

XT

-1.6

0.8
0.7

0.7
0.2

ITT

0.1

0.2
--

2.4

0.1

0.1

25.7
6.0
2.2
6.2
6.1
10.6
6.3
377T

0.5
0.5
l.l
0.5
0.5
0.7
-1.6

0.7

0.8

TT

Total

TT

0.7
2.1
6.3
6.4
6.4
27~X

S£_
—

2.2

2.2

New Money
Bagjuiar'T S H ¥ — i
T3&
:
: Cash
26 wk. ; 52 wk.
: Mgmt.

2.1
6.1
5.6

6.0
6.2
6.1
6.1
6.3
30.7

5.7
6.0
2.0
5.9
5.9
5.9
1.6
33"*"6~

6.4

6.4
3.1
6.1
5.6
5j5_
2678"

1.6
1.6

Total

6.2

6.2

6.9

6.9
7.0
6.4
6.6
26.9

Total

Maturities"
Regular Bills*
Cash
13 &
:
Mjjrab.
26 wk.
52 wk.

1.0

1.0

"or

TT"

1.0
2.5
-4.5

-0.2
-0.2

"or

--or

1.0
2.5
•4.7
-0.2

Treasury Bill Offerings January 1976 to Date
($ Billions)
Date
1976

Issues
Regular Bills
13 &
26 wk.
52 wk.

M•lay

4
6
13
20
27
Total May
Total Jan.May 1576

3.2
6.2
6.2
6.0
6.1
24.5

3.2

137.5

15.5

June

1
3
8
10
17
24
29
Total Jan.
to June
1976 —

Cash
Mgmt.

2.5

2.9
6.0

2.0
5.7
5.3
5.2
2.6

162.3

18.4

4.5

Office of the Secretary of the Treasury,
Office of Government Financing
Note:

Total

Maturities
Regular Bills
13 &
Cash
26 wk.
52 wk.
Mgmt.

3.2
6.2
6.2
6.0
6.1
27.7

6.4
6.4
6.2
6.3
25.3

2.4

155.5

134.3

10.8

2.4

—

6.0

Total

New Money
Regular Bills
13 &
Cash
26 wk. : 52 wk.
Mgmt.

.8

2.4
6.4
6.4
6.2
6.3
27.7

-.8

.8

151.1

3.2

4.7

6.3

2.4
6.3

6.0
5.6
5.5
2.6

6.0
7.6
5.5
2.6

-.3
-.3
-.3

185.2

160.3

181.5

2.0

2.4

.8
-.2
-.2
-.2
-.2

-.2
-.2
-.2
-.2

2.9
6.0
2.0
5.7
5.3
5.2
2.6

.5

-3.5
•

-.3

2.0

2.0

13.:

8.0

Total

-2.0

4.3
.5
-.3
2.0
-.3
-2.3

-.3

5.2

-3.5

3.7

June 22, 1976
Figures may not add to totals due to rounding.

Attached charts were presented at the Advisory Committee
Briefings on April 27, 1976 and do not reflect the effect
of subsequent events.

Treasury Bill Offerings January 1976 to Date
($ Billions)
:

Date

Issues
Regular Bills :
• 13 &
26 wk. : 52 wk. :

1976
May

4
6
13
20
27
Total May

Total Jan.May 1976
June

1
3

:

Cash
Mgmt. :

3.2
6.2
6.2
6.0
6.1
24.5

3.2

——

137.5

15.5

2.5

2.9
6.0

Total Jan. 1976to date 143.5

18.4

2.5

Office of the Secretary of the Treasury
Office of Government Financing

Maturities
Regular Bills
:
13 & :
: Cash
Total : 26 wk. : 52 wk.
: McTTrt. : Total :

New Money
Regular• Bills
13 & :
: Cash :
26 wk.: 52 wk.
: Mgmt. : Total

3.2
6.2
6.2
6.0
6.1
27.7

6.4
6.4
6.2
6.3
25.3

2.4

2.4
6.4
6.4
6.2
6.3
27.7

-.2
-.2
-.2
-.2
-.8

155.5

134.3

10.8

151.2

3.2

2.9
6.0

6.3

164.4

140.6

2.4

—

6.1

2.4

13.2

6.1

.8

2.4
6.3

-.3

159.9

2.9

.8
4.7

__

.8
-.2
-.2
-.2
-.2

-3.6

4.3

.5

5.2

.5
-.3

-3.6

4.5

May 24, 1976

SHORT TERM INTEREST RATES
Weekly Averages
%

-15
-14

15
14
13
12
11
10
9
8
7
6

5
4
3h i

Federal Funds

-i"

Prime Rate

Commercial
Paper Rate

!

•

-11
-10
-9
Week Ending
April 21, 1976

-8
-7
-6

-5
ev^s.s*
•*±i,
S5^«
-4
-3
i

i i

i i

1973

Otlice ot the Secretary ol the Treasury
OHice ol Debt Analysis

i

i i

i i

1974
Calendar Years

i i i i i I i i i i

1975

1976

April 27 1976 18

INTERMEDIATE AND LONG MARKET RATES
Monthly Averages
New Aa
Corporates

%

-.•»***•...

Through
April 23, 1976

10
New Conventional
Mortgages
9
8
-,•£,»•••*M•••»•••»••**,*

New 20 Year
Municipal Bonds

J
I 1 I 1I 1 1I 11 I
J M M J S N J M M J S N J M M J S N J M M
1973
1974
1975
1976
OHice of the Secretary of the Treasury
Office of Debt Analysis

I April 27, 1976-23

TREASURY FINANCING REQUIREMENTS
January-June 1976 y
$Bil.

Uses

Increase in
Operating Cash'

-SSVv

60
\

50

Gov't Acc't
Investment

Sources

B

1

^Special Issues
^Savings Bonds, etc
21/2

mm
Refundings"

40
Maturities

30
20
Cash Deficit

Net N e w Cash 33

10

To Be
Done

0
t Net of exchanges for maturing marketable securities.
* Includes $4,/2 billion CMB's and $1.5 billion 1/31/76 bills in 2-year cycle slot.
±J Assumes $12 billion June 30 cash balance.
OMire ol m e Secretary of tne Treasury
Oflice ol Debt Analysis

April 27. 1976-16

TREASURY FINANCING REQUIREMENTS
May-June 1976^
$Bil

Sources

Uses

30
-—281/4

^•Decrease in Operating Cash

Gov't Acc't
Investment

Special Issuesf

20

^Savings Bonds, etc
Maturities

VA

Refundings
10
ll3/4

Cash Deficit

Net Cash
Financing

0
t Net of exchanges for maturing marketable securities.
L/Assumes $12 billion June 30 cash balance.
Ollice ol the Secretary ol the Treasury
Ollice ol Debt Analysis

1 April 27. 1976-19

TREASURY OPERATING CASH BALANCE

July

Aug Sept. Oct. Nov. Dec.
1975

Jan. Feb. Mar. Apr.
1976

May

June

* Daily
Office of the Secretary of the Treasury
Office of Debt Analysis

April 27.1976-15

TREASURY NET NEW MONEY BORROWING
Calendar Year Halves

jOver 15 yrs.
|7-15 yrs.
2-7 yrs.
2 yrs. & under

33

33.5

9

Bills

^To be
done

EOKM

1.3

1974
Office of the Secretary of the Treasury
Office of Debt Analysis

1975

1976
April 27. 1976-14

GROSS MARKET BORROWING 1974 - TO DATE^
Calendar Year Halves
$Bil.
7060
50

Over 15 yrs.
7-15 yrs.
^ 2 - 7 yrs.
2 yrs. & under
Bills

59.2

40
30
20
10
0
1974
Office of the Secretary ol the Treasury
Off e of Debt Analysis

1975

-^Gross public offerings of coupon issues; net offerings of regular bills. Excludes Federal
Reserve and Government Account transactions.
21
Issued or announced through April 21,1976.

1976
April 27. 1976-9

PRIVATE HOLDINGS OF TREASURY MARKETABLE
DEBT BY MATURITY
276.4

^

170.7

Over 15 yrs.
7-15 yrs.
2-7 yrs.
2 yrs. & under

255.9

wm.
210.4

181.0
164.9
vzm

Dec
1973
Office of the Secretary of the Treasury
Office of Debt Analysis

Jun.

Dec
1974

Jun.

Dec
1975

Mar.
1976
April 27. 1976-10

AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held
Years
June 1966
5 years
4 months

5V21

4V2-

3Vz

March 1976
2 years
5 months

3,
2V2

1966

1967 1968 1969

Office ol the Secretary of the Treasury
OHice ol Debt Analysis

1970

1971 1972 1973 1974 1975 1976
April 27.1976 12

COVERAGE OF 13 WEEK BILLS
Basis Points

Auction Tails

7.5-

0
$Bil.

111

Mill

LLU

• •

Total Tenders
r" V,*r

Accepted Tenders

0

•LL

S

O
1975

Q ' " « ™» w t *

N

D

M

A

M

1976
Aoril 27. 1976-2

COVERAGE OF 26 WEEK BILLS
Basis Points

Auction Tails

7.5

I I I I J M

S
Ollice ol the Secretary ol the Treasury
Office ol Debt Analysis

O
1975

N

T

I I I I I I I I I I I I

M
April 27. 1976-3

COVERAGE OF OUTSTANDING 52 WEEK BILLS
Basis Points

Auction Tails
10

0
$Bil.

Accepted Tenders

Total Tenders

6
5

lllllllllllll

0 May 6 June 3 July 1 July 29 A u g 26 Sept. 25 Oct. 21 Nov. 18 Dec. 16 Jan. 13 Feb. 10 Mar. 9 April 6
1975
Office of the Secretary of the Treasury
Office of Debt Analysis

1976
April 27. 1976-4

COVERAGE OF TREASURY COUPON ISSUES
July 1975 Through April 1976
Basis Points

Auction Tails

o
$Bil.
8

Total
Tenders
^Accepted
"" Tenders
as
r^.
OS

r-v
r-v
<Ss

oo
r-«
as

OS
•-<
00
OS
(^ as
r^
oo oo
r^
c\j
r^
i^
r*.
r>«. Is*
r^
oo
\->
•_- ,«
_op -i> •r^
O i O s O s O s O s O S O s O O s O s o s & a s

CM

oo
as

I

- I , - I , - I , - I . - I , - I _ I C \ | ' - < ' -

- « ^ ^ ^
^

^

<:
r^

Ollice ol the Secietary ol Ihe Treasury
Ollice ol Debt Analysis

>:
oo

^
°o

^
oo

^
>-00
oo oo

f^ (^ 00

^

5?

,

,

6?
to

"

H

S?'
oo

ID
Q

- '

6?

6?

•^
r^
as
6?

Q
oo
os

5?

°o zi
rv oo
os &>
6?

;£ >- ;*r^ "^ VO
April 27 1976 8

NUMBER OF TENDERS FOR 7-YEAR 8% NOTES
(Thousands)*
Commercial Banks
Individuals
Dealers & Brokers
Mutual Savings
Banks

Number of Tenders:
IH Over $500,000

Corporations

^ $201,000 to $500,000
Private Pensions

•I $1,000 to $200,000

State and Local
Governments
Insurance
Companies
All Other

0

10

15

20

25

/A70

75

* Data estimated from partial results. Sample data suggest significant misclassification
of smaller tenders from commercial banks.
April 27. 1976-21
Office of the Secretary of the Treasury
Office of Debt Analysis

COVERAGE OF 7-YEAR 8% NOTES
(Billions of Dollars)*

-V

Commercial Banks
Individuals
Dealers & Brokers
Mutual Savings
Banks
Corporations

Tenders:
HI Over $500,000

Private Pensions

Z0 $201,000 to $500,000
State and Local
Governments

•I $1,000 to $200,000

Insurance
Companies
All Other

0

1

2

3

4

5

6

7

* Data estimated from partial results. Sample data suggest significant reclassification
of smaller tenders from commercial banks.
Office of the Secretary of the Treasury
Office of Debt Analysis

8

MARKETABLE MATURITIES THROUGH APRIL 30, 1977
Privately Held, Excluding Bills & Exchange Notes

J
O H i c e ol the Secretary ol the Treasury
Otlice ot Debt Analysis

F
M
1977

A
April 27. 1976-1

OWNERSHIP OF THE MATURING ISSUES
THROUGH APRIL 1977*
Maturing Issues

5 % % Nt. May 1976
6% Nt. May 1976
67 2 % Nt. May 1976
8 % % Nt. June 1976
5%%Nt. Aug. 1976
67 2 % Nt. Aug. 1976
77 2 % Nt. Aug. 1976
87 4 % Nt. Sept. 1976
67 2 % Nt. Oct. 1976
674% Nt. Nov. 1976
7%% Nt. Nov. 1976
774% Nt. Dec. 1976
6% Nt. Feb. 1977
8% Nt. Feb. 1977
6%% Nt. Mar. 1977
7%%Nt. Apr. 1977
Total

Total
Privately
Held
2,203
1,482
1,868
1,999
1,594
2,006
2,546
1,662
1,510
4,015
1,346
2,023
1,544
2,085
2,120
1,519
31,522

(In millions of dollars)
Savings Institutions
Commercial
LongIntermediateterm
Banks
term
.
2/
Investors^
Investors-'
5
190
1,220
870
125
10
830
165
5
960
85
5
760
110
1,100
120
15
1,155
165
100
1,025
15
680
190
50
1,750
240
5
940
130
1,105
220
15
720
150
10
865
125
5
1.140
215
15
210
945
16,065

155

2,540

State &
Local CorporaForeign
General
tions
Funds
165
115
175
350
105
135
170
100
210
340
80
190
190
175
140
95
2,735

N

Other
Private
Holders

135
80
20
75
240
110
15
35
115
375
90
90
220
20
250
90

145
80
120
60
155
40
225
65
75
885
40
215
160
95
340
80

343
212
548
464
219
501
801
337
225
375
61
203
89
795
30
84

1,960

2,780

5,287

* Based on February 1976 survey of ownership.
1/ Includes State and local pension funds and life insurance companies.
2/ Includes fire, casualty, and marine ins., mutual savings banks, savings and loan, and corporate pension funds.
Office of the Secretary of the Treasury
Office of Debt Analysis April 27,1976-24

MARKET YIELDS ON GOVERNMENTS
(Bid Yields)

6

0
of the Secretary of the Treasury
of Debt Analysis

8 10 12 14 16 18 20 22 24 26 28

3
4
Years to Maturity
April 27, 1976-22

TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
l$Bil.

$Bil

6
4
2
0
6
4
2
0
6
4
2
0
6
4
2
0

1976
4

4.1

*

4.0

7

I " • I ; i. iji.31
1977
2

!l.5
—1.5

21

K

B 1 & 4 " 2.5
1.5BST b? 14B'8 (9 H B
1

3

.

3

• gI alB
air 1 II
a I all
6.0 1978

5,0

2.3B2.1

4.6

4.5
3.0

I

1979
3.1
17

J F M A

1.7

2.8
|

1
.9
1£

?J
||

JM _J |J_A| S_ |O _N ID

2.4

2.0

4
2
0
4
2
0
2
0
6
4
2
0
4
2
0

1980

1.6

I

20

1.7

1.6

I

I
1981

5.4

2.7

2.0

i
1.7

1.4

1.1

19821.9

I
23

I
6.0

1983
1.1

1984
1.0

J F M A M J J A S O N D

E B New issues calendar year 1975.
E H New Issues calendar year 1976.
Office of the Secretary of the Treasury
Office of Debt Analysis

Apnl 27. 197627

TREASURY MARKETABLE MATURITIES
Privately Held, Excluding Bills and Exchange Notes
$Bil

$Bil.
2

1.3

1985

0
2

1986

0
2V

1987
1988
1989
1990
2.4
1.1

1991
1992
2.0

1993

I
.7

1994
J F M A M J

J A S O N D

2h
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0

1995
.5

1996
1997
1998
.4

1.8

1999
200015

.6
rm

2001
2002
2003
2004
1.0
E3

2005

J F M A M J J A S O N D

K New issues calendar year 1975.
i H New issues calendar year 1976.
Office of the Secretary ot the Treasury
Office of Debt Analysis

April 27. 1976-28

TREASURY FINANCING REQUIREMENTS
May - June 1975
$Bil.

Sources

Uses
Adjustment
to Cash v

Decrease in Operating
f Cash

-ZOVA-

30
Gov't Acct.
Investment

^H

20-

i

Vz «s>

VA

Agency & Other

%

m

^ Special Issues
Savings Bonds
f & Other

Maturities
3

l /4^

1
Off Budget Deficit

10-

Refund ings S*

^Q

*s
Budget Deficit
Net New Cash

/*

0

Office of the Secretary ol the Treasury
Ollice ol Debt Analysis

April 27, 1976 26

TREASURY OPERATING CASH BALANCE

Aug
OflK» o< th» Secretary <rf the TrMMiry
Ottic* ol Debt Analysis

Sept. Oct
1974

Nov. Dec. Jan
* Daily

Feb.

Mar. Apr.
1975

May

June

April 27, 1976-25

$Bil.

CHANGES IN PRIVATE HOLDINGS OF TREASURY
MARKETABLE DEBT BY MATURITY

50
45.5
Over 15 yrs.
7-15 yrs.
23 2-7 yrs.
^2yrs.& under

40
30
20
10

0
-10

tsss/s/ss\

mmmm

-5.9

1974
Office ol the Secretary ol the Treasury
Office ol Debt Analysis

1975

i*
1976

* First quarter 1976.
April 27. 1976 11

AGENCY MATURITIES v
Privately Held
$Bil. 1984

$Bil.

1 - .7
1 -i^.
0
198815

1985

1986

1987

1990

1991

1.1

i .1
1989

1
.2

2

0

1992

1993

1994

.4

1995

1
2 2

0

1996

lh
0

.1 .1

1997
± .3

1998

1999

i A 2 .1

2000

2001

2002

2003

2004

2005

2006

2007

lh
0

1
0
1 2 3 4 1 2 3 4 1 2 3 4 123 4

1234 1234 1234

1234

Calendar Years Quarterly
Office of the Secretary ol the Treasury
Office of Debt Analysis

y Issued or announced through April 19, 1976.
* Less than $50 million.

April 27, 1976-7

For information on submitting tenders in the Washington, D. C. area:
FOR RELEASE AT 4:00 P.M.

PHONE W04-2604

February 27, 1976

TREASURY TO AUCTION $2.0 BILLION OF NOTES
The Department of the Treasury will auction $2.0 billion of 4-year notes to
raise new cash. Additional amounts of the notes may be issued to Federal Reserve
Banks as agents of foreign and international monetary authorities.
The notes now being offered will be Treasury Notes of Series C-1980 dated
March 17, 1976, due March 31, 1980 (CUSIP No. 912827 FK 3 ) , with interest payable on
September 30, 1976, and thereafter on March 31 and September 30. They will be
issued in registered and bearer form in denominations of $1,000, $5,000, $10,000,
$100,000, and $1,000,000, and they will be available for issue in book-entry form.
Payment for the notes must be made on March 17, 1976.
made through tax and loan accounts.

Payment may not be

Tenders will be received up to 1:30 p.m., Eastern Standard time, Friday,
March 5, 1976, 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 Thursday, March 4.
Each tender must be in the amount of
$1,000 or a multiple thereof, and all tenders must state the yield desired, if a
competitive tender, or the term "noncompetitive", if a noncompetitive tender.
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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 1/8 of 1 percent necessary to make the
average accepted price 100.000 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
icompetitive tender allotted will be determined and each successful competitive bidder
;Will pay the price corresponding to the yield bid. Price calculations will be
jcarried 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 99.001 will not be accepted.
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 $500,000 or less
will be accepted in full at the average price of accepted competitive tenders, which
Price will be 100.000 or less.

WS-681

(OVER)

-2Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and dealers who make primary markets in Government securities and
report daily to the Federal Reserve Bank of New York their positions with respect
to Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally-insured savings and loan associations, States,
political subdivisions or instrumentalities thereof, public pension and retirement
and other public funds, international organizations in which the United States holds
membership, foreign central banks and foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank of
New York their positions with respect to Government securities and borrowings
thereon, Federal Reserve Banks, and Government accounts. Tenders from others must
be accompanied by payment of 5 percent of the face amount of notes applied for.
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 notes with their tenders in order to meet the time limits pertaining to
chrcks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Wednesday,
March 17, 1976, at the Federal Reserve Bank or Branch or at the Bureau of the
Public Debt in cash, in other funds immediately available to the Treasury by
March 17, 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 i
which must be received at such Bank or at the Treasury no later than: (1) Thursda
March 11, 1976, if the check is drawn on a bank in the Federal Reserve District ot
the Bank to which the check is submitted, or the Fifth Federal Reserve District in
the case of the Treasury, or (2) Tuesday, March 9, 1976,
if the check is drawn
on a bank in another district. Checks received after the dates set forth in the
preceding sentence will not be accepted unless they are payable at a Federal Reser e
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 notes allotted wi
be subject to forfeiture to the United States.

DOO

99

March 5, 1976

FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 4-YEAR TREASURY NOTES

The Treasury has accepted $2,0 billion of the $5.4 billion of
tenders received from the public for the 4-year notes, Series C-1980,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield

7.50Z 1/
7.55X
7.54Z

The interest rate on the notes will be 7-1/2%.
the above yields result in the following prices:
Low-yield price 99.990
High-yield price
Average-yield price

At the 7-1/2% rate,

99.818
99.853

The $2.0 billion of accepted tenders includes 34% of the amount of
notes bid for at the highest yield and $0.7 billion of noncompetitive
tenders accepted at the average yield.
In addition, $15 million of tenders were accepted at the averageyield price from foreign and international monetary authorities.
1/ Excepting 9 tenders totaling $891,000.

WS-698

For information on submitting tenders in the Washington, D. C. area:

PHONE WO4-2604

FOR IMMEDIATE RELEASE March 11, 1976
TREASURY TO AUCTION $3.0 BILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $3.0 billion of 2-year notes to
refund $2.3 billion of notes maturing March 31, 1976, and to raise $0.7 billion
of new cash. The public holds $2,143 million of the maturing notes and $ 145 million
is held by Government accounts and the Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities. Additional amounts of
the notes may be issued to Federal Reserve Banks as agents of foreign and international monetary authorities for new cash.
The notes now being offered will be Treasury Notes of Series K-1978 dated
March 31, 1976, due March 31, 1978 (CUSIP No. 912827 FL 1) with interest payable
semiannually on September 30, 1976, March 31, 1977, September 30, 1977, and
March 31, 1978. The coupon rate will be determined after tenders are allotted.
The notes will be issued in registered and bearer form in denominations of $5,000,
$10,000, $100,000 and $1,000,000, and they will be available for issue in bookentry form to designated bidders. Payment for the notes may not be made through
tax and loan accounts.
Tenders will be received up to 1:30 p.m., Eastern Standard time, Thursday,
March 18, 1976, 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 March 17. Tenders must, be in the amount of $5,000 or a
multiple thereof, and all tenders must state the yield desired, if a competitive
tender, or the term "noncompetitive", if a noncompetitive tender. 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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 1/8 of 1 percent necessary to make
the average accepted price 100.000 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 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. Noncompetitive bidders will be required to pay the average
price of accepted competitive tenders; the price will be 100.000 or less.
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 $500,000 or

WS-711
(OVER)

-2less, and all tenders from Government accounts and the Federal Reserve Banks
for themselves and as agents of foreign and international monetary authorities,
will be accepted in full at the average price of accepted 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 Government securities and borrowings thereon, may submit tenders
for the account of customers, provided the names of the customers are set forth
therein. 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 pubi|.p fiinds, internff^pna^, bf£flT}i»ations in which the United States
holds membership, foreign central banks ana 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 5 percent of the face amount of notes
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 with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.,
Payment for accepted tenders must be completed on or before Wednesday,
March 31, 1976. Payment must be in cash, 8% Treasury Notes of Series H-1976,
which will be accepted at par, in other funds immediately available to the
Treasury by the payment date 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) Thursday, March 25, 1976, 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) Tuesday, March 23, 1976, if the check is drawn on a bank in another district.
Checks received after the dates set forth in the preceding sentence will not be
accepted unless they are payable at a Federal Reserve Bank. Where full payment is
noL completed on time, the allotment will be canceled and the deposit with the
tender up to 5 percent of the amount of notes allotted will be subject to
forfeiture to the United States.

oOo

FOR IMMEDIATE RELEASE

March 18, 1976

RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted $3.0 billion, including $0.1 billion
from Government accounts and Federal Reserve Banks for their own
account, of the $4.9 billion of tenders received for the 2-year
notes, Series K-1978, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.71% 1/
Highest yield
Average yield

6.80%
6.76%

The interest rate on the notes will be 6-3/4%. At the 6-3/4% rate,
the above yields result in the following prices:
Low-yield price 100.074
High-yield price
Average-yield price

99.908
99.982

The $3.0 billion of accepted tenders includes 10% of the amount
of notes bid for at the highest yield and $0.7 billion of noncompetitive
tenders from the public accepted at the average yield.
In addition, $0.1 billion of tenders were accepted at the averageyield price from foreign and international monetary authorities.
1/Excepting 3 tenders totaling $290,000

WS-729

For information on submitting tenders in the Washington, D. C. area:
FOR IMMEDIATE RELEASE

torch

PHONE WO4-2604

16, 1976

TREASURY TO AUCTION $2.5 BILLION OF NOTES
The Department of the Treasury will auction $2.5 billion of 4-year 10-1/2-month
notes to raise new cash. Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities at the
average price of accepted tenders.
The notes now being offered will be Treasury Notes of Series E-1981 dated
April 5, 1976, due February 15, 1981 (CUSJP No. 912827 FM 9), with interest payable
on August 15, 1976, and thereafter on February 15 and August 15. The coupon rate
will be determined after tenders are allotted. 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, and they will be available for issue in book-entry f^rm t o designated
bidders.
Payment for the notes must be made on April 5, 1976.
made through tax and loan accounts.

Payment may not be

Tenders will be received up to 1:30 p.m., Eastern Standard time* Wednesday,
March 24, 1976, 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 Tuesday, March 23. Each tender must be in the
amount of $1,000 or a multiple thereof, and all tenders must State the yield
desired, if a competitive tender, or the term "noncompetitive", if a noncompetitive
tender. 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.
Competitive tenders must be expressed in terms of annual yield in two decimal
places, e.g., 7.11, 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 1/8 of 1 percent necessary to make the
average accepted price 100.000 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 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 99.001 will not be accepted.
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 $500,000 or
less, will be accepted in full at the average price of accepted competitive tenders,
which price will be 100.000 or less.
WS-724
(OVER)

-2-

Si

Commercial banks, which for this purpose are defined as banks accepting
demand deposits, and dealers who make primary markets in Government securities and
report daily to the Federal Reserve Bank of New York their positions with respect
to Government securities and borrowings thereon, may submit tenders for the account
of customers, provided the names of the customers are set forth in such tenders.
Others will not be permitted to submit tenders except for their own account.
Tenders will be received without deposit from commercial and other banks for
their own account, Federally-insured savings and loan associations, States,
political subdivisions or instrumentalities thereof, public pension and retirement
and other public funds, international organizations in which the United States holds
membership, foreign central banks and foreign States, dealers who make primary
markets in Government securities and report daily to the Federal Reserve Bank of
New York their positions with respect to Government securities and borrowings
thereon, Federal Reserve Banks, and Government accounts. Tenders from others must
be accompanied by payment of 5 percent of the face amount of notes applied for.
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 notes with their tenders in order to meet the time limits pertaining to
checks as hereinafter set forth. Allotment notices will not be sent to bidders
who submit noncompetitive tenders.
Payment for accepted tenders must be completed on or before Monday, April 5,
1976, at the Federal Reserve Bank or Branch or at the Bureau of the Public Debt
in cash, in other funds immediately available to the Treasury by April 5, 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) Wednesday,
March 31, 1976, 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 the
case of the Treasury, or (2) Monday, March 29, 1976, if the check is drawn on a
bank in another district. Checks received after the dates set forth in 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 will be canceled
and the deposit with the tender up to 5 percent of the amount of notes allotted will
be subject to forfeiture to the United States.

oOo

3<
FOR IMMEDIATE RELEASE March 24, 1976
RESULTS OF AUCTION OF 4-YEAR 10-1/2 MONTH TREASURY NOTES
The Treasury has accepted $2.5 billion of the $5.1 billion of
tenders received frpm the public for the 4-<year 10-1/2 month notes, Series
E-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 7.35% 1/
Hiffeeat yield
Average yield

7.3W
7.38%

The interest rate on the notes will be 7-3/8% . At the 7-3/8% rate,
the above yields result in the following prices:
Low-yield price 100.101
High-yield price
Average-yield price

99.940
99.980

The $2.5 billion of accepted tenders includes 100% of the amount of notes
bid for at the highest yield and $0.5 billion of noncompetitive tenders accepted
at the average yield.
In addition, $150 million of tenders were accepted at the average-yiela
price from foreign and international monetary authorities.
Attention is directed to the fact that the coupon rate of 7-3/8% on the
new notes (Series E-1981) is the same as that on previously Issued Treasury
Notes (Series C-1981) and that both notes will mature on February 15, 1981.
However, interest to be paid on August 15, 1976, will be $26.74451 per thousand
for the new Series E-1981 notes and $36.87500 per thousand for the existing
Series C-1981 notes. After August 15, 1976, both Series C-1981 and E-1981 will
have the same semi-annual interest payments, $36.87500 per thousand. Three
factors will distinguish the two notes; the series designation, the issue date,
and the CUSIP number. Series C-1981 was issued on February 18, 1975 (CUSIP
No. 912827 ED 0 ) , and Series E-1981 will be issued on April 5, 1976 (CUSIP
No. 912827 FM 9).
1/ Excepting 5 tenders totaling $6,530,000

WS-739

FOR RELEASE A T 11:45 A . M .

April 5, 1976

TREASURY OFFERS $2.5 BILLION OF TREASURY BILLS
The Department of the Treasury, by this public notice, invites tenders for
$2,500,000,000, or thereabouts, of 14- day Treasury bills to be issued
April 8 1976 representing an additional amount of bills dated October 23. 1975,
maturing April' 22, 1976 (CUSIP No. 912793 ZD 1 ) .
The bills will be Issued on a discount basis under competitive bidding,
arid 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 all Federal Reserve Banks and Branches up to
1:30 p.m., Eastern Standard time* Wednesday, April 7, 1976. Tenders will not be
received at the Department of the Treasury, Washington. Wire and telephone
tenders may be received at the discretion of each Federal Reserve Bank or
Branch. Tenders must be for a minimum of $10,000,000. Tenders over $10,000,000
must be in multiples of $1,000,000. The price on tenders 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 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 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 tenders will be advise
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. Settlement for accepted
tenders in accordance with the bids must be made at the Federal Reserve Bank
or Branch on April 8,1976, in immediately available funds.

WS

765

-2-

U

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.

For information on submitting tenders in the Washington, D. C. area:

PHONE WO4-2604

FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE April 28, 1976
TREASURY TO OFFER $3.5 BILLION OF 10-YEAR NOTES
The Department of the Treasury will offer to sell $3.5 billion of 10-year notes
as one of three securities to be issued for the purpose of refunding debt maturing
May 15 and raising new cash. The amount of the offering may be Increased by a
reasonable amount to the extent that the total amount of subscriptions for $500,000
or less accompanied by 20% deposit so warrants. Details of the other two securities
are contained in separate announcements. Additional amounts of the notes may be
Issued to Government accounts and Federal Reserve Banks for their own account.
The notes now being offered will be 7-7/8% Treasury Notes of Series A-1986
dated May 17, 1976, due May 15, 1986 (CUSIP No. 912827 FP 2). They will be sold
at par. Interest will be payable on a semiannual basis on November 15, 1976,
and thereafter 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
and they will be available for issue in book-entry form to designated subscribers.
Subscriptions will be received through Wednesday, May 5, 1976, at any Federal
Reserve Bank or Branch and at the Bureau of the Public Debt, Washington, D. C. 20226;
provided, however, that subscriptions up to $500,000 accompanied by a 20% deposit
will be considered timely received if they are mailed to any such agency under a
postmark no later than Tuesday, May 4, 1976. Subscriptions must be in the amount
of $1,000 or a multiple thereof. The notation "SUBSCRIPTION FOR TREASURY NOTES"
should be printed at the bottom of envelopes in which subscriptions are submitted.
Commercial banks, which for this purpose are defined as banks accepting demand
deposits, and dealers who make primary markets in Government securities and report
daily to the Federal Reserve Bank of New York their positions with respect to
Government securities and borrowings thereon, may submit subscriptions for the account
of customers, PROVIDED THE NAMES OF THE CUSTOMERS ARE SET FORTH THEREIN. Others
will not be permitted to submit tenders except for their own account.
The Secretary of the Treasury expressly reserves the right to accept or reject
any or all subscriptions, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, subscriptions for $500,000, or less,
will be allotted in full provided that 20% of the face value of the securities fdr
each subscriber is submitted as a deposit. Such deposits must be submitted to the
Federal Reserve Bank or Branch, or to the Bureau of the Public Debt, with the
subscription; this will apply even if the subscription is for the account of a
commercial bank or securities dealer, or for one of their customers. Guarantees
in lieu of deposits will not be accepted. Allotment notices will not be sent
to subscribers making the 20% deposit.
Subscriptions not accompanied by the 20% deposit will be received subject to
a percentage allotment irrespective of the size of the subscription. No allotment
will be made of these subscriptions until and unless the subscriptions accompanied
by 20% deposit pursuant to the preceding paragraph have been allotted in full. On
such subscriptions a 5% deposit will be required from all subscribers except
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,

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international organisations in which the United States holds membership, foreign
central banks sad foreign States* dealers who make primary markets in Government
securities end 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. Commercial banks and securities dealers authorised to
enter subscriptions for customers will be required to certify that they have
received the 5% deposit from their customers or guarantee payment ef the deposits.
Subscribers may submit subscriptions under each of the provisions of the
two foregoing paragraphs, i.e., up to $500,000 with a 20% cash.deposit and in
any amount with a 5% deposit, Each of the two types of subscriptions will be
treated as separate subscriptions.
Payment for accepted subscriptions must be completed on or before Monday,
May 17, 1976. Payment must be in cash, 6-1/2% Trea