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LIBRARY
N0V9 1977
-Or.J'00M 5004
REASURy DEPAJJTMEN
_J^JJl£(^
PRESS RELEASES
WS-1004
TO
WS-1105
AUGUST 2, 1976
THROUGH
SEPTEMBER 30, 1976
LIBRARY
N0V9 1977
ROOM 5004
REASURY DEPARTMEN
I
rtmentaflheTREASURY
, D.C. 20220
TELEPHONE 964-2041
•
August 2, 1976
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,700 million of 13-week Treasury bills and for $3,700 million
of 26-week Treasury bills, both series to be issued on August 5, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing November 4, 1976
High
Low
Average
26-week bills
maturing February 3, 1977
Price
Discount
Rate
Investment
Rate 1/
Price
Discount
Rate
Investment
Rate 1/
98.705
98.694
98.698
5.123%
5.167%
5.151%
5.26%
5.31%
5.29%
97.244
97.228
97.233
5.451%
5.483%
5.473%
5.68%
5.72%
5.71%
Tenders at the low price for the 13-week bills were allotted 13%.
Tenders at the low price for the 26-week bills were allotted 28%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
j
Boston
$
42,060,000
New York
3 ,560,180,000
Philadelphia
35,275,000
Cleveland
37,510,000
21,880,000
Richmond
Atlanta
31,105,000
260,975,000
Chicago
45,010,000
St. Louis
41,495,000
Minneapolis
24,635,000
Kansas City
43,555,000
Dallas
San Francisco 278,800,000
TOTALS^, 422,480,000
Accepted
$
28,060,000
2,240,220,000
35,275,000
37,210,000
21,445,000
31,015,000
162,475,000
29,010,000
20,315,000
24,635,000
24,335,000
46,180,000
Received
$
39,280,000
5,417,690,000
54,535,000
146,070,000
41,500,000
15,360,000
731,130,000
34,825,000
45,835,000
32,625,000
32,775,000
417,735,000
$2,700,175,000 a/$7,009,360,000
Accepted
$
24,080,000
2,887,275,000
18,655,000
71,670,000
26,500,000
11,430,000
431,610,000
21,825,000
14,955,000
29,405,000
17,115,000
145,975,000
$3,700,495,000 *J
a/ Includes $323,545,000 noncompetitive tenders from the public.
b/Includes $154,580,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1004
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE WARREN F. BRECHT
ASSISTANT SECRETARY (ADMINISTRATION)
U. S. DEPARTMENT OF THE TREASURY
BEFORE
SENATE COMMITTEE ON BANKING, HOUSING
AND URBAN AFFAIRS
AUGUST 3, 1976
Mr. Chairman and Members of this Committee:
I am pleased to represent the Department of the Treasury
in responding to your concerns about employment discrimination
in financial institutions and Treasury's role in enforcing
Federal law prohibiting such discrimination.
Before presenting my opening statement, I would like to
introduce those who are with me today: Mr. David A. Sawyer,
Director of the Department's Office of Equal Opportunity
Program, and Mrs. Inez S. Lee, Deputy Director of that office.
Also with me today are our Regional Contract Compliance
Managers: Joseph F. Leahy, New York; Joseph F. Nash,
Washington, D. C; George H. Fisher, Chicago; William G.
Thomas, Los Angeles; Kenneth G. Patton, Houston; and Millard
F. Rutherford, Atlanta.
WS-1005
- 2 Introduction and Background
We believe that the conclusions of the recently-released
GAO report on the Treasury Department's bank equal opportunity
compliance program, together with your July 1 statement, do not
reflect the real progress achieved through Treasury's surveillance of financial institutions during the past 8 to 10 years.
By way of background, banks and other financial
institutions were not covered by Executive Order 11246 or
previous executive orders on non-discrimination until late
1966, at which time the President declared financial institutions "federal contractors" based on their status as federal
depositaries and as agents for the issuance and redemption of
savings bonds. Treasury's active role in bank compliance
began when regulations were issued in November 1967.
From the outset, the Treasury Department has administered
its bank compliance program with a small staff. We started
with a staff of five in 1968 and even today have only about 40
(including clerical support) to administer a nationwide program
covering approximately 4,500 banks.
To carry out a meaningful compliance program with a small
'Staff has required an innovative approach. Frequent, in-depth
reviews of large numbers of individual banks simply has not
been possible. Accordingly, ours has been primarily an educationally oriented, technical assistance approach, relying
- 3 heavily on moral suasion and conciliation to establish
affirmative action plans in the banks under our contractual
jurisdiction. To get more minorities into the banking
industry, and to move both minorities and women up the career
ladder into managerial and executive positions, we pushed hard
for a strong moral commitment and an emphasis on voluntary
compliance by banking executives. To reach as many bankers
as possible, we have participated over the years in numerous
conferences and seminars sponsored by the American Bankers
Association, State Bankers Associations, banking schools, and
other groups. By "multiplying" our limited staff in this
manner, we were able to reach effectively far more banks than
would have ever been possible otherwise.
Stronger Enforcement Emphasis
Despite this emphasis on fostering a high sense of voluntary commitment toward affirmative action, we have recognized
the need to place more emphasis on tougher enforcement
especially directed toward banks which were recalcitrant about
developing affirmative action programs. The need for such an
effort, discussed at length in the recent GAO report, had
already been recognized in an internal management review of
the Office of Equal Opportunity Program. Steps already had
been taken to rectify this deficiency. As part of this stronger
enforcement approach, Treasury has now issued about 15 showcause notices to banks whose programs for eliminating employment
- 4 discrimination were regarded by us as insufficient and lacking
a good faith effort. In all cases we have been able to get
these banks to take positive steps and to develop affirmative
action plans and conciliation agreements which satisfy our
requirements.
Even before we began issuing show-cause notices, in
approximately 3 0 percent of our compliance reviews, letters
which could be considered "pre-show-cause" notices were issued
where deficiencies were revealed and where corrective action
was required. In such cases, banks were requested to rectify
these deficiencies within a given period of time. In the
great majority of instances, the banks responded in a positive
and timely fashion. In the remainder, the banks responded
after additional work had been done on our part.
Perhaps there is a philosophical difference, but we at
Treasury believe very strongly that our primary mission in
this program is to promote equal opportunity in the banks,
rather than to withdraw their federal contractual status. We
do not hesitate to issue show-cause notices or to impose further
sanctions where banks refuse to comply. Yet, if we can achieve
our objective without imposing sanctions, we feel we have done
our job.
- 5 Improvements Already Made
Significant improvements already have been made in the
internal management and conduct of our bank compliance program.
Most of the improvements recommended by our own internal
management review, as well as most of the GAO recommendations,
already have been implemented.
Some of the more significant
improvements include:
— Strengthening the staff of six regional offices. After
a thorough search, we found and hired excellent staff as
our new Regional Managers, and then we maximized our
delegation of authority to them.
We were fortunate in
acquiring very able managers, who have had many years
of equal opportunity experience and are also proven
administrators.
— Developing and issuing a complete and up-to-date'"Contract
Compliance Operations Manual" and a "Standard Compliance
Review Report Format."
Both the Operations Manual and
Report Format were developed to assure greater uniformity
throughout our regional offices.
(The Bureau of National
Affairs recently published guidelines and procedures
established by the compliance agencies.
The Operations
Manual was one of only two cited as worthy of publication,
and the Report Format was the only one of its type published
by them.)
- 6 —
Conducting an intensive, week-long seminar for our equal
opportunity specialists. This seminar, developed and
conducted by the Regional Managers in December 1975,
stressed the knowledge of the latest laws and regulations
and more rigorous analytical requirements. Again, besides
bringing all equal opportunity specialists to the desired
level of proficiency and professionalism, we believe this
seminar has also assured greater uniformity in applying
the EEO laws throughout the banking industry.
— Instituting a series of quarterly seminars in each region
with personnel from the banks which are scheduled to be
reviewed during the coming quarter. During these seminars,
we try to educate the bank representatives on the latest
EEO requirements and the specific information required for
an acceptable affirmative action plan. This educational
approach has been successful in that the banks can know
in advance what is expected of them, and in the process
increases the likelihood of their developing an acceptable
affirmative action plan or one which requires relatively
few changes to be acceptable. This reduces subsequent
staff time during on-site reviews and increases our
limited staff's productivity.
— Developing a more complete and meaningful information
system to help us identify those banks where we should
- 7 concentrate'our limited resources in reviewing affirmative
action plans and conducting on-site visits.
— Finally, taking a much stronger enforcement posture by
not hesitating to issue show-cause notices where they are
warranted.
As noted earlier, all of the show-cause notices
issued to date have occurred during the past two years.
In summary, we believe that by taking these actions, we
have largely rectified past deficiencies, some of which had
been noted by the GAO study team and some of which had come
out in the course of our own internal review.
Results of Banks' EEO Programs
I think it appropriate at this time to review the banks'
EEO accomplishments during the period in which Treasury has
had a bank compliance responsibility.
Prior to 1968, minority
employment in banks was insignificant and women were almost
totally in the lower graded positions.
Today, within the universe of just over 1,000,000
employees covered by our compliance program, minority employment has risen from below 40,000 in 1968 to over 164,000 in
1975; for Blacks, the increase went from approximately 22,000
to over 97,000; for Hispanics from approximately 12,000 to
over 45,000; and for Orientals from about 5,000 to almost
20,000.
Furthermore, minorities rose from 8 percent of the
total bank employment to about 16 percent during this period.
- 8 Department of Labor studies on penetration of Blacks in
the workforce of 11 major industries have indicated that penetration has been greatest in the banking industry. Studies by
the Office of Federal Contract Compliance Programs further
reveal that parity could be expected by the banking industry
by the late 1970's.
Both the Treasury Department and the banking industry
recognize that most of the progress to date has been in hiring,
and that in the future much greater emphasis must be placed
on upward mobility and career development programs for both
minorities and women, with goals for increasing the number of
minorities and women into the middle and upper management
positions. We are particularly concerned about women bank
employees, since they have represented the majority of banks'
total employment already. As noted earlier, the majority,
unfortunately, have been in the lower graded positions.
But progress has occurred in this area. For example, the
Bureau of National Affairs reported in its June 15 issue that
a survey by the American Bankers Association involving 4 9 of
the country's 50 largest banks indicated that minority and
female employment in bank management grew significantly between
197 0 and L97 5. The ABA figures indicated that the total of
minority officers and managers in the covered banks practically
doubled during the same period—from 5 percent to 9.3 percent.
- 9 Also, the number of women officers and managers nearly
tripled—from 7,650 to 19,200, an increase from 15 percent to
26 percent of all bank officers.
Finally, the ABA and a number of its member banks have
developed and are continuing to develop a significant number
of new programs aimed at improving the employment opportunities
for minorities and women. To cite a few examples:
— Special skills training in reading, writing, math and
clerical skills which young people need but which too
often minorities do not receive in the public schools.
— Revamped training programs in the banks to deal with
a new kind of workforce, made up.of people who are
not trained and qualified, but who are trainable and
qualifiable, thereby enabling thousands of minority
young men and women to enter the working world
previously beyond their hopes.
— Participation in job fairs which have concentrated
on recruiting and hiring minorities and women.
— The efforts some banks have made in setting up
recruiting vans which go out into the minority
communities not only to hire those who want to work,
but to encourage those who have not thought about
working at banks.
- 10 — Awareness programs for helping supervisors and
managers deal with equal opportunity and minority
problems more effectively.
— Efforts to encourage minority and women employees to
participate in the regular bank training programs both
in-house, through the American Institute of Banking,
and through tuition refund programs, so that they will
gain skills development and move up the career ladder.
All things considered, we believe that the banking
industry has made significant progress toward achieving equal
employment opportunity for all employees over the past eight
years. We have been advised by numerous bankers throughout
the country that the Treasury program of moral suasion,
technical guidance and the more recently tougher enforcement
posture have been principal factors leading to impressive
changes and evident results.
The GAO Report
The GAO Report goes into considerable detail on the lack
of documentation, incomplete records, inordinate lengths of
time certain bank reviews remained open, lack of compliance
with OFCCP orders', and so on. Without going into a myriad of
detailed comments, most of which are covered in our formal
response to the report, we do not deny some of the shortcomings of the past, especially prior to two years ago when we
- 11 began to take significant steps to improve our EEO compliance
program, enhance the quality of management and staff, and
ensure greater uniformity and professionalism in our work.
As I have mentioned already, most of the deficiencies mentioned
in the GAO report have been or are being corrected.
I recall, Mr. Chairman, that during 1974 you made a
series of positive speeches on the general theme, "What's
Right With the Federal Government." Like you, I would like
to take the positive approach and focus on the present and
future, rather than dwell on the past. We are committed; we
are trying to do our best in an area that is fraught with
pitfalls and is often a thankless task.
Resources to carry out our work have been a problem.
We continue to seek additional budget and personnel; -while
making some headway, it has certainly been less than I would
have liked. Yet, realistically, our bank EEO compliance
program, like many worthwhile programs, must compete against
one another for the limited resources available. There are
probably few programs in Treasury that couldn't use more
people and more dollars, were budget restraints not a fact
of life. Since I have budgetary responsibility within the
Department, I am painfully aware of this process. All
budgetary requests simply cannot be honored, and reasonable
people can differ on priorities. Having said this, I will
- 12 continue to commit the Treasury Department to "do its best
with what we've got" in carrying out the equal opportunity
compliance responsibilities.
Conclusion
We continue to believe that success should be measured
by end results; namely, increased hiring, development and
promotion of women and minorities in the banking community.
Success is best measured by results, rather than by numbers
of show-cause letters or withdrawals of depositary status.
Mr. Chairman, this concludes my opening statement. My
associates and I will be pleased to answer any questions you
may have.
Contact: Richard B. Self
Extension: 8256
July 30, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES
COUNTERVAILING DUTY INVESTIGATION ON
IMPORTS OF UNWROUGHT ZINC
FROM SPAIN
Assistant Secretary of the Treasury David R. Macdonald
announced today a formal notice of investigation and receipt
of countervailing duty petition with respect to imports of
unwrought zinc from Spain. This action will be published
in the Federal Register of August 2, 1976.
Under the U.S. Countervailing Duty Law (19 USC 1303),
the Secretary of the Treasury is required to assess an
additional (countervailing) duty that is equal to the amount
of the bounty or grant that has been found to be paid or
bestowed on the imported merchandise. This action is taken
pursuant to allegations by the American Lead-Zinc Institute
that the Spanish Government, by rebating the desgravacion
fiscal tax on export, provides a bounty or grant on exports
of unwrought zinc. A preliminary determination on this
case must be reached by no later than December 17, 1976.
A final determination must be issued by June 17, 1977.
Imports of zinc from Spain totaled approximately
$18 million in 1975.
*
WS-1006
*
*
FOR RELEASE UPON DELIVERY
STATEMENT OF DAVID R. MACDONALD
ASSISTANT SECRETARY (ENFORCEMENT, OPERATIONS,
AND TARIFF AFFAIRS)
DEPARTMENT OF THE TREASURY
BEFORE THE TRADE SUBCOMMITTEE
HOUSE WAYS AND MEANS COMMITTEE
ON H.R. 9220
AUGUST 3, 1976
Mr. Chairman and Members of the Committee, I am
David R. Macdonald, Assistant Secretary (Enforcement,
Operations, and Tariff Affairs), Department of the Treasury.
My responsibilities include supervision of the Customs
Service. I would like to thank you, Mr. Conable, and the
Committee for the invitation to discuss H.R. 9220, the
Customs Modernization and Simplification Act.
As the title of the bill implies, the proposals
contained within it were designed to give to U.S. Customs
the necessary flexibility to adapt and grow with the
international business community of today.
The primary objective of the Customs Modernization
and Simplification legislation package is to build
flexibility into the customs laws by permitting the
Customs Service to modernize and simplify procedures and
thus (1) increase the productivity of the customs work
WS-1007
- 2 force by simplifying procedures in order to handle the
continuing increases in workload, (2) speed-up the response
of the Customs Service to the needs of the importing
community by instituting modern business procedures and
methods in the merchandise processing and financial
aspects of importing, and (3) insure compliance with
customs laws through modern audit techniques so that
customs laws are enforced more thoroughly and equitably.
The bill is divided into three major titles.
Title I
would allow Customs to institute up-to-date business
methods and adapt accepted financial practices in conjunction with computerized techniques to the processing
of importations.
As a necessary adjunct, the proposed
legislation would establish importer recordkeeping requirements and strengthen the authority of customs officers to
inspect importers and others with respect to customsrelated books and records.
Customs would then have better
means to insure compliance with customs laws, which,
heretofore, have often been circumvented.
Basically, the
major provisions of Title I would provide Customs with
the same capability to select, process and audit entries
and importer/brokers that the Internal Revenue Service
has had for years with regard to tax returns and tax payers.
We realize that administration of the Tariff Act differs
- 3 from the administration of the Internal Revenue Code.
Proper enforcement of duties, quotas and other customs
requirements necessitates the physical inspection of
goods, which is not necessarily true of income tax
administration.
Therefore, if the Customs Modernization
Act becomes law, the inspection of physical goods entering
into the country will continue, and in addition, Customs
will be able to concentrate more on those items in which
a high incidence of violations has been found.
Specifically, the bill would permit the Secretary of
the Treasury or his delegate to prescribe regulations
requiring records to be kept by importers and the period
they are to be retained; to provide for the filing of a
"return" to cover all merchandise imported by a consignee
during a designated period in lieu of the filing of a
separate entry for each shipment made during the period;
and to permit an alternative method for the payment of
duty where a person has qualified to file a periodic
return.
It would also provide broadened authority to
examine records of importers and others to compel their
production by administrative or judicial means.
Title II of the proposed legislation is a pot pourri
of amendments to the Tariff Act and related laws, for the
purpose of facilitating the processing of international
- 4 travelers and low value importations and to introduce
greater flexibility into the law which would result in
cost-saving efficiencies.
Some of these provisions are:
(1) An amendment to the Tariff Schedules of the United
States (19 U.S.C. 1202) to provide for a flat rate of
duty of 10 percent on dutiable articles for personal use,
valued not over $500 fair retail value, accompanying a
returning resident arriving in the United States.
(2) A
provision eliminating certain archaic provisions such as
those which require the filing of forms and the payment
of a ten-cent entrance and clearance fee.
(3) An amendment
to change from less than $3 to less than $10 the limit in
the duties or taxes which the Secretary of the Treasury
is authorized to disregard; and to change from $10 to $25
the limit on the value of articles sent as bona fide gifts
and as accompanying baggage which may be admitted free of
duty and tax, and to change from $1 to $5 the limit in any
other case.
(4) An amendment to create for the holder of
an endorsed airway bill accompanying merchandise imported
by air transportation the same presumption (i.e., that
he is the intended consignee of the merchandise) accorded
to the holder of an endorsed maritime or rail bill of
lading under the Tariff Act of 1930.
(5) An amendment
to increase from $250 to $500 the informal entry monetary
limit.
(6) An amendment to expand the use of informal
- 5 entry procedures to certain articles imported solely for
household or personal use or as bona fide gifts by the
importer. (7) An amendment to permit Customs officers,
at their discretion, to determine when the examination of
packages may be waived.
Also, the bill would amend section 491 of the Tariff
Act of 1930, as amended (19 U.S.C. 1491), to authorize
the disposal of distilled spirits, wines, and beer forfeited summarily or by order of the court, at a public
competitive bid sale. Forfeited liquor must now be
disposed of by delivery to a Government agency, gifts
to eleemosynary institutions, or destruction.
Further, this title would exempt from trademark
restrictions merchandise purchased for personal use which
accompanies returning residents. This provision is
designed to obviate the situation that arises when a
traveler buys goods abroad, then finds that exclusive
licensees in this country can exclude his goods or force
him to obliterate the trademark when he returns.
The bill would also provide for a monetary penalty
as an alternative to seizure of merchandise transported
in violation of the coastwise laws by amending section 27
of the Merchant Marine Act of 1920, as amended.
Finally, Title II of the bill would add a new section
- 6589 to the Tariff Act of 1930 which would grant the same
arrest authority to officers of the Customs Service which
has been granted to officers of the Immigration and
Naturalization Service.
Title III of the bill would amend section 641 of the
Tariff Act of 1930, to modernize the procedures for licensing
and regulating Customs brokers.
The bill would establish
a national license for Customs brokers, improve the quality
of supervision exercised by the Customs broker over his
business, protect the importer by requiring the broker to
post a performance bond, provide the United States Customs
Service with greater supervisory control over the activities
of Customs brokers in certain instances, and modernize the
disciplinary hearing procedures by substituting an independent hearing examiner for the Customs officer who now
presides over such hearing.
Mr. Chairman, some opponents of this bill, principally
the Customhouse brokers, have accused Customs of supporting
this bill in order to create work for itself.
Mr. Chairman, we have enough to do.
Believe me,
Customs enforces over
400 different laws at the borders of the United States for
over 40 different agencies.
Since 1950, Customs workload
has expanded far in excess of its work force.
While
entries have risen 336%, vehicles 236%, persons 199%, and
- 7 aircraft 409%, the number of Customs employees has risen
52%.
We are not looking for more work, and we do not
think the importer is looking for more forms
and complexities which are passed on to the customer as
increased cost, nor is the U.S. traveler eager to be
delayed any more than he now is when returning to this
country.
It was out of our desire to relieve ourselves
of this legislatively imposed burden that inspired us to
ask you and Mr. Conable to sponsor this bill.
Finally, Mr. Chairman, I cannot close my testimony
without commenting briefly upon discussions we have had
with various segments of the import community.
When the
Customs Modernization and Simplification Act was first
proposed, we heard from a number of different groups
which adamantly proposed that Section 592 of the Tariff
Act of 1930 be amended in favor of the importing community.
As you know, Section 592 provides for either the forfeiture of merchandise or the assessment of a penalty
equal to the value of such merchandise as to which a
false entry has been filed with the Customs Service,
even when the inaccurate entry is only a result of
negligence.
Section 618 of the same Act then goes on to
allow the Customs Service to mitigate the penalty upon
application by the importer.
This provision can be
extremely onerous in that it creates, before mitigation
- 8 is completed, a contingent liability which is far in
excess of the likely penalty which will ultimately be
assessed.
After discussing this matter with a number of interested groups, many of which proposed totally unrealistic
amendments which would have gutted Treasury's power
effectively to enforce the payment of Customs duties,
the Treasury Department sat down and outlined those
principles which, when the modern audit capability contained
in the Customs Modernization Act has been authorized by
Congress, may govern the modification of Section 592.
My purpose in raising this matter at this hearing,
Mr. Chairman, is first to assure you that the Treasury
Department has not "negotiated with" or "approved" any
amendment to the Customs Modernization Act.
Nevertheless,
since we are aware of the immense time pressures placed
upon this Subcommittee by reason of tax legislative
hearings and other matters, we attempted to rationalize
the views of responsible opposing interests without thereby
intending to preempt your function and responsibility to
hold hearings and make legislative decisions in the public
interest.
No discussions have been held by me with any
group, other for the purpose of attempting to find the
best possible solution to some very difficult problems in
- 9 the importation process while protecting the interest of
the Treasury Department and the public in assuring collection of the revenue and protection of consumers.
We at the Treasury Department and the Commissioner
and his staff at the Customs Service have worked long and
hard in examining the entire breadth of Customs laws and
procedures with a view towards weeding out the useless,
weaving together the inconsistent, preserving while
refining and updating the necessary, and formulating the
new.
We are confident that the end product which lies
before you not only would bring Customs into the modern
era of international commerce but would construct a
framework and allow the breathing space for Customs
procedures to grow with and adapt to the future.
I would be pleased to answer any questions now or
following the statement of the Commissioner of Customs,
Vernon D. Acree.
0O0
FOR RELEASE
A.M. Papers, Tuesday, August 3
RISE IN INTERNATIONAL LENDING BY U.S. BANKS SLOWS
New international lending by United States banks
is expected to rise by $11 billion, or 11 percent in 1976,
as against $15 billion or 18 percent in 1975, according to
Treasury's annual "Outlook for International Lending by U.S.
Banks," released today.
The study indicates that a major reason for the more
modest increase in lending volume currently foreseen is the
low level of demand from borrowers in the stronger industrial
nations. It reports that bankers are exercising caution in
expanding their portfolios of higher risk loans, but reveals
that senior officers remain confident about the soundness of
their outstanding credits and do not expect any significant
losses on loans to developing countries.
Gerald L. Parsky, Assistant Secretary for International
Affairs, noting this development in releasing the study, said:
"The expected increase in foreign loans this year, although
below the rise recorded in 1975, nevertheless represents a
substantial contribution to the financing needs of countries
facing current account deficits."
The survey covers the prospective magnitude of international lending this year, while reviewing the major constraints on lending activity, terms and conditions of loans,
and the geographical direction of lending. It projects most
of the expansion in international lending in Western Europe,
Japan, and the more mature developing countries of Latin
America and the Far East,
In looking at the terms and conditions on which loans
are being extended, the survey finds a general widening of
spreads in interest rates for countries which have borrowed
heavily, along with the inclusion of special fees, and a
tendency
WS-1008 toward shorter average maturities.
- 2 The increase in short-term trade financing, associated
with the strong recovery of world trade volume, appears to be
a further factor in reducing the attractiveness of longer term
sovereign risk loans in some areas.
"The additional volume of financing provided by the
private banking sector will be a major supplement to other
private and official channels in helping countries meet their
financial needs as they undertake adjustments in their domestic
economic policies," Assistant Secretary Parsky stated.
0O0
Outlook for International Lending by U.S. Banks
1976
Summary
Lending Estimates
The volume of net international lending by U.S. banks
in 1976 (from domestic offices and foreign branches combined) is likely to be determined less by the availability
of loanable funds than by the level of demand from low
risk borrowers. Interviews with senior officers of major
American banks conducted by members of the Treasury staff
suggest that the demand for credit from customers in the
countries which are financially strong has been essentially
flat or even declining and that loan demand has been strong
only in developing countries and some of the smaller industrial nations. Thus the expectations of bank officials
would point to new international lending of about $11 billion
during 1976. This would be an increase of around 11%, compared to an increase of about $15 billion, or 18%, in 1975.
This estimate is, of course, tentative and could change
as bankers adapt their lending policies to changes in economic and financial conditions. This projection may underestimate the actual increase in U.S. foreign lending this
year judging from the somewhat higher rate of lending during
the first two months of 1976 and bankers' own expectations
of increased business during the fourth quarter. During the
early part of 1975, bank officers foresaw an increase of about
$9-10 billion in new foreign loans, but actually increased
their lending by $15 billion, partially to compensate for
weaker than expected domestic loan demand. While the strong
expansion in the U.S. economy has not yet been reflected in
increased domestic loan demand, we would expect loan demand to
pick up as the expansion proceeds. In addition, a concern
about a possible resurgence of inflation in the U.S. could
lead to a tightening of monetary policy and a reduction in
aggregate credit availability. The result of both these
phenomena could likely be some reduction, at the margin, in
the growth of U.S. bank lending to foreigners. However, the
magnitude of these effects should not be exaggerated. Of much
more importance in determining the level of credit availability
for foreign borrowers will be such factors as relative returns
on different kinds of loans, country limits and assessments of
creditworthiness.
- 2 Terms and Conditions
Despite the slowdown in demand from industrial country
borrowers, the present expectation is that in 19 76 banks
will continue to exercise greater selectivity in the choice
of borrowers with a widening of interest spreads and a tendency toward shorter loan maturities for higher-risk countries. The interest spread on loans to some of the
more mature developing countries, which have borrowed
heavily, is edging up from 1 3/4% to 1 7/8% over the London
Interbank Offer Rate (LIBO) while bankers are requiring
minimum spreads of 2% over LIBO on even very short-term
trade credits to countries considered marginal borrowers.
While most bankers interviewed intended at least to maintain
their outstanding loans in non-oil develping countries at
current levels, they would prefer to shorten the average
maturity of their loan portfolio as opportunities to do so
arise. Bankers continue to have a strong preference for a
maximum term of five years, but are willing to go up to
seven years on project loans with secured repayment
provisions.
Choice of Borrowers
Bankers are generally being more selective in their
lending. They have been maintaining their outstandings at
current levels in some countries and increasing only their
very short-term exposure in a number of others. In general,
the countries to which they would like to increase their
outstanding loans have not been seeking additional funds.
The geographical pattern of bank lending this year will
be influenced not only by concerns about creditworthiness,
but also by the strength of economic recovery and world
trade growth with its concomitant short-term trade finance.
In other words, the almost natural increase in trade financing associated with this recovery seems likely to be a
further factor in reducing the attractiveness of longer term
sovereign risk loans in some geographical areas. The particularly strong increase in trade volume expected among
OECD countries (now estimated to be over 10%) suggests that
much of the increase in short-term lending will be directed
to these countries. Indeed, U.S. bankers indicated that
they saw Western Europe and Japan as the primary areas for
the expansion of their international activity in 1976.
They also expect to increase credits to several of the major
Latin American countries and to a number of Far Eastern
nations.
- 3 I.
International Lending by U.S. Banks in 1975
Outstanding foreign credits extended through U.S. banks
(which includes U.S. domestic offices and foreign branches as
well as agencies and branches of foreign banks in the U.S.)
increased from $83 billion at the end of 1974 to $97.9 billion
at the end of 1975—a total increase of $14.9 billion or about
18%. This compares to an increase of $26.6 billion or 47%
in U.S. foreign lending during 1974. These data, adjusted
to exclude interbank placements of funds, are shown in Table I.
It is not possible to trace the direction of U.S. foreign
lending for the entire calendar year 1975. While Treasury
figures give the geographical distribution of lending from
domestic offices, data on the country breakdown of credits
from foreign branches—which accounted for most of the increase in U.S. foreign loans during this past year—are
available only from end-September, 1975, under the Federal
Reserve's new reporting system. Although published figures
are available only for the fourth quarter of 1975 and are not
fully adjusted to exclude interbank placements, they nonetheless provide a useful indication of the direction of new
lending as well as the total exposure of U.S. banks in particular countries.
As compiled in Table II, the data indicate that loans
to Western European countries account for over 45% of total
U.S. foreign lending, followed by Latin America (26%) and
Asia (22%). During the fourth quarter of 1975, U.S. banks
and their foreign branches increased their claims on nonU.S. residents by nearly $11.5 billion or 6.6%, for a yearend figure of $184.2 billion. The proportionate increase
in broad geographical areas roughly corresponds to the distribution of U.S. banks' total loan portfolios by area.
U.S. banks increased their loans and credits to European
borrowers by some $4.4 billion or 5.6%, with the largest
amounts extended to France (nearly $1.5 billion, an increase
of over 19%) and to Germany ($803 million or 13%). Loans
and credits to Latin America countries rose by $3.6 billion,
principally going to Brazil ($1.2 billion, a 16.4% increase)
and Mexico ($887 million, a 11.5% increase). New lending
to Asian nations grew by $2.6 billion (7.2%) including an
increase of $1.7 billion in loans to Japan (8.8%)/while loans and
credits to Africa rose by $418 million (8.4%).
II. Outlook for International Lending in 1976
Senior officers of U.S. banks indicate that they expect
new international lending in 1976 to be below the increase
recorded in 1S75. There appears to be ample capacity for a greater expansion since
_ 4 most banks were not able to reach targeted rates of growth
for either domestic or foreign loans during 1975. The chief
problem, however, will be to match credit availability with
suitable borrowers. Bankers reported that a large proportion
of first quarter loan demand came from developing countries
and indicated that they were exercising caution about expanding their portfolio of higher-risk loans. It should be
stressed however, that bankers did not express concern about
the possibility of significant losses on loans to developing countries in 1976. As a result of their greater selectivity in lending to developing countries and weak loan demand from customers in the stronger industrial nations,
bankers now expect to increase their international lending
in 1976 by only about $11 billion. This would increase the
volume of outstanding loans by about 11% and amounts to
only about two-thirds of the $15 billion in new credits extended during 1975.
As the experience of last year suggests, bankers retain
considerable flexibility in adjusting their international
loan allowables upward. If domestic loan demand does not
pick up during the course of the year, bankers may seek more
aggressively to expand their international loan portfolios
in an effort to reach targeted growth rates of overall
assets and earnings. On the other hand, a strong revival
of demand from domestic customers could serve to "crowd out"
some potential foreign borrowers. This phenomenon could be
accentuated if concern about the possibility of renewed
inflation leads to a general tightening of monetary policy
and credit conditions in the U.S. It is difficult to quantify the magnitude of these effects. Of greater importance
in determining the volume of foreign lending will be such
considerations as relative returns on different types of
loans, assessments of creditworthiness and country limits.
Loan Terms and Conditions
In response to sluggish loan demand in the U.S. and
abroad, U.S. banks have been actively competing for lowrisk short-term credits to foreign borrowers. As a result,
spreads on short-term loans have fallen to 1% over LIBO and
in many cases to as low as 3/4% or even 1/2% for prime
borrowers. Weak loan demand from the most attractive industrial country borrowers has also produced downward competitive pressure on interest rates on term loans. U.S.
bankers report that spreads on longer term loans to prime
developed country borrowers have declined to 1 1/8 to 1 1/4%
for the five to seven year maturities in comparison to a
minimum
of
domestic
Bankers
the year.
do
spread
and
expect,
industrial
of 1however,
1/2%country
over
that
the
demand
spreads
six months
picks
willLIBO
up
widen
inin
the
as
1975.
course
- 5 A number of banks find that they are approaching their
country limits in some developing countries. As a result
of their high exposure, growing external debt levels of most
developing countries and persistently high demand, loan conditions for LDC's at some banks have stiffened. While a few
term loans to the more developed OPEC countries—particularly
Iran and Venezuela—have been extended at 1 1/2% or even
1 3/8%, most loans to developing countries have minimum spreads
of 1 3/4 to 2% over LIBO. The interest spreads on loans to
the more mature developing countries which have borrowed
heavily, such as Brazil, are edging upwards to about 1 7/8
or even 2% at present. On loans to other eligible developing
countries, such as South Korea and Taiwan, whose external
indebtedness has grown considerably, banks are requiring
spreads of 2% over LIBO. For those countries considered
marginal borrowers—such as Iraq and Egypt—even short-term
trade credits have been priced very stiffly at spreads of 2
to 2 1/2% over LIBO. On many loans to developing countries,
bankers have been adding on front-end, commitment or other
fees to bring the effective yield to nore than 2-1/2%.. These rates
refer to loans to governments or guaranteed by governments
or central banks. Loans to private borrowers which do not
have a government guarantee run higher, and in the case of
Brazil have reached spreads of 2 1/2% to 4% over LIBO for
relatively short maturities.
Along with the widening of interest margins, banks are
also attempting to reduce the maturities of their loans to
developing countries. Thus although most bankers interviewed intended to maintain or increase their outstandings
in non-oil LDC's, they will be tending to reinvest the proceeds of maturing loans primarily at short-term. With the
strong revival of the U.S. and Eurobond markets, term loans
to corporate borrowers in developed countries have declined.
Bankers prefer to limit their term loans to the five
year maturities, and are in fact avoiding term loans in
favor of short-term financing in the case of several of the
developing countries. While a few seven year credits have
been extended under pressure from customers, bankers do not
foresee any general lengthening of loan maturities.
Direction of Lending
U.S. bankers view Western European as a primary
area of the expansion of their international activity in
1976. As business activity continues to pick up, a
number of bankers expect to increase their lending to
Germany. Lending to France, which rose strongly during
1975, is expected to continue to increase this year. A
number of bankers expressed interest in expanding their
- 6 loans to Spain, where loan demand reportedly is very high.
While American bankers are continuing to watch developments
in Portugal carefully, several were interested in expanding
their credits this year.
A number of bankers expressed interest in increasing
their loans to selected Eastern European countries this
year, particularly to Yugoslavia, Romania and Poland.
Among Latin American countries, most bankers interviewed
expected to increase their lending most significantly in their
two largest markets, Mexico and Brazil. Following Argentina's
recent change of government, bankers expect to increase modestly
their loans to Argentinian borrowers this year. Bankers are
actively seeking to expand their positions in Venezuela.
The Far East is an area in which U.S. bankers have
substantial positions and in which they anticipate that much
of their planned 1976 loan growth will take place. Japan
is their largest Far Eastern market and although some banks
are approaching country limits, most anticipate an increase
in lending to Japan as loan demand increases. Bankers also
continue to view S. Korea, the Philippines and Taiwan favorably
and expect to increase their credits to these three countries
this year. Some cautious loan expansion is expected in
Indonesia. Credits to Thailand, Malaysia and Singapore will
probably also continue to increase.
TABLE I
Claims on Non-Bank Foreigners Reported by Banks in
the U.S. and their Foreign Branches
(In millions of dollars)
Date
U.S.
Offices!'
Foreign
Branches^-'
Total
12/72
12/73
12/74
1/75
2/75
3/75
4/75
5/75'
6/75
7/75
8/75
9/75
10/75
11/75
12/75
1/76P
2/76P
16,342
19,948
32,131
32,752
33,328
34,290
34,053
34,572
33,450
34,108
34,383
34,371
36,357
36,607
37,873
38,057
38,372
24,026
36,429
50,870
51,385
52,580
53,807
54,461
55,189
55,936
55,633
56,458
56,653
58,159
58,266
60,006
61,195
61,397
40,368
56,377
83,001
84,137
85,908
88,097
88,514
89,761
89,386
89,741
90,841
91,024
94,516
94,873
97,879
99,252
99,769
Monthly
Amount
+1.136
+1,772
+2,189
+ 417
+1,247
- 375
+ 355
+1,100
+ 183
+3,492
+ 357
+3,006
+1,373
+ 386
I
+1.4
+2.1
+2.5
+ .5
+1.4
- .4
Quarterly
Amount
1
+5,097
+6.1
+1,289
+1.5
+1,638
+1.8
+6,855
+7.5
Annual
Amount
I
+16,009
+26,626
+39.7
+47.2
+14,876
+17.9
+ .4
+1.2
+ .2
+3.7
+ .4
+3.1
+1.4
+ .4
1/ Compiled by adding totals of Tables CM-II-1 and CM-II-IV, less claims on banks, Treasury Bulletin, March and April 1976
and less branches' liabilities to parent bank from Table 19(b), p. 71, Federal Reserve Bulletin. April 1976.
2/ Compiled by adding claims on official institutions and non-bank foreigners, from claims on foreigners in all f
countries and currencies, Federal Reserve Bulletin, April 1976, and unpublished Federal Reserve data
p,( Preliminary
"TABLE 2.
GEOGRAPHICAL DISTRIBUTION OF CLAIMS ON FOREIGNERS REPORTED BY
U.S. BANKS AND THEIR MAJOR FOREIGN BRANCHES
(in millions of dollars)
Septemberr 1975
Country
Europe
Belgium-Luxembourg
France
Germany
Italy
United Kingdom
Other Western Europe
U.S.S.R.
Other Eastern Europe
Canada
Latin America
Argentina
Brazil
Chile
Colombia
Mexico
Panama
Peru
Venezuela
Other Latin America
Domestic
Offices 1/
7,279
71,144
5,630
6,696
5,845
4,361
34,506
11,057
78,423
6,081
7,494
6,182
4,698
37,752
12,689
491
659
2,558
1,714
2,868
4,584
17,543
1,126
1,912
27,299
44,842
1,940
7,110
485
493
120
684
2,453
5,227
1,973
451
798
337
337
3,246
1,632
168
310
2,870
691
471
1,253
8,658
15,263
Asia
China (Taiwan)
834
239
Hong Kong
53
India
182
Indonesia
9,566
Japan
1,691
Korea (South)
390
Philippines
193
Singapore
438
Thailand
Middle East oil-exporting
694
Countries
983
Other Asia
Africa
Airican oil-cxportlug
countries
Other Africa
All Other Countries
GRAM) TOTAL
Foreign
Offices 2/
1,565
814
5,198
619
1,055
11,609
20,834
623
2,021
605
1,177
7,680
2,664
1,090
2,308
20,267
36,097
1,457
2,260
163
216
1,072
9,522
1,095
3,050
1,254
19,088
2,409
1,485
3,243
271
709
1,671
628
2,365
1,611
3,406
4,971
718
December 1975
Total
Percent
Amount Distribution
Domestic
Offices 1/
45.3
8,496
3.5
4.3
3.6
2.7
298
21.8
7.3
0.4
1.7
2.7
26.0
1.1
4.1
0.4
0.7
4.4
1.5
0.6
1.3
Foreign
Offices 2/
74,351
5,226
7,648
6,670
4,834
34,253
12,415
82,847
5,524
8,946
6,985
5,185
38,405
14,041
596
774
2,709
1,357
2,987
4,406
19,824
1,188
2,712
28,589
48,413
1,941
8,277
440
478
69
549
2,468
6,099
2,158
1,298
315
351
4,152
1,626
178
278
3,049
889
525
753
5,565
704
11.9
20.9
1,134
9,990
16,023
1,205
11,487
22,688
0.9
1.3
0.1
0.7
970
247
53
217
756
11.0
10,098
1,725
1.4
0.9
1.9
0.4
1.4
0.9
2.9
Total
Percent
Amount Distribution
1,495
509
1,027
8,567
3,047
1,229
2,339
21,477
38,711
1,726
1,742
163
216
1,346
10,669
423
341
448
1,225
3,460
1,563
20,767
2,538
1,648
3,801
283
731
553
925
1,795
683
2,348
1,608
1,705
3,684
5,389
813
Change: September to Dec ember, 1975
Total
Percentage
Domestic Foreign
Change
Offices Offices Amount
4,424
-557
1,452
1,217
-153
3,207
-404
952
825
473
7.6
0.4
1.6
2.4
500
-22
14
906
-6
10
-32
179
-253
1,358
1,352
105
151
115
119
+5.6
-9.2
+19.4
+13.0
+10.4
+1.9
+10.7
+17.5
+4.1
-357
-178
-3.9
26.3
2,281
1,290
3,571
1.1
4.4
0.3
0.6
4.7
1.7
0.7
1.3
62
800
-45
-15
15
198
54
-61
367
-51
1
1,167
-135
-150
872
185
85
150
887
383
139
31
-122
1,854
1,210
2,614
+8.0
+0.1
+16.4
-15.9
-12.7
+11.5
+14.4
+12.8
+1.3
46.0
+7.2
+18.5
-22.9
45.0
3.0
4.9
3.8
2.8
20.9
11.5
21.9
0.9
0.9
0.1
0.8
11.4
1.4
0.8
2.1
0.4
-119
1,332
760
136
8
0
35
532
34
33
148
10
8C3
487
653
-96
133
269
-526
-518
0
274
0
309
1,147
1,679
95
130
410
12
129
163
558
22
0
+24.6
+S.S
+5.4
+11.0
+17.2
+3.1
1.3
0.9
2.9
-141
-58
140
124
55
278
-17
-3
418
+8.4
-0.7
-0.2
218
424
642
480
768
2,982
1,417
699
3,119
127.516
4,329
3,818
0.4
2.5
2.2
288
1,347
835
3,204
3,580
4,621
4,415
0.4
2.5
2.4
70
70
136
56
222
461
126
292
597
+19.6
+6.7
+15.6
172.735
100.0
49.932
134.269
184.201
100.0
4.713
6.753
11.466
+6.6
45.219
1/
Excludes loans to unaffiliated foreign banks; includes claims on banks' own foreign branches.
2/
Includes claims on other banks, except on branches of the same U.S. parent
FOR RELEASE AT 4:00 P.M.
August 3, 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 $6,500 million , or
thereabouts, to be issued
August 12, 1976,
as follows:
92-day bills (to maturity date) in the amount of $2,700 million, or
thereabouts, representing an additional amount of bills dated May 13, 1976,
and to mature November 12, 1976
(CUSIP No. 912793 B9 6), originally issued in
the amount of $3,602 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,800 million, or thereabouts, to be dated August 12, 1976,
and to mature February 10, 1977
(CUSIP No. 912793 E5 1).
The bills will be issued for cash and in exchange for Treasury bills maturing
August 12, 1976,
outstanding in the amount of $6,505 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $3,354 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, August 9, 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-1009
(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. 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
August 12, 1976,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing August 12, 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 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
August 3, 1976
RESULTS OF AUCTION OF 3-YEAR TREASURY NOTES
The Treasury has accepted $2,002 million of $5,405 million of
tenders received from the public for the 3-year notes, Series J-1979,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.88% 1/
Highest yield
Average yield
6.92%
6.91%
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 99.987
High-yield price
Average-yield price
99.880
99.907
The $2,002 million of accepted tenders includes 18% of the amount of
notes bid for at the highest yield and $ 673 million of noncompetitive
tenders accepted at the average yield.
In addition, $920 million of tenders were accepted at the averageyield price from Government Accounts and Federal Reserve Banks for their
own account in exchange for notes maturing August 15, 1976, ($700 million)
and from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash ($220 million).
1/ Excepting 1 tender of $300,000
WS-1010
Ike Department of theTREASURY
WASHINGTON, D.C. 20220
|
TELEPHONE 964-2041
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE UNION LEAGUE CLUB OF NEW YORK
AUGUST 5, 19 76
It is both an honor and a real personal pleasure to
address this distinguished audience and to be among so many
old friends again.
The Union League Club of New York stands for fundamental
values of loyalty and dedication and good citizenship which
are needed today more than ever. Over a hundred years ago,
at a time of national crisis, your founders outlined the
objectives that have guided you ever since:
* "To dignify politics as a pursuit and a study;
* . "To reawaken a practical interest in public affairs
in those who have become discouraged," and
* "To enforce a sense of the sacred obligation inherent
in citizenship."
And so your organization has fought the good fight
against slavery, against denial of the right to vote,
against Tammany Hall, and many of you are fighting today
against other wrongs in our society and standing foursquare
behind the things that are right about America.
I know that each of us here shares a common concern
about the future and the continued g rowth of the remarkable
and dynamic economic system that has given our people the
highest living standards and the gre atest prosperity known
to man. And it is clear that unless the American people
rally behind the principles that und erlie this system, our
steps will falter. Because far more is involved than the
survival of a few companies, or a fe w jobs, or whether the
price of beef goes up or down over t he next few months.
What is at stake is the very surviva 1 of our economic
P
freedoms and, along with them, our ersonal and political
freedoms as well.
WS-1011
-2Abraham Lincoln, in talking about our nation's founders
during the Civil War, said, "Surely each man has as strong
a motive now to preserve our liberties as each had then to
establish them."
The same holds true today. Our system, while not
perfect, has given Americans the blessings of both liberty
and abundance. That system will continue to be true to us
so long as we are true to it. This means that every citizen
has the duty to ensure that our elected officials pursue
sane and solid and responsible policies that will promote
our economic stability and assure durable growth.
That is why I believe the election oH 1976 is one of
the most important in our history -- certainly the most
important in my lifetime. Why do I say that? Because, the
decision the American people make this year at the polls
will determine not only our nation's course for the next
four or eight years, but well into the next century. And
after all the political speeches have been made, and the
editorials written, what that decision will really boil down
to is this -- a choice between the freedom for each of us to
live our lives as we best see fit, or the surrendering of
more of that freedom to an increasingly powerful government
in exchange for a false promise of security and permanent
prosperity. This theme was best described by Gibbon in his
epitaph foi ancient Athens. "In the end," he wrote, "more
than they wanted freedom, they wanted security. They wanted
a comfortable life and they lost it all -- security, comfort
and freedom. When the Athenians finally wanted not to give
to society but for society to give to them, when the freedom
they wished for most was freedom from responsibility, then
Athens ceased to be free." That is the issue.
I believe that what this country needs is a political
program that is, in Harry Truman's words, a genuine contract
with the people, a commitment to more than vague good
intentions.
This program does not have to be complicated to be
effective. All it requires is an underlying moral commitment
to personal freedom and care for those who genuinely need
help. This commitment would be linked to four equally
explicit goals:
* Prosperity and economic growth through encouragement
of the private sector that provides jobs and generates the
abundance that pays for government as well.
* Skillful management of economic affairs by creating
an environment of sustained, non-inflationary growth' which
will benefit every man, woman and child in our country.
*
* Reducing the growth of runaway government spending
which more and more Americans recognize as the biggest
single domestic problem facine our country today.
-3* Lowering the level of taxation in America. Taxes
are too high for almost everyone. We must reduce the overall level of taxation so that our vital economy and society
are spared the stultification and decay we have seen in
other societies where the state has consumed an ever larger
part of the national product.
These moral and practical guidelines would provide the
basis for the most sweeping reform of American government in
our history. But what have the American people been offered
thus far in this political campaign? If, indeed, a platform
is a contract with the people, then the platform adopted a
few weeks ago here in New York City is a stark statement of
the principle of spend-spend, elect-elect, inflation, controls,
bigger and bigger government syndrome that has been at the
very root of our economic problems during the postwar period -especially the past 10 years -- and still remains alive and
well in Washington, D.C. today.
This platform should really be called "Promises Promises
Promises," for just like Santa Claus, and all the platforms
from years past, it has something for everybody. The trouble
is, playing Santa with the taxpayer's money dispenses neither
good will nor integrity. The only thing it does dispense is
pure hypocrisy.
Take a look at the platform and see what it calls for:
Guaranteed jobs for all at government expense;
National economic planning;
National day care systems;
A mandatory national health system;
A phased-in federal takeover of welfare;
Entirely new federally funded programs for transportation;
New public needs employment programs for the cities;
Substantially increased federal payments to education;
Countercyclical aid to state and local governments;
More federal subsidies for public housing;
Higher commodity prices for farmers, yet lower food
prices for consumers. And then to top it all off, we're
promised a balanced budget.
Now isn't it wonderful? There's more money for literally
everything that lives and breathes. The list goes on and
on. But what it all adds up to is bigger and bigger government
higher and higher inflation, and eventually more unemployment
and greater economic instability.
-4And in all of this, mind you, not a word about who
would pay for all these programs or even how much they would
cost. Well, they do cost, and they're going to cost a lot,
because there is no such thing as a "free" lunch or "free"
education, or "free" health care. In fact, there is no free
anything.
What is the price of these instant cure-alls? The
programs of this platform could easily exceed an additional
$200 billion -- that's $1,000 for every man, woman and child
in America or over one-half of what our federal budget is
today. The average American taxpayer would have to work for
half the year just to support government, and only then
could he start to support himself and his family.
But the platform makes the appealing claim that all
these programs are possible without substantial new inflation
given a federal policy of full employment, because for every
one million newly employed people who pay taxes, the federal
deficit will supposedly be decreased by $16 billion. But
how are these people to'become employed? Why, by spending
more money, of course. This means that the deficit will not
disappear by such steps but will only grow.
So where would the additional needed revenue come from
to balance the budget? It could be raised by borrowing or
taxing from the private sector, but that would only lead to
a loss of jobs in the private sector. The other alternative
would be to inflate the money supply which would merely set
us off on another boom-bust cycle. The supposed cure, then,
turns out to be illusory, and what results is new and higher
inflation which in turn would only lead to a new and higher
level of unemployment.
The issues involved here 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.
Here, the outstanding fact is, that in every countiy
in which the percentage of government domination has increased
there has been a tendency to move toward instability, toward
minority government and toward a threat to a free society.
Have we forgotten the inextricable relationship between our
economic freedom and our social and political freedoms?
-5Our 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 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 the
system and society disintegrates. I am convinced that our
uniquely creative and productive society will also collapse
if we permit inflation to dominate our economic affairs.
There is no tradeoff between the goals of price stability
and low unemployment as some critics have erroneously claimed.
If we are to increase the output of goods and services and
reduce unemployment, we .must first make further progress in
reducing inflation.
The intensity of my feelings about inflation has
resulted in some critics labeling me as obsessed. However,
I am not so much obsessed as I am downright antagonistic
toward those who consistently vote for bigger deficits. 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 as they strive -- too often in a losing struggle
to provide the necessities of food, housing, clothing,
transportation, and medical attention. 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. It is the most vicious hoax ever perpetrated for
the expedient purposes of a few at the cost of many. And
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
clout to beat the system by keeping their incomes rising
even more rapidly than inflation. When inflation takes over
an economy it is the poorest people who suffer most and turn
to the government. It's an insidious process, because they
become willing clients of the state and the very policies
which created their misery.
-6The Democratic party platform then, far from being a
guide to a new prosperity built upon sustained non-inflationary
growth, is in reality a blueprint for economic disaster. By
advocating such a massive and undesirable federal takeover
of our national economy without even stipulating the means,
the cost, or the method of payment, this platform not only
insults the good faith and intelligence of the American
taxpayer, but ignores the fundamental lesson of the past
decade: it was these same excessive fiscal and monetary
policies that caused the worst inflation in our peacetime history
which in turn led to the worst recession "in more than a
generation. Our people have paid a terrible price for that
ignorance.
In President Ford, we have a man who knows that real
leadership is not always saying yes, because he has had the
courage to say no. Thanks to his prudent, tough policies,
we now have the best chance in a long time to enter an era
of durable economic stability.
Our critics term the President's policies "Government
by veto." But it is precisely because the President has
vetoed more than 50 bills passed by the reckless freespending Congress that the taxpa>rers have saved more than
$14 billion.
Restraint on spending brought about by the President is
the reason inflation has been cut in half, inflationary
expectations have been lessened, and 87-1/2 million people are
now working, more than at any other time in the nation's
history. In essence, we've come a long way from the depths
of the recession in 197 5 and we're now well advanced into a
period of economic expansion.
The essential point to remember, however, is that the
President acted as he did because he had to. We must never
forget that the other party has controlled both houses of
Congress in all but four years since 1930. During this
campaign the American people are being told we need to try
new ideas, to spend a lot more money to create public
employment which will allow us to balance the budget. This
is a total contradiction; more of the same old quack nostrums
which have in reality produced budget deficits in 38 out of
the past 46 years. Every time you see the sun rise here in
New York City, be reminded that your Federal Government,
spurred by an undisciplined Congress, has spent more than a
billion dollars of your hard-earned money. And if you think
that's incredible, let me give you some more unbelievable
facts about government spending.
-7Since 1962, our budget has exploded from $100 billion
to a figure that will certainly top $400 billion in 1977.
That's an increase of 3001 in 15 years. The government is
now growing much faster than our ability or willingness to
pay for it.
The U.S. Treasury in just the past 10 years has borrowed
half a trillion dollars in the private capital markets.
That's money that was swallowed up by the Washington bureaucracy
that could and should have been invested in the dynamic
private sector.
Added to that is the suffocating weight of excess
government regulations that are threatening to overwhelm
many small businesses. Government now controls over 10% of
everything we produce in the economy and indirectly controls
almost all of the rest. That translates into a cost to
consumers of $125 billion a year. One-hundred and. thirty
million man-hours are spent just filling out the forms.
It doesn't take a Ph.D. in economics to realize that
the federal government has become the nation's biggest
single employer, its biggest consumer, and its biggest
borrower, and also the biggest source of inflation in the
United States economy.
I am frankly astonished that whenever our critics are
confronted with such irrefutable evidence proving we haire
too much government, they nevertheless plow on trying to
make the case that there is not enough. The casualties of
this misguided logic are jobs.
Free lives, individual lives, productive lives are
built on capital investment, not on the red ink and the
printing press of the government. If we are going to
create the kind of jobs that will keep people permanently
employed, that will meet the needs of a growing labor force
and that will reduce our inflation by expanding our output
of goods and services, then we must equip our workers with
new and efficient plant, machinery, and tools. These
capital needs of the future are staggering, about $4-1/2
trillion in the next decade --or about three times as much
as we spent in the last decade.
Savings are the source of this needed capital. But
savings are currently being drained by excessive government
deficits. Resources absorbed by government for its spending
today cannot simultaneously be invested in expanded plant
and machinery to employ more people tomorrow. We cannot
have both bigger government* and a healthy expanding private
sector. Government doesn't create wealth -- people do. We
-8cannot continue to transfer each year an increasing percentage
of our national wealth from the most productive to the least
productive sector of our economy without endangering the
economic future of cur children.
If we're really sincere about providing more productive
and lasting jobs for our economy we will only succeed by
strengthening our free enterprise system, and that, I might
add, constitutes the centerpiece of President Ford's program.
This means controlling government spending, getting rid of
excessive and counterproductive regulations, reducing
personal and corporate taxes, and striking a new balance
that favors less consumption and government spending and
more savings and investment. The only way to wage a real
war on poverty is to create jobs in the private sector, not
jobs for bureaucrats.
In the past, we have looked upon our dynamic free
enterprise system as the Golden Goose that produced all our
blessings and encouraged the self-initiative that has made
our country the envy of the world. But today Congress is
spending faster than the goose can lay its eggs. And should
these policies continue, they will not only steal all the
eggs, but kill the goose itself.
What a tragedy that would be. Just look at what we
would be sacrificing:
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 Wrorld.
V
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
inhuman monster caricature painted by political demagogues,
the American private sector is in reality the mightiest
engine for social progress and individual improvement ever
created.
This, is the crucial theme that must be communicated
broadly and deeply into the national consciousness: The
American production and distribution system is the very
-9mainspring of our nation's strength -- the source of present
abundance and the foundation of our hopes for a better
future.
Yet we could lose it unless we act. Let's face it.
Under the politics of spend-spend, elect-elect we will get
a massive increase in federal expenditures which will inevitably
be followed by a new round of double-digit inflation and a
wrenching recession. And that means more cries for government
help and more calls for government intervention. So what
we're talking about is the survival of our free enterprise
system and, more importantly, whether the protection of our
personal liberties can survive in its absence.
Ladies and gentlemen, the question is, are we going to
promote the individual or the government? We cannot do
both. That is the issue, and our freedom and your children's
is at stake. Do we want more freedom of choice and more
freedom of individual action? Or do we want to see these
freedoms and all the other individual freedoms we hold so
dear gradually erode under more and more government encroachments on our lives. That is the true, crucial decision
behind the rhetoric and personalities of this election year.
And the choice we make will affect not only our own futures,
and our children's, but the future of our country itself as
America embarks on its third century as the hope and inspiration
of free people everywhere.
Gerry Ford has taken his stand. He's taken a stand to
protect the dignity and freedom of millions of individuals
like yourselves by leading the battle .to slow the growth in
government. Control over government spending will allow you
to keep more of your own money. President Ford has made and
continues to make those tough decisions despite persistent
criticisms, because he knows that it's the hard-working
taxpayers who keep this country going. And those people'
need to be protected, not punished. That's the honest way
to run an Administration -- nothing flashy, no gimmicks,
just facing up to the job at hand each day and doing it.
And by succeeding, he's also demonstrated that he understands
what the real meaning of compassion is all about.
Two hundred years ago Thomas Jefferson said, "To
preserve our independence 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 was
the choice 200 years ago and it remains the same today. But
time is now running out. 1976 may be the last opportunity
-10we will have to stem the tide of big government and thinly
disguised state socialism as practiced -- if not preached -by many in Congress and elsewhere today.
If we love our freedom, then we must be prepared to
defend it. Between now and election day I urge each one of
you to decide how you can most effectively contribute to the
preservation of a society that in 200 years has come to
symbolize man's capacity to attain freedom, prosperity and
dignity. This is an election in which the individual
efforts of individual citizens will make the difference.
Thank you.
0O0
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SUMMARY OF LENDING ACTIVITY
July 1 - July 15, 1976
Federal Financing Bank lending activity for the period
July 1 through July 15, 1976, was announced as follows by
Roland H. Cook, Secretary:
On July 1, the Tennessee Valley Authority borrowed
$235 million from the Federal Financing Bank. The loan matures
September 30, 1976, and bears interest at a rate of 5.624*.
The Bank made the following loans to utility companies
guaranteed by the Rural Electrification Administration:
Interest
Date
Borrower
Maturity
Rate
Amount
7/1 Oglethorpe Electric
$10,148,000
12/31/10 8.196%
Membership Corp.
10,000,000
12/31/10
8.179%
7/12 Cooperative Power
Association
4,200,000
12/31/10
8.144%
7/14 Colorado-Ute Electric
5,400,000
Association
12/31/10
8.146%
7/15 Tri-State Generation
and Transmission Assn
12/31/10
8.144%
12/31/10
8.144%
5,255,000
7/15 United Power Association 5,000,000
Interest payments on the above REA loans are
basis.
made on a quarterly
On July 1, the Federal Financing Bank paid $503,283,767.55
to the Secretary of the Treasury for New York City Note #8. The
face amount of the note is $500 million and bears interest at a
face rate of 7.37%. The note matures April 15, 1977. The
effective rate of return to the FFB is 6.495%. The Secretary
of the Treasury made the loan to New York City under the New
York City Seasonal Financing Act of 1975.
WS-1012
© o
£^
FOR IMMEDIATE RELEASE
7/9 Dairyland Power
Association
LO
„
VO
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t
vo
- 2On July 6, the FFB purchased $4,770,000 of notes from
the Department of Health, Education and Welfare. The
Department had previously acquired the notes which were issued by
various public agencies under the Medical Facilities Loan
Program. The notes purchased by the Bank are guaranteed by the
Department of Health, Education and Welfare and mature July
1, 2000. The interest rate is 8.150%.
The General Services Administration made the following
borrowings from the Federal Financing Bank:
Date Series Amount Maturity Interest Rate
7/6 M $ 267,531.68 7/31/03 8.302%
7/13
L
1,355,526.09
11/15/04
8.269%
On July 6, the Student Loan Marketing Association (SLMA)
borrowed $15 million. The proceeds of the loan were used to
repay a $10 million note maturing with the Bank, to pay interest
due, and to raise additional funds. The loan matures October
5, 1976, and bears interest at a rate of 5.688%. SLMA
borrowings are guaranteed by the Department of Health, Education
and Welfare.
The 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
7/9 Government of Greece $ 3,300,000.00 7/1/86 7.814%
7/9 Government of Brazil 822,538.80 10/1/83 7.684%
7/9 Government of Brazil 205,111.30 3/15/83 7.616%
7/12 Government of China 13,157,296.09 1/2/84 7.587%
7/12 Government of Brazil 713,194.84 10/1/83 7.611%
7/13 Government of Uruguay 3,600,000.00 6/30/83 7.513%
7/14 Government of Greece 42,700,000.00 7/1/86 7.727%
7/14 Government of Korea 11,819,132.83 3/31/84 7:611%
7/15 Government of Korea 290,443.00 3/31/84 7.621%
- 3-
*, nn?nnnnly *?* t h e U , S ' R a i l w a y Association (USRA) borrowed
$3,903,000 against Note #9. The Association will loan the
funds to the Missouri-Kansas-Texas Railroad Company
pursuant to Section 211 of the Regional Rail Reorganization
Act of 1973, as amended. Principal is payable in semi-annual
installments of $390,300 commencing on October 20, 1984 with
a final maturity of April 20, 1989. The interest rate is
8.053%. USRA borrowings are guaranteed by the Department
of Transportation.
On July 14, the National Railroad Passenger Corporation
(Amtrak) made a drawing against Note #6 in the amount of
$15 million. The loan matures October 1, 1976. The interest
rate is 5.415%. Amtrak borrowings are guaranteed by the
Department of Transportation.
On July 15, the FFB purchased a $400 million 5 year
Certificate of Beneficial Ownership from the Farmers Home
Administration. The maturity is July 15, 1981. The interest
rate is 7.80% on an annual basis.
Federal Financing Bank loans outstanding July 15, 1976
totalled $23.6 billion.
# # #
Contact: L.F. Potts
Extension 2951
August 5, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES MODIFICATION OF
DUMPING FINDING ON POTASSIUM CHLORIDE, OTHERWISE
KNOWN AS MURIATE OF POTASH, FROM CANADA
Assistant Secretary of the Treasury David R. Macdonald
announced today a Modification of Dumping Finding on potassium
chloride, otherwise known as muriate of potash, from Canada,
with respect to Brockville Chemical Industries, Ltd.; Hudson
Bay Mining & Smelting Co., Ltd.; Swift Canadian Co., Ltd.;
and Cominco, Ltd. Notice of this action will appear in the
Federal Register of August 6, 1976.
For the reasons stated in the "Notice of Tentative
Determination to Modify or Revoke Dumping Finding" published
in the Federal Register of May 16, 1975, with respect to
Brockville Chemical Industries, Ltd.; Hudson Bay Mining &
Smelting Co., Ltd.; and Swift Canadian Co., Ltd, and in the
Federal Register of December 16, 1975, with respect to
Cominco, Ltd., potassium chloride, otherwise known as muriate
of potash, from Canada, is no longer being, nor likely to
be, sold in the United States at less than fair value by
these four companies.
During calendar year 1975, imports of the subject
merchandise from the four above-named companies were valued
at approximately $47.4 million.
o 0 o
WS-1013
heDepartmentoftheTREASURY I
mtmmrtKi
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IINGTON, nD.C.
20220
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T F I i-nuriMt- nnA on/n
TELEPHONE 964-2041
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August 5, 1976
TREASURY ANNOUNCES
PRELIMINARY RESULTS OF SALE OF TEN YEAR NOTES
The Treasury announced today that it would accept
approximately $7.6 billion in subscriptions for the 10-year
note maturing August 15, 1986. In addition, $1,476 billion
was allotted to Federal Reserve and Government accounts.
Subscriptions accompanied by the 20 percent deposit will be
accepted in full in amounts up to $300,000. Subscriptions
accompanied by the 20 percent deposit for amounts exceeding
$300,000 will be accepted in the amount of $300,000. No
other subscriptions from the public will be accepted.
Subscriptions accompanied by the 20 percent deposit
totalled $10,230 billion. Other subscriptions from the
public totalled $14,139 billion for an aggregate subscription of $24,369 billion.
In a statement accompanying the announcement, Treasury^
Secretary William E. Simon noted the importance of maintaining
control over the siz e of fixed price offerings and avoiding
issues of unwieldy size. "A critical element of our debt
management policy mu st be to insure that Treasury's financing
activities are consi stent with the objective of stable,
properly functioning financial markets. It is also vital
that we maintain our efforts to achieve a balanced debt
structure. This sue cessful sale makes an important contribution The
in both
areas."
ten-year
note sale brings the total size of
Treasury's August refinancing to $10.6 billion, reducing
net new cash needs for the balance of the Transition Quarter
to the range of $3.5 to $5.5 billion.
The sale of this note has enhanced the achievement of
over-all Treasury debt management objectives and will result
in some additional extension of the average maturity of the
privately-held marketable debt. The importance of achieving
a balanced debt structure, after years of continuing decline
in the average maturity, is underscored by the growing amount
of gross financing required to refund maturing issues and to
raise additional cash. In the first seven months of this
year the Treasury issued over $58 billion of new coupon
securities and bills to refund maturing coupon issues and to
raise new money. An additional $212 billion of bills was
also issued to refund maturing bills.
WS-1014
IheDepartmentoftheJREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL OF THE TREASURY DEPARTMENT
BEFORE THE SECTION OF TAXATION OF THE
AMERICAN BAR ASSOCIATION
ATLANTA, GEORGIA
AUGUST 7, 1976
One day last month, the front page of the New York Times
carried an article with the headline "Tax Bills Pass in Senate
with Contents Unknown." This is, of course, a comment both on
our legislative process and on the state of our tax laws. The
same day, the lead editorial in the Washington Post began:
"It used to be called the Tax Reform Bill.
As it now stands on the Senate floor, it deserves
to be- called the Tax Shelter and Covert Subsidy
Bill."
The accuracy or inaccuracy of that headline or that editorial conclusion is not important. What is important is what
a responsible, informed, free press is telling the American
public about our tax system. This bicentennial year seems to
be an occasion for us to pause and reflect on where we have
been as a nation, where we are, and where we are heading.
I will resist for today the temptation to examine the
state of our legislative process that produced such a headline—although I am sure a political science professor could
shape an entire college course around that statement. Rather,
I would like to examine with you the state of our income tax
laws after 200 years of national growth and only 63 years of
growth of the income tax.
As we are all well aware, this nation was born during a
tax revolt. The citizens of the 13 colonies were persuaded
that the taxes being imposed on them were unfair and inequitable.
WS-1015
-2From the adoption of the Sixteenth Amendment in 1913s
the income tax has progressed from a 15-page statute levying
taxes at rates from 1% to 6% to an Internal Revenue Code requiring 1,700 pages of the United States Code and 6,000 pages
of regulations levying income taxes at rates up to 70$.
Notwithstanding this dramatic increase in size, complexity,
and tax levels, this tax system has served the country well
along the way. It—along with some help from purchasers of
government securities—enabled the United States to finance two
World Wars and two so-called limited wars. It has assisted in
the financing of the exploration of the moon and Mars. It has
paid for a host of programs representing the noble efforts of
our society to deal with its problems—from a war on poverty
to wars on crime—from foreign aid to school lunch programs—
from the search for a cure for cancer to the development of an
effective swine flu vaccine.
But our tax system has been called upon to do a lot more
than finance the direct efforts of its government. It has
encouraged home ownership by millions of Americans by allowing
the deduction of interest paid on a home mortgage. It has been
used in an effort to alleviate the economic impact of major
illness by allowing for the deduction of certain expenses for
medical care and permitting the exclusion of sick pay from
income. The dividend exclusion has been added to foster the
ownership of stock by small investors, while the investment tax
credit has encouraged American industry to increase its productive capacity and create more jobs. Through Domestic International Sales Corporations, it has encouraged manufacture at
home rather than abroad by U.S. companies selling in foreign
markets. It has encouraged investment in real estate developments through provisions such as those permitting accelerated
depreciation of new projects.
The list is nearly endless. The income tax has been an
efficient, convenient and effective tool for accomplishing many
national objectives. An efficient, well-managed bureaucracy
in the IRS has assisted in carrying out many national programs
under the guise of collecting the revenue necessary to finance
and administer other programs. That organization has done a
good job, I might add. So good, in fact, that its team of
professionals is looked to for assistance whenever a new,
unplanned job comes along—whether it's administering a wage
and price control program or providing staff for an energy
office or a sky marshal program.
-3The significant feature of this tax program has been the
voluntary compliance of the American public with the tax laws.
This feature is not only significant but unique. That an
American citizen would sit down at the end of the year and
voluntarily report to his government—accurately and honestly—
his income and his tax liability is an idea not readily accepted
in many countries of the world. Sure there are some built-in
incentives—criminal sanctions from noncompliance, withholding
from wages and salaries, and quarterly payments to ease the blow
on April 15. Indeed, withholding tables that produce refunds
for a large number of taxpayers probably help greatly in assuring
compliance and early filing.
But this maze that is our tax law has developed to the
point where we must ask ourselves where we are headed. We must
ask whether the tax law has been called upon to do too many
things. The most frequently quoted statement by Commissioner
Alexander was his apology to the American taxpayer for the
length and complexity of this year's tax returns. We are told
that two out of five taxpayers seeks professional help in preparing their individual returns—with millions more who could
benefit from such assistance. We are told by the General
Accounting Office—with apparent delight on the part of the
press—that even accountants and tax lawyers can't compute the
average taxpayer's liability without error more than half of
the time. Those figures should not be too surprising since,
unfortunately, there are many issues as to which there is no
single right answer. Many entries on a return can depend upon
the judgment of the preparer and on whether or not a doubt is
resolved in favor of the taxpayer or the government. But it
also should not be a surprise that this situation has fostered
the growth of organized tax protest movements and has produced
press reports of an impending tax rebellion.
If we believe—as I do—that our "voluntary, self-assessment" tax system is worth holding onto, we must act now. It
may no longer be a "self-assessment" system when nearly half
of the returns are prepared by hired hands. Hired, incidentally,
in most instances not because of the affluence of the taxpayer,
but because of his feeling of helplessness when faced with a
set of incomprehensible forms, instructions, rules and regulations .
In my preparation for this appearance today, I learned
that your Section has had since May of 1972 a Special Committee
on Simplification. One Washington wag—obviously not a tax
lawyer—believes that putting a committee of tax lawyers in
-4charge of simplifying the tax code is akin to putting a committee of foxes in charge of the chicken farm. I repeat that
story for you, not because I believe it is true, but because I
believe you need to be reminded of the skepticism with which
the public is likely to greet any proposal for simplification
coming from a group whose livelihood is perceived to be dependent
upon the complexities of the present system.
I have read each of the annual reports of your Committee
on Simplification. It is interesting to observe that in its
first report the Committee stated that, "The Committee's
understanding of its function is not that of advocating basic
reform of the tax law." Rather, the Committee set as its goal
to propose something "more limited and,...more readily attainable
in the near future."
After four years of effort—and against the backdrop of
a 67^-page House-passed tax "reform" bill and an apologetic
Commissioner—your Committee has become bolder and more ambitious. Tax Section Recommendation No. 1976-1, adopted by your
Council on March 5, 1976, and by the Board of Governors of the
ABA on April 7, 1976, gets right to the heart of the matter.
I believe the first paragraph of that resolution states the
goal so succinctly and so well that it bears repeating here.
Indeed, if our tax code could be as precise and concise, it
would require only 170 pages rather than 1,700. It begins:
"RESOLVED that the American Bar Association
recommends to the Congress that it simplify the
internal revenue laws to the maximum extent
consistent with basic equity, efficiency, and
the need for revenue, so that such laws can be
easily understood and complied with by taxpayers
and fairly and consistently administered and
enforced by the Treasury Department."
Now a resolution like that implies that the revenue laws
presently cannot be easily understood and complied with by
taxpayers and cannot be fairly and consistently administered and
enforced by the Treasury Department. Indeed, your Committee's
report says as much. It begins:
"There is general agreement that the
internal revenue laws have, in many respects,
become so complex as to defy comprehension; that
uniform enforcement is virtually impossible;
that compliance with these laws requires an
undue expenditure of time and money; and that
-5the complexity of these laws affects public
confidence in our tax system and imperils the
voluntary compliance upon which the system
depends. Thus the internal revenue laws are
in dire need of major simplification, and a
comprehensive program is needed."
Those are very strong words, indeed. I believe they are
especially worthy of attention because of their source which
I have already indicated is likely to be regarded with suspicion
by the general public. But their thrust bears a remarkable
resemblance to the words used by Secretary Simon in a speech
three months earlier when he said:
"Let me turn now to the...step that I
personally believe we should begin considering
with regard to our tax system. This is a concept that has been suggested from time to time
but it is rarely given serious consideration.
It is simply this: to wipe the slate clean of
personal tax preferences, special deductions
and credits, exclusions from income, and the
like, imposing instead a single, progressive
tax on all individuals."
When the official charged with collecting the taxes and
the leadership of the tax bar can agree on a basic objective,
it must have some merit. But getting there will not be easy.
Ours is a complex society, with complicated and sophisticated financial transactions (some of which certainly have
become more complex as the result of efforts to minimize taxes).
The obvious questions will come to your minds more quickly than
they will to others. How do we deal with personal holding
companies, collapsible corporations or corporate reorganizations under a simplified system?
There would also be tremendous transitional problems—and
problems of effective dates to prevent a rash of pre-effectivedate transactions in anticipation of true reform. You are all
aware of the problems associated with the phasing in and phasing
out of a single tax feature such as the investment tax credit.
Overhauling the entire system will immeasurably compound those
problems. These problems should not deter us, however, since
the phasing out of complexities will always produce its own set
of transitory complexities, no matter when it is undertaken.
-6It will not be easy to sell tax reform to those—and there
will inevitably be some—who will pay higher taxes. I suspect
it will be even more difficult to sell reform to those whose
over-all tax burden will actually decrease, but for whom the
prospects for decrease are well hidden by the complexities of
current law.
I am happy to report that the initial phase of the task
is under way. At the direction of Secretary Simon, a task
force headed by Charles Walker, Assistant Secretary for Tax
Policy, has begun the task of making tentative decisions on
specific elements of a proposed restructured system.
While it is premature to suggest what any of the tentative
decisions of the Basic Tax Reform Project are, we can take a
look at the approach that is being followed.
The present system is being reviewed in its entirety, with
a view to recommending changes that will:
1. Make it simple;
2. Make it more fair;
3. Make it economically efficient.
The simplification goal is self-evident. The Code provisions should be easily understood and applied, especially by
the large majority of individual taxpayers. Simplicity is, of
course, of less concern and more difficult to achieve for high
income, sophisticated taxpayers and large business enterprises.
The fairness goal is to treat similarly situated taxpayers
in as equal a manner as possible, and to produce a system under
which all taxpayers are perceived to pay, and in fact do pay,
their fair share of taxes.
The economic efficiency goal is to neutralize the tax
system in the decisions on utilization and allocation of resources .
The Treasury review is assuming that no changes should
occur in the total revenue raised, in the effective degree of
progressivity in the present tax system, or in the distribution
of the tax burden among income classes.
At this point, a number of tentative decisions have been
-7made, with more yet to be made. When these have been completed,
computer analysis will be used to assist in determining an
appropriate rate structure and in ascertaining the need for
revising some of the tentative decisions.
In the work to date, there has been an effort to broaden
the tax base in every reasonable and consistent way, and to
reduce deductions, credits and exemptions to a minimum. In
this respect, the starting point has been to eliminate all of
them, and to retreat from that point only as far as necessary
to advance the goals of simplicity, fairness and efficiency of
the tax system. Decisions also have been made concerning the
measurement and taxation of income from business, conducted
both in corporate and noncorporate form. Decisions are in
process with respect to the measurement and taxation of foreign
source income. Decisions are yet to be made on numerous other
subjects, including proposed statutory assurance that the
relative tax burden among income classes, reflected by the
lower rate structure adopted for the broadened base, will remain constant.
When the work of this task force is made public, hopefully
by the end of this year, we will put to the acid test the degree
of our national addiction to the use of the income tax to try
to fine-tune our society.
No doubt every special interest group that currently benefits from one of the deductions, exemptions or special provisions
will look with a jaundiced eye at any proposal that eliminates
such a provision. We will be reminded with a vengeance that one
taxpayer's concept of "equity" will be looked on as another
person's loophole.
This is when we will need the cooperation, patience, understanding and selfless leadership of the tax bar. During the
past two years I have been privileged to get acquainted with
some of the leaders of the Section of Taxation and to work
closely with a number of your colleagues in government—both
at Treasury and on Capitol Hill. I have talked with and met
a number of your officers and committee chairmen. I have been
highly impressed with the attitude and spirit of genuine concern
for the tax system reflected in the actions and deliberations of
the Section of Taxation.
Any Basic Tax Reform proposal worth its salt will contain
some real shockers. Some of the concepts that have come to be
regarded as fundamental may have to be discarded.
-8That is when I believe the Tax Section can provide a
valuable public service. Against the backdrop of the inevitable
emotional reactions, your Section can provide an objective
analysis of the proposal in terms of its ability to meet the
announced objectives. While your analysis will undoubtedly
prompt you to propose modifications, I hope you can resist the
temptation to fine-tune the package with a host of special provisions .
Then, if you agree that the proposal—taken as a whole—
is an improvement over what we have today, the Section should
speak out in no uncertain terms. You will have the opportunity
and, I believe, the responsibility, to help educate a public
that, although it may be ready for change, has in the past shown
itself to be very reluctant to accept dramatic changes.
I am convinced that this task is not only necessary, but
one that can be accomplished.
o 0 o
Contact: H.C.Shelley
Extension 2951
August 6, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES PRELIMINARY COUNTERVAILING
DUTY DETERMINATION ON CERTAIN SCISSORS AND SHEARS
FROM BRAZIL
Assistant Secretary of the Treasury David R. Macdonald
announced today a preliminary determination under the
Countervailing Duty Law (19 U.S.C. 1303) that bounties or
grants are being paid or bestowed on imports of certain
scissors and shears from Brazil. Notice to this effect will
be published in the Federal Register of August 9, 1976.
A final determination must be made by February 9, 19 77.
Information before the Treasury indicates that certain
scissors and shears are receiving bounties or grants in the
form of indirect tax credits, preferential financing, and
income tax exemptions.
The petition, filed by the National Association of
Scissors and Shears Manufacturers, relates to scissors and
shears valued at more than $1.75 per dozen.
During 19 75, imports of certain scissors and shears
from Brazil were valued at roughly $1.2 million.
*
WS-1016
*
*
August 6, 1976
Contact: Vera Hirschberg
964-5985
MEMORANDUM TO CORRESPONDENTS
Treasury Under Secretary Jerry Thomas will be
available for a "get acquainted" session with reporters
at 10:30 a.m. Tuesday, August 10, 1976 in Room 4125,
Main Treasury.
kDepartmentoftheJREASURY
HNGTON, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
August 6, 1976
RESULTS OF AUCTION OF 25-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF AUGUST REFINANCING
The Treasury has accepted $1.0 billion of the $2.5 billion of
tenders received from the public for the 25-year bonds auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average Yield
7.98%
8.03%
8.01%
The interest rate on the bonds will be 8%.
yields result in the following prices:
Low-yield price 100.215
High-yield price
Average-yield price
At the 8% rate, the above
99.679
99.893
The $1.0 billion of accepted tenders includes 30% of the amount of bonds
bid for at the highest yield and $132 million of noncompetitive tenders
accepted at the average yield.
In addition, $0.6 billion of tenders were accepted at the average-yield
price from Government accounts and from Federal Reserve Banks for themselves
and as agents of foreign and international monetary authorities.
SUMMARY RESULTS OF AUGUST REFINANCING
Through the sale of the three issues offered in the August refinancing,
the Treasury raised approximately $6.3 billion of new money and refunded $8.0
billion of securities maturing August 15, 1976. The following table summarizes
the results:
6-7/8%
Notes
8/15/79
Public
$2.0
Government Accounts
and Federal Reserve
Banks
.7
Foreign Accounts
for Cash
„„ TOTAL 279
WS-1017
New Issues
8%
8%
Note
Bond
8/15/79 8/15/962001
$7-6
$1.0
1.5
Nonmarketable
Special
Issues
-
.6
Total Maturing Net New
Securities Money
Held
Raised
$10.6
$4.5
3.5
3.5
$6.1
.2
.2
9.1
1.6
.7
8.0
6.3
STATEMENT BY JOHN M. NIEHUSS
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INVESTMENT AND ENERGY POLICY
SUBMITTED TO THE
HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
SUBCOMMITTEE ON ENERGY AND POWER
WASHINGTON, D. C.
AUGUST 6, 1976
The Alaskan Natural Gas
Transportation Act of 1976
Mr. Chairman and Members of the Committee:
I am pleased to submit the following statement for the
record setting forth Treasury Department views concerning
the proposed Alaskan Natural Gas Transportation Act of 1976.
Treasury Department General Support for Expediting Legislation
The Treasury (1) supports the concept of legislation to
provide a procedure to expedite the final selection of an
Alaskan Natural Gas Transportation System and (2) urges the
Congress to take prompt action on S. 3521, as modified by the
comments you have heard from the FEA and Interior Department
witnesses who appeared before you.
The Treasury Department's interest in the proposals for
an Alaskan natural gas transportation system relates primarily
to the issues associated with financing such a large and
complicated project. As you will recall, the Department
testified before this Subcommittee on May 17, 1976 and
presented a detailed statement on the financial issues raised
by the proposed projects. (A copy of the May 17, 1976
Statement is attached for reference.) Our present position
on the financing question is essentially the same as that
expressed in the previous testimony, and I will not review our
analysis in detail in this statement. We still believe that
it will be possible to arrange a private financing for an
WS-1018
- 2Alaskan gas transportation system without federal financial
assistance provided that appropriate regulatory and administrative actions are taken and the financial risks associated
with the project are equitably shared by all the parties
benefiting from the project.
However, we also continue to believe that whether a
totally private financing is achievable will remain a matter
of speculation until one of the projects is selected, the
project participants are identified and the regulatory conditions under which the project would be constructed and
operated are known. Final selection of one of the competing
projects is essential before many of the difficult issues
involved in financing a transportation system can be resolved.
Expedition of the final selection of the project would, therefore, also expedite the resolution of the financial issues
involved.
Specific Comments on Financing Aspects of S. 3521
S. 3521, as reported by the Senate Committees on
Commerce and Interior and Insular Affairs, contains a number
of sections relating to the financing of an Alaskan natural
gas transportation system. Specifically, Section 5(d) requires
the Federal Power Commission to include in its recommendation
to the President an analysis of anticipated tariffs and the
feasibility of financing each of the transportation systems
it reviews. Section 6(a) of the proposed legislation permits
any government agency to submit a report to the President on
issues (including the sources of financing for capital costs)
raised by the FPC recommendation to the President. Lastly,
Section 7(c) requires the President to submit, along with his
recommendation to Congress, a financial analysis of the transportation system chosen by him. This section further provides
that unless the President "reasonably anticipates" that the
system chosen by him can be privately financed, he shall make
recommendations concerning the use of existing federal financing
authority or the need for new federal financing authority.
In our view, these provisions adequately provide for
appropriate review b'y the Federal Power Commission, interested
government agencies and the President of the financial questions
involved. We support their inclusion in the legislation and
generally believe that they provide an adequate procedure for
resolving the difficult issues involved in financing an
Alaskan natural gas transportation system.
- 3 The Federal Power Commission hearings may provide an
appropriate forum for the various interested parties to
resolve the numerous remaining financial questions with
respect to the projects. For example, it is conceivable that
as a result of the FPC process, agreement could be reached
'
on appropriate project tariffs and financial participation
by project beneficiaries which would create a reasonable
expectation that the project could be privately financed,
constructed and operated. However, if such arrangements'
were not concluded during the FPC process, S. 3521 would
give the various government departments (including the
Department of the Treasury) an opportunity to make recommendations to the President with respect to additional actions which
might be taken under the provisions of S. 3521, the Natural
Gas Act and other applicable laws to achieve a private financing.
Should it be found that existing laws do not contain adequate
authority for the implementation or maintenance of needed regulatory actions, consideration could then be given to legislation
which would provide the necessary authority.
As noted above, we do not believe that federal financial
assistance will be needed if appropriate regulatory and/or
legislative actions are taken which equitably apportion the
financial risks among the various project beneficiaries.
However, in the event that the President concluded that it
was not possible to conclude arrangements or introduce legislation which would make a private financing possible, S. 3521
would require him to make recommendations to Congress concerning federal financial assistance. In this regard, we would
expect that the Treasury and other interested agencies would
make recommendations to the President which would minimize the
amount of federal assistance given and the impact of such
assistance on our capital markets.
While it is impossible to predict precisely the form
of the FPC decision concerning the financial issues, one
alternative would be for the FPC to grant a certificate conditional upon subsequent arrangement of financing. It has also
been suggested that the FPC defer the setting of a rate of
return on equity in the project entity until after an attempt
has been made to arrange financing. These procedures would
imply that, after selection by the FPC, the successful applicant would attempt to arrange
definitive financing and
then return to the Commission for approval of the final
financial package.
- 4It is important that the procedures established by
the legislation permit expedited handling and limit judicial
review of any subsequent FPC action in connection with
financing of the project. Otherwise, the purpose of the
legislation could be frustrated and the implementation of
the project delayed. The provisions of Section 9 of the
Act authorizing the FPC to "issue and take...other authorizations necessary or related to the construction and initial^
commercial operation of the transportation system selected"
appear to provide for such expedited treatment and limitation
of judicial review for subsequent FPC actions on financing
issues. However, it is such a critical issue with respect
to the financing of the project that we call it to the
Committee's attention in case it wishes to seek views of
other witnesses or perhaps deal with the question in the
Committee report.
Mr. Chairman, FEA and Interior Department witnesses
who appeared before you have outlined in some detail the
modifications which the Administration is proposing to
S. 3521. I will not comment on these proposals except to
note that the Treasury fully endorses these recommendations.
IheDepartmentoftheTREASURY
TELEPHONE 964-2041
HNGTON, D.C. 20220
August 9, 1976
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,700 million of 13-week Treasury bills and for $3,800 million
of 26-week Treasury bills, both series to be issued on August 12, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing November 12, 1976
High
Low
Average
26-week bills
maturing February 10, 1977
Price
Discount
Rate
Investment
Rate 1/
98.689
98.675
98.676
5.130%
5.185%
5.181%
5.27%
5.33%
5.32%
Discount
Rate
Price
97.272 a/
97.250
97.259
Investment
Rate 1/
5.396% 5.62%
5.440%
5.67%
5.422%
5.65%
a/ Excepting 1 tender of $1,500,000
Tenders at the low price for the 13-week bills were allotted 80%.
Tenders at the low price for the 26-week bills were allotted 10%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
|
Boston
$
42,855,000
New York
4 ,329,420,000
Philadelphia
15,900,000
Cleveland
28,275,000
Richmond
14,145,000
Atlanta
26,175,000
Chicago
309,340,000
St. Louis
47,040,000
35,695,000
Minneapolis
Kansas City
47,330,000
Dallas
26,000,000
San Francisco 286,665,000
TOTALS$5,208,840,000
Accepted
$
21,255,000
2,194,630,000
14,615,000
26,680,000
14,145,000
24,900,000
253,340,000
20,775,000
8,695,000
30,920,000
12,000,000
78,965,000
Received
1
Accepted
:$
37,265,000 $
22,765,000
: 5,084,325,000 3,172,625,000
::
22,145,000
36,645,000
75,915,000
:
135,915,000
18,215,000
::
18,215,000
10,605,000
::
10,605,000
250,630,000
::
412,130,000
23,020,000
•:
34,020,000
46,790,000
.:
49,490,000
27,610,000
:
30,610,000
17,170,000
:
22,170,000
113,325,000
:
227,625,000
$2,700,920,000 b/$6,099,015,000 $3,800,815,000 c/
b/Includes $ 308,620,000noncompetitive tenders from the public.
c/Includes $144,670,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1019
/
FOR RELEASE AFTER 1:00 P.M., EDT, MONDAY, AUGUST 9, 1976
OPENING ADDRESS BY THE HONORABLE EDWIN H. YEO, III
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
AT THE XII INTERNATIONAL INSURANCE SEMINAR (1976)
FAIRMONT HOTEL, SAN FRANCISCO, CALIFORNIA
MONDAY, AUGUST 9, 1976
WS-1020
I am delighted to be here today, and thank you for
giving me such a timely topic to address.
Without being
overly dramatic, I would argue that our conduct of macro
policies -- not just in the U.S., but in Japan, the
U.K., Germany, and other major countries, over the
next year or so will play a pivotal role in determining
the course of economic and financial developments for the
rest of the decade.
The policy prescription I am going to present is,
in a nutshell, "take it up carefully, boys".
The need
for extreme care stems from the highly unusual context
in which I and my colleagues at finance ministries and
central banks around the world are operating.
There are several aspects of the economic mileu in
which we are operating that I want to discuss with you
today.
I want to begin with developments during the
last few months and their implications for the future
and our perception of the circumstances in which we are
operating.
Next, I'd like to move on to a discussion
of medium-term concerns, and put these in their international
context.
The present situation of the U.S., like that of many
other industrial countries, is that the economy is in the
transition period from recovery to expansion.
The two
2
major stimuli in the recovery were a surge in consumer
spending as confidence revived -- consumers relaxed
somewhat their high liquidity preferences and some
precautionary balances were run down; and a swing
to restocking of inventories following the violent
decumulation during the previous recession.
The crucial question now is, how do we best ensure
sustained expansion?
Specifically, how do we avoid a
repeat of the 1972 - 75 boom-bust sequence on the one
hand, and an early stalling of the adolescent forces of
expansion on the other hand?
The public debate on this issue -- in the U.S., and
also in international fora such as the OECD -- seems to
me to have missed an important point, which I can perhaps
develop best by analyzing some recent developments in the
U.S. economy.
In particular, I want to call your attention to the
recent evidence on consumer behavior -- the available
information we have on what is going on in the heads of
our basic economic unit, the individual.
First, the past three to four months has seen a
stability in retail sales which has occurred, despite
continual growth of both real and money income though to
be sure this has largely reflected sharply increased
employment, rather than increases in income per employed
person.
3
This stabilization of retail sales is still puzzling at
this stage of the upturn.
There is absolutely no
evidence that consumers' liquidity positions are strained -as is characteristic of the upper turning point of the
cycle.
Quite the contrary, consumers appear to be
relatively liquid and benefitting from a comfortable
relationship between debt service requirements and income
flows.
Rather, it appears that this reflects a more basic
feeling of hesitancy on the part of consumers:
-- attitudinal surveys show an erosion in optimism
regarding the outlook starting in late spring and early
summer, and approximate stability since then with perhaps
some firming of attitudes very recently.
It would appear
that these attitudes have been manifest in a higher liquidity
preference, a more cautious allocation of income to spending.
The result, in a period of rising incomes has been a higher
saving rate.
These attitudes have also been manifested in a rise in
the labor force participation rate for women, which has taken
an uncharacteristic spurt recently.
I say "uncharacteristic"
because there have historically been two stages in the cycle
when such spurts in participation rates for women occur -early in the recovery, as word gets around that things are
looking up, that jobs are available; and -- toward the
upper turning point, when accumulation of consumer debt
leads to pressures for additions to household incomes.
4
This latest increase, which has gone on for three
months now -- May, June and July --is distinctly
abnormal.
To me, these two departures from historical experience
are evidence of a basic change in the economic environment.
I think we have not fully realized the amount of scar
tissue the 1972 - 75 boom-bust cycle has left on each
of us as individuals, the individuals who as consumers
ultimately determine the course of the economy.
Some
analysts seem to think that assumptions about individuals'
economic behavior that were developed in the 1950's and
early 1960's are as applicable today as they were then.
This in turn assumes that attitudes and behavior have
not been conditioned by the extremities of 1972 - 75.
my judgment, the analysts are wrong;
In
and their policy
prescriptions require close scrutiny as a result.
My
assumption is that we have been heavily conditioned by our
recent past, and as a result, our collective economic
and financial behavior may differ from what had been
presumed to be characteristic in earlier years.
(1)
"outlook".
Consumers are extremely sensitive to the economic
They translate quickly and forcefully changes
in their perception of prospects into alterations in their
spending/saving behavior.
Inflation is viewed as being "bad"
for business and for themselves.
If inflation appears to
be quickening, we as individuals act to guard against the
5
the increased possibility of economic adversities resulting
from higher prices;
(2)
Expectations of inflation, touched off by
stimulatory actions from growing government budgets and
other excesses cause perverse consumer behavior leading to
less, not more, current consumption spending, with attendant
effects on inventories and orders with cumulative impact
on production and employment.
If I am right, actions by the authorities to stimulate
the economy may be counter-productive, if we as individuals
view them prospectively as "inflationary".
Taking the
argument a step further, if this sort of response mechanism
presently characterizes the economies of the major industrial
countries, we have stood the so'called "Philips Curve" on
its head.
Not only is there no certain trade-off between
inflation and unemployment, attempts to expand the economy
may increase unemployment.
(3)
The converse of this last point is that if
consumers conceive that prospects for relative stability
in prices have improved and if income flows are high and
liquidity positions are comfortable, consumer spending
can quicken very appreciably.
In my view, this was one
of the factors behind the surge in consumer outlays in
the U.S. in the fourth quarter of 1975 and the first
quarter of 1976.
After uncertainty regarding price
6
prospects in the summer of 1975 -- a pessimism
stemming from the assumption that economic recovery
automatically meant more inflation -- attitudes changed.
As we moved into the winter the tantalizing prospect of
recovery with less inflation became more tangible and
we as individuals responded by opening up our pocketbooks.
Interrelated with changes in individuals' economic
behavior is the legacy of 1972 - 75 on our capital stock.
As was agreed at the Summit in Puerto Rico, an essential
precondition for sustained, non-inflationary growth,
is a revival of investment -- specifically, fixed private
capital formation.
The reasons for this emphasis on fixed investment
are quite clear:
-- The severity of the recent recession led to
substantially reduced real investment rates, lower
growth rates and the resulting lower growth of productive
capacity in most major countries.
-- Unless this is made up, capacity limits could be
reached at an unusually early stage in the upturn.
Although
it is difficult to estimate the margin of unused capacity
with a high degree of accuracy, recent trends suggest that
7
it may be smaller than earlier estimates suggested.
Capacity utilization in some industries in some
countries is already quite high and there is a clear
danger of the re-emergence of "bottlenecks" unless
investment in key sectors is strongly increased.
-- In addition, changes in relative input prices
resulting from the exorbitant increase in energy prices
have rendered a portion of existing capital stock
obsolete and may well have raised required capitaloutput ratios for the future.
-- The economic and political need to develop
alternative sources of energy, as well as emphasis on
pollution control facilities, will also increase investment
requirements tremendously over the next decade.
-- Finally, the severity of the past inflationary
episode had its own contribution both in terms of total
volume of investment and to the unevenness of capacity
adequacy across industry groups, as a result of its
distortionary effects on resource allocation.
In short, the need to make up for low investment
ratios earlier in the 70's, sectoral pressure on capacity,
technical obsolescence, and the objectives of greater
energy self-sufficiency and pollution control, all
require increasing the share of private capital formation
in GNP.
8
A recovery of profits from their depressed levels
of recent years will be a necessary pre-condition for
a sustained revival of fixed investment.
-- In the U.S., the share of profits in GNP averaged
7.1% during the period 1970 - 1975, compared with nearly
10% during the decade of the 1960fs.
-- A study published in the Bank of England Quarterly
Bulletin indicated a decline in the pre-tax real rate of
return in private fixed capital in the U.K. from roughly
11% in the early 1950's to less than 7% in the 1970's.
One source for the real resources necessary to
realize this goal is the public sector.
We need to reduce
public sector deficits, and keep a tight rein on the share
of the public sector in GNP.
In addition, there may well
need to be a less rapid growth in consumption than we have
enjoyed in the past.
Both of these policy prescriptions entail some
fairly stark decisions for economic managers.
During most of the postwar period, there has been
enough resources to fulfill expectations (or ratify demands)
for rising real consumption levels, increasing levels of
government services, and to provide the necessary real
investment to keep things moving.
In these circumstances,
macroeconomic management could be devoted to guiding the
overall economy through some relatively mild cycles, with
9
one eye cocked for untoward developments on the international
side.
In present circumstances, there is simply not enough
to go around in the style we all became accustomed to in
the 1960's.
Real consumption cannot regain past growth
trends, and government services cannot command an increasing
share of GNP, without squeezing private investment.
In
turn, squeezing investment will mean a lower growth rate
in the future and at some point, an absolute decline in
material well-being.
Close beneath the surface is the debate which has
been bubbling along for several years:
between those who
believe that the traditional macro tools of monetary and
fiscal policy are still sufficient to guide the course
of the economy; and those who believe that some sort of
"incomes policy" is necessary to prevent inflation in a
squabble over income shares.
I want to be very clear -- "incomes policies" are
not suitable to the U.S. economy.
I was flatly opposed
to our own experiment with wage/price controls at the
time they were imposed.
They do not look any better in
retrospect.
On the other hand, I think that we need to intensify
our efforts to widen the forum and stimulate formation
of a consensus on economic policy.
This, after all, is
an integral part of the democratic process and includes
10
not only general agreement on the goals of policy, but
also an understanding of the economic realities as they
affect both policy choices and the goals themselves.
I believe that the German system of concerted
action among representatives of government, business,
and labor has major elements of this.
I have been
impressed by the reported candor and cooperative spirit
of these regularly scheduled meetings, particularly the
demonstrated ability of the concerted action framework
to produce a broad consensus on the underlying economic
situation and to identify priority policy goals.
In the
process, the government retains the ability to use the
basic tools of economic management.
Such a mechanism
does not prevent the applications of such fiscal and
monetary policies as may be required to keep the economy
on an even keel.
I want to keep before you the sharp distinction
between this sort of dialogue and "incomes policy,"
which I understand as a process of reaching agreement
on how the economic pie is shared.
11
At the extreme, this latter involves detailed, formal
economic planning —
so much for wages, so much for profits.
A more limited form is wage and price controls.
Perhaps
I need not reiterate the degree of our dissatisfaction with
our fairly recent experiment along these lines.
"Disaster"
would be a somewhat mild characterization; it could be prefaced with "unmitigated" for those who like their salad
well-dressed.
There is an economic maxim
that, for best results,
the economy policymaker should have as many policy instruments as he has economic targets.
Looked at another way,
there is an argument for specialization and division of
labor in economic policymaking.
do the things they do best —
That is, let market forces
allocate resources.
And let
macropolicies operate in their most efficient manner, again,
via market forces.
If the resulting distribution of income or wealth is
not acceptable on social or ethical grounds, there are
tried and truemethods of reducing inequities, notably via
the system of transfer payments characteristic of virtually
all advanced societies.
New policy tools, notably the
negative income tax, have been suggested.
The important
thing is to avoid altering the basic thrust or nature of
demand management policy.
They do, of course, interact —
e.g., taxation can, and in this country and many others, does
affect incentives to save and invest.
12
The point here is that we are in a situation where,
even with extremely skillful management of our economic
policies, we will have to accept a lower rate of growth
of consumption —
both public and private —
have accustomed ourselves to expect.
than we
The policymakers'
job is quite hard enough without hamstringing our most
powerful and effective economic policy tools —
monetary
and fiscal measures.
The policy prescription is two-fold:
(1) Develop and maintain a clear view of the
economic realities —
goals, policies, constraints;
(2) Let market forces help, rather than fruitlessly
try to thwart them by such devics as indexing and wage/
price controls.
Let's not kid ourselves —
limited.
our options are very
Unless my analysis up to now is far off the
mark, we must face up to the basic facts of life, and
shape both the dialogue and our policies accordingly.
We will do no one a service —
quite the contrary
—
by such exercises in wishful thinking as the so-called
"Humphrey-Hawkins" bill.
Much as I would like to be able
to say, "Yes, Virginia, there is a Santa Claus," there
13
really is no alternative to "take it up carefully, boys".
This applies to the so-called LDC's, as well as to the
industrial countries we have been focussing on so far.
As you no doubt are aware, the LDC's have had a
double-barreled blow to their trade balances
—
export earnings fell with the slump in the industrial
countries, while import payments ballooned as a result
of the OPEC action raising oil prices.
In the short
run, these countries sought to mitigate the effects
of these events on their development programs by
borrowing very large sums abroad.
A sustained
expansion in the industrial countries is a prerequisite
if they are to be able to absorb this debt, and accommodate
additional debt, with a growing stream of export earnings.
At the same time, however, the LDC's must "take it up easy"
themselves -- they must pursue appropriate domestic policies
to ensure that consumption does not grow so rapidly as
to crowd out investment or outstrip earnings,thus simultaneously
increasing indebtedness while eroding the ability to service
debt.
Finally, I want to say a word about the international
monetary context in which all of this takes place.
This forum, and its international list of participants
and subjects for discussion, attests to the increasingly
14
interdependent world in which we live. That interdependence
has very basic implications for macro management in each
and every one of our countries; namely, that it is no
longer possible -- if indeed it ever was -- to impose
stability on the world economy from without.
The last attempt to impose stability externally -Bretton Woods -- gasped its last in early 1973, with
the advent of widespread,albeit "managed," floating of
currencies.
This demise has been formally recognized,
and the framework for a new international economic
system established, at Rambouillet and Jamaica. The
essence of this new dispensation is its recognition
that stability must come from within — as a result of
appropriate domestic policies, not some sort of
international Procrustes Bed.
However, old ideas die hard.
Despite the failure
of Bretton Woods, under much less severe strain than
the events of the last few years have put on the
international economy, we still see periodic efforts to
restore Bretton Woods-style parity relationships, with
all the attendant paraphernalia of massive intervention,
swaps, stiff-upper-lip statements which no one believes,
etc.
15
What these attempts to turn back the clock represent
is really an attempt to repeal the law of supply and
demand - - a failure to fully understand the power of
market forces.
After all, the increasing economic interdependence
we all talk about is really nothing more than the
increasing degree of participation in the international
economy. We do so for the old, tried, and true reasons
summed up in the terms "comparative advantage", "gains
from trade", etc.
Increasingly, international
specialization and division of labor have come to
involve flows of capital as well as of goods. It is
this development more than anything which perhaps brought
exchange
fixed/rates down. The benefits we gain from this process
of increased international specialization are such that
very few would propose reversing the process. However,
if the gains from the process are to be maximized,
market forces must do their work both at home and abroad.
The international adjustment process must work -- which
means appropriate signals being quickly transmitted among
using
the various economic factors. This means/the market
mechanism — it means no artificial international straightjacket.
It also means that there is no conflict between
policies for domestic and international stability -- both
are the same.
J.O
Despite these lessons of the past several years -which seem quite clear and obvious to me -- we still
have a number of snake oil salesmen
around hawking
something called "exchange rate stability" as a criterion
"true monetary reform".
In rebuttal, I would simply like to point to
the record.
Where there has been a reasonable degree
of what I call "empathy" between domestic economic
developments in various countries, the rates of
exchange of their currencies have tended to
remain fairly stable. When wide divergence in economic
performances have appeared, the exchange rates have also
diverged.
When evidence of economic mismanagement
or lack of control emerges, the market reacts accordingly.
Thus, "take it up easy, boys" is also the
prescription for stability in the international economy.
It is the only way we can have sustained, noninflationary
expansion in the world economy, without disruptive
divergence in performance, with resultant disturbances
in exchange and capital markets.
oOo
For Release 10:00 a.m.
Tuesday, August 10, 1976
WHY NOT TRY THE TRUTH?
A REPUBLICAN'S CALL FOR A SERIOUS PARTY PLATFORM
By William E. Simon
"Political campaigns," James Harvey Robinson complained
in 1937, "are designedly made into emotional orgies which
endeavor to distract attention from the real issues involved,
and they actually paralyze what slight powers of cerebration'
man can normally muster." Methods and results have not
changed since then. The modern presidential race, from its
kick-off in New Hampshire to its ceremonial culmination in
Washington on Inauguration Day, is one long media carnival
of color, charisma, sound, fury, and only an occasional
stray fact.
The trend to vagueness in American politics has been
building for many years and the major casualty has been the
party platform as a significant statement of issues. In a
country where presidential elections and the national
destiny were once decided on the basis of platform issues
(the organization of the economic system, the national
banking system, tariffs, slavery and the fate of the Union
itself, to name a few) most recent party platforms have been
studies in political silly putty -- soft, shapeless heaps of
meaningless rhetoric larded with impossible promises and
intended to be all things to all people.
This is particularly true of the current Democratic
Party Platform which has been made as elastic and amorphous
as possible. What a sad comedown for the party of Harry
Truman, who wrote in his memoirs that, "To me, party platforms
are contracts with the people." Today, they are not so much
contracts as long strings of eloquent loopholes. Nor have
Republican Party Platforms been any more effective in communicating
the substance of issues to the American electorate. The
recent tendency has been for both candidates and parties to
try to "out vague" each other, thereby hoping to capture
most of the middle ground and a generous share of both
fringes. There have been times when this tactic has worked.
I believe, however, that it would be a fatal mistake for the
GOP to pursue this strategy in 1976.
The only way for the Republican Party to emerge from
the threat of permanent underdog status is to take a clear
WS-1021
- 2stand on the crucial issues that our natural constituency -and all Americans -- can understand and support. Instead of
merely creating a variation of the other party's program or
once again simply repeating everything we are opposed to, I
believe we can cut through the formless Democratic claims by
adopting a clear, hard-hitting platform.
Abraham Lincoln, the first Republican President,
said: "I have faith in the people ... The danger is in
their being misled. Let them know the truth and the country
is safe." It is high time we adhered to this maxim of
Lincoln's and appealed to the basic good sense and hunger
for the truth that most Americans share.
The alternative is to limp out of a potentially bitter
convention battle with a watered-down imitation of the
Democratic Platform and the unappealing prospect of having
to out-charm and out-obfuscate an effective opponent.
For the grim statistics are inescapable -- from an
almost even split with the Democrates in the early 1940's,
the national political balance has tilted to the point
where, in George Gallop's latest (May 1976) measuring of
party identification, Democrats outnumber Republicans by
more than 2 to 1 (46% to 22% with the remaining 32% independent).
And Governor Carter's appeal as a native son threatens to
deeply erode the Democratic crossover vote in the South that
helped the GOP to capture the White House in both 1968 and
1972. Add to this the fact that Republican strength in the
Senate, the House, State legislatures and governors' mansions
is at its lowest ebb since the election failure of 1964 and
it becomes clear that this is not the time for the writing
of an insipid campaign platform because such a political
"business-as-usual" approach would only perpetuate the more
than a generation of Republican decline.
Since the Great Depression, the GOP has elected only
two Presidents. One of them, Dwight Eisenhower, was perceived
by most of the public as an apolitical war hero; the other,
Richard Nixon, was narrowly elected in 1968 on a wave of
public revulsion at the mishandled Vietnam War, domestic
violence and chaos, and the broken promises of the New
Frontier and the Great Society. Furthermore, 1968 was far
from a total victory -- the narrow election of a Republican
President was offset by the election of Democratic majorities
in both houses of the Congress. The country clearly wanted
a breathing spell after eight frenetic and disillusioning
years of Democratic Presidents. But the GOP itself did not
capture the imaginations or sympathies of most voters. A
majority cast their ballots for either Hubert Humphrey or
George Wallace for the Presidency and they continued to
favor Democratic House and Senate candidates^.
- 3• ioIo ing ! m 0 V f d a s t e p c l o s e r to a new Republican consensu*
in 1972
But there, too, Democratic folly -- in this case
S tem
d i ^ ? ^
*°laTy " 5 t U T 6 b y G e o r f i e McGovern's New Left
disciples -- may have had as much to do with the outcome 11
Republican efforts. The Administration's popular foreign
policy initiatives and its other positive doLstic achievements
deserve a large part of the credit for the Republican
*
victory in 1972, but it only reached landslide proportions
because millions of Democrats and Independents fea?ed and
distrusted what they perceived to be the dangerous and
foolish radicalism of McGovern positons on everything from
foreign policy to expanded social programs. However?
r . t ^ n L ^ o n e ^ i d e d Presidential returns, the same voters
returned strong Democratic majorities in both the Senate and
the House of Representatives.
thP P™^gJTS th! ?irst term of the Republican Administratis,
the President found it necessary to trade off many domestic
Republican policies and goals in order to carry out his
foreign policy. Given the composition of the Congress
compromise was perhaps inevitable, but it led to the disillusionment
of many conservative supporters, Republican, Democratic and
independent alike, who saw government spending and the
national debt continue to escalate and government programs,
icgulations and red tape continue to proliferate. The
overall domestic track record was a striking case of what
columnist Pat Buchanan has called "Conservative Votes
Liberal Victories." As he points out in his recent book of
the same title:
"...looking back at the budget, economic and
social policies of the Republican years, it
would not be unfair to conclude that the
political verdict of 1968 had brought
reaffirmation, rather than repudiation, of
Great Society liberalism."
The Republican Record
In early 1973, before his administration began to
wither as a result of the Watergate crisis, President Nixon
put a great deal of effort into reshaping domestic policy.
t£S Slate o f t h e Union Address, and the detailed proposals
that followed it, were true to genuine Republican principles.
Bolstered by his election landslide, the President launched
an all-out "Battle of the Budget" intended as the first
stage in a long series of domestic Republican initiatives
that would cut back the runaway growth of big government and
restore the Nation to fiscal stability. But this promising
beginning of a policy geared to what conservative political
analysts like Kevin Phillips had heralded as an "Emerging
Republican Majority" went up in smoke.
- 4By mid-1974 the culmination of a decade of economic
policy errors by the Executive Office and Congress and the
external shocks of severe oil and food price changes had
created the worst recession in forty years in the U.S.
economy. When Gerald Ford became President in August the
economic outlook was bleak; the output of goods and services
was falling rapidly; inflation had risen to extraordinary
double-digit levels; employment opportunities had stagnated
and the unemployment rate was beginning to rise; housing,
personal spending and business capital investment were all
deteriorating; the international economy was in disarray as
the negative effects of unprecedented oil and food price
changes contributed to the growing recession pressures; and
a widespread collapse of confidence occurred.
The President immediately committed his full attention
to restoring economic stability. The Economic Policy Board
was created and assigned the task of designing policies that
would control the extraordinary inflation pressures and
restore economic growth to reduce unemployment. A sense of
discipline was returned to government spending decisions and
the President's recommendations were backed up by vetoes
which the mood of the people forced Congress to sustain. A
well-timed package of tax relief was proposed by the President
and eventually passed by Congress. Support for responsible
monetary policies was given to maintain the important independent
role of the Federal Reserve System. Most important, the
Administration resisted the strident calls for massive new
spending programs, double-digit money supply growth rates, a
return to wage and price controls and the appeals of numerous
special interest groups pleading for unique treatment. This
courageous course was severely criticized by our opponents
who insisted that the country was on the verge of an economic
collapse. But the wisdom of our policies is now demonstrated
by the actions of these same critics who now claim credit
for the results of our policies.
The important point is that responsible fiscal and
monetary policies were adopted at the right time and then
sustained. The results are clear: the U.S. economy is now
well into the second year of a strong and balanced recovery
that has spread throughout the entire system; inflation is
now less than one half the level that existed when the
policy changes were made; employment has increased approximately
3-1/2 million persons and the unemployment rate has declined;
and international monetary and trade conditions have improved
significantly. This is not to say that our problems are
over -- that is merely idle rhetoric. Inflation pressures
are still intense; unemployment is far too high; Federal
spending continues to rise too rapidly; and specific internationa
trade and investment problems persist. But the irrefutable
evidence
fiscal
monetary in
polices
are
moving
us is
inthat
the responsible
right direction
and and
confidence
the U.ST"
- 5economy, at home and abroad has been restored. While this
strong recovery may ST-EaTen fof-gFanted by some, I believe
it is the direct result of the positive actions taken bv
President Ford and the explicit avoidance of ?he discredited
policies of the past that our critics so strongly urged us
to adopt. We now have the best prospects for fultained
economic progress that have existed for many years* What
X r ? a i J L h a E * e £ S W i U ' ° f C 0 U r S e » d e P e n d on7current policy
decisions which in turn, will be shaped by our Republican
Party Platform decisions and the November elections
•*. J1 *• tonPreSident Ford's great credit that, despite
the sweeping Democratic gams in the 1974 Congressional
elections, he has successfully rallied the Republican
minority in the Congress and used the power of the veto to
tight inflation and recession and lead America to a healthy
balanced economic recovery. If all the massive spending
measures advocated by the Democratic majority in the past
two years had become law, we would today be on our way to an
accelerating rate of inflation followed by a deeper recession
Nevertheless, the Democratic Party Platform is based on the
same discredited policies of spend-spend, elect-elect,
inflation, controls, bigger and bigger government syndrome
that has been at the very root of our economic problems
during the postwar period, especially the past ten years,
and still remains alive and well in Washington today.
This platform should really be called "Promises Promises
Promises," for just like Santa Claus, and like all the
platforms from years past, it has something for everybody.
fhe trouble is, playing Santa with the taxpayer's money
dispenses neither good will nor integrity. The only thing
it does dispense is pure hypocrisy.
, There has been a lot of talk this year about politicians
wno don t keep their promises, who have lost the trust of
the American people, and who have forgotten the meaning of
the simple word, integrity. Yet even though our opponents
are using all those key words, it's clear to me from studying
yneir platform that a genuine committment to reality is
J
lacking.
Take a look at the platform and see what it calls for:
Guaranteed jobs for all at government expense;
national economic planning;
national day care systems;
a mandatory national health system;
a phased-in federal takeover of welfare;
entirely new programs for transportation;
new public needs employment programs for the cities;
substantially increased federal payments to education;
countercyclical aid to state and local governments;
- 6more federal subsidies for public housing;
higher commodity prices for farmers, yet lower food
prices for consumers. And then to top it all off, we're
promised a balanced budget. Isn't it wonderful? There's
more money for literally everything that lives and breathes.
But what it all adds up to is bigger and bigger government,
higher and higher inflation, and eventually more unemployment
and greater economic instability.
And in all of this, mind you, not a word about who
would pay for all these programs or even how much they would
cost. Well they do cost, and they're going to cost a lot,
because there is no such thing as a "free" lunch or "free"
education, or free" health care. In fact there is no free
anything.
The 1976 Democratic Platform might well add another
$200 billion in annual government spending and could, if
implemented, create serious and protracted economic problems.
The costs in the Platform could amount to nearly $1000 in
new federal spending for every man, woman and child in the
United States and would create real risks of a return to
double-digit inflation which would rapidly erode the savings,
earnings and economic security of all Americans. Hardest
hit of all would be low-income Americans and those who, like
many of our senior citizens, live on fixed incomes.
In addition to a vastly expanded spending program the
Democratic Platform calls for more credit at "favorable"
terms to "needy" groups, and a much closer "coordination" of
Federal Reserve credit policies with the objectives of the
Congress and the President. No matter how rationalized,
these monetary proposals are nothing more than a veiled call
for more money creation and for greater government influence
in the credit allocation process. And to those who would
be so liberal in spending other people's money and who are
fond of quoting from the economist John Maynard Keynes, I
suggest to them that they not forget a very critical passage
in the book by Lord Keynes on the Versailles peace conference:
"Lenin is said to have declared that the very best way to
destroy the Capitalist System was to debauch the currency
... Lenin was certainly right. There is no subtler, no
surer means of overturning the existing basis of society
than to debauch the currency. The process engages all the
hidden forces of economic law on the side of destruction,
and does it in a manner which not one in a million is able
to diagnose."
If we remove the last vestige of independence from the
Federal Reserve, we will be encouraging the politicians to
print more money as soon as any economic difficulty appears.
The moment the politicians get their hands on the mechanism
of the money supply is the moment when you begin to destroy
- 7the economy and the society. At that moment they can nav
for everything and account to no one. Just think of whlre
we would be today if we had acquiesced to the persistent
calls last year for double-digit growth in the^oney Iup p i y .
The fallacy of this irresponsible fiscal and mon^ta™
approach is clearly demonstrated by the record of TcanlmVr
performance. In the mid-1960's the United States began an
unfortunate series of economic booms and recession*- serine
overheating of the economy created severe price prlssurelaccelerating inflation caused recessions by restricting
housing construction, personal spending and business investmentthe recessions created unwanted unemployment which w a s t e d '
?on°n^ e S a n d C S U S ! d r P e r s o n a l w i r i n g ; rising S e ^ l M e n t
too often triggered fiscal and monetary policies setting off
another round of excessive stimulus leading once again to
overheating -- inflation -- recession -- unem^loyrnlnJ and
even more government intervention.
employment and
One reason we have had so much instability is the
excessive stimulus provided by government fiscal policies
eJec^LrtL5^01111^1,16^61*5 have tried t0 convince the
l ! M central government can identify, solve and
IL ,Ll $ 5
}emS ? f s o c l e t y " ^ight now. In Fiscal
;"arr \l6* F e d eral outlays totaled $135 billion; by Fiscal
lll^l li e x P e n d l t u r ? s had doubled to a level of $268 billion.
«Ii3?
• n 6 X t tT ?° £ l S C a l y e a r s " 1 9 7 4 t 0 197 * "- Federal
spending increased 36 percent to a level of $365 billion.
Another large increase will occur in Fiscal Year 1977
? T
if
^ /HUlrTly
* he President's recommendations are rejected
and the Congressional target of $413 billion is actually
luirnied.
he
S°vernment is now growing much faster than our
aK-Tl
ability or willingness to pay for it. The Federal Government
will have reported a deficit in sixteen of the past seventeen
v i f ^ i / S * " r v o r thi rty-nine of the last forty-seven -- at
yearend Fiscal Year 1977. During the single decade of
vJl^ i Y ! a L 1 ? 6 8 t h r °ugh Fiscal Year 1977, the cumulative
Tn AA- deficits will total approximately $250 billion.
••«*? UJ 1 0 1 1 .'. n e t b o r r o w i n g s to support over one hundred
ott-budget programs, not even included in the Federal
budget will total at least another $230 billion. That
means that Federal demands on the financial markets will
total almost one-half of a trillion dollars in a single
aecade. The reality of these chronic Federal deficits must
oe compared with the consensus view that the budget must be
balanced over time if we are to achieve the levels of
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allocating
e strong
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provide
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- 8Every independent study that has been done clearly
points to the need for a higher share of our GNP to be used
for investment if we are to find productive jobs for all who
want to work. There is no way to accomplish this if the
Federal Government does not eliminate its deficits and thus
its demands on financial markets. The need to restrain
excessive Federal spending is based on the economic fact
that savings must be available to finance the needed investment
as well as to contain the inflation. This is the only way
to create stable conditions that will make the current
expansion long lasting.
It doesn't take a Ph.D. in economics to realize that
the Federal Government has become the nation's biggest
single employer, its biggest consumer, its biggest borrower,
and also the biggest source of inflation in the United
States economy. A Democratic Congress in cooperation with
a Democratic President like Governor Carter, who has already
committed himself to massive new spending programs including
a compulsory national health plan, the Humphrey-Hawkins bill
guaranteeing a job for every American at government expense
if necessary, massive Federal aid to the cities, and a
nationwide system of child care centers, would inevitably
follow this economic game plan -- which is a blueprint for
disaster.
Yet here we are, only a few months away from the 1976
elections and, despite the contrast between.President
Ford's performance and an abysmal Democratic legislative
record, that party is heavily favored in the polls to hold
its strong majorities in the House and Senate and to recapture
the White House. Meanwhile, President Ford and Governor
Reagan are engaged in a down-to-the-wire battle for the GOP
nomination. And once that decision is made -- and regardless
of its outcome -- the Republican Party will have to face the
most unified Democratic Presidential effort mounted since
the days of Franklin D. Roosevelt.
THE NEED TO SHARPEN THE REPUBLICAN IMAGE
How did we reach this point? "The trouble with the
Republican Party," as Woodrow Wilson once observed, "is that
it has not had a new idea for 30 years. I am not speaking
as a politician," he added. "I am speaking as a historian."
Well, it has been another 51 years since Woodrow Wilson made
his observation and I am afraid it still holds true, at
least in the minds of a growing number of voters.
As far as they are concerned, the Republican Party,
except for its good record in avoiding wars (only a potent
issue while the guns are still smoking), stands for very
little indeed. It isn't so much that the average voter
thinks the GOP is too conservative or needs more "bleeding
- 9hearts"; the problem is that he thinks we ignore, do not
relate, and are irrelevant to, the average American, who,
ironically, is still a pretty conservative, very coiftmonsense
fellow. Too many voters see the GOP not as a partyv but as
a narrow, vested interest --a barely disguised front for
big corporations, bankers and the Chamber of Commerce.
Unfortunately this misconception is as potent as it is
false.
By contrast, since the 1930's the Democratic Party has
managed to hold the loyalties of millions of blue collar
workers, liberal elitists and regional, ethnic and racial
minorities who bury their individual differences to coexist
under the Democratic umbrella when the time comes to vote.
The GOP has been unable to coalesce an equally potent,
cross-class, inter-regional appeal over the same time
period. Even our traditional base constituency of skilled
workers, farmers, white collar workers and business and
professional people -- the expanded American middle class
that covers such a broad social and economic share of our
population -- has been severely shaken by Watergate and our
failure (due in large measure to overwhelming Democratic
Congressional opposition) to fully match our domestic policy
to our political rhetoric during eight years in the White
House. In addition, looking further down the road, more and
mote of the sons and daughters of this potential Republican
power base are demonstrating their lack of faith in either
party by registering as independents.
But more immediately to the point, the GOP has not done
a very good job of serving this natural Republican constituency.
As Senator Bill Brock of Tennessee recently put it,
"There is much frustration in our natural
base -- the small businessman who is being
driven crazy by bureaucracy and regulation ...
lots of them are saying it doesn't matter
who's in charge in Washington; no one can
stop it. We've failed to pay attention to
older Americans, to the suburbs, to the
urban communities. By accident or design,
we're driving people away from participation."
What will it take to turn the party -- and its potential
majority constituency -- away from the road to political
extinction? It will require more than an attractive candidate.
It will require a commonsense appeal to the American voters -a platform that is a genuine contract with the people and a
commitment to more than vague good intentions. We need to
spell out, in plain language, what we stand for and what we
believe in.
- 10 THE REPUBLICAN PHILOSOPHY
Where should we stake out our ideological ground? To
begin, we believe in the maximum possible individual freedom
and the minimum possible degree of government interference
in the lives of our people. We recognize that many of the
social programs created in recent years are necessary and
will continue although the cumbersome and costly delivery
system needs to be greatly improved. But there is no reason
why America, under effective Republican leadership, cannot
develop a conservative form of compassionate government
which meets basic human needs with an emphasis on individual
freedom of choice and a heavy reliance on the productivity
and economic vitality of our free enterprise system rather
than massive government planning, control and taxation.
We have reached the point where most Americans expect
some form of government action to help them cope with
problems like old age, illness and unemployment. But that
does not mean that the growth of massive government programs
should follow from such a commitment.
Instead of trying to do a little less, a little later
than the Democrats, we must have a positive program of our
own. It does not have to be complicated to be effective.
But it does require an underlying commitment and compassion
for those who genuinely need help. The periodic distortions
of the economy by excessive government spending and exaggerated
growth in the money supply is unwise -- not compassionate.
In fact, the very people who are supposed to be helped by
such action are usually the ones most hurt by the economic
problems created.
Some observers call this message negative and hardhearted. These so-called compassionate people say we are
callous and unsympathetic to be against massive new spending,
to be against huge deficits, and to be against the government
running our lives. I am sorry, but I respectfully disagree.
There is no such thing as true compassion without
responsibility; to show true concern, we must take into
account not only the short-term effects of our actions but
the long-term as well. The suggestions that we simply spend
and spend are precisely those which have, over the years,
hurt the poor and the disadvantaged the most. It would be a
grave injustice to the people of this Nation, and especially
to those who deserve a helping hand, to continue down the
path when we know from experience that the short-term prosperity
we buy now will be followed by years of even greater hardship
and suffering tomorrow. It is time in these United States
to put our economy back on a sound, steady footing so that
people may have lasting jobs and lasting hope for the future.
- 11 Do we want more freedom of choice and more freedom of
individual action? Or do we want to see the economic
freedoms and all the other individual freedoms we hold so
dear gradually erode under more and more government encroachments
on our lives? That is the crucial decision behind the
™BBn™
rhetoric and personalities of this election year. And the
choice we make will affect not only our own futures, and our
children's, but the future of our country as America embarks
on its third century as the hope and inspiration of free
people everywhere.
The commitment to a positive program should be linked
to five explicit policy goals:
* Prosperity and economic growth through encouragement
of the private sector that provides five of every six
jobs in America and generates the abundance that pays
for government as well.
* Skillful management of economic affairs by creating
an environment of sustained, non-inflationary growth
which will benefit every man, woman and child in our
country.
* Reducing the growth of runaway government which more
and more Americans recognize as the biggest single
domestic problem facing our country today.
* Lowering the level of taxation in America. Taxes are
too high for almost everyone. We must reduce the
overall level of taxation so that our vital economy
and society are spared the deterioration we have seen
in other societies where the state has consumed an
ever larger part of the national product.
* Government leaders should pay less attention to
special interests and more to the general interest by
emphasizing national economic priorities in developing
legislation.
In general, these priorities involve an integrated set
of goals involving improving the real standard-of-living,
maximizing employment opportunities, stabilizing prices and
maintaining a free and open international trade and investment
system. But these general goals must be converted into
specific economic policies. For example, if we are going to
create the kind of jobs that will keep people permanently
employed, that will meet the needs of a growing labor force
and that will reduce our inflation by expanding our output
of goods and services, then we must equip our workers with
new and efficient plant, machinery, and tools. These
capital needs of the future are staggering, about $4-1/2 trillion
in the next decade --or about three times as much as we
spent in the last decade.
- 12 Savings are the source of this needed capital. But
savings are currently being drained by excessive government
deficits. Resources absorbed by government for its spending
today cannot simultaneously be invested in expanded plant
and machinery to employ more people tomorrow. We cannot
have both bigger government and a healthy expanding private
sector as our opponents would have us believe. Governments
don't create wealth -- people do. We cannot continue to
transfer each year an increasing percentage of our national
wealth from the most productive to the least productive
sector of our economy without endangering our economic
future.
If we're really sincere about providing more productive
and lasting jobs for our economy we will only succeed by
strengthening our free enterprise system. Many areas would
be affected, but two would be particularly affected, taxes
and welfare. The goal for both would be the same: equity,
efficiency and simplicity.
As they are now constituted, America's tax and welfare
systems are a national disgrace. Our complex, contradictory
and inequitable tax laws are a boondoggle for lawyers and
accountants and sheer hell for everyone else. Successive
Democratic Congresses have tinkered with tax legislation to
curry favor with pressure groups, court temporary popularity
at election time, and generally wreak havoc with the economy.
The result has been economic instability and taxpayer
distrust and frustration. It is time to restructure the tax
system to provide more equity and tax relief for every
American taxpayer.
Our welfare system has been equally disastrous, both
socially and economically. It degrades millions of our
citizens; it wastes billions of dollars through inefficiency
and duplication of effort; and it offers welfare recipients
little or no encouragement to build meaningful, productive
lives for themselves and their families. The Administration
has done its best to improve the operation of the welfare
system through administrative rulings but basic reform
requires a comprehensive revison of the existing maze of
individual programs. This reform should include rigorous
work requirements for those able to work and incentives to
allow marginal earners to seek employment or stay on the job
while receiving needed assistance.
A sound Republican platform could also harness private
sector know-how to replace cumbersome and wasteful government
programs in the area of job training, especially for minorities
and the underprivileged. Let me give you one striking
example of how a few highly motivated community leaders with
a sound understanding of private sector job requirements
began an organization that has since helped hundreds of
- 13 thousands of potential welfare recipients to become productive
members of Society. In 1964 Reverend Leon H. Sullivan, a
black pastor and civic leader, founded the first Opportunity
Industrialization Center in an abandoned jailhouse in a high
crime section of North Philadelphia. His aim was as simple
as it was important - - t o avoid bureaucratic red tape and
waste, and to provide relevant job training and placement
with maximum efficiency at a minimum cost.
The success of Reverend Sullivan's program was such
that there are now local OIC affiliates in every part of the
country. And between 1964 and 1975 the program trained
353 thousand men and women and placed 250 thousand in jobs
with an impressive 85% retention rate. These OlC-trained
and placed workers earned nearly $5 billion during the same
period, paid $600 million in Federal taxes and saved the
taxpayer $1.5 billion in potential welfare payments.
OIC is not now and never should become a political
football. But it is the kind of effective, private sectororiented approach to job training and underprivileged
minorities that a Republican Platform should espouse in
place of multi-billion dollar Democratic proposals for
federal employment boondoggles.
Another area rich in potential for a solid Republican
Platform is the whole range of Federal deregulation. Year
after year the Federal regulatory bureaucracy, with a will
and a life of its own, and with the support of a wide range
of special economic and political interest groups, has grown
like toadstools after a heavy rain. Today the Federal
regulatory apparatus employs an army of 100 thousand people
and costs the private sector (ultimately, the American
consumer) $40 billion a year just to fill out forms.
President Ford has worked long and hard for regulatory
reform despite Congressional opposition. A serious Republican
Platform should carry on this work and call for an across
the board cost-benefit analysis of all Federal regulatory
agencies to determine which ones provide needed services to
the public which justify their costs. Those that do not
should be abolished for the sake of consumers, businessmen,
employees and taxpayers.
Deregulation is only one of many "sleeper" issues that
could rally support from millions of Americans -- but only
as part of a clearly enunciated Republican Platform.
Other platform planks should deal forcefully and directly
with:
* Congressional Reform: Major surgery is required to
correct the inefficient and all-too-often obstructions
system of Congressional operations that has built up
- 14 under the Democratic Congressional power monopoly of
more than a generation. The platform should also
provide for the closest possible coordination and
cooperation between GOP Presidential and Congressional
candidates. No matter what initiatives to achieve
economic goals are made by the President the actual
legislation -- including the control of spending -requires a responsive Congress. Winning the White
House without making substantial gains in the Congress
would be a hollow victory at best; an effective
Republican President can only excel with strong
Republican Congressional support on the legislative
front.
* A Thorough Study of Federal/State/Local Relationships:
lecause of the vast changes in government, society
and the economy, and because of the complex variety
of legislative and administrative measures that are
now a part of government at all levels, a thorough
examination of the relationship between the three
layers of government is now long overdue. The
findings would make it possible to tailor future
legislation and planning to reality rather than
rhetoric, and would clearly re-define limits and
distinctions that have become blurred by sloppy
legislation and ambiguous court rulings.
* Automatic Phaseout of Redundant Government Programs
and Personnel: Most Federal programs should have an
automatic phaseout date and face automatic elimination,
like Federal regulatory agencies, unless their extended
existence can be justified on a regular, periodic
basis. The burden of proof should lie with the
programs and bureaucrats who soak up billions of
dollars in revenues, not with the taxpayers who foot
the bill.
* Renewed Emphasis on the Private Sector as the Basic
Source of Economic Productivity and Creativity:
Despite the demonstrated superiority of the free
enterprise system there has been an ominous trend
toward greater government control and even ownership
in some cases. Specific examples include the unfortunate
experience with wage and price controls in the early
1970's, repeated efforts to control the allocation of
capital through legislation, the arbitrary establishment
of numerous environmental standards before necessary
cost/benefit studies are prepared, and the general
spread of restrictive regulations. In a more general
sense, legislation has been proposed to increase
central government planning for the allocation of
resources in the entire economy. The Republican
Party Platform should categorically reject these
counterproductive measures.
- 15 * Maintenance of a Free and Open World Trade and
Investment SystemT Considerable success hasFeeh
achieved on intfernatibnal monetary reform and multilateral
negotiations for improving the framework of trade.
The United States will continue in its efforts
to create a free and open trade and investment system.
Reforms like these must be made if America is to
survive as a free and prosperous nation and fulfill its
leadership role in the world community. All of them directly
address the issue that is fast becoming the main public
concern of our times -- the accelerating growth of big
government and the resultant loss of personal and economic
freedom. The Democratic Party Platform would result in the
explosive growth of big government in America. We should
stress that the Republican Party favors allowing the American
people to keep more of their own money to spend as they
please, whereas the Democratic Party would have the Federal
Government spend the people's money for them. This is the
real choice between the Democratic and Republican Party
Platforms. The Republican approach is to emphasize the
individual. The Democratic approach is to emphasize bigger
government. A few Democratic Party leaders pay half-hearted
lip service to the idea of dismantling their own monster.
But, like Doctor Frankenstein, their hearts really aren't in
it; it's their baby and their political status quo. Governor
Carter, who originally preached so effectively against
Washington and big government is evidently prepared to
enlarge their domain significantly.
Only a united, revitalized Republican Party, running on
a detailed, well thought-out and clearly enunciated platform,
can achieve the kind of political and economic reform our
country needs and our people want. But time is running out.
The national elections in November may be the last opportunity
our party will have to stem the tide of big government and
thinly-disguised state socialism as practiced -- if not
preached - - b y the Democratic Party.
"Those who won our independence," wrote Justice Louis
Brandeis, "believed that the final end of the State was to
make men free to develop their faculties ... They valued
liberty both as an end and as a means. They believed liberty
to be the secret of happiness and courage to be the secret
of liberty."
What the Republican Party needs today is the courage of
its convictions - - a renewed belief in the fundamental
truths of liberty that the Party of Lincoln embodies, along
with the guts and vision to take the truth to the people.
We can only succeed if we act as statesmen instead of
politicians, if we build and expound a platform of programs
instead of platitudes and offer serious ideas and practical
policies based on common sense and common decency.
- 16 Is the Republican Party finished? An awful lot of
people seem to think so. But, if we are failing, it is
because, in a very real sense, we have not yet begun to
fight. For unless we enunciate and battle for our principles,
we cannot reasonably expect the American people to give us
the mandate we need to govern effectively.
And whether we succeed or fail, much more is at stake
than just the future of our party. The issues have never
been more clearly explicit; we must keep them from getting
buried in the superficialities of a political campaign.
teaerai nnancing DanK
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
August 10, 1976
SUMMARY OF LENDING ACTIVITY
July 16 - July 30, 1976
Federal Financing Bank lending activity for the period
July 16 through July 30, 1976, was announced as follows by
Roland H. Cook, Secretary:
The Federal Financing Bank made the following loans to
the Tennessee Valley Authority:
Date
Amount
Maturity
Interest Rate
$ 55,000,000
10/29/76
5.338%
UTE
5.395
160,000,000
10/29/76
7/30
The proceeds of the loans were used to repay $135 million in
notes with the Bank and to raise additional funds.
On July 16, the Bank purchased from the Secretary of the
Treasury the following New York City loans made under the New
York City Seasonal Financing Act of 1975:
Face
Interest
Final
FFB Rate
Note
Amount
Amount
Rate
Maturity
of Return
(millions)
9
$150,954,962.42
4/20/77
6.145^
$150
7.02
10
201,403,013.74
5/20/77
6.225
200
7.10
The notes were purchased with the right of recourse against the
Secretary of the Treasury.
The Federal Financing Bank made the following loans to
utility companies guaranteed by the Rural Electrification
Administration:
Interest
Date
Borrower
Maturity
Amount
Rate
7/20
South Mississippi
Electric Power Assn.
$5,950,000
7/24/78
7.043%
7/26
Murraysville Telephone Co. 400,000
7/26/78
7.063%
7/30
Southern Illinois Power 1,725,000
7/30/78
6.925%
7/30
Big Rivers Electric Corp. 1,188,000
12/31/10
8.188%
Interest payments on the above REA loans are made on a quarterly
basis.
WS-1022
- 2On July 21, the FFB purchased the following debentures
from Small Business Investment Companies:
Interest
Borrower
Amount
Maturity
Rate
7.725%
$ 700,000
7/1/81
Doan Resources Corp.
Small Business Invest7/1/81
320,000
7.725%
ment Co. of Connecticut
500,000
7/1/86
8.085%
Enterprise Capital Corp.
1,100,000
7/1/86
8.085%
ESIC Capital, Inc.
1,500,000
7/1/86
8.085%
Iverness Capital Corp.
350,000
7/1/86
8.085%
1,000,000
7/1/86
8.085%
Mome Capital Corp.
Monmouth Capital Corp.
8.085%
7/1/86
640,000
Small Business Assistance
300,000
7/1/86
8.085%
Corp. of Panama City, Fla.
Winfield Capital Corp.
These debentures are guaranteed by the Small Business Administration
On July 21, the Bank purchased from the Department of Health,
Education and Welfare Series E notes in the amount of $175,000.
The notes mature July 1, 2000, and bear interest at a rate of
8 .214%. The Department had previously acquired the notes which
were issued by various public agencies under the Medical Facilities
Loan Program. The notes purchased by the FFB are guaranteed by
HEW.
The Federal Financing Bank made the following advances to
borrowers guaranteed by the Department of Defense under the
Interest
Foreign Military Sales Act:
Maturity
Rate
Date Borrower Amount
7.593%
7/21 Government of Peru $ 6,800,000.00
12/31/82
7/23 Government of Nicaragua 240,000.00
6/30/80
7.239%
7/28 Government of Jordan 1,944,765.82
6/30/85
7.720%
7/29 Government of Israel 29,573,562.72
6/10/85
7.730%
7/30 Government of Jordan 582,839.19
6/30/85
7.714%
On July 26, the U.S. Railway Association (USRA) borrowed
from the Bank $685,000 against Note #6. The maturity of the
loan is December 26, 1990. The interest rate, set at the time
of the first advance, is 8.055%.
- 3On July 30, the USRA rolled over Note #3 in the amount
of $1,024,296.22 and borrowed $4,707.83 to pay the interest
due. The loan matures August 29, 1976 and bears interest
at a rate of 5.394%. USRA borrowings from the FFB are
guaranteed by the Department of Transportation.
The National Railroad Passenger Corporation (Amtrak)
made the following drawings from the FFB:
Date
Note
#
Interest
Rate
Amount
Maturity
7/26 6 $ 10,000,000 10/1/76
7/29
9
120,000,000
(rollover)
5.423%
7/30
6
10,000,000
10/28/76
5.432%
5.392%
10/1/76
A
Amtrak borrowings from the Bank are guaranteed by the Department
of Transportation.
a
•rc On June 21, the Chicago, Rock Island and Pacific Railroad
Company signed a $17.5 million commitment agreement with the
Bank. Interest rates are determined at the time of each
advance. The final maturity of all advances is June 21,
1991. On July 28, the FFB made an advance to the Railroad
in the amount of $828,722. The interest rate is 8.145%.
Ghicago, Rock Island and Pacific Railroad Company borrowings
from the Bank are guaranteed by the Department of Transportation.
On July 27, the Student Loan Marketing Association (SLMA)
borrowed $20 million from the Bank. The loan matures October
26, 1976 and bears interest at a rate of 5.461%. The proceeds
of the loan were used to repay $20 million in principal.
SLMA borrowings are guaranteed by the Department of Health,
Education, and Welfare.
Federal Financing Bank loans outstanding on July 30,
1976 totalled $24.1 billion.
oOo
FOR RELEASE AT 4:00 P.M.
August 10, 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 $6,100 million » o r
thereabouts, to be issued August 19, 1976,
as follows:
91-day bills (to maturity date) in the amount of $2,500 million*
or
thereabouts, representing an additional amount of bills dated May 20, 1976,
and to mature November 18, 1976 (CUSIP No. 912793 C2 0), originally issued in
the amount of $ 3,503 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,600 million* or thereabouts, to be dated August 19, 1976,
and'to mature February 17, 1977 (CUSIP No. 912793 E6 9).
The bills will be issued for cash and in exchange for Treasury bills maturing
August 19, 1976,
outstanding in the amount of $6,106 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,801 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, August 16, 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-1023
(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.
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 August 19, 1976,
In cash or
other immediately available funds or in a like face amount of Treasury bills
maturing August 19, 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 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
August 12, 1976
LIEBLING LEAVES TREASURY
FOR CHAIR AT LAFAYETTE COLLEGE
Secretary of the Treasury William E. Simon announced today
that Herman I. Liebling, a senior economic advisor and Deputy
Director of the Treasury's Office of Financial Analysis will
leave the Department on August 31, 1976 to join Lafayette College
in Easton, Pennsylvania as the Frank Lee and Edna Smith Professor
of Economics and Business.
Secretary Simon stated that he "personally will miss Mr.
Liebling's invaluable insights concerning economic and financial
developments. His advice has been and is reflected in our national
economic growth and stablilization policies. I certainly regret
the loss to the Treasury, but I am pleased that he will occupy
a Chair at as outstanding an institution as Lafayette College:"
Secretary Simon noted that on several occasions during his
tenure, Mr. Liebling counseled economic policy which went against
conventional thinking, but in retrospect has been proved correct:
In mid-1962, Mr. Liebling counseled against a quick tax cut to
avoid a predicted recession, which didn't materialize; favored a
tax increase as early as mid-1965 to pay for Vietnam expenditures;
foresaw that the 1968 tax surcharge would not cause a recession
as many were warning; rejected over-stimulative policies in early
1975, having recognized that the economy was already bottoming out.
Mr. Liebling was the Treasury's representative on the Federal
inter-agency "Troika" group, whose function is to formulate
economic forecasts for presentation to the President's Economic
Policy Board.
He received the Meritorious Service Award of the Treasury
Department for "his skill in discerning changes in basic economic
forces in the economy and his ability in forecasting the future
performances of the economy...to make possible economic policy
decisions."
Mr. Liebling also served as a U.S. representative on Article
VIII Consultations with the IMF, a delegate to the Short-Term
Forecasting Group of the OECD, and AID advisor to the Finance
Ministry of the Government of Morocco, and a deputy to the
WS-1024
President's Cabinet Committee on Price Stability.
- 2Mr. Liebling also was Senior Lecturer, with the equivalent
rank of full professor, at the University of Maryland. He is
the author of many articles in scholarly journals and books.
A native of New York City, Mr. Liebling attended public
schools there and received his MA and Ph.D degrees in economics
from The American University in Washington, D.C. He and his wife,
the former Mabel Barbara Rudman of Jamaica, New York, have two
children.
0O0
kpartmentoftheJREASURY
STON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE AT 4:00 P.M.
August 12, 1976
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for $2,900 million, or thereabouts, of 364-day Treasury bills to be dated
August 24, 1976, and to mature August 23, 1977 (CUSIP No. 912793 H3 3).
The
bills will be issued for cash and in exchange for Treasury bills maturing
August 24, 1976.
This issue will not provide new money for the Treasury as the maturing
issue is outstanding in the amount of $2,900 million, of which $2,120 million
is held by the public and $780 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, August 18, 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
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-1025
-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 August 24, 1976,
in
cash or other immediately available funds or in a like face amount of Treasury
bills maturing
August 24, 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 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
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vDepartmentoftheTREASURY
0HINGTON, D.C. 20220
TELEPHONE 964-2041
Contact: David R. Macdonald
FOR IMMEDIATE RELEASE
Extension: 2033
August 13, 1976
TREASURY ANNOUNCES FINAL DETERMINATION FOR
AUTOMOBILE ANTIDUMPING CASES
Assistant Secretary of the Treasury David R. Macdonald
announced today that final determinations had been made in
the Treasury Department's Antidumping investigations of
automobile imports. The actions announced today discontinue
the investigations as to 23 firms and terminate the investigations as to 5 firms. In those instances where an
investigation has been discontinued the manufacturers•
prices will be monitored by the Treasury Department for the
next two years.
These investigations involving automobiles
manufactured in 8 foreign countries (West Germany, the
United Kingdom, France, Belgium, Italy, Sweden, Japan and
Canada) were initiated on August 11, 1975 after the Treasury
Department had received petitions from the United Auto
Workers and Congressman John Dent of Pennsylvania, alleging
that foreign automobiles were being "dumped" on the U.S.
market and were injuring the domestic automobile industry.
On May 4, 1976, Secretary of the Treasury William Simon
announced that he was tentatively discontinuing these
investigations on condition that certain commitments
regarding future prices were received from the manufacturers
involved. The actions announced today are as a result of
the receipt by the Treasury Department of such commitments.
Secretary Simon indicated at the time of his May 4
announcement that he was taking this course of action
because of the unique circumstances which existed in the
automobile industry during the period of the investigation
(January 1 through August 31, 1975). The discontinuances
were issued under a rarely used section of the Antidumping
WS-1026
Regulations which authorizes such action whenever the
Secretary concludes that there are circumstances on the
basis of which it may no longer be appropriate to continue
-2an Antidumping investigation. An explanation of those
circumstances was included in the Secretary's press release
of May 4 and in the Federal Register notices of May 17,
19 76, announcing the tentative discontinuances.
The 23 manufacturers who have been required to supply
commitments to the Treasury Department had been found
during the period of the investigation to have been pricing
their automobiles in the U.S. market below their home market
prices for comparable products. However, in the cases of
Japanese and European manufacturers price adjustments since
the end of the investigatory period along with changes in
the relative values of currencies have eliminated these price
differentials, as calculated under the special circumstances
found to exist for the purposes of this investigation. In
the case of several firms, specific additional price adjustments will be required on their 1977 models in order to
comply with these commitments. In all cases these firms
have pledged to maintain their relative prices in such a
way as to assure that these price differentials do not
reappear. Insofar as Canadian manufacturers are concerned
pledges have been received to continue the elimination of
price differentials within the context of the special
circumstances created by the integration of the U.S. and
Canadian industries.
Five of the manufacturers investigated (Honda, Nissan,
Porsche, Rolls Royce and Toyota) were found not to be selling
below fair value and as to those firms the investigation
has been concluded and no future monitoring of prices will
be required.
These cases collectively represent the most extensive
Antidumping investigation ever conducted by the U.S.
* * *
Treasury Department and encompassed
trade amounting to
$7.2 billion in 1975.
department of theTREASURY
6T0N, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE AT 12:00 P.M.
W
August 13, 1976
TREASURY TO AUCTION $2,500 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,500
million of2-year notes to refund $1443 million of notes
held by the public maturing August 31, 1976, and to raise
$l,057million of new money. Additional amounts of these
notes may be issued at the average price of accepted tenders
to Government accounts and to Federal Reserve Banks for
themselves in exchange for $219 million of maturing Treasury
securities held by them and as agents of foreign and
international monetary authorities for new cash only.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.
Attachment
WS-1027
HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
OF 2-YEAR NOTES
August 13, 1976
Amount Offered:
To the public
$2,500 million
Description of Security:
Term and type of security
2-year notes
Maturity date
August 31, 1978
Call date.
No provision
Interest coupon rate
Investment yield
To be determined based on the
average of accepted bids
To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
February 28 and August 31
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by investor
None
Preferred allotment
Deposit requirement
Noncompetitive bid for
$500,000 or less
5% o f f a c e a m o u nt
Deposit guarantee by designated institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Thursday, August 19, 1976,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank within
FRB district where submitted
c) check drawn on bank outside
FRB district where submitted
Delivery date for definitive securities
Tuesday, August 31, 1976
Thursday, August 26, 1976
Tuesday, August 24, 1976
Tuesday, August 31, 1976
^mmmmk^mA^A^AmA^Awmm—
\tDepartmentoftheTREASURY
TELEPHONE 964-2041
KINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
|
August 16, 1976
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,500 million of 13-week Treasury bills and for $3,600 million
of 26-week Treasury bills, both series to be issued on August 19, 1976,
were opened at the Federal Reserve Banks today- The details are as follows:
26-week bills
maturing February 17, 1977
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing November 18, 1976
Price
High
Low
Average
Discount
Rate
98.706 a/5.119%
98.698
5.151%
98.700
5.143%
Investment
Rate 1/
5.26%
5.29%
5.28%
Price
Discount
Rate
Investment
Rate 1/
97.290
97.271
97.275
5.360%
5.398%
5.390%
5.59%
5.63%
5.62%
a/ Excepting 2 tenders totaling $4,000,000
Tenders at the low price for the 13-week bills were allotted 67%.
Tenders at the low price for the 26-week bills were allotted 23%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
1
Accepted
22,705,000
29,705,000 $
Boston
$
2,128,015,000
3,787,925,000
New York
17,405,000
30,840,000
Philadelphia
30,670,000
33,340,000
Cleveland
21,345,000
55,145,000
Richmond
28,105,000
28,630,000
Atlanta
109,045,000
295,220,000
Chicago
26,835,000
46,115,000
St. Louis
8,715,000
39,100,000
Minneapolis
50,560,000
80,320,000
Kansas City
19,315,000
20,315,000
Dallas
39,525,000
San Francisco 304,325,000
TOTALS$4>750,980,000
Received
Accepted
8,045,000
$
26,045,000 $
2,799,115,000
5,751,415,000
5,715,000
81915,000
138,630,000
258,630,000
28,490,000
76,640,000
47,500,000
48,000,000
392,185,000
560,435,000
25,745,000
61,7455000
11,665,000
50,665,000
23,200,000
29,400,000
18,085,000
29,855,000
104,245,000
339,245;000
$2,502,240,000 b/$7,240,990,000
$3,602,620,000 c/
b/ Includes $370,905,000 noncompetitive tenders from the public.
c/ Includes $171,995,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1028
The DepartmentoftheJREASURY
Dep
TELEPHONE 964-2041
WASHINGTON, D.C. 20220
FOR RELEASE AT 4:00 P.M.
August 17, 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 $6,200 million , or
thereabouts, to be issued August 26, 1976,
as follows:
92-day bills (to maturity date) in the amount of $2,600 million, or
thereabouts, representing an additional amount of bills dated May 27, 1976,
and to mature November 26, 1976 (CUSIP No. 912793 C3 8), originally issued in
the amount of $3,602 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,600 million, or thereabouts, to be dated August 26, 1976,
and to mature February 24, 1977
(CUSIP No. 912793 E7 7).
The bills will be issued for cash and in exchange for Treasury bills maturing
August 26, 1976,
outstanding in the amount of $6,230 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,789 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, August 23, 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-1029
[
(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. 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 companyPublic 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 August 26, 1976,
in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing August 26, 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 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.
oO'Do
ADDRESS BY THE HONORABLE ROBERT A. GERARD
ASSISTANT SECRETARY OF THE TREASURY
FOR CAPITAL MARKETS AND DEBT MANAGEMENT
BEFORE THE 1976 ANNUAL MEETING OF THE
AMERICAN BAR ASSOCIATION
SECTION OF LOCAL GOVERNMENT LAW
ATLANTA, GEORGIA
SATURDAY, AUGUST 7, 1976, 12:00 NOON
I am delighted to have the chance to be with you today.
Unfortunately, given some other demands on my time, my stay
in Atlanta will be very short. I say unfortunately not only
because Atlanta is a beautiful City, but also because I'd hoped
to stay long enough to pick up by osmosis some of the magical
solutions — the kind that cost nothing and solve everything —
that I hear can be had down here.
I will touch on a variety of subjects this afternoon —
with particular emphasis on the disclosure question you
addressed earlier in your meeting — but I'd like to begin
with some general comments.
At the outset, let me note that we in Washington are
acutely aware of the financial issues facing many of our state
and local governments. Since World War II, the geographies
and demographics of this nation have undergone radical change
and, in many cases, state and local governments have been
adversely affected.
But these phenomena do not lead me to the conclusion —
espoused by so many these days — that the Federal Government
should act to paper over these fundamental changes by massive
infusions of cash, either directly, or, even worse, by granting
state and local government access to the Federal printing press
through bond guarantees or similar programs.
No, the response to these changes must come from your
clients: state and local governments. And I am pleased to note,
in the midst of all the rhetoric about Federal takeovers of this
function or Federal guarantees of that bond, that taxpayers and
elected officials are beginning to rise to the challenge.
During my year and half involvement in developing and
administering the Federal loan program for New York City, it
has been fashionable in some circles to point to New York City
as the "wave of the future." If New York is in trouble, some
say, then other cities will be engulfed before long.
I disagree. In all major respects but one, New York City
is different.
ws-i
mn
- 2 -
New York City is different because it was first. New York
City stands as a warning to other cities, that if they do not
practice fiscal restraint, if they lose control over costs,
over their relations with their employees, and their relationships with the financial community, they too will undergo the
trauma that New York City has undergone.
This lesson has not been lost on the officials and citizens
of other cities. In municipalities throughout the nation,
reduced growth in expenditures, curtailed construction programs,
and other budgetary measures offer tangible evidence that
fiscal restraint is at last being practiced as well as preached.
It is also evident on the labor front. For many years,
increases in the salaries of public employees exceeded
increases in the private sector. This is no longer so. Hard
pressed by higher local taxes, citizens have made their views
known. In San Francisco and other cities, hitherto known for
their generous wage policies, first taxpayers and then the
government have insisted on moderate contracts and the people
have willingly endured the long strikes necessary to secure
such contracts. Other cities, sensing the shifting mood of the
nation, have negotiated labor contracts which are, by past
standards, remarkably moderate.
Not the least remarkable of these contracts are the ones
recently negotiated in New York City. Long the pacesetter in
exorbitant wages and benefits, 225,000 union employees in
New York City have recently agreed to a wage freeze and a plan
to reduce fringe benefits over the next two years. So the
lesson of New York has been learned — by New York as well as
by other cities.
The other reason that New York is different from other
cities is that it has a unique set of economic and financial
attributes. It remains the center of the financial world.
Despite the enormous population shifts of the postwar era, it
remains twice as large as the second largest city in this
country, and has not lost population as rapidly as many other
major cities. And, contrary to popular impression, it has not
been a magnet for the poor. Ten other cities have a higher
percentage of their population on welfare.
But these very strengths are a major source of the City's
current problems. These strengths allowed it to tap the
financial markets to an unprecedented degree. As a result, its
debt load now far exceeds that of any other major city and
debt service costs alone exceed the total budgets of all but a
handful of our cities.
- 3 -
Moreover, this access to financial markets carried with
it even greater access to the short-term end of the market —
Tax Anticipation notes, Bond Anticipation notes, and Revenue
Anticipation notes. The fiscal strength which allowed the
City to accumulate more than $4 billion of short-term debt was
a final catalyst to crisis.
Much has been done to turn the situation around in
New York City and I am convinced that the resources exist to
complete the job. Whether the political will is there, however,
remains to be seen. Today, I do want to concentrate on one
area in which New York's progress is highly relevant for other
cities: the area of disclosure.
In the past year, there has been a quantum leap in the
quantity and quality of the financial information concerning
New York City which has been developed and disclosed to the
public. While New York is still at least a year away from a
truly sound and reliable accounting system, we now know far
more about the City's finances than has ever been known —
more, in many respects, than we know about most other cities.
But it is not only in New York that city management has
become conscious of the need for better disclosure. Since the
well-publicized problems of the past year have destroyed the
myth that municipal bonds of major municipalities are risk-free,
investors are no longer willing to invest on the basis of the
limited information that has accompanied municipal offerings in
the past. Other municipalities must sell their obligations to
these same disclosure-conscious investors and, in addition,
they must sell these obligations with the assistance of underwriters and dealers, and professionals who are themselves
increasingly conscious that they may be liable to the investor
if disclosure by the issuer is inadequate.
Six weeks ago, I could have told you that Federal legislation
requiring increased disclosure of financial information by certain
municipalities would pass. I would not have predicted the date,
nor the precise terms of the bill, but I could properly have
described it as an idea whose time has come: the public wants it;
intermediaries have come to believe they need it; and the
legislators were ultimately, I believe, prepared to pass it.
Then, on June 24, the Supreme Court rendered its decision
in National League of Cities v^ Usery. That decision, it is fair
to say, took most of us by surprise. It raised, and is continuing
to raise, fundamental questions about the permissible extent of
Federal regulation of traditional state functions. Coming in
the wake of certain court decisions limiting underwriters'
liability, it is viewed by some as the final blow to Federal
disclosure legislation.
- 4 In Usery, the Court held invalid 1974 legislation extending
the minimum wage to employees of state and local governments.
For our purposes, these are the key words of Justice Rehnquist's
opinion: "We hold that insofar as the challenged amendments
operate to directly displace the state's freedom to structure
integral operations in areas of traditional Government functions,
they are not within the authority granted the Congress by
Article 1, Section 8, Clause 3 (The Commerce Clause)."
But the potentially far-reaching implications of this
decision for Federal regulation of state and local activities
are evidenced by the unusually strong dissent of Justices Brennan,
White and Marshall. Mr. Justice Brennan sees Usery as no less
than a reversal of the comprehensive power granted Congress under
the Commerce Clause. "I cannot recall another instance in the
Court's history," says Justice Brennan, "when the reasoning of
so many decisions covering so long a span of time has been
discarded rough-shod." He sees this decision as envisioning a
"startling restructuring of our Federal System."
Others have been quick to seize upon this decision not
only as sounding the death knell for Federal disclosure legislation, but also as vitiating whatever Federal authority currently
exists in the municipal securities area. In a recent complaint,
the City of New York has sought a declaratory judgment that
the Securities and Exchange Commission lacks jurisdiction to
enforce certain aspects of the Securities laws with respect to
issuance and sale of securities by the City of New York. The
City rested its Constitutional case principally upon the Usery
decision.
Before we can properly assess the impact of the Usery case
and other developments upon the prospects or need for Federal
disclosure legislation, we must take a step back. Let me
briefly summarize the developments in the field of municipal
finance which have given rise to Congressional consideration
of Federal disclosure legislation, then we can return to the
substance of such legislation and what it may mean for your clients.
The Emergence of Federal Disclosure Legislation
Forty-three years ago, when municipal securities were
exempted from the then new Federal Securities Laws, few persons
could have foreseen that by 1975, annual offerings in this
sector would total $60 billion — approximately $30 billion in
bonds and $30 billion in short-term borrowings. Nor could they
have foreseen the cause of this dramatic increase in borrowings
— the increasing level and scope of services offered by state
and local governments.
- 5 -
Not so long ago, the basic units of local government could
be simply defined. A village was a village, a city was a city,
a state was a state, and they taxed and borrowed accordingly.
Each rendered a few services — usually limited to the basics —
education, police, sometimes a fire department.
It is no longer so simple. In the effort to cope with the
major shifts of the past forty years, within the context of state
laws designed to deal with a simpler system, a bewildering variety
of overlapping tax structures have developed. School districts,
pollution districts, hospital and housing districts have joined
the traditional list of town, county and state units in
competing for the taxpayers' money. In addition, there are now
usage taxes, sales taxes, and other special taxes. A fiscal map
would show that the citizen in a typical municipality is subject
to no less than four taxing districts, and usually more, in
addition to those taxes he pays for specific goods or services
rendered.
The complications that these changes have introduced into
our lives as taxpayers pale by comparison with the complications
they have created for municipal investors. It is no longer
adequate, for example, to gauge the creditworthiness of a
municipality by comparing its existing debt with the debt-carrying
ability of its citizens. One must also consider the other debts
indirectly borne by its taxpayers. In the case of New York, for
example, total debt may exceed direct debt of the City by no
more than 20 percent. But in Chicago, total debt is roughly
three times as high as direct debt. In Los Angeles, it is nearly
six times as high.
But by far the greatest problem which faces the investor
in analyzing financial information is lack of comparability:
the disparity in the quantity of information disclosed, the
standards by which the adequacy of the disclosed information
is measured, and the comparability of accounting conventions
used to report this information. Frequently, different
municipalities within the same state use different.systems.
Adherence to the voluntary guidelines which have developed in
the public accounting area is spotty, and different accounting
conventions are widely accepted. To choose just one example,
it is permissible to record pension liabilities on a "pay-asyou-go" basis, paying pensions out of the current year budget
without establishing any reserve for future liabilities —
irrespective of whether or not they are vested.
Moreover, this increasing complexity has developed at a
time when the individual is playing an increasingly important
role in the municipal market. Lacking the resources and
- 6expertise of the traditional investors — the banks and fire
and casualty companies — the dearth of reliable and comparable
information places an especially heavy burden on the individual
investor.
These problems received little attention when the major
municipalities were unfailingly paying their debts on time and
the myth persisted that general obligations — secured by the
ad valorem taxing power — were risk free. Historical evidence
to the contrary was ignored and the occasional need for small
municipalities to reschedule their debts was seen as an aberration.
But there is now no investor in the country who is unaware
of the problems which have afflicted New York, and few investors
who are not aware of problems besetting certain other major cities.
Furthermore, investors now see the current problems of
municipalities reflected in the price of the bonds they own.
Formerly, the secondary market for securities was relatively
immune from price changes other than those induced by general
shifts in market conditions. But now bond prices actively
reflect the market's assessment of the issuer's current fiscal
prospects. To assure these assessments are correct, it is
essential that the information relied upon is sound.
Even the strongest advocate of free markets would concede
that the market functions best where the best information is
available. And, in my view, that demands uniform Federal
legislation.
Before turning to the specifics of such legislation,
let's take another look at Usery. Let me say at the outset
that I believe Federal disclosure legislation, even if
predicated upon the Commerce Clause, would not be precluded
by the Usery decision.
In recent years, in case after case, the Commerce Clause
has been interpreted to give Congress authority over whatever
could remotely or indirectly be linked to interstate commerce.
But I do not believe that the Court in Usery intended to roll
back the Commerce Clause to 1824 as Mr. Justice Brennan suggests.
It has simply returned to that narrower concept of interests
commerce which prevailed not so many years ago.
On the facts of Usery, the Court saw no evidence of
interstate commerce other than in the generalized sense that
every economic transaction in our inter-related economy may
have some indirect bearing on other transactions in the
- 7 economy. What the Court saw, in the words of Mr. Justice B
Rehnquist was a simple attempt by the State to "structure *
integral operations in areas of traditional Government
functions," and that activity, the Court held, was not interstate
8Late
commerce.
Integral is the key word, and Webster says, pertains to
"an essential part of the whole." If I may be so bold I
think — based on the facts and the context — that Justice
Rehnquist should have used the term "internal," and held that
the Tenth Amendment precluded the Federal Government from
intruding in the relationships between a state and its citizens.
However, in my view, it is quite a different matter when a
state or local government — even in the exercise of a governmental function so traditional as borrowing money — chooses to
deal with citizens of other states. In invoking a key benefit
of our Federal system — free and unfettered access to the
financial resources of citizens of other states — it hardly
befits a state to suggest that the Federal authority which
guarantees the access in the first place does not permit the
Federal Government to insure that such access is on fair and
reasonable terms.
I've been away from the law for two years and can no
longer cite from memory any of the many judicial articulations
of the principle that our Constitution is a living document
and must be construed with a keen eye to the practicalities of
a situation. In my view, it is virtually axiomatic that a
uniform, nationwide system of disclosure will help the municipal
market to the uniform benefit of every participant. I am almost
equally certain that unless such a system is developed, the
municipal market as we know it today won't be with us for very
long, and will be replaced by methods of financing involving
far higher levels of Federal intrusion than those contemplated
by the current proposals for Federal disclosure. It would
indeed be a pyrrhic victory for state's rights and the principles
of Federalism if a broad construction of Usery were to result in
virtual denial of access by state and local governments to
private sources of financing.
In short, I don't see Usery as a roadblock in this area,
and I hope Congress and the Courts will agree. Assuming I am
right, let me turn briefly to the principles which should be
roiiowed with respect to such legislation.
- 8 The fundamental goal of disclosure legislation must be to
assure that the maximum amount of relevant information is
readily available, with a minimum amount of Federal intervention
and a minimum of cost. Disclosure rules and regulations should
enhance the market, not interfere with the market mechanism for
municipal issues. Most important, in order to ensure that
municipal investors are able to make a concise, comparative
analysis of the finances of different issuers, disclosure
legislation must standardize the presentation of the information
being disclosed.
It is the importance of standardization which requires
that a disclosure program be administered at the Federal level.
We have examined carefully the voluntary disclosure approach.
It has been argued that since investors and underwriters are
demanding more information, if the free market were left to
its own devices, the information would be provided by those
issuers which needed market access. We concluded, however that
precisely to assure that the free market mechanism will function
smoothly with respect to municipal issues, it is necessary to
insist upon mandatory disclosure of financial information by
issuers entering the market. It is only by mandatory disclosure
that adequate, uniform, usable information can be assured, and
that its flow to the investing public can be guaranteed.
In designing a disclosure system, we must keep in mind
that the policy trade-offs here differ from those employed in
the corporate area. It is not an overstatement to say that,
under existing law and procedures, the governing principle in
the corporate area is spare no expense to give the investor
every last ounce of protection. In the municipal area, where
such expenses must be directly paid by taxpayers, I do not think
we can or should make a similar choice.
There are many municipalities which do not enter the
capital markets frequently or to a heavy degree, and thus
present lesser concerns to the investing public or to the
proper functioning of our nation's capital markets. There
are many municipal issues which have a relatively limited
market. So that mandatory disclosure does not result in
overkill, we favor the setting of threshold limits below which
disclosure would not be required.
Once the issuers which should disclose have been identified,
the information required of them should be carefully specified
and relatively comprehensive. Some flexibility, of course, is
required, but state and local governments, we believe, are
entitled to have Congress decide the kind of information it is
required to disclose.
- 9I do not believe that municipal issuers should undergo
the same disclosure, filing and clearance and registration
procedures as corporate securities. Such an approach would
impose burdens and costs which outweigh the benefits derived.
Instead, we have generally supported legislation strictly
designed to insure that information — reports and distribution
statements — be prepared and made readily available to the
public.
Let me stress this fundamental distinction even at the
risk of belaboring the point. We do not believe regulatory
measures, intimately involving the SEC in the issuance process,
as it is in the corporate area, are necessary. What is essential
is that informational reports and statements be prepared and
made readily available.
I suggested earlier that I believe sound municipal
disclosure legislation, by insuring the flow of information
essential to healthy markets, will result in a net reduction
in borrowing costs, even after costs of compliance are included.
What I must add, however, is that such benefits are in large
part dependent upon our willingness at the same time to address
the liability issue, calmly, rationally and unemotionally.
In looking at developments in the financial markets over
the last decade or so, few things are more frightening to me
than the growing tendency, fostered by a line of judicial
decisions — hopefully broken by Hochfelder — to bring even
the most frivilous securities claims to court, typically
clothed in the class action lawsuit.
If I may borrow a phrase from the sports pages, the watchword seems to be: "it's not whether you can win or lose, but
whether you play the game." Of course, there are winners ...
and there are losers. Almost invariably, plaintiffs' counsel
gets the grand prize and defendants' counsel the consolation
prize. The losers? Issuers, investors, consumers, the economy
itself, all of which must pay the cost of an extravaganza and
a prize ceremony which makes Montreal look like a small town
carnival.
Broadly speaking, I think we need an over-all reappraisal
of the private action under the securities laws, but I'll save
this point for the securities bar. In the municipal field,
as we face the possibility of new and comprehensive legislation,
we do have the opportunity to incorporate some fundamental
principles.
- 10 First, I think the legislation itself must set forth
with detail and clarity the specific items and methods
of disclosure required. As little as possible must be
left to subsequent regulatory interpretation.
Second, causes of action against an issuer must be
strictly based on violations of the above requirements
and an issuer's exposure limited to actual, out-ofpocket losses.
Third, the legislation should recognize the principle
that potential underwriters' liability will be directly
reflected in the issuer's borrowing costs. If an underwriter can be held liable for an issuer's disclosure,
any underwriter willing to participate at all will
purchase "insurance" against exposure in the only form
our securities laws recognize: retaining more lawyers
and accountants. It may be superficially satisfying
for issuers to know the underwriters seem to be bearing
part of the liability burden, but in the end the issuer
— and thus the taxpayer — will pay a high price for
such satisfaction. It may not be popular in some circles,
but I personally believe that an underwriter should be
relieved by statute of any liability with respect to
disclosures by an issuer unless (1) it conceals actual
knowledge of false disclosures or material non-disclosures
or (2) it provides information to investors other than
that provided by the issuer which is false or materially
misleading.
I began
my remarks today with the suggestion, perhaps somewhat veiled, that there are no easy answers to the problems —
both legal and financial — which face the public sector today.
No wave of a wand will relieve state and local officials from
the intense pressures caused by the imbalance, enhanced by an
inflationary environment, between the electorate's desires on
the one hand and its willingness to pay for them on the other.
No stroke of the pen will resolve — or even materially simplify —
the complex dilemmas facing the lawyer representinga a public body.
At the same time, certain developments do provide a basis
for optimism. There is more and more evidence that the electorate
is beginning to understand both the choices which face us and the
implications of the various alternatives. Citizens at all levels
are beginning to pay more and more attention to the fiscal and
financial affairs of their governments. They are beginning to
demand more facts and beginning to question the hitherto
unquestioned need for more frills, more marginal activities,
more deficit spending. It is incumbent upon public officials
at all levels of government and those who advise them to
recognize this key attitudinal
oOOchange. This is what we're working
toward in Washington and I hope we have your guidance and support.
Contact: L.F. Potts
Extention 2951
August 17, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT NOT LESS THAN FAIR VALUE WITH RESPECT TO
INDUSTRIAL VEHICLE TIRES FROM CANADA
The Treasury Department announced today a.determination
that industrial vehicle tires from Canada are not being, nor
are likely to be, sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended. Notice of
this decision will appear in the Federal Register of August 18,
1976.
A "Notice of Tentative Negative Determination" was published in the Federal Register of May 27, 1976. The product
description, included for clarity in the notice, is that of
"press-on, solid, rubber tires, cured or bonded to steel
base bands, used on off-the-highway work vehicles, whether
or not self-propelled." Tires made of urethane or rubber
compounds were not included in the class or kind. Customs
made comparisons on approximately 75 percent of the sales
by the sole Canadian exporter during the period of investigation (July 1 through December 31, 1975) and found no
margins.
Imports of the subject merchandise during calendar
year 1975 amounted to approximately $1 million.
o 0 o
WS-1031
FOR IMMEDIATE RELEASE
Contact: H. J. Hintgen
Extension 2427
August 17, 1976
TWO SERIES OF 7-3/8 PERCENT TREASURY NOTES
DUE 2-15-81 TO BE CONSOLIDATED
The Treasury has announced that the two series of 7-3/8
percent Treasury notes both maturing February 15, 1981, will
be consolidated on its records as of September 1.
According to the Treasury, this action is being taken
to avoid market confusion and to facilitate transactions in
these securities during the remaining period to maturity.
Under the consolidation, the 7-3/8 percent Treasury notes,
Series E-1981, will be merged with those of Series C-1981.
In effect, the Series E-1981 notes will be treated as if
they had been an additional issue of the Series C-1981.
Amendments to the Treasury circulars governing these
issues will be published in the Federal Register prior to
the effective date of the consolidation to formalize the
actions. Under its plan, the Department will merge all
accounts of the two series under Series C-1981 and cancel
all unissued stock of the Series E-1981. In addition, book
entry accounts for these issues will also be consolidated,
and after the effective date, transactions involving notes
of either series will he handled as Series C-1981 transactions.
As a result of this consolidation, the two series of
notes will become fully interchangeable in all trading in
the market.
oOo
WS-1032
Jhe Department of theJREASURY
ELEPHONE 964-2041
INGTON, D.C. 2022
FOR IMMEDIATE RELEASE
August 18, 1976
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2,900 million of 52-week Treasury bills to be dated
August 24, 1976, and to mature August 23, 1977, were opened at the Federal
Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $1,950,000)
Investment Rate
Price
Discount Rate
(Equivalent Coupon-Issue Yield)
High
Low
Average -
94.337
94.289
94.304
5.601%
5.648%
5.633%
5.93%
5.98%
5.97%
Tenders at the low price were allotted 77%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
29,140,000
3,702,470,000
67,140,000
104,770,000
41,135,000
5,025,000
460,270,000
39,170,000
63,730,000
19,145,000
29,210,000
315,820,000
$
23,140,000
2,210,970,000
40,140,000
94,770,000
17,135,000
5,025,000
186,470,000
28,480,000
53,730,000
13,145,000
10,210,000
216,820,000
TOTAL
$4,877,025,000
$2,900,035,000
The $2,900 million of accepted tenders includes $ 770 million of
noncompetitive tenders from the public and $ 673 million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities accepted at the average price.
An additional $50 million of the bills will be issued to Federal Reserve
Banks as agents of foreign and international monetary authorities for new cash.
WS-1033
FOR IMMEDIATE RELEASE
Contact: H. J. Hintgen
Extension 2427
August is, 1976
ENGRAVED TREASURY SECURITIES GIVING WAY TO BOOK-ENTRY
The Treasury Department today reported that book-entry
securities now represent 81.6 percent, or/$320.4 billion,
of the marketable public debt. Of the outstanding marketable
Treasury issues,86 percent of the Treasury bills, 78 percent
of the Treasury notes, and 66 percent of the Treasury bonds
are in book-entry form, rather than in engraved certificates.
In a progress report on the program to accelerate expansion of the book-entry system, as announced by Secretary
William E. Simon on March 31, Treasury now proposes that the
objectives of a certificateless system for marketable Treasury
securities be accomplished in two phases, with the first
phase directed at Treasury bills.
It is tentatively planned that beginning in the latter
part of 1976, the Treasury, with one exception, will issue
52-week bills only in book-entry form. The exception is
for a small number of institutional investors, prevented
either by law or by regulation from holding securities in
book-entry form, to purchase bills of the $100,000 denomination
for a limited period of time.
It is anticipated that similar offerings of 26-week
and 13-week bills, in book-entry form only, would follow
during the first nine months of 1977. Book-entry bills for
these issues would be available through member banks of
the Federal Reserve System and the Department of the Treasury.
Tenders for book-entry bills to be issued by Treasury
could be submitted either directly or through a Federal
Reserve Bank. While the accounts would be established and
maintained without charge to the investor, there would be
some limitations on the services the Treasury would provide.
WS-1034
- 2 -
It is recognized that the implementation of this plan
will have a far-reaching effect on the marketing of Treasury
securities, and will be of interest to the general public
The book-entry procedure was initiated in 1968 by the
Federal Reserve Banks for the accounts of commercial bank
members of the Federal Reserve System. It was later extended
to include individuals and institutions. The book-entry system
reduces the burden of paperwork created by the mounting volume
of public debt transactions; it protects against loss, theft,
and counterfeiting; and it substantially reduces the cost of
issuing, storing and delivering Treasury securities.
o 0 o
FOR IMMEDIATE RELEASE
August 19, 1976
AMENDED RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
The announcement yesterday of the results of the
52-week Treasury bill auction is corrected to state
that the $2,900 million of accepted tenders included $97 million
of noncompetitive tenders from the public.
All other particulars in the announcement of August 18
remain the same.
# # #
WS-1035
©
:ederai financing bank
—•
</> CM
WASHINGTON, D.C. 20220
<u o
n" CM
FOR IMMEDIATE RELEASE
August 19, 1976
Summary of Lending ActivityAugust 1 - August 15, 1976
The Federal Financing Bank lending activity for the
period August 1 through August 15, 1976 was announced as
follows by Roland H. Cook, Secretary;
On August 2, the Federal Financing Bank made an advance
to the Chicago, Rock Island and Pacific Railroad Company in
the amount of $2,916,725. The maturity is June 21, 1991
and the interest rate is 8.145%. The loan is guaranteed by
the Department of Transportation.
The National Railroad Passenger Service (Amtrak) made
the following drawings from the FFB:
Date
Note #
8/2
8/10
8/10
6
6
7
Amount
Maturity
$12,000,000
3,000,000
3,000,000
Interest Rate
10/1/76
10/1/76
9/13/76
5.423:
5.436%
5.436%
Amtrak borrowings from the Bank are guaranteed by the Department
of Transportation.
The Bank made the following loans to utility companies
guaranteed by the Rural Electrification Administration:
Interest Rate
Date
Borrower
Amount
Maturity
8/2
Oglethorpe Electric
Membership Corp.
$5,482
12/31/10
8.205
Cooperative Power
Association
6,150
12/31/10
8.205%
Central Louisiana
Telephone
379
12/31/10
8.170%
Colorado-Ute Electric
Association
6,000
12/31/10
8.138%
Tri-State Generation
§ Transmission Assn.
4,958
12/31/10
8.122%
8/2
8/4
8/11
8/12
Interest payments on the above REA loans are made on a quarterly
basis.
WS-1036
- 2On August 3, the U.S. Railway Association (USRA) borrowed
$2,482,353.21 against Note #8. The loan matures April 30,
1979, and bears interest at a rate of 7.219%. USRA borrowings
from the FFB are guaranteed by the Department of Transportation.
The Student Loan Marketing Association (SLMA) made the
following borrowings:
Date Amount Maturity Interest Rate
8/3 $20,000,000 11/2/76 5.416%
8/10
20,000,000
11/9/76
5.448%
SLMA borrowings are guaranteed by the Department of Health,
Education and Welfare.
The General Services Administration made the following
loans from the Federal Financing Bank:
Date Series Amount Maturity Interest Rate
8/4 M $ 491,334.26 7/31/03 8.319%
8/13
L
1,444,143.98
11/15/04
8.236%
On August 4, the FFB paid $226,486,268.83 to the Secretary
of the Treasury for New York City Note #11. The face amount
of the note is $225 million and bears interest at a face
rate of 7.04%. The note matures May 20, 1977. The effective
rate of return to the FFB is 6.165%. The Secretary of the
Treasury made the loan to New York City under the New York
City Seasonal Financing Act of 1975.
On August 5, the FFB advanced $14 million at 8.150%
interest to St. Charles Association, a "new community" in
Maryland. This loan is guaranteed by the Department of
Housing and Urban Development and matures March 1, 1995.
On August 12, the Bank advanced $28,910.89 to the
Government of China. The maturity of the loan is December
31, 1982. The interest rate is 7.368%. The borrowing is
guaranteed by the Department of Defense under the Foreign
Military Sales Act.
On August 13, the Tennessee Valley Authority borrowed
$40 million from the Bank. The loan matures November 30,
1976; and bears interest at a rate of 5.405%.
Federal Financing Bank loans outstanding on August 15,
1976 totalled $24.5 billion.
# # #
FOR IMMEDIATE RELEASE
August 19, 1976
PAUL TAYLOR NAMED
DEPUTY FISCAL ASSISTANT SECRETARY
Secretary of the Treasury William E. Simon
today announced the appointment of Paul Taylor,
a Treasury career official, as Deputy Fiscal
Assistant Secretary of the Treasury. He succeeds
Sidney Cox, who recently retired.
Mr. Taylor is a native of Washington, D. C.,
and attended schools in that city. He received
degrees from Strayer College and Southeastern
University, majoring in accounting and business
administration.
Mr. Taylor's entire work career has been with
the Treasury. He has held a number of positions
including Assistant Commissioner for Governmentwide Accounting in the Bureau of Government Financial Operations. Immediately prior to this present
appointment, he served as Assistant Fiscal Assistant
Secretary.
Mr. Taylor has received the Department's
Meritorious Service Award.
He is married to the former Carolyn Penn of
Washington, D. C. They have a son and four daughters
and reside in Lanham, Maryland.
0O0
WS-1037
flie Department of
WASHINGTON, D.C. 20220
theTREASURY
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
August
lg#
^^
RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted $2,502 million of $4 292
million of tenders received from the public for the
2-year notes, Series Q-1978, auctioned today.
The range of accepted competitive bids was as
follows:
Lowest yield
Highest yield
Average yield
T
ntereSt rate on
^
c c/o^"
ing prices. ^ ^
^
^ ^
6.59%
6.69%
6.67%
the notes wil1 b
YieldS
Low-yield price 100.065
High-yield price
Average-yield price
rGSUlt
1/
e 6-5/8%. At
in the
^llow-
99.880
99.917
The $2,50 2 million of accepted tenders includes 20%
<\A\he.™ount
2 f n o t e s b i d f o r a t t h e highest yield and
»J4J million of noncompetitive tenders accepted at the
average yield.
^uIn addition' $414 million of tenders were accepted
at the average-yield price from Government Accounts and
Federal Reserve Banks for their own account and as agents
ror foreign and international monetary authorities in exchange for notes maturing August 3 1 , 1976 ($204 m i l l i o n ) ,
and from Federal Reserve Banks as agents for foreign and
international monetary authorities for n e w cash ($210 million)
a+.
1/ Excepting 2 tenders totaling $510,000
WS-1038
Department of theTREASURY
INGTON, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
August 23, 1976
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,600 million of 13-week Treasury bills and for $3,600 million
of 26-week Treasury bills, both series to be issued on August 26, 1976,
were opened at the Federal Reserve Banks today- The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing November 26, 1976
26-week bills
maturing February 24, 1977
Discount Investment
Price
Rate 1/
Discount Investment
Price
Rate
Rate 1/
5.28%
5.28%
97.288
97.275
97.280
Rate
High 98.692 a/ 5.118% 5.26%
Low
98.686
5.142%
Average
98.687
5.138%
5.364%
5.390%
5.380%
5.59%
5.62%
5.61%
a/ Excepting 2 tenders totaling $710,000
Tenders at the low price for the 13-week bills were allotted 85%.
Tenders at the low price for the 26-week bills were allotted 15%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
. Received
|
Boston
$
42,020,000
New York
4,453,375,000
Philadelphia
22,055,000
Cleveland
29,885,000
Richmond
27,225,000
Atlanta
39,790,000
Chicago
277,445,000
St. Louis
44,700,000
Minneapolis
41,345,000
Kansas City
32,020,000
Dallas
42,220,000
San Francisco 327,025,000
TOTALS$5,379,105,000
Accepted
$
20,420,000
2,279,205,000
20,840,000
29,495,000
22,040,000
37,985,000
67,405,000
22,250,000
7,345,000
27,335,000
17,220,000
50,660,000
Received
\
Accepted
9,605,000
: $ 49,705,000 $
3,332,920,000
: 5,465,015,000
8,600,000
8,175,000
:
113,995,000
13,995,000
J
40,040,000
11,340,000
J
23,255,000
'. 23,255,000
:
519,170,000
60,070,000
:
38,110,000
13,110,000
::
:
48,250,000
24,250,000
.
37,885,000
25,185,000
:
28,960,000
15,960,000
: 311,440,000
63,190,000
$2,602,200,000 b/$6,684,425,000 $3,601,055,000c/
y Includes $ 362,545,000 noncompetitive tenders from the public.
SJ Includes $ 176,310,000 noncompetitive tenders from the public.
If Equivalent coupon-issue yield.
WS-1039
FOR RELEASE AT 4:00 P.M.
A u g u s t 2^
lgJ6
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 $6,100 million , or
thereabouts, to be issued September 2, 1976, as follows:
91-day bilis (to maturity date) in the amount of $2,500 million, or
thereabouts, representing an additional amount of bills dated June 3, 1976,
and to mature December 2, 1976
(CUSIP No. 912793 C4 6), originally issued in
the amount of $3,503 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,600 million, or thereabouts, to be dated September 2, 1976,
and to mature March 3, 1977
(CUSIP No. 912793 E8 5).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 2, 1976, outstanding in the amount of $6,092 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,506 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, August 30, 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-10A0
(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. 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 September 2, 1976, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing September 2, 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 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.
o0o
STATEMENT OF THE HONORABLE DAVID R. MACDONALD
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT, OPERATIONS AND TARIFF AFFAIRS)
before the
SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE COMMITTEE ON GOVERNMENT OPERATIONS
August 24, 1976 9:30 A.M.
Mr. Chairman and Members of the Subcommittee:
Thank you for this opportunity to appear before the
Subcommittee and testify concerning the Treasury Department's
role in combating the drug abuse problem.
While any discussion of Treasury's anti-narcotics
activities must include a reference to the conventional
law enforcement efforts of some of our bureaus, today I
would like to focus on some of our actions related to the
financial aspects of the drug traffic.
Of the Treasury bureaus, the U.S. Customs Service
has, of course, the major drug enforcement responsibilities.
Since, however, Commissioner Acree has just testified
concerning Customs' efforts, there is little point in my
commenting on them. The statistics on drugs seized at
the border attest to the excellent contribution that
Customs personnel are making to the Federal drug effort.
The Bureau of Alcohol, Tobacco and Firearms is also
playing a part in the anti-drug effort. I understand that
the BATF field offices are maintaining close liaison with
their DEA counterparts and that their cooperation has been
good. Apparently, in recent years, there has been an
increasing link between firearms violations and drugs.
Traffickers frequently have guns to protect their inventory
and money. If they are convicted felons or if the firearms
in their possession have been modified, it is likely that
a Federal violation has occurred.
WS-1041
-2Regardless of the success of our agents in apprehending
drug traffickers who violate laws within Treasury's area
of jurisdiction, I believe that the financial aspects of
the drug trade have been, to a large extent, neglected by
law enforcement agencies. The traffic in illegal drugs is
an international industry that encircles the world. In
the United States, it is "big business." At the retail
level alone, it generates annual gross receipts estimated
to be several billion dollars. Moreover, while the high
level trafficker can avoid handling the narcotics, he
cannot stay away from the flow of money. Like most
criminals, he is in business for profit.
While I am alarmed and concerned by the growth of
the market for illegal drugs, I am also surprised that so
large an industry can be quite successfully concealed.
The activities of legitimate businesses that gross far
less are very visible in our communities. For example,
while the value of the annual retail sales of illegal
drugs has been estimated to be upwards of $10 billion,
the 19 74 sales of the A&P grocery chain amounted to less
than $7 billion. To make those sales, A&P required more
than 3,000 stores, 100,000 employees, and $200,000,000
in working capital and recycled billions of dollars
through the banking system.
As a result of our perception of the financial
aspects of drug trafficking, late last year, we contacted
DEA and suggested a joint effort to gather additional
information about the money side of the business. Because
Mexican heroin has been a dominant factor in the drug
market, it was decided to concentrate on Mexican related
transactions. DEA agents were requested to make a special
effort to gather financial information pertaining to
traffic with Mexico; and in addition, Treasury and DEA
personnel undertook to gather data on the currency flow
along the Mexican border.
Even though this joint effort has not been completed,
the data gathered thus far from the Federal Reserve
System, commercial banks, and DEA field agents, tend to
confirm the general belief that the drug traffic is a
multi-billion dollar business in the U.S. In addition,
information supplied by DEA indicates that while a large
number of relatively small operations are involved at the
lower levels of the drug distribution system, the smuggling
and wholesale distribution are dominated by large, well
organized and financed conspiracies.
-3Our study disclosed that for 12 months ending
October, 1975, the Federal Reserve offices in San Antonio,
El Paso, and Los Angeles, had taken in about $629 million
more in currency than they had placed into circulation.
San Antonio and El Paso, which have relatively small
Federal Reserve offices, accounted for $486 million of
that total. Further investigation diclosed that most
of the surplus of currency received by those two Federal
Reserve banks in Texas stemmed from Mexican banks.
The presence of a large surplus of U.S. currency in
Mexico is probably due to a combination of factors. One
of the more obvious would be expenditures by U.S. tourists
visiting Mexico. The Banco de Mexico has reported that
foreign tourists spent a total of about $801 million in
Mexico in 1975. In our opinion, however, only a small
part of that amount should be attributed to expenditures
made in U.S. currency. The bulk of expenditures by
tourists would very likely have been made by traveller's
checks, credit cards, and various other currencies.
Consequently, while we realize that our analysis is
by no means conclusive, we believe that it tends to give
additional support to the hypothesis that hundreds of
millions of dollars in U.S. currency are taken into Mexico
to pay for drugs that are being smuggled into the U.S.
It is my understanding that information DEA has gathered
during the course of some of its investigations also
supports this view.
For example, in one case involving a large trafficking
organization that dealt primarily in cocaine and marijuana,
boxes of currency were carried into Mexico to pay for
drugs and were deposited in Mexican banks. Banking records
in this country^ indicate that millions of dollars of this
currency were later shipped by a Mexican bank to one of
its correspondent banks in the U.S. for credit to the
Mexican bank's account at that U.S. bank. It was established
that the leader of the organization then used the U.S. bank
to move more than $1,500,000 of this money to one of his
Swiss bank accounts.
The financial operations of the ring utilized more
than 20 bank accounts located in various cities in the
U.S., Mexico, the Bahamas, Canada, and Switzerland, as
well as in other European and Latin American countries.
It has been alleged that the organization, at one time,
held more than $250 million in various Swiss and Mexican
bank accounts.
-4I understand that DEA is currently in a position to
supply additional case material that would further illustrate the large amount of currency involved not only in
traffic with Mexico but also the smuggling of drugs from
other countries.
Other indications of the volume of the financial
transactions associated with the sale of illegal drugs
are contained in reports on drug activity in New York.
DEA agents have stated that they have seen bank security
films, taken during regular business hours, showing
people walking into a bank with shopping bags full of
what appeared to be currency. It has also been alleged
that, for small commissions, a number of bank employees
have exchanged millions of dollars for drug dealers.
The traffickers brought in a large quantity of bills of
smaller denomination and exchanged them for quantities
of 50 and 100 dollar bills.
There have been other allegations that, in one
instance in Florida, a trafficker periodically deposited
suit cases of currency in a bank account.
The above information indicates to me that we should
be directing more of our energies, in both the domestic
and international areas, toward the identification and
analysis of the financial transactions of drug dealers.
Treasury has already taken certain steps in that direction.
As a result of our efforts in certain international
meetings, we have been instrumental in having the UN
Commission on Narcotic Drugs adopt a U.S. proposed
resolution urging governments which have not already done
so to make the financing of narcotics trafficking a
punishable offense and, in addition, to exchange information
that would be helpful in identifying persons committing
such offenses. Subsequently, in June, 19 76, the resolution
was adopted unanimously by the UN Economic and Social
Council, and the UN Secretary General is currently notifying
UN members of the action taken. The law enforcement agencies
of more than 100 foreign countries could be affected by
that resolution. Mexico was a co-sponsor.
-5Also on the international front, Treasury played a
vital role in the negotiation of the U.S. - Swiss Mutual'
Assistance Treaty in Criminal Matters. That treaty which
was recently ratified by the Senate, will be effective in
January, 1977. It should prove to be a significant step
forward in international cooperation in narcotics investigations. It will expedite the exchange of information concerning alleged drug traffickers even while a case is still
in the investigatory stage. Under the treaty, Swiss bank
information should become much more readily available to
U.S. law enforcement authorities.
In addition, since most of the major drug traffickers
are engaged in organized criminal activity, as defined in
the treaty, the treaty may be used in criminal tax investigations of traffickers when information from Switzerland
is required. The IRS will be able to request the Swiss,
through our Department of Justice, to provide bank records
and other financial information essential to such investigations .
I would also like to briefly discuss the Treasury
Department's activities stemming from the so-called Bank
Secrecy Act. I believe that with appropriate implementation
the Act can become a very effective tool in our fight against
drug traffickers on both the domestic and international fronts.
•
»
In 1970, when Congress drafted and enacted this legislation as Titles I and PI of Public Law M-508, it was
expected that the Act would be useful in combating many
different kinds of criminal activity, especially those with
international aspects. Nevertheless, it was generally
believed that its most important contribution would be the
support it would provide the IRS. But, in view of the
growth of the drug problem in recent years, we may have
to reevaluate the situation. In looking for more effective
means to halt the growth in drug trafficking, we are
beginning to see the Act in a new light. In my opinion,
its potential as a major resource in Federal efforts
against large-scale dealers and smugglers has not been
generally recognized.
The Treasury regulations that were issued to implement
the law require financial institutions to maintain certain
basic records of transactions in excess of $100. These
records can be valuable in drug related investigations.
IRS needs the records in its tax investigation of traffickers,
-6and DEA needs them to trace the financial transactions
that can document large-scale conspiracies similar to the
Mexican case that I previously referred to.
The regulations also require domestic banks and
other financial institutions to report unusual currency
transactions in excess of $10,000 to the IRS. We know
that, since the drug traffic is mainly a cash-and-carry
business, large volumes of currency are generated. This
currency must be recycled through the banking system. If
it is recycled directly through domestic banks, it should
cause the banks to file the prescribed currency transaction
reports.
In view of the reporting requirement, very few
traffickers are going to risk taking a large volume of
currency into a bank and request that it be changed into
larger denominations, cashiers checks, or certificates of
deposit unless they have made special, illegal arrangements
to evade the reporting requirement. The fact, however, that
such arrangements are necessary and may result in additional
severe criminal penalties is, in itself, a deterrent to
traffickers and makes their illegal acts more difficult to
complete successfully.
Another provision in the regulations requires all
travellers entering or leaving the United States to file
a report with Customs if they are carrying currency and
other monetary instruments in excess of $5,000- Customs
has already made effective use of this provision in
connection with drug related cases. Customs can seize
and forfeit the currency involved when there is an apparently
willful failure to report it. There is no need to prove any
other violation. Customs has had hundreds of thaudands
of dollars of drug related money forfeited under this authority.
The requirement that travellers report the movement
of currency to Customs will be even more useful in the
anti-narcotics effort if the provision in Title IV of
S. 3411, President Ford's "Narcotics Sentencing and Seizure
Act of 1976" are passed and enacted. The President's bill
would clarify the law by specifying that a willful attempt
to take more than $5,000 out of the U.S. without reporting
it is a violation. In addition, it would give Customs, in
"exigent circumstances", the explicit authority to make
warrantless searches of travellers leaving the United States
where there is probable cause to believe the reporting
requirement has been violated. Currently, the law implies
-7that, if there is reason to believe that a violation is.
about to occur, a warrant must be obtained before a search
for unreported currency can be made. This is impractical.
Frequently, the information that would be necessary to apply
for a warrant does not come to light until just before a
courier is about to leave the country when there is not
enough time to obtain the warrant. Since the flow of
currency in drug smuggling operations is usually out of
the United States, the benefits to drug enforcement from
the proposed changes are obvious.
You may be interested in knowing that, some persons
who are on record with Customs and DEA as possible drug
violators have filed reports indicating that they have
transported currency in excess of $5,000 into or out of
this country. This information is being made available
to DEA as well as to the IRS.
My office has been delegated the responsibility for
the overall administration and coordination of the Treasury
regulations that govern the reporting and recordkeeping
requirements X have been discussing. In that context, I
have proposed that a small unit be established in my office
to correlate and analyze the domestic currency reports sub-^
mitted to the IRS by banks and the reports of the international transportation of currency filed with Customs.
It is-essential that such reports, together with any other
related information in Customs and IRS files, be thoroughly
analyzed so that we can give DEA and other Federal agencies
as much assistance as possible in their enforcement missions.
Looking toward the future, I would hope that all
Federal agencies charged with the responsibility for
investigating narcotics trafficking and other organized
criminal activities would focus on the financial aspects
of such activities. In my opinion, success in such investigations will require personnel with substantial
financial and accounting backgrounds, as well as organizational structures that will attract them.
It is possible that the Treasury Department with its
large number of investigators with financial expertise and
its training capabilities may be able to provide DEA with
some assistance in this area. We stand ready to do whatever
********
we can to help.
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE GEORGE H. DIXON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SENATE COMMITTEE ON FINANCE
WEDNESDAY, AUGUST 25, 1976, 10:00 A.M.
Mr. Chairman, I am pleased to appear here today, as Acting
Secretary of the Treasury, to testify in support of S.16 25,
President Ford's proposal to renew the General Revenue Sharing
program. The Administration believes that revenue sharing has
worked exceptionally well in responding to the needs which it
was designed to meet. We strongly urge that the program be continued in its broad general outlines, as proposed by the President in his message to Congress in April of 1975.
Since General Revenue Sharing was enacted in 1972, it hasmade available over $26 billion to States and communities throughout the Nation. These funds have done much to strengthen the
viability of our Federal system of Government, a system that is
predicated upon the shared exercise of powers and responsibilities.
Revenue Sharing has contributed to a revitalized Federalism by
shifting some resources to those governments closest to the people, where there is often a clearer perception of the needs of
citizens. Simply put, some tasks are better performed by State
and local governments, instead of being directed from Washington.
Revenue Sharing has placed funds where need exists. It has
given a greater measure of assistance to our hard-pressed center
cities than it has to their more prosperous suburbs. It has
aided low income States relatively more than those with higher
income populations.
The program has been free of the costly, and sometimes counter-productive, bureaucratic red tape associated with Federal aid
programs. Small and rural communities, which often benefit little
from other Federal assistance, can participate in revenue sharing
without engaging in expensive and highly competitive "grantsmanship."
WS-1042
- 2 Mr. Chairman, we believe that upon evaluation the Committee
will find that S.1625, the Administration's renewal proposal, is
balanced and well reasoned. It leaves unaltered what has worked
and offers improvements in the areas of public participation,
reporting and publicity, civil rights, and allocation of funds
where experience has shown that change will enhance the program.
S.1625 would extend the funding of General Revenue Sharing
for five and three quarter years — a time frame which assures
sufficient certainty to state and local recipients while permitting further Congressional and Presidential review of the program's performance.
The Administration bill does propose one important modification in the formula — lifting the 145% maximum per capita constraint on local entitlements to 175% in five increments of six
percentage points each. This amendment would direct more money
into some needy large cities and, coupled with the proposed $150
million annual funding increments, would not cause a net dollar
loss in funding to more than a handful of jurisdictions now benefitting from the constraints.
In the civil rights area, our renewal proposal would provide
the Office of Revenue Sharing with a more flexible array of sanctions to be used where needed to achieve compliance. This change
is necessary to assure that flexibility exists to withhold all
or part of a government's entitlement. It can be argued that the
existing statutory framework does not permit partial withholding.
Along with the non-discrimination requirement, reporting and
publicity standards are other major Federal restrictions attached
to use of General Revenue Sharing entitlements. We believe it is
important to improve their effectiveness. S.1625 would give more
discretion to the Secretary of the Treasury to prescribe reporting and publicity requirements that are varied by type of recipient government. This will improve the availability and quality
of information while not imposing unneeded burdens on our States
and communities.
The Administration is proposing one additional closely-related
requirement: That recipient units assure the Secretary of the
Treasury that a public hearing or some appropriate alternative
means is provided by which citizens may participate in decisions
concerning the use of revenue sharing funds. This provision will
help the revenue sharing program better accomplish its goal of
bringing government closer to the people.
- 3 We think that the changes we are urging in these areas will
serve their purpose without putting an unnecessary burden on
States and communities of diverse size and with varied political
processes. Strict and pervasive requirements are contrary to the
goals of the General Revenue Sharing program and would reduce its
effectiveness.
As this Committee is fully aware, the House of Representatives
has passed HR.13367, which would extend the General Revenue Sharing
program for three-and-three-quarter years. The Administration's
reaction to the House action was summarized by President Ford on
June 10th. He expressed his pleasure that the House had voted to
extend the program in a manner which preserved the basic concepts
of revenue sharing. The President urged, however, that the Senate
examine the House bill in light of the recommendations contained
in S.1625.
The basic differences between the Administration's renewal
measure and the legislation passed by the House can be summarized
as follows:
- The Administration has recommended extension for five-andthree-quarter years, while the House bill would only continue the program for three-and-three-quarter years.
- S.1625, the Administration bill, would raise the maximum
per capita constraint gradually to 175%. The House bill
would continue the constraint at 145%.
- The Administration measure would continue to provide for a
$150 million annual increase in funding while the House bill
would freeze funding at $6.65 billion annually.
- The House bill would set new standards of eligibility for
jurisdictions to participate in the program while the Administration would continue the present standards.
- HR.13367 would greatly expand Federal requirements governing the manner in which States and localities publicize and
report receipt and use of revenue sharing funds. The Administration proposal, while requiring public hearings, takes
a much more flexible approach in these areas.
- The House passed bill mandates new statutory standards in
the civil rights area. The non-discrimination sanctions
of the current law are to be applied to all activities of
a government unless it can be shown by "clear and convinc-
- 4 ing evidence" that shared funds are not involved "directly or
indirectly" in a discriminatory activity. In addition, certain
administrative actions have to take place within specific statutory time limits. The Administration bill, while strengthening
the Secretary's enforcement powers, would not further expand the
existing broad prohibition against discrimination in activities
funded through revenue sharing and does not set a statutory timetable.
I would like to discuss the differences in approach I have
noted and state the reasons we prefer the Administration's recommendations .
If revenue sharing funds are to be spent wisely, it is important that recipients have assurance that a level of funds will be
available to them over time. At the same time, there is a need
to periodically re-evaluate the program. The Administration considers the five-and-three-quarter year authorization as an appropriate balancing of these concerns.
The continuation of the $150 million annual increases in the
level of funding also makes good sense. It provides a cushion
against inflation and, by placing a little more money in the pot,
reduces the impact of reductions on recipients whose entitlements
are lowered by data changes or the proposed changes in the maximum
constraint.
The Administration strongly urges that the Senate eliminate
Section 7 of HR.13367, which sets new standards of eligibility
for recipient participation in the GRS program. While we recognize the desirability of restricting eligibility to truly active
and general purpose governments, we do not believe that the House
bill, or any other proposal we have seen to date, does so effectively. Essentially Section 7 would have little impact, yet it
would place considerable administrative burden on the Census Bureau
and the Treasury Department. Further, no serious inequity results
from the distribution of small sums of shared funds to those governments considered by some to be relatively inactive.
We believe that the burden created by the new publicity, reporting, public participation, and auditing requirements in HR.13367,
far exceeds their positive impact. The expanded and detailed standards set forth are onerous and would be costly to both recipients
and the Federal Government.
A careful look at the requirements of the House bill will show
that the changes proposed are detrimental. Revenue sharing would
lose much of its attractiveness as a simple and efficient Federal
- 5 assistance program. While some discretion is given to the Secretary of the Treasury to waive certain requirements in the House
bill, this limited flexibility does not cure many of the difficulties we foresee. Let me quickly touch upon some of the changes
that would be mandated by the House:
- Greatly expanded Proposed and Actual Use Reports; a new
summary on the proposed official budget of the recipient;
a narrative on the adopted budget. These documents must
be published and made available to the public.
- Two public hearings — one on the Proposed Use Report and
one relating revenue sharing funds to the entire budget
would also be required of many governments.
- An annual audit of all of a recipient's jurisdictions'
accounts in accordance with "generally accepted" audit
standards.
The non-discrimination provisions of HR.13367 would change
the legal requirements under which the revenue sharing program
operates. The new burden of proof which has been added to the
statute would lead to substantial uncertainty. In addition, Section 9 of the House measure would require Treasury's response within statutory time limits to findings by other Federal agencies,
State agencies, and Federal and State courts. This response, as
well as other Treasury actions, would have to take place within
specific statutory time limits and could lead to a cut-off of
revenue sharing funds.
The prohibition against discrimination in the current revenue
sharing statute is straight-forward and adequate. To be sure, the
Office of Revenue Sharing has been criticized for delays in the
processing of civil rights complaints. The problem, however, does
not stem from inadequate authority but has largely resulted from
lack of resources. We are committed to correct that situation and
substantial progress has been made.
In summary, the House-passed bill to extend revenue sharing
clearly contemplates much greater costs and restrictions being
placed on recipient governments than the program we know today.
Similarly, revenue sharing would no longer be a Federal domestic
assistance program with a very low cost of administration.
The Administration urges extension of revenue sharing as proposed in S.1625 — without cumbersome new constraints. The vitality of our Federal system of decentralized government requires
- 6 prompt passage of this important renewal legislation.
Mr. Chairman, my colleagues and I will be happy to answer
any questions which you may have.
o 0 o
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
FINANCIAL WOMEN'S ASSOCIATION
OF NEW YORK
AUGUST 12, 1976
Thank you for your warm welcome. I'm particularly
happy to be with, so many old friends because I'd like to
speak with you about the critical economic issues that
confront the nation in this election year and the clear
choice available to the American people.
It is especially important to consider these issues
with members of the financial community whose experience and
knowledge readily enable you to recognize the effects of
imbalanced or poorly conceived, government policies both in
our economy and in our financial system. The health of our
economic system depends very directly on the pursuit of
sensible and well-balanced economic policies by the Federal
government. Such policies can bring about an-environment
that will encourage sustainable economic growth, that would
be relatively free of inflation and that is characterized by
reasonable rates of interest along with robust credit flows
and. high levels of confidence.
Unfortunately, these traits have too frequently not
been the hallmark of our economic system for the past decade,
and, as a consequence, our financial, system has developed
some signs of stress. More importantly, failure to pursue
sensible economic policies by the government in the future
will put our entire economic and political system into
serious jeopardy.
I know that each of us here shaves a common concern
about the future and the continued growth of the remarkable
and dynamic economic system that has given our people the
highest living standards and the greatest prosperity known
to man. And it is clear that unless the American people
rally behind the principles that underlie this system, our
steps will falter. Because far more is involved than the
survival of a few companies, or a few jobs, or whether the
-2price of beef goes up or down over the next few months.
What is at stake is the very survival of our economic freedoms
and along with them our personal and political freedoms as
well.
Abraham Lincoln, referring to the nation's founders,
said, "Surely each man has as strong a motive now to preserve
our liberties as each had then to establish them."
The same holds true today. Our system, while not
perfect, has given Americans the blessings of both liberty
and abundance. That system will continue to be true to us
so long as we are true to it. This means that every citizen
has the duty to ensure that our elected officials pursue
sane and solid and responsible policies that will promote
our economic stability and assure durable growth.
That is why I believe the election of 1976 is one of
the most important in our history -- certainly the most
important in my lifetime. Why do I say that? Because, the
decision the American people make this year at the polls
will determine our nation's course not only for the next
four or eight years, but well into the next century. And
after all the political speeches have been made, and the
editorials written, what that decision will really boil down
to is this - - a choice between the freedom for each of us to
live our lives as we best see fit, or the surrendering of
more of that freedom to an increasingly powerful government
in exchange for a false promise of security and permanent
prosperity. This theme was best described by Gibbon in his
epitaph for ancient Athens. "In the end," he wrote, "more
than they wanted freedom, they wanted security. They wanted
a comfortable life and they lost it all -- security, comfort
and freedom. When the Athenians finally wanted not to give
to society but for society to give to them, when the freedom
they wished for most was freedom from responsibility, then
Athens ceased to be free." That is the issue.
I believe that what this country needs is a political
program that is, in Harry Truman's words, a genuine contract
with the people, a commitment to more than vague good
intentions.
This program does not have to be complicated to be
effective. All it requires is an underlying commitment to
personal freedom.and compassion for those who genuinely need
help. This commitment would be linked to five equally
explicit goals:
-3* Prosperity and economic growth through encouragement
of the private sector that provides jobs and generates the
abundance that pays for government as well.
* Skillful management of economic affairs by creating
an environment of sustained, non-inflationary growth which
will benefit every man, woman and child in our country.
* Redu cing the growth of runaway government spending
which more and more Americans recognize as the biggest
single domestic problem facing our country today.
* Lowering the level of taxation in America. Taxes
are too high for almost everyone. We must reduce the overall
level of taxation so that our vital economy and society are
spared the stultification and decay we have seen in other
societies where the state has consumed an ever larger part
of the national product.
* And the fifth and final goal -- government leaders
who pay less attention to special interests and more to the
general interest by emphasizing national economic priorities
in.developing legislation.
These guidelines would provide the basis for a prosperous
and noninflationary economic environment that would benefit
us all for generations to come.
But what have the American people been offered thus far
in this political campaign? If, indeed, a platform is a
contract with the people, then the platform adopted a few
weeks ago here in New York City is a stark statement of the
principle of spend-spend, elect-elect, inflation, controls,
Digger and bigger government syndrome that has been at the
very root of our economic problems during the postwar period especially the past 10 years -- and still remains alive and
well in Washington, D.C. today.
This platform should really be called "Promises
Promises," for just like Santa Claus, and like all the
platforms from years past, it has something for everybody.
The trouble is, playing Santa with the taxpayer's money^
dispenses neither good will nor integrity. The only thing
it does dispense is pure hypocrisy.
Take a good look at the platform and see what it calls
for:
-4Guaranteed jobs for all at government expense;
National economic planning;
National day care systems;
A mandatory national health system;
A phased-in federal takeover of welfare;
Entirely new programs for transportation;
New public needs employment programs for the cities;
Substantially increased federal payments to education;
Countercyclical aid to state and local governments;
More federal subsidies for public housing;
Higher commodity prices for farmers, yet lower food
prices for consumers. .And then to top it all off, we're
promised a balanced budget.
Isn't it wonderful? There's more money for literally
everything that lives and breathes. The list goes on and
on. But what it all adds up to is bigger and bigger government,
higher and higher inflation, and eventually more unemployment
and greater economic instability.
And in all of this, mind you, not a word about who
would pay for all these programs or even how much they would
cos.t. Well, they do cost, and they're going to cost a lot,
because there is no such thing as a "free" lunch or "free"
education, or "free" health care. In fact, there is no free
anything.
What is the price of these instant cure-alls? The
programs of this platform could easily exceed an additional
$200 billion -- that's $1,000 for every man, woman and child
in America or over one-half of what our federal budget is
today. The average American taxpayer would have to work for
half the year just to support government, and only then
could he start to support himself and his family.
But the platform makes the appealing claim that all
these programs are possible without substantial new inflation,
given a federal policy of full employment, because for
the millions of newly employed people there will be much
higher tax revenues and the deficit will supposedly be
decreased. But how are these people to become employed?
Why, by spending more money of course. This means that the
deficit will not disappear by such steps but will only grow.
So where would the additional needed revenue come from
to balance the budget? It could be raised by borrowing or
taxing from the private sector, but that would only lead to
a loss of jobs in the private sector. The other alternative
would be to inflate the money supply which would merely set
-5set us off on another boom-bust cycle. The supposed cure,
then, turns out to be illusory, and what results is new and
higher inflation which in turn would only lead to a new and
higher level of unemployment.
Furthermore, a return to high levels of inflation will
only serve to put great pressure on our financial system
which has already experienced a rather pronounced shift
towards less liquidity and higher debt over the past decade.
The extensive rebuilding of corporate balance sheets over
the past year has improved the mix of assets, liabilities,
and equity but only back to their 1972 relative composition.
The system is still fairly rigid and less able to absorb the
consequences of poor government policies.
Another wave of inflation with rising interest rates
and falling equity prices will only force more corporate
treasurers into short-term financing for their long-term
needs, will only lower interest coverage ratios further, and
ultimately raise the risk of widespread insolvencies or
bankruptcies. Our financial institutions will find themselves
faced with growing needs for credit just at the time that
serious disintermediation sets in. In other words, a
repetition of the credit cycles that have unfortunately
characterized our economy and our financial system since the
mid-1960s would occur, but starting this time from an even
more highly leveraged overall financial base.
Indeed, repeated waves of credit and economic changes -•
generated by excessive government spending, a proliferation
of costly regulations, large-sized deficits, and too rapid a
growth of money -- would easily rekindle serious price
inflation as well as regenerate very high inflationary
expectations. Eventually, this would result in a process of
excessive debt growth; would make businesses vulnerable to
the inevitable recessions caused by inflation; would subject
many financial institutions to pronounced bouts of disint-ermediation and serious problems of solvency.
In addition to eroding the financial base of our economic
system by an excessive growth of spending and the need to
continuously finance large-sized deficits, there are also
clear calls in the Democratic Platform for more credit on
favorable terms to "needy" groups as well as a closer
"coordination" of Federal Reserve credit policies with the
objectives of the Congress and the President. No matter how
Viewed or how rationalized, these monetary proposals are
nothing more than a veiled call for more money creation and
for greater government influence in the credit allocation
more
process.
dependent
Inflationary
on government,
cycles which
more specially
make our subsidized
institutions
-6credit for this group or that group, and greater pressure on
the Federal Reserve to -- quote -- "be responsive to the
needs of the public" collectively spell out a greater concentration of economic power in the hands of the Federal
government.
To those who would be so quick in making such a change
and who are fond of quoting from the economist John Maynard
Keynes, I suggest to them that they not forget a very critical
passage in the book by Lord Keynes on the Versailles peace
conference:
"Lenin is said to have declared that the very best
way to destroy the Capitalist System was to debase
the currency. . . Lenin was certainly right. There
is no subtler, no surer means of overturning the
existing basis of society than to debase the currency.
The process, engages all the hidden forces of economic
law on the side of destruction, and does it in a manner
which not one in a million is able to diagnose."
If we remove the last vestige of independence from the
Federal Reserve, we will only be encouraging the politicians
to print more money. The moment the monetary mechanism
falls into the hands of the politicians is the moment when
you begin to destroy the economy and the society. Make no
mistake about this, for it is then that the politicians can
pay for everything but have to account to no one. Just
think of where we would be today had we acquiesced to the
persistent 'calls last year by the politicians and the "politicaleconomists" for double-digit growth in the money supply. We
would now be facing a much more serious inflation problem
and on our way to aborting our current economic expansion.
If the independence of the Federal Reserve is eroded,
God help us. The Congress which established the Federal
Reserve in 1913 recognized the vital necessity of having a
monetary authority that was insulated from everyday political
pressures. And yet today we have a clear call to turn the
Federal Reserve into what is really a junior or subordinate
partner of the political process.
Coupled with this move to take over more policy making
authority of the Federal Reserve are specific proposals to
allocate credit to special groups -- by guarantees, by low
interest loans, by direct subsidies. In one way or another,
more political criteria will be injected into the credit
making process. But if our credit mechanism becomes' dominated
by the Federal government, how will it decide who is to get
credit? How will it determine which areas, which industries,
which households, and which businesses are worthy of credit?
-7How will it decide whether a swimming pool in the inner city
is worth more to our society than several new homes in the
suburbs or a small factory in the solar energy field located
in the southwest? How will it choose between an area of
stagnant growth (with high unemployment) or an area of
robust development (that needs capital)? Obviously, control
over credit will greatly influence what we produce as a
nation, which areas will grow, how production is to be
based, where people can get jobs, who is to benefit and who
will have access to this output.
The issues involved here are by no means narrowly
economic. They concern fundamental principles of equity and
of social stability. The trouble with growing government
spending, regulations and credit allocation schemes is that
however good the intentions which underlie the growth, those
intentions are not achieved; that instead, the growth in
government domination makes low-income people worse off,
undermines social cohesion and threatens the very foundation
of a free society.
The outstanding fact is, that in every country in
which the percentage of government domination has increased
there has been a tendency to move toward instability, toward
minority government and toward a threat to a free society.
Have we forgotten the inextricable relationship between our
economic freedom and our social and political freedoms?
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 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 the
system and society disintegrates. I am convinced that our
uniquely creative and productive society will also collapse
if we permit inflation to dominate our economic affairs.
There is no tradeoff between the goals of price stability
and low unemployment as some critics have erroneously claimed.
If we are to increase the output of goods and services and
reduce unemployment, we must first make further progress in
reducing inflation.
-8-
The intensity of my feelings about inflation has
resulted m some critics labeling me as obsessed. However
I am not so much obsessed as I am downright antagonistic '
toward those who consistently vote for bigger deficits
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 as they strive -- too often in a losing
struggle -- to provide the necessities of food, housing
clothing, transportation, and medical attention. 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. It is the most vicious hoax ever perpetrated for
the expedient purposes of a few at the cost of many. And
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
clout to beat the system by keeping their incomes rising
even more rapidly than inflation. When inflation takes over
an economy it is the poorest people who suffer most and turn
to the government. It's an insidious process, because
they become willing clients of the state, and the very
policies which created their misery.
The Democratic party platform then, far from being a
guide to a new prosperity built upon sustained non-inflationary
growth, is m reality a blueprint for economic disaster. By
advocatmgsuch a massive and undesirable federal takeover
of our national economy without even stipulating the means,
the cost, or the method of payment, this platform not only
insults the good faith and intelligence of the American
taxpayer, but.ignores the fundamental lesson of the past
decade: it was these same excessive fiscal and monetary
policies that caused the worst inflation in our peacetime
history which m turn led to the worst recession in more
than a generation.. Our people have paid a terrible price
for that ignorance.
lppri,^niJre^ident Ford> we have a man who knows that real
aaersnip l s n o t a ^ a y s saying yes, because he has had the
havp a ^ *£ S a y J 10 ' T h a n k s "to his prudent policies, we now
HnraKi
chance in a long time to enter an era of
durable economic stability.
-9Our critics term the President's policies "Government
by veto." But it is precisely because the President has
vetoed more than 50 bills passed by the reckless freespending Congress that the taxpayers have saved more than
$14 billion.
Restraint on spending brought about by the President is
one of the reasons inflation has been cut in half, inflationary
expectations have been lessened, and almost 88 million
people are now working, more than at any other time in the
nation's history. In essence, we've come a long wray from
the depths of the recession in 1975 and we're now well
advanced into a period of economic expansion.
The essential point to remember, however, is that the
President acted as he did because he had to. We must never
forget that the other party has controlled both houses
of Congress in all but four years since 1930. During this
campaign the American people are being told we need to try
Eiw ideas, which translates into spending a lot more money
to create many new programs, including public employment,
which will allow us to balance the budget. This is a total
contradiction; more of the same old quack nostrums which have
in reality produced budget deficits in 38 out of the past 46
years. Every time you see the sun rise here in New York City,
be reminded that your Federal Government, spurred by an
undisciplined Congress, has spent more than a billion dollars
of your hard-earned money. And if you think that's incredible,
let me give you some more' unbelievable facts about government.
spending.
Since 1962, our budget has exploded from $100 billion
to a figure that will certainly top $400 billion in 1977.
The government is now growing much faster than our ability
or* willingness to pay for it.
The U.S. Treasury in just the past 10 years has borrowed
half a trillion dollars in the private capital markets.
That's money that was swallowed up by the Washington bureaucrac)
that could and should have been invested in the dynamic
private sector.
Added to that is the suffocating weight of excess
government regulations that are threatening to overwhelm
many small businesses. Government now controls over 10% of
everything we produce in the economy and indirectly controls
almost all of the rest. That translates into a cost to
consumers of $125 billion a year. One-hundred and thirty
million man-hours are spent.just filling out the forms.
-10-
It doesn't take a Ph.D. in economics to realize that
the federal government has become the nation's biggest
single employer, its biggest consumer, and its biggest
borrower, and also the biggest source of inflation in the
United States economy.
I am frankly astonished that whenever our critics are
confronted with such irrefutable evidence proving we have
too much government, they nevertheless plow on trying to
make the case that there is not enough. The casualties of
this misguided logic are jobs.
Free lives, individual lives, productive lives are
built on capital investment, not on the red ink and the
printing press of the government. If we are going to
create the kind of jobs that will keep people permanently
employed, that will meet the needs of a growing labor force
and that will reduce our inflation by expanding our output
of goods and services, then we must equip our workers with
new and efficient plant, -machinery, and tools. These
capital needs of the future are staggering, about $4-1/2
trillion in the next decade -- or about three times as much
as we spent in the last decade.
Savings are the source of this needed capital. But
savings are currently being drained by excessive government
deficits. Resources absorbed by government for its spending
today cannot simultaneously be invested in expanded plant
and machinery to employ more people tomorrow. We cannot
have both bigger government and a healthy expanding private
sector. Government doesn't create wealth -- people do. We
cannot continue to transfer each year an increasing percentage
of our national wealth from the most productive to the least
productive sector of our economy without endangering the
economic future of our children.
If we're really sincere about providing more productive
and lasting jobs for our economy we will only succeed by
strengthening our free enterprise system, and that, I might
add, constitutes the centerpiece of President Ford's program.
This means controlling government spending, getting rid of
excessive and counterproductive regulations, reducing
personal and corporate taxes, and striking a new balance
that favors less consumption and government spending and
more savings and investment. The only way to wage a real
war on poverty is to create jobs in the private sector, not
jobs for bureaucrats.
-11-
In the past, we have looked upon our dynamic free
enterprise system as the Golden Goose that produced all our
blessings and encouraged the self-initiative that has made
our country the envy of the world. But today Congress is
spending faster than the goose can lay its eggs. And should
these policies continue, they will not only steal all the
eggs, but kill the goose itself.
What a tragedy that would be. Just look at what we
would be sacrificing:
* 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
inhuman monster caricature painted by political demagogues,
the American private sector is in reality the mightiest
engine for social progress and individual improvement ever
created.
This is the crucial theme that must be communicated
broadly and deeply into the national consciousness: the
American production and distribution system is the very
mainspring of our nation's strength -- the source of present
abundance and the foundation of our hopes for a better
future.
Yet we could lose it unless we act. Let's face it.
Under the politics of spend-spend, elect-elect we will get
a massive increase in federal expenditures which will
inevitably be followed by a new round of double-digit
inflation, a wrenching recession and serious strains on our
financial system. And that means more cries for government
help and more calls for government intervention. So what
we're talking about is the survival of our free enterprise
system and, more importantly, whether the protection of our
personal liberties can survive in its absence.
-12-
Ladies and gentlemen, the question is, are we going to
promote the individual or the government? We cannot do
both. That is the issue, and our freedom and your children's
is at stake. Do we want more freedom of choice and more
freedom of individual action? Or do we want to see these
freedoms and all the other individual freedoms we hold so
dear gradually erode under more and more- government encroachments on our lives. That is the true, crucial decision
behind the rhetoric and personalities of this election year.
And the choice we make will affect not only our own futures,
and our children's, but the future of our country itself as
America embarks on its third century as the hope and inspiration
of free people everywhere.
Gerry Ford has taken his stand. He's taken a stand to
protect the dignity and freedom of millions of individuals
like yourselves by leading the battle to slow the growth in
government. Control over government spending will"allow you
to keep more of your own money. President Ford has made and
continues to make those tough decisions despite persistent
criticisms, because he knows that it's the hard-working
taxpayers who keep this country going. And those people
need to be protected, not punished. That's the honest way
to run an Administration -- nothing flashy, no gimmicks,
just facing up to the job at hand each day and doing it.
And by succeeding, he's also demonstrated that he understands
what the real meaning of compassion is all about.
Two hundred years ago Thomas Jefferson said, "To
preserve our independence 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 was
the choice 200 years ago and it remains the same today. But
time is now running out. 1976 may be the last opportunity
we will have to stem the tide of big government and thinly
disguised state socialism as practiced -- if not preached -by many in Congress and elsewhere today.
If we love our freedom, then we must be prepared to
defend it. Between now and election day I urge each one of
you to decide how you can most effectively contribute to the
preservation of a society that in 200 years has come to
symbolize man's capacity to attain freedom, prosperity and
dignity. This is an election in which the individual
oOo will make the difference.
efforts of individual citizens
Thank you.
ATMN1STRATT0N POSITIONS
H.R. 10612
TAX RFFORH ACT OF 197^
Rtfyrn'to: Room 4040
|to!w«3 £tafi-Tax Division
(PREPARED FOR USE BY THE HOUSE AND SENATE
CONFEREES IN CONJUNCTION WITH THE
\t
v.
CONFERENCE COMPARISON)
t'
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V
-'. t
-\ '
TREASURY DEPARTMENT
AUGUST 25,
1976
TABLE OF CONTENTS
Title
Page
I & II LAL and Other Tax Shelter Provisions
1
III Minimum and Maximum Tax Changes
IV
V
VI
12
Individual Tax Reductions
14
Tax Simplification
15
Business Related Individual Provisions
16
VII Accumulation Trusts
VIII
IX
X
20
Capital Formation
21
Small Business Provisions
25
Changes in the Treatment of Foreign Income . . .
26
XI Amendments Affecting DISC
33
XII Administrative Provisions
34
XIII Miscellaneous Provisions
XIV
XV
44
Capital Gains and Losses
53
Pension and Insurance Taxation
54
XVI Real Estate Investment Trusts
57
XVII Railroad and Airline Provisions
59
XVIII Tax Credit for Home Garden Tools
60
XIX Repeal and Revision of Obsolete, Rarely Used,
Etc., Provisions of Internal Revenue Code of
1954
XX Energy-related Provisions
61
62
68
XXI Tax Exempt Organizations
XXII Estate and Gift Tax Provisions
XXIII
XXIV
XXV
XXVI
Other Amendments
•
71
77
United States International Trade Commission . . 79
Additional Miscellaneous Provisions
81
Other Miscellaneous Amendments
83
XXVII Additional Senate Floor Amendments
85
Administration Positions
on H.R. 10612
Titles I and II - LAL and Other Tax Shelter Provisions
Real Estate Provisions
Administration Position
1. Limitation on Deductions (LAL)
1. Support House bill.
No objection to alternative
approaches which seek to
match expenses with the
income related thereto.
Discussion: In 1973 the Administration introduced LAL and the minimum taxable income
proposals to deal with high income taxpayers
who pay little or no income tax.
2. Limitation on deductible losses
of limited partners
2. Oppose the substantive
provision and the effective
date.
Discussion: The "at risk" limitation is not
aopror>riate for real estate since real estate
has value against which the bona fides of the
financing can be established.
3. Minimum Tax
3. Oppose, provided that LAL
or other effective curbs on
real estate tax shelters are
enacted.
In addition, if LAL or other
effective curbs on real estate
shelters are enacted, delete
existing preference.
Supoort Senate bill with respec
to treatment of excess investment interest EXCEPT for low
and moderate income housing
provisions (Sparkman amendment)
Prefer Finance Committee
provisions.
- 2 -
Administration Position
4 Recapture of depreciation on
real property
4. Support House bill. Oppose
Sparkman amendment for low
and moderate income housing
Discussion: Support provision in the House bill
Droviding for. a phase-out of recapture between
100 months and 200 months in the case of government subsidized low income housing.
5. 5-year amortization for lowincome housing
5. Support House bill.
- 3 ^artninfr Provisions
Administration Position
I Limitation on Deductions (LAL)
6. Support House bill with
certain modifications:
- LAL should not apply to
timber generally,
- LAL should apply to preproductive expenses of livestock and certain one year
crops.
No objection to Senate farming
provisions (items 7, 8) as an
alternative solution.
Discussion: In 1973 the Administration introduced LAL and the minimum taxable income
proposals to deal with high income taxpayers
who pay little or no income tax.
7. Limitation on deductions to
amount at risk
No objection to Senate
provision as an alternative
solution if combined with
limitations on farming
syndicates.
Discussion: The "at risk" limitation for farming^
would be an effective deterrent to sham transactions
which generally present difficult enforcement
problems for the Internal Revenue Service.
- 4 Administration Position
Limitations on deductions for
farming syndicates
8. No objection to Senate
provisions as an alternative
approach.
Discussion: The Senate limitations deal directly
with certain of the underlying deductions which
result in tax abuse.
9. Accrual accounting for farm
corporations
LO. Termination of additions to
Excess Deductions Accounts
under section 1251 (EDA)
9. Support House bill, including
the exception for family
farm corporations.
10. Support, provided that
limitations on farm tax
shelters are enacted.
No objection to D reorganization provision.
Discussion: The "D" reorganization provision
provides for the carryover of EDA to the
surviving corporations on an aggregate basis
and can be administratively complex.
ftjl and Gas Provisions
Administration Position
11. Limitations on Deductions (LAL)
11. Support House bill effective
at such time as the prices of
oil and gas in interstate
markets are deregulated.
No objection to alternative
approaches which seek to more
properly match income with
expenses related thereto,
effective upon complete deregulation.
12. Limitation on deductions to
amount at risk
13. Minimum tax
14. Recapture of intangible
drilling costs
12. Oppose both the House and the
Senate provisions.
13. Oppose both the House and the
Senate provisions, provided
that LAL or other effective
curbs on oil and gas shelters
effective upon deregulation are enacted.
14
Support
at such
oil and
markets
House bill effective
time as the prices of
gas in interstate
are deregulated.
- 6 -
Administration Position
Movie Provisions
15. Limitation
on Deductions (LAL)
a) Film purchase shelter
b) Service company shelter
15
a) Support House bill.
No objection to alternative
approaches which seek to more
properly match expenses with
income related thereto.
b) Support House bill.
No objection to Senate
provisions (items 16, 17)
as alternative solutions.
Discussion: In 1973 the Administration introduced LAL and the minimum taxable income
proposals to deal with high income taxpayers
who pay little or no income tax.
16. At risk rule
a) Film purchase shelter
b) Service company shelter
16. a-b) No objection to Senate
provisions as an alternative
solution.
Oppose the special exception
for certain production
companies.
Discussion: The "at risk" limitation for movies would
be an effective deterrent to sham transactions
which generally present difficult enforcement
problems for the'Internal Revenue Service.
- 7 -
Administration Position
17. Capitalization--Service company
shelter
17. No objection to Senate
provisions as an alternative
solution.
Discussion: The capitalization provision deals
directly with the deductions which result in
tax abuse.
Equipment Leasing Provisions
18. Limitation on Deductions (LAL)
19. Limitation on deductions to
amount at risk
18. Support House bill with
certain modifications:
- ADR variance in useful
lives should not be treated as
an accelerated deduction;
- LAL should not apply to
operating - as opposed to
net - leases.
No objection to alternative
approaches which seek to more
properly match expenses with
income related thereto.
19. Oppose Senate provision
Discussion: The "at risk" limitation is not
appropriate for equipment leasing since equipment has value against which the bona fides
of the financing can be established.
"
20. Minimum tax
20. Oppose both the House and the
Senate provisions, provided
LAL or other effective curbs
on equipment leasing shelters
are enacted.
In addition, if LAL or other
effective curbs on equipment
leasing shelters are enacted,
delete existing preference.
- 8 -
Sports Franchise Provisions
21. Limitation on deductions (LAL)
Administration Position
21. Oppose House bill
Discussion: Application of LAL to sports
franchises is an unwarranted extension of
the Administration's 1973 proposal. Tax
abuse in sports franchises can be handled
administratively by the Internal Revenue
Service.
22. Allocation of Basis to
Player Contracts
22. Prefer Senate bill
Discussion: The Adminstration opposes any special
rules applicable only to sports franchises as
unnecessary.
23. Recapture of Depreciation
on Player Contracts
23. Prefer Senate bill.
- 9 -
Administration Position
24. Minimum tax 24. Oppose House bill.
Partnership Provisions
25. Partnership syndication and 25. Support Senate provision.
organization fees
Discussion: Section 248 of the Internal Revenue
Code presently allows a corporation to amortize
its organizational expenses over a period of not
less than 60 months.
26. Retroactive allocations of
partnership income or loss
26. Support Senate provision.
- 10 -
Administration Position
27. Partnership special allocations
27. Support Senate provision
28. Deductible losses of limited
partners - at risk
28. Oppose the substantive
provision and the effective
date.
Discussion: The provision restricts only the basis
of limited partners of a partnershio. It does not
purport, to generally repeal the long-established
rule based on Crane v. United States, 331 U.S. 1
(1947) that nonrecourse financing is included in
the cost, and thus the basis of property. Thus,
other business arrangements may be used to circumvent the limitation.
The provision also leaves unanswered
the issue of proper allocation to the various partners
of the basis attributable to nonrecourse liabilities.
The limited partners' share of the basis attributable
to such liabilities may be suspended until principal
is repaid. The subsequent increases in basis resulting from such a suspense account could raise serious
administrative problems in enforcing the limitation.
- 11 -
Interest
Administration Position
29. Treatment of prepaid interest
29. Support Senate provision,
although do not object to
House provision.
30. Limitation on deduction of
nonbusiness interest
30. Oppose House bill.
Support Senate approach.
(See Administration Position
on treatment of interest in
the minimum tax.)
Discussion: The $12,000 limitation on nonbusiness
interest is an arbitrary limit on the interest
deduction which would deter individuals from
purchasing assets with borrowed funds. Moreover,
the limitation can have the effect of permanently
disallowing deductions for home mortgage interest
iZ -
Title III - Minimum and Maximum Tax Changes
Administration Position
jl. Minimum tax for individuals
31. a-c) Prefer Senate provision.
d) 1. Prefer Senate provision
a) Tax rate
b) Exemption
2,3 and 4 (House bill)
c) Deduction for regular
taxes
with 70% AGI.
Oppose both the House and the
Senate provisions and, in
addition, delete existing
preferences, provided LAL or
other effective curbs on tax
shelters are enacted.
d) Preferences included in
minimum tax
4. (Senate amendment) Suppo:
Senate approach. Oppose House
Limitation on Nonbusiness
Interest.
5; Oppose House and Senate
provisions.
Discussion: The Senate provision providing for
a deduction for regular taxes paid tends to make
the minimum tax more in nature of an alternative,
rather than an add-on,tax, The Administration
strongly supports an alternative minimum tax. .
32. Minimum tax on corporations
32. a-f) Oppose Senate provisions
a) Tax rate
The amendments to the
minimum tax for corporations
were adopted on the Senate
floor. No hearings were held
on these changes which can
impact adversely on many
trades or businesses.
b) Exemption
c) Deduction for regular
taxes
d) Carryover of regular
taxes
e) Preferences included in
minimum tax
f) Exemption for timber
- 13 -
Administration Position
33. Maximum tax 33. No objection to conforming
maximum tax with minimum tax
provisions.
- 14 Title IV - Individual Tax Reductions
34. General tax credit
Administration Position
34.
Discussion: The Administration is disappointed
by the form, duration and extent of the tax cut
extension provisions in the House and Senate
bills. It continues to support greater tax reductions
coupled with a doliar-for-doliar reduction in
federal expenditures.
35. Standard deduction
35.
36. Earned income credit
36
37. Disregard of earned income
credit
37. No objection to House and
Senate provisions.
- 15 -
Title V - Tax Simplification
38. Alimony payments
39. Child care expenses
Administration Position
38. Support provision with
Senate effective date
39. Oppose the refundable
feature of the Senate
provision.
Discussion: The credit for child care expenses
may be considered a cost of earning income. The
credit thereby performs a legitimate tax function
in determining the proper amount of tax due.
However, refundability has nothing to do with
the determination of tax liability; it is simply
an addition to the tax system which more properly
serves a welfare function.
40. Support House provision.
No objection to Senate
provision for Federal
employees injured as the
result of acts of terrorism.
Discussion: The Senate floor amendment retaining
sick pay provisions of current law for taxpayers
with adjusted gross incomes of $15,000 or less is
contrary to the simplification purpose of Title V.
Also, more fundamentally, no justification exists
for treating sick pay any differently than other
wages.
40. Sick pay and certain military
disability pensions
- 16 -
Administration Position
41. Moving expenses
41. Support Senate provision
42. Tax study by Joint Committee
42. No objection to Senate
provision.
43. No objection to Senate
43. Treasury report on tax simpliprovision.
fication and integration of
corporate and individual income
taxes
Discussion: Treasury is presently undertaking a
study on basic tax reform.
Title VI - Business Related Individual Provisions
44. Deductions for expenses
attributable to business use
of homes
44. Support Senate provision.
Oppose Senate floor amendment
of Senator Bartlett expanding
definition of business use of
home.
- 17 -
Administration Position
45. Deduction for expenses attributable to rental of vacation
homes
45. No objection to House and
Senate provisions.
Discussion: It is appropriate to replace the
present facts and circumstances test of current
law with an objective mechanical rule. The
Administration prefers the two week rule to the
alternative tests of the House and Senate provisions.
46. Deductions for attending foreign
conventions
46. Support Senate provision
(as reported by the Finance
Committee). Oppose Senate
floor amendment retaining
present law.
Discussion: The Senate provision would curb most
of the abuse of the deduction allowed for attending foreign conventions. The House provision
contains mechanical rules which would be difficult
to administer. It also fails to deal with conventions on cruise ships. The Administration believes that the
deduction for attending foreign conventions has
been abused and that current law is inadequate
to deal with the problem. The Administration,
therefore, opposes the Senate floor amendment
which would make no change in present law.
- 18 -
Administration Position
47. Qualified stock options 47. Support House provision
48. Nonbusiness guaranties
48. Support House provision
Discussion: Current law creates an arbitrary
distinction in the treatment of guaranteed
payments depending on whether the guarantor
is an individual and on whether the obligation
is that of a corporation.
- 19 -
Administration Position
49. Deduction for legislators travel 49. No objection to House
expenses away from home
provision with Senate
modification that the
Secretary of Labor
(rather than IRS) establish the daily amount of
allowable living expenses
- 20 -
Title VII - Accumulation Trusts
Administration Position
50. Revision of Method of Taxing 50. Support Senate provisions.
Accumulation Distributions on
Trusts
Discussion: The Senate provisions incorporate
perfecting amendments to the House bill and
thus are preferable.
- 21 Title VIII - Capital Formation
Administration Position
51. Extension of $100,000 limitation 51. Support Senate provision
on used property
52. Extension of 10-percent investment
credit
52. Support Senate provision.
53. First-in-first-out treatment of
investment credit amounts
53. Support Senate provision
provided that present treatment retained for pre-1976
carryovers.
Discussion: The FIFO rule improves the incentive to
further capital investment. However, present
law should be retained for investment credit
carryovers from pre-1976 years to prevent windfalls.
54. Extension of expiring investment 54. Oppose Senate provision.
tax credits
Discussion: The provision provides a windfall
for a limited number of taxpayers who have unused,
expiring credits from 1966.
- 22 -
Administration Position
55. ESOP investment credit provision
55. Oppose Senate provision
Discussion: The Administration supports tax
incentives for broadened stock ownership which
are available to all taxpayers. ESOPs are
restricted to corporate employees and do not
afford diversification and investment choice.
In addition, as among corporate employees,
ESOPs tied to the investment tax credit favor
employees in capital intensive industries.
56. Retroactive regulations on
Employee Stock Ownership Plans
(ESOPs)
56. Oppose Senate provision
Discussion: To the extent that Congress endorses
different rules for ESOPs, it should set forth
specific criteria in legislation developed after
public hearings and comment.
57. Study of stock ownership expansion
57. Support Senate provision.
- 23 -
Administration Position
58. Investment credit in the case of
ninviP and television films
58. Support Senate provision
except for "elect out .
Discussion: The provision provides a compromise
investment credit for pre-'75 years in settlement of pending litigation. The "elect out" of
the Senate provision frustrates the intent of
the compromise to dispose of this litigation.
59. Investment credit in the case of
certain ships
59. Oppose Senate provision
(including its retroactive
effective date).
Discussion: The provision selectively overturns
the general tax concept of "basis" underlying
the allowance of depreciation and investment
credit.
60. Small fishing vessel construction
reserves
60. Oppose Senate provision.
- 24 -
Administration Position
61. Net operating loss carryover
election
61. Support Senate provision
provided that the election
be made on an annual basis
for the losses occurring
in such year.
62. Limitation on trafficking in
net operating loss carryovers
62. Oppose Senate provision
Discussion: The provision would significantly
alter the tax consequences of certain corporate
acquisitions where one of the parties to the
transaction has net operating loss carryovers.
The Administration strongly recommends that no
such basic changes be made without an opportunity for study and comment by the major professional associations and other interested parties.
The Internal Revenue Service has indicated that
the provision will be difficult/to administer
due to its uncertainty and complexity^ These
factors may also impede legitimate business
transactions.
If the provision is adopted, the
Administration recommends that its effective
date be delayed for at least one year and that
Congress invite comments and specifically undertake to make necessary substantive and technical
modifications prior to its effective date.
- 25 -
Administration Position
63. Credit for artist's donations
of own work to charitable
organizations
63. Oppose Senate provision
Discussion: If a credit is allowed for artist s
donations of his own work, the Administration
prefers a 5 year holding period before the
artist is eligible for such credit.
Title IX - Small Business Provisions
64. Continuation of changes in
corporate tax rates and increase
in surtax exemption.
64. Support Senate provision
Discussion: Making the tax changes permanent is
part of the President's deepened tax cut proposal.
Also, the extension of the tax cuts to mutual
insurance companies corrects a clear drafting
oversight in the Tax Reduction Act.
'I 6 Title X -- Changes in the Treatment of Foreign Income
Administration Position
65. Income earned abroad by U.S.
citizens living or residing
abroad
65-1. Prefer the House bill,
but do not object to the
Senate version.
65-2. Do not oppose the Senate
provision.
66. Income tax treatment of nonresident alien individuals
who are married to citizens
or residents of the United
States
66-1. Support.
66-2. Support.
66r3. Support the Senate
provision.
Effective date. Prefer
Senate effective date.
67. Foreign trusts having one or
more United States beneficiaries to be taxed currently
to grantor
67-1. Support. Prefer the
Senate change.
67-2. Support.
Effective date. Prefer
Senate effective date.
68.
Interest charge on accumulation distributions from
foreign trusts
69. Excise tax on transfers of
property to foreign persons
to avoid Federal income tax
68.
Support. Prefer the
Senate version.
Effective date. Prefer
Senate effective date.
69.
Support. Prefer the
Senate version.
- 2? -
Administration Position
70. Amendment of provisions relating to investment in U.S.
property by controlled foreign corporations
70.
Support the change from
present law, and prefer
the Senate bill.
71. Shipping profits of foreign
corporations
71-1. Support. Prefer the
Senate version.
Effective date. Prefer
Senate effective date.
71-2. Oppose the House provision
71-3. Do not oppose Senate
provision.
Oppose the House provision
and support the Senate bill
which would make no change
in present law.
Discussion: The House provision would change
present law to make it more difficult to
administer.
72. Agricultural products
72.
Do not object to the elimination of the per-country
limitation. Support the
Senate version. Oppose the
House provisions which
would retain the per-country
for possession source income,
and delay the effective
date for 3 years in the case
of mining
companies.
Discussion: The House provision would
single
out
possession source income and mining companies for
special treatment which discriminates against
other taxpayers. The Administration cannot find
any reason to single out these two classes of
taxpayers for this kind of special treatment.
73.' Requirement that foreign
tax credit be determined
on overall basis
73.
- 29 -
Administration Position
Recapture of foreign losses
74.
Support the recapture of
foreign losses, and prefer
the Senate version.
Treatment of capital gains
for purposes of foreign
tax credit
75.
Support and prefer the
Senate version.
Foreign oil and gas extraction income
76a. Oppose the House provision
Transitional rule for foreign tax credit limit
Discussion: Generally oppose retroactive relief
granted by the House provision.
Definition of foreign oilrelated income
76b.
No objection to Senate
provision.
Discussion: The Senate provision is consistent
with the inclusion of interest from foreign
corporations and dividends in the definition
of foreign oil related income.
Foreign oil and gas extraction income earned
by individuals
76c.
Support Senate provision
Tax credit for production-sharing contracts
76d.
Do not oppose the Senate
provision.
- 30 -
Adriini*tration Position
76.
Foreign oil and gas extraction income
76e-l. Support the Senate
e. Reduction in amount
provision, with
allowed as foreign tax
modifications.
credit on oil extraction
income
Discussion: The Administration supports limiting
the credit for oil and gas extraction taxes to 48
percent. However, the Administration recommends
that the limit be computed not on a country-bycountry basis, but by applying the overall limitation .separately with respect to oil extraction
income and other income using the regular section
904 rules for carryovers, etc.; that the definition of oil and gas extraction income be narrowed
to include dividends only when they are from ^ a
foreign corporation when taxes are deemed paid
with respect to those dividends; that interest
be excluded from the definition.
76e-2. Oppose the Senate
provision.
Discussion: The Administration opposes the
attempt to define the portion of the payment
to a foreign government which is a royalty. A
new definition would only confuse the issue.
It would raise doubts as to the applicability
and the effect of recent IRS statements concerning the creditability of taxes. It would
cloud the applicability of the law in non-oil
and gas areas.
77. Underwriting income 77. Support the Senate
provision.
78. Third-tier foreign tax 78. Support Senate provision.
credit when section 951
applies
- 31 -
Administration Position
79.
Support the House proInterest on bank deposits
vision.
earned by nonresident aliens
and foreign corporations
Discussion: The Administration strongly supports
the permanent exemption which is contained in
the House provision.
Changes in ruling requirements under section 367;
certain changes in section
1248
80-1. Strongly support the change
in present law, and prefer
the Senate version.
80-2. Support the change in
present law, and prefer the
Senate version.
80-3. Strongly support the change
in present law, and prefer
the Senate version.
Contiguous country branches of domestic life insurance companies
81.
Do not object to either
version.
Tax treatment of corporations conducting trade or
business in Puerto Rico
and possessions of the
United States
82rl. Do not object to the change
in present law. Prefer the
Senate version.
82-2. Do not object.
Effective date. Prefer
Senate effective date.
Repeal of provisions relating to China Trade Act Corporations
83.
Support the phaseout
generally, and prefer the
Senate version.
- 32 -
Administration Position
84 Denial of certain tax bene- 84. Strongly oppose the
fists on international boycotts
Senate provision.
and bribe-produced income
Discussion: The Senate provision is an
inappropriate means of dealing with the
problems of boycotts and bribes. Moreover,
these provisions would create substantial
administrative problems.
- 33 -
Title XI — Domestic International Sales Corporations (DISCs)
Administration Position
Amendments affecting DISC
85.
Oppose both the House and
Senate versions.
Discussion: In the context of the House and
Senate bills, the Administration recommends
the following compromise position:
1. Incremental rule limiting DISC benefits
to the extent current export gross receipts
exceed 60 percent of the average for 3 out or
4 base period years (initially 1972-1975);
2. Base period moves forward after 1980;
3. Exception to incremental rule contained
in House and Senate versions for DISCs having
taxable income of $100,000 or less for a taxable year;
4. DISC benefits retained for agriculture;
5. DISC retained for military sales;
6. Technical changes with respect to disqualification recapture and producer's loans
as in House version;
7. Senate provisions relating to distributions of DISC stock and double counting in the
case of distribution to meet qualification
requirements;
8. Effective date: for incremental rule taxable years beginning after December 31, 1976.
- 34 -
Title XII - Administrative Provisions
Administration Position
Public inspection of written
determinations by Internal
Revenue Service
86. Support Senate provision,
Discussion: The Senate provision reflects a
compromise worked out among representatives
of the tax bar, the accounting profession, the
Internal Revenue Service, the Treasury Department and public interest firms. Thus, the
provision represents a publicly considered
solution to a problem which has been the subject
of extensive and costly litigation over the past
several years. Certain technical matters, however, should be clarified by- the Conference
Committee.
- 35 -
Administration Position
87. Disclosure of returns and 87. a-c. Support Senate provisions.
return information
a) In general
b) Definition of returns
and return information
c) Disclosure to Congress
- 36 -
Administration Position
d) White House (and other d-e. Support Senate provisions
Federal agencies)
e) Civil and Criminal tax
cases
- 37 -
Administration Position
f) Nontax criminal cases
g) Nontax civil matters
h) General Accounting Office
f. Oppose requirement of
"probable" cause" for disclosure
to Justice Department and other
Federal agencies of taxpayer infor
nation in nontax criminal cases.
Prefer Finance Committee amendment
g-h. Support Senate provisions
- 38 -
Administration Position
i) Statistical use
j) Other agencies - inspection
on a general basis
k) State and local governments
1) Taxpayers with a material
interest
m) Miscellaneous disclosures
n) Procedures and records
concerning disclosure
i-n. Support Senate provisions
with following modification:
- Tax information disclosed to
Federal, State and local welfare
agencies should be limited to
the tax information available
from the IRS individual master
files.
- 39 Administration Position
o) Safeguards
o-q. Support Senate provisions
p) Reports to Congress
q) Enforcement
88. Income tax return preparers
88. Support Senate provision.
- 40 -
Administration Position
39. Jeopardy and Termination 89. Support Senate provision.
Assessments
Discussion: The Senate provision protects taxpayers
against any abusive use of jeopardy and termination
assessments, while providing more flexibility than
the House provision for a mutually satisfactory
disposition. Also, the Senate provision deals with
the issues presented by the Supreme Court decision
in Laing v. United States.
The Administration recommends that the
effective date be February 28, 1977 to provide the
IRS time to implement the new provision.
90. Administrative summons 90. Prefer Senate provision.
Discussion: The Administration recommends that
the effective date be February 28, 1977 to provide the IRS time to implement the new provision.
Certain other technical* matters should be clarified by the Conference Committee.
91. Assessments in case of mathematical or clerical errors
91. Support Senate provision.
- 41
Administration Position
92. Withholding State income taxes
from military personnel
92. Support House or Senate
provision.
93. Withholding of State or local
income tax from members of the
National Guard or ready reserve
93. Support Senate provision
?4. Voluntary withholding of
State income taxes from Federal
employees
94. Support Senate provision
95. Definition of city for purposes
of withholding
95. Enacted into law (Public
Law 94-).
96. Withholding tax on certain
gambling winnings
96. Support Senate provision but
oppose Senate floor amendment
excluding State lotteries from
withholding requirements.
97. Withholding of Federal
taxes on certain individuals
engaged in fishing
97. Oppose Senate provision
Discussion: The Administration recommends that the
exemption be limited to one crewman (in addition
to the operator) to deal with the problem of fishermen who own their own boats and hire crewmen on an
intermittent basis.
- 42 Administration Position
98. Voluntary withholding of State
income taxes in the case of
certain legislative officers
and employees
98. No objection to House provision
99. Support Senate provision
99. Minimum exemption from levy
for wages, salary, and other
income
Discussion: The Administration recommends that
the ettective date be February 28, 1977 to provide the IRS time to implement the new provision.
100. Joint Committee Refund Cases
100. Support Senate provision
Discussion: The Administration recommends that
the provision be made applicable to refunds
submitted to Joint Committee after the date
of enactment of H.R. 10612.
101. Use of Social Security numbersx
101. Support House provision
Discussion: The Administration recommends that
the use ot social security numbers be limited
to Federal, State and local tax administrative
purposes.
- 43 -
Administration Position
102. Interest on mathematical
errors on returns prepared
by IRS
102.
103. Award of Costs and Attorneys'
Fees to Prevailing taxpayer
103. Oppose Senate provision
Discussion: With an opportunity for recovery of
attorney's fees, which are not normally awarded
the prevailing party in litigation, there will
be a greater incentive for litigation, even though
the amount involved may be small and the taxpayer's
case may appear frivolous on its face.
- 44 -
Title XIII - Miscellaneous Provisions
L04. Certain housing associations
105. Tax treatment of certain
1972 disaster loans
106. Worthless debts of political
parties
^Tnim'stration Position ^ #
104. Support Senate provision.
105
Support provision with
' April 15", 1977 date (Senate
provision) for payment of
first annual installment of
unpaid tax liability.
106. Support provision with Senate
effective date.
Discussion: The Administration opposes the
retroactive application of the provision provided bv the House bill.
- 45 -
Administration Position
Exemption from taxation of
interest on bonds issued to
finance certain student loans
107. Oppose Senate provision
Discussion: The Senate provision creates an
undesirable precedent for the issuance of taxexempt bonds" by private corporations having only
a minimal connection with governmental units.
The Treasury Department has proposed regulations
dealing with this question and is working on them
with state and local representatives.
Prepublication Expenditures
108. Oppose House provision
Discussion: The tax treatment of prepublication
expenses should not depend upon the particular
past practice of an individual publisher but
upon sound tax rules of general application.
Income from lease of intangible
property as personal holding
company income
109. Oppose Senate provision
Discussion: The Senate provision (adopted as a
floor amendment) extends retroactive relief to
one taxpayer and- reverses through legislation an
adverse decision rendered against that taxpayer
in the Court of Claims. The Treasury Department
would not object to the provision as amended by
the Senate Finance Committee on July 23, 1976,
if the provision were made prospective only.
- 46 Administration Position
110. Work Incentive (WIN) and
Federal Welfare Recipient
Employment Tax Credits
110. Oppose Senate provision
111. Repeal of excise tax on
certain parts for light-duty
trucks
111. No objection to Senate
provision.
112. Exemption from manufacturers'
tax for certain articles resold
after certain modifications
112. No objection to Senate
provision.
- 47 Administration Position
113. Franchise Transfers 113. Support Senate provision
114. Clarification of an employer's
duty to keep records and to
record tips
114. Oppose Senate provision.
Discussion: Tip income has presented IRS with
chronic compliance problems due to a lack of
reliable records from which the correct amount
of tips can be verified. The Senate provision
obviates sound attempts by IRS to alleviate
these problems.
115. Pollution Control Facilities: 115. Support Senate provision with
5-year -amortization and
certain modifications:
investment credit
- section 169 should be
extended only until December
31, 1980; and
- the present definition of
pollution control facility
and the requirement that a
facility be added to a plant
etc., in operation by
January 1, 1969 should be
retained.
Discussion: As modified, the provision carries
out the purpose of section 169 by accomodating
further upgrading of pre-1969 plants.
116. Qualification of fishing 116. No objection to Senate
organizations as tax-exempt
provision.
agricultural organizations
117. Subchapter S corporation
shareholder rules
117. Support Senate provision.
- 48 -
Administration Position
118. Application of section 6013(e) 118. Oppose Senate provision
Discussion: The Senate provision extends retroactive relief to a limited number of taxpayers.
119. Modifications in percentage
depletion for oil and gas
119-1,2. No objection to Senate
provision.
-3,4. Support Senate provision
Discussion: The Administration believes that the
provisions should apply to all similarly situated
taxpayers. There is no justification for the
exclusion of certain trusts from these provisions.
120. Implementation of Federal
State Tax Collection Act of
1972
120. No objection to Senate
provision with certain
modifications.
Discussion: The Administration opposes the
provision precluding any user charge and opposes
reducing from two States to one the number of
States necessary to start the system.
121. Cancellation of certain student
loans
121. No objection to Senate
provision.
- 49 Administration Position
122. Simultaneous liquidation of
parent and subsidiary corporations
122. Support Senate provision
Discussion: The Senate provision eliminates a
trap for the unwary.
123. Prohibition of State-Local
123. Oppose Senate provision
Taxation of Certain Vessels,
Barges, or Crafts Using
Interstate Waterways
Discussion: The Federal government has, over the
years, imposed relatively few constraints on the
power of States to impose taxes. The fact that
current State practices impose record keeping and
financial burdens upon barge operations is not a
sufficient reason for the Federal government to
prevent the States from imposing taxes on this
form of transportation.
124. Oppose Senate provision
124. Contributions in Aid of
Construction for Certain
Utilities
Discussion: The Senate provision departs from
the general tax principle that payments for
services constitute taxable income.
125. Prohibition of Discriminatory
State or Local Taxes on^
Generation or Transmission
of Electricity
125. No objection to Senate
provision.
126. Deduction for cost of removing
architectural and transportational barriers to handicapped
and elderly
126. Oppose Senate provision
- 50 -
Administration Position
127. Publication of statistics
of income
127. No objection to Senate
provision.
128. Report on tax increases
resulting from inflation
128. No objection to Senate
provision.
129. Taxation of certified
historic structures
129. Support Senate provision
Discussion: The Senate provision provides a
variety of measures designed to equalize the
tax treatment of new buildings and restored
historic structures and has the Administration's
full support.
- 51 -
Administration Position
130. Supplemental Security Income
for victims of certain natural
disasters
130. No objection to Senate
provision.
- 52 -
Administration Position
131. Exclusion of countries which
aid and abet international
terrorists from preferential
tariff treatment
131. Oppose Senate provision.
Discussion: The trade laws are not an appropriate
vehicle tor solving complex foreign policy
problems.
132. Net operating loss deduction
for Cuban expropriation
132. Oppose Senate provision.
133. Study of tax treatment of
married, single persons
133. No objection to Senate
provision.
- 53 -
Title XIV - Capital Gains and Losses
Administration Position
134. Increase in amount of ordinary
income against which capital
loss may be offset
134. Support House provision
Discussion: There has been no change in the
$1,000 offset since 1942, and the economic
value of this deduction has decreased significantly since that time.
135. Increase in holding period for
long-term capital gains
135. Support House provision
Discussion: The reasons for distinguishing between
long-term and short-term capital gains - the
"bunching" problem and the need to differentiate
between assets held for investment and speculation suggest that the distinction should be drawn on the
basis of one full year.
- 54 -
Title XV - Pension and Insurance Taxation
Administration Position
136. Individual retirement account
(IRA) for spouse
136. No objection to Senate
provision.
Discussion: The Administration recommends a
broad study of retirement security which would
give consideration to the future protection of
housewives.
137. Limitation on contributions
to certain H.R. 10 plans
137. No objection to Senate
provision.
138. Deduction for retirement
savings of private and government employees - limited
employee retirement accounts
138. Support House provision
No objection to Senate
provision.
- 55 Administration Position
139- Retirement deductions for members 139. Support Senate provision
of Armed Forces Reserves and
National Guard
140. Tax-exempt annuity contracts
in closed end mutual funds
140. No objection to Senate
provision.
141. Pension fund investments in
segregated asset accounts of
life insurance companies
141. No objection to Senate
provision.
142. Extension of study of salary
reduction and cash or deferred
profit-sharing plans
142. No objection to Senate
provision.
- 56 -
Administration Position
143. Consolidated returns for life 143. No objection to Senate
and mutual insurance companies
provision.
144. Guaranteed renewal life
insurance contracts
144. Support Senate provision.
145. Tax-free rollover in event of
plan termination
145. Enacted into law (Public
Law 94-267).
- 57 Title XVI - Real Estate Investment Trusts
Administration Position
146. Deficiency dividend procedure 146. Support Senate provision.
147. Failure to meet income source
tests
147. Support Senate provision.
148. Treatment of property held for
sale to customers
148. Support Senate provision.
149. Increase in 90-percent gross
149. Support Senate provision.
income requirement to 95 percent
150. Change in definition of "rents
from real property"
150. Support Senate provision.
151. Change in distribution
requirements
151. Support Senate provision.
152. Manner and effect of termination or revocation of election
152. Support Senate provision.
- 58 -
Administration Position
153. Excise tax on distribution
made after taxable year
154. Allowance of net operating
loss carryover
153. Support.
154. Support Senate provision
155. Support Senate provision
155. Alternative tax in case of
Capital Gains
Discussion: The Senate provisions incorporate
perfecting amendments to the House bill and
thus are preferable.
- 59 -
Title XVII - Railroad Provisions
Administration Position
156. Amortization of track accounts 156. Oppose^ Senate provision
Discussion: The retirement-replacement method
of accounting for depreciation of track already
provides significant advantages to railroads.
157. Railroad ties
157. Support Senate provision
(other than the Senate floor
amendment of Senator Stone).
Discussion: The Finance Committee amendment provides
a more uniform application of the retirementreplacement method of accounting than the House
provision or the Senate floor amendment.
158. Investment credit for railroads
158. Oppose Senate provision
Discussion: The problems of railroads and airlines
are fundamental." Therefore, meaningful assistance
to these industries should be provided by means
other than special changes in long-established tax
principles governing the investment credit.
159. Investment credit for airlines
Discussion:
159. Oppose Senate provision
See discussion under #158.
- 60 -
Title XVIII - Tax Credit for Home Garden Tools
Administration Position
160. Home garden tool credit
160. Oppose House provision.
- 61 -
Title XIX - Repeal and Revision of Obsolete,
i, , — r i l ,
^
»
^
—
—
—
•
—
—
1
^
«
^
—
—
^
—
—
—
—
—
•
—
Rarely Used, Etc., Provisions of
Internal Revenue Code of 1954
Administration Position
'Deadwood" provisions
161. Support provision.
Discussion: The Administration recommends a
clarifying amendment to the definition of
"Secretary or his delegate".
- 62 -
Title XX - Energy-related Provisions
Administration Position
162. Residential insulation credit 162. Prefer House provision
with Senate effective date
Discussion: The Senate provisions which increase
the maximum credit will not result in any incremental increase in purchases, and the low income
grants under the FEA extension act make refundability unnecessary. Moreover, there is no need "
to give credits to those who simply are replacing
worn out heating systems.
163. Residential solar or geothermal
energy equipment credit
163. Prefer Senate provision
except for the refundable
credit.
Discussion: The Administration is opposed to this tax
credit because it does not believe that it will result in
any incremental increase in the use of this equipment, but
will result in a windfall to those few taxpayers who
for personal reasons may be installing this presently
uneconomical equipment. Moreover, there is no reason to
provide an indirect tax credit when the Congress in the
FEA extension act decided to study the feasibility of
direct grants.
164. Residential heat pump credit 164. Oppose Senate provision.
Discussion: The Administration is opposed to the heat pump
credit because it may be very costly, and because it will
result in greater energy consumption since the restriction
to replacements of electric resistance heating systems is
unadministrable.
- 63 Administration Position
L65. Credit for wind-related 165. Oppose Senate provision.
residential energy equipment
Discussion: The Administration is opposed to this provision
because it would not increase use of this equipment if
it is economical, and because direct grants are preferable.
166. Business insulation credit
166. Prefer Senate provision
due to its effective dates.
Discussion: This provision is unnecessary since a
profit making organization can be expected to
insulate if it. will save enough energy to be cost
effective. The tax credit would simply provide a
windfall for expenditures that would occur anyway
while inducing relatively little additional
expenditures. Moreover, businesses will now be
able to "finance this equipment under the $2 billion
loan guarantee program established under the FEA
extension act.
167. Business solar and geothermal 167. Prefer House bill rates
equipment credit
with Senate effective dates.
Discussion: The Administration is opposed to this provision for the same reasons it opposes item 166, the business
insulation credit.
168. Investment credit for wind168. Oppose Senate provision
related energy equipment used
in the production of electricity
Discussion: The Administration is opposed to this provision for the same reasons it opposes item 166, the
business insulation credit.
- 64 -
Administration Position
169. 12-percent credit for certain
energy equipment
169.
Discussion: The necessary technology for increased utilization of most of this equipment is lacking at this time
Therefore, an investment credit such as this will have no
substantial effect on their use at this time and will
largely represent a windfall to those utilizing such
equipment. As between an increased investment credit and
a rapid amortization, an increased investment credit is
preferable since an incentive based on rapid amortization
favors equipment with a long useful life and discriminates
against equipment with a short useful life.
a) Waste conversion equipment
a) Prefer Senate provision,
Discussion: See above discussion.
b) Organic fuel conversion
equipment
b) Oppose Senate provision
Discussion: See above discussion.
c) Railroad equipment
Discussion: See above discussion.
c) Prefer Senate provision
- 65 -
Administration Position
d) Deep mining coal equipment
d) Prefer Senate provision
Discussion: See discussion on preceding page.
e) Coal liquefication and
gasification processing equipment
e) Prefer Senate provision
Discussion: See discussion on preceding page.
f) Shale oil conversion equipment
f) Prefer Senate provision
Discussion: See discussion on preceding page.
- 66 -
Administration Position
g) TVA compensatory adjustments g) Oppose Senate provision
Discussion: The TVA already has a substantial competitive advantage over commercial power companies in that
it is not subject to Federal taxation. Further aid is
not appropriate.
Deduction for production and
170. Oppose Senate provision.
intangible drilling costs of
geothermal development
Discussion: As technology is developed, this industry
may not need a permanent operating subsidy, particularly
one which will establish a new form of drilling fund tax
shelter.
The Administration supports instead allowing
geothermal drilling and precommercial development expenditures
to be treated as research and experimental expenditures that may be expended under section 174.
Denial of investment for 171. Prefer Senate effective date
portable air conditioners and
heaters
Discussion: The investment credit should not be selectively
modified to carry out policies inconsistent with the
purpose of the investment credit provision, particularly
when little energy will be saved and business decisions
of taxpayers will be distorted.
- 67 -
•Administration Position
172. Study of recycling incentives
172. No objection to Senate
provision.
Discussion: The Administration has already
studied this proposal and has found it to be
'very costly and ineffective. Further study
is not likely to change these findings.
173. Repeal of manufacturers excise
tax on buses and bus parts
173. Oppose Senate provision
174. Excise tax on rerefined lubrieating oil
174. Oppose Senate provision
175. Exemption from retail excise
tax on special motor fuels in
nonhighway use
175. No objection to Senate
provision.
176. Duty-free exchange of crude oil
176
« No objection to Senate
provision.
- 68 Title XXI - Tax Exempt Organizations
Administration Position
177. Modification of self-dealing
transitional rules in 1969 Act
relating to leased property
177. No objection to Senate
provision.
178. Private foundation set-asides
178. No objection to Senate
provision.
179. Mandatory payout rate for
private foundations
179. Support Senate provision
Discussion: The present fluctuating payout rate
is steadily eroding the endowments of private
foundations.
180. Extension of Time to Amend
Charitable Remainder Trust
Governing Instrument
180. No objection to Senate
provision.
- 69 -
Administration Position
181. Reduction of private foundation
excise tax on investment income
181. Support Senate provision
Discussion: The excise tax should be limited to the
amount required'to cover the cost of auditing exempt
organizations. The 2% rate of the Senate provision will cover such costs.
182. Unrelated trade or business
income of trade shows, State
fairs, etc.
182. Oppose Senate provision
Discussion: The Administration would have no
objection to an exemption for trade shows that
did not change the qualification requirements
for exempt organizations.
183. Declaratory judgments regarding
tax-exempt status as charitable
etc., organization
183. Support Senate provision
with House effective date
- 70 -
Administration Position
184. Provision for establishment of
alcoholism trust fund
184. Oppose Senate provision
185. Exclusion of certain companion
sitting placement services
from employment tax
requirements
185. No objection to Senate
provision.
186. Minimum distribution requirements to include miscellaneous
distributions
186. Oppose Senate provision
Discussion: The special rule for distributions ^ ^
of 5200 or less for "civic or community activities
should be clarified to cover only those activities
in furtherance of charitable purposes.
- 71 Title XXII - Estate and Gift Tax Provisions
Administration Position
187. Allowance of credit against the
estate tax
187. Support House provision
Discussion: The Administration proposed an increase
in the estate tax exemption to $150,000 and the
elimination of the lower bracket rates on the first
$100,000 of taxable estate, with both changes phasing in over five years. The House bill achieves
substantially equivalent results.
188. Unification of estate and gift
tax rates
188. No objection to House
provision.
189. Transfers made within 3 years
of death
189. Support House provision
190. Gross up for gift taxes
190. Support House provision
191. Increase in estate tax marital
deduction
191. Support House provision,
Discussion: The Administration proposed an
unlimited marital deduction for estate and
pift tax purposes.
- 72 -
Administration Position
192. Increase in gift tax marital
deduction
192. Support House provision
Discussion: See discussion for #191.
193. Joint interests
193. Support House provision
194. Special valuation for certain
types of property
194. Prefer House provision
Discussion: The Administration prefers the
House nrovision since it is more limited in
scope and more tightly drafted. Both provisions will tend to lock elderly people and
their heirs into potentially inefficient uses
of the land.
- 73 -
Administration Position
195. Extension of time for payment
of estate
nf
esfate tax
195. Support House provision
Discussion: The Administration supports the
greater liberalization of the extension provisions in the House provision. It also supports
the tightening of eligibility requirements
although it is concerned that the House
requirements may be too strict.
196. Redemption of stock to pay
estate tax
196.
Support House provision
Discussion: The Administration supports the
limitation of the favorable treatment to shareholders whose interests in the estate are reduced
by the payment of the taxes, etc., but it is
concerned that the tougher qualifications for
eligible closely-held business interests may be
too strict.
197. Carryover basis
197.
Opposed to House provision
Discussion: The Administration opposes any
change in the present stepped-up basis rule,
under which the heirs receive a new fair market
value basis for property transferred from a
decedent.
- 74 -
Administration Position
L98. Generation-skipping transfers
198. Because of major technical
deficiencies in both bills
and the great complexity
of the subject, the Administration recommends that the
Conference take no action on
this issue and delete both
provisions.
199. Orphans' exclusion
199. No objection to House
provision.
200. Requirement that IRS furnish
a statement explaining estate
or gift valuation
200. No objection to House
provision.
201. Gift tax returns
201.
Support House provision.
- 75 Administration Position
202. Public index of filed tax liens
202. Oppose House provision.
203. Inclusion of stock in decedent's 203. Support House provision.
estate where decedent retains
voting rights
204. Disclaimers
204. Support House provision.
205. Estate & gift tax exclusions
205. Support House provision.
for qualified retirement benefits
206. Gift tax treatment of certain
community property
206.
Support both provisions.
- 76 -
Administration Position
Income tax treatment of certain
selling expenses of estates and
trusts
207. Support House provision
Estate tax credit for payment
in kind
208. No objection to Senate
provision.
- 77 Title XXIII - Other Amendments
Administration Position
209. Outdoor advertising displays
209. No objection to Senate
provision.
210. Tax treatment of large cigars
210. Support Senate provision,
Piscussion: If the bracket rate were changed to
107o, rather than 8-1/2% (the Senate provision),
there would be no revenue loss and administration
of the tax would be facilitated.
211. Gain from sales or exchanges
between related parties
211. Support Senate provision
212. Uniformed Services Health
Professions Scholarships
212. Support Senate provision
Discussion: The Administration supports the
floor amendment by Senator Ford which was
adopted bv the Senate.
- 78 -
Administration Position
213. Tax counseling for the elderly
213. Oppose Senate provision
Discussion: Special tax assistance for the^
elderly is unnecessary in light of the IRS'
current, effective taxpayer assistance program. Also, the provision for tax-free reimbursement of expenses furthers the proliferation of statutory exemptions in the tax code.
214. Commission on value added
taxation
214. No objection to Senate
provision.
- 79 -
Administration Position
215. Exchange funds
215. Support House provision,
Discussion: The Senate provision unnecessarily
broadens the "grandfather" clause for partnership exchange funds and provides a special
exception for certain family partnerships.
216. Distributions by subchapter S
corporations
216. No objection to Senate
provision.
Title XXIV
217. Voting by Commission on import 217. Oppose Senate provision
relief
Discussion: It is important for the U.S.
International Trade Commission to reach
definitive majority positions. The Administration therefore supports the objectives
underlying the Senate provision. However,
the Administration opposes this specific
provision because it could have the effect
of allowing the vote of a minority of the
Commissioners to be binding on the President and the Congress. The problem could
best be dealt with in a separate bill after
full public hearings and discussion of the
problems.
- 80 -
Administration Position
218. Increase in number of
Commissioners
218. Oppose the Senate
provision.
Discussion: The Administration would support
reducing the number of Commissioners from
six to five.
219. Authorization of appropriations
219. No objection to Senate
provision.
220. Administration of the Commission 220. Support Senate provision
221. Continuation of reports with
respect to synthetic organic
chemicals
221. No objection to Senate
provision.
- 81 -
Title XXV
Administration Position
222. Contributions of certain
Government publications
222. No objection to Senate
provision.
223. Lobbying by public charities
223. Support Senate provision
224. Tax liens, etc., not to
constitute "acquisition
indebtedness"
224. No objection to Senate
provision.
Discussion: The Administration recommends technical
revisions to the Senate provision to ensure that
it applies only to special assessments of a type
normally made by a State or local governmental unit
or instrumentality and cannot be utilized as a
device for financing improvements to an exempt
organization's property.
- 82 -
Administration Position
225. Extension of private foundation
transitional rule for sale of
business holdings
225. No objection to Senate
provision.
226. No objection to Senate
provision except for the
exemption of libraries
and museums from the
section 4940 tax.
Discussion: The exemption for libraries and
museums from the audit fee tax has no real
justification. It creates another species
of foundation which is especially difficult
to define.
226. Private operating foundations;
Imputed interest; Libraries and
museums
227. Study of tax incentives
227. No objection to Senate
provision.
- 83 -
Title XXVI - Other Miscellaneous Amendments
Administration Position
228. Credit for certain education 228.
expenses
229. Interest on certain governmental 229. Oppose Senate provision,
obligations for hospital construction
Discussion: This selective expansion of current
law is not warranted - private hospitals will
invest only where a profit is expected. The
precedent is bad - other private businesses will
seek similar treatment, and such proliferation
of tax-exempt industrial development bonds would
adversely affect state and local borrowing.
230. Group prepaid legal services 230. Oppose Senate provision
Discussion: The Senate provision is contrary to
the well-established tax principle that deductions
for personal expenses are generally not allowed.
231. Unrelated business income from
231. Oppose Senate provision
services provided by a taxexempt hospital to other taxexempt hospitals
Discussion: The Senate provision will allow
certain hospitals to engage in the business
of selling services to other hospitals in
competition with commercial operators. No
provision is made for passing savings on to
small hospitals who may be charged more than
cost for the services provided. Thus, the
Administration opposes this provision.
- 84 -
Administration Position
Clinical services of cooperative 232. No objection to Senate
hospitals
*
provision.
Certain charitable contributions 233. No objection to Senate
of inventory
provision.
Discussion: The limitation of the maximum deduction to twice the manufacturer's basis for the
property ensures that a company cannot profit
by manufacturing solely to make charitable contributions .
- 85 Title XXVII - Additional Floor Amendments
Administration Position
234. Tax credit for expenses for
certain amateur athletes
234. Oppose Senate provision.
Discussion: The President s Commission on Amateur
Athletics has been requested by the President to
study further the issue of incentives for amateur
athletes. Any tax relief at this time is, therefore,
premature.
235. Exemption of certain amateur 235. Oppose Senate provision.
athletic organizations from tax
Discussion: See discussion #234.
236. Taxable Status of Pension
Benefit Guaranty Corporation
236. Support Senate provision.
Discussion: The Senate provision rectifies an
apparent oversight in the ERISA legislation.
237. Level premium plans covering
owner-employees
237. No objection to Senate
provision.
238. Lump-sum distributions from
pension plans
238. No objection to Senate
provision.
- 86 -
Administration Position
239. | ^ P ° r % j L * ; J ; " 2 i ^ 9 7 6
Senate September 1, 1976
effective date.
Discussion: In order to avoid uncertainty for
current transactions, it would be appropriate
to adopt a date of enactment effective date.
239. Tax treatment of the grantor
of certain options
240. Exempt-interest dividends of
regulated investment companies
240. No objection to Senate
provision.
Discussion: Will enable investors with limited
funds to acquire tax-exempt bonds, thus helping
to provide a more efficient market for state and
local obligations.
241. Commission on tax simplification 241. No objection to Senate
and modernization
provision.
242. Common trust fund treatment of
certain custodial accounts
242. Support Senate provision,
- 87 -
Administration Position
243. Oil and Gas Depletion Rules
Relating to Transfers of Proven
Property
243. No objection to Senate
provision.
244. Support test for dependent
children of separated or
divorced parents
244. No objection to Senate
provision.
245. Deferral of gain on involuntary
conversion of real property
245. Oppose Senate provision
246. Exclusion from gross income of
246. Support Senate provision
gain from sale of residence by
taxpayer who has attained age 65
- 88 Administration Position
v7.
Exemption from taxation for 247. Support Senate provision.
certain mutual deposit guarantee
funds
Discussion: The January 1, 1969 limitation should
be deleted. Otherwise, the provision will have to
be further amended for corporations organized after
1968. The Administration prefers the approach taken
in H.R. 13532 (94th Cong., 2d Session).
48. Additional changes in subchapter 248. Support Senate provision,
S shareholder rules
149. Individual retirement accounts
for volunteer firemen
249. No objection to Senate
provision.
250. Optional taxable year of
inclusion for sale of livestock
on account of drought
250. Oppose Senate provision
Discussion: The present tax deferral rules with
respect to livestock provided by section 1033
of the Internal Revenue Code provide adequate
relief for farmers in drought areas.
251. Sense of the Senate regarding
revenue loss of bill in
conference
251.
Ihe Department of theTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE AT 12:00 NOON
August 25, 1976
TREASURY TO AUCTION $2,000 MILLION OF 4-YEAR NOTES
The Department of the Treasury will auction $2,000
million 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 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-1044
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 4-YEAR NOTES
August 25, 1976
Amount Offered:
To the public
$2,000 million
Description of Security:
Term and type of security
4-year notes - Series E-1980
Maturity date
September 30, 1980
Call date
No provision
Interest coupon rate
•n
To be determined 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
".....
Minimum denomination available
March 31 and September 30
$ 1,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by investor
None
Preferred allotment
Noncompetitive bid for
$500,000 or less
Deposit requirement
5% of face amount
Deposit guarantee by designated institutions....
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, August 31, 1976,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank within
FRB district where submitted
c) check drawn on bank outside
FRB district where submitted
Delivery date for coupon securities
Tuesday, September 14, 1976
Thursday, September 9, 1976
Tuesday, September 7, 1976
Tuesday, September 14, 1976
FOR IMMEDIATE RELEASE
FRIDAY, SEPTEMBER 3, 1976
CONTACT: PRISCILLA CRANE (202) 634-5248
A revised edition of "Audit Guide and Standards for
Revenue Sharing Recipients" was issued today by the U.S.
Treasury Department's Office of Revenue Sharing.
The updated Guide provides information to States and
local governments and their auditors about procedures
required to assure compliance with changes which have been
made in the revenue sharing law and regulations since the
first Audit Guide was issued, in October 1973.
The only amendment to revenue sharing law since the
statute was passed in 1972 offers recipient governments the
option of retaining data for 60 months, where more current
data have been affected adversely by a Federally-declared
disaster. The General Revenue Sharing Program is
authorized by Title I of the State and Local Fiscal
Assistance Act of 1972 (P.L. 92.512).
Recent changes in the regulations primarily affect the
non-discrimination provisions of revenue sharing law.
For example, the new Audit Guide includes standards for
audit of recipient government records of the use of real
WS-1045
and tangible property purchased with shared revenues, since
regulations promulgated last fall state that the nondiscrimination provisions of revenue sharing law apply as
long as such property is used and wherever it is used.
Civil rights reporting procedures incorporated in
the Guide require that pending litigation and complaints
be disclosed in audit reports.
Whereas the original Audit Guide stated that financial
data provided to the U.S. Bureau of the Census and used in
allocating revenue sharing funds must be on a cash basis,
the new document indicates that an accrual basis may be
used.
The new Guide clarifies audit procedures related to
such matters as the return of previously-obligated revenue
sharing funds to a recipient's trust fund; requirements
of the Davis-Bacon (prevailing wage) Act; requirements of
reports required to be filed with the Equal Employment
Opportunity Commission; and procedures to verify the
maintenance of transfer provisions of law which are
applicable to state governments.
Individual copies of the new Audit Guide may be
obtained from the Office of Revenue Sharing, 2401 E St.,
N.W., Washington, DC
-30-
20226.
FOR IMMEDIATE RELEASE
Contact: L.F. Potts
Extension 2951
August 27, 1976
TREASURY ANNOUNCES THREE ACTIONS
UNDER THE ANTIDUMPING ACT
Assistant Secretary of the Treasury David R. Macdonald
announced today three actions under the Antidumping Act.
In the first action, Assistant Secretary Macdonald announced
that he was issuing a dumping finding with respect to acrylic
sheet from Japan. The dumping finding will be published in
the Federal Register of August 30, 1976.
On April 29, 1976, the Treasury Department determined
that acrylic sheet from Japan, other than that produced and
sold by Mitsubishi Rayon Company, Ltd., was being, or likely
to be, sold at less than fair value within the meaning of
the Antidumping Act, 1921, as amended.
On July 26, 1976, the United States International Trade
Commission advised the Secretary of the Treasury that an
industry in the United States was being injured by reason of
the importation of the subject merchandise from Japan, sold,
or likely to be sold, at less than fair value.
After these two determinations, the finding of dumping
automatically follows as the final administrative requirement
in antidumping investigations.
Imports of acrylic sheet from Japan during calendar
year 1975 were valued at approximately $3.7 million.
In the second action, Assistant Secretary Macdonald
announced the initiation of an antidumping investigation on
imports of pressure sensitive plastic tape from West Germany.
Notice of this action will also be published in the Federal
Register of August 30, 1976.
WS-1046
-2-
Assistant Secretary Macdonald'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 there is injury to or likelihood of injury to
or prevention of establishment of an industry in the United
States.
Imports of the subject merchandise from West Germany
during calendar year 1975 were valued at roughly $4.6 million.
In the third action, Mr. Macdonald announced an extension
of investigatory period with respect to clear sheet glass
from Romania. Because of the complicated nature of this case,
the investigatory period is being extended from 6 months to
no more than 9 months. Notice of of this action will appear
in the Federal Register of August 30, 1976. A tentative
decision was to have been made on October 8, 1976, but will
now be made on or before January 8, 1977.
Imports of the subject merchandise from Romania during
the period January-June 1976 were valued at roughly $1.4 million.
o 0 o
Contact: L.F. Potts
Extension 2951
August 27, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES FINAL DETERMINATION OF SALES AT
LESS THAN FAIR VALUE WITH RESPECT TO KNITTING MACHINES
FOR LADIES' SEAMLESS HOSIERY
FROM ITALY
Assistant Secretary of the Treasury David R. Macdonald
announced today that knitting machines for ladies' seamless
hosiery from Italy are being or are likely to be sold at
less than fair value within the meaning of the Antidumping
Act, 1912, as amended. Notice of this determination will
be published in the Federal Register of August 30, 1976.
The case has been 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 injury determination, dumping duties will
be assessed on all entries of the subject merchandise on which
such affirmative determination is made and where dumping
margins exist.
A "Withholding of Appraisement Notice," published in
the Federal Register of May 21, 1976, stated that there was
reasonable cause to believe or suspect that there were sales
of the subject merchandise from Italy at less than fair value.
Pursuant to this notice, interested persons were afforded
the opportunity to present oral and written views prior to
the final determination in this case.
Imports of the subject merchandise from Italy during
calendar year 1975 were valued at approximately $3.25 million.
o 0 o
WS-1047
WtmentoftheTREASURY [}
fON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE ON DELIVERY
STATEMENT OF THE HONORABLE EDWIN H. YEO III
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE
THE SUBCOMMITTEE ON INTERNATIONAL FINANCE, SENATE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
FRIDAY, AUGUST 27, 1976, 10 A.M.
Mr. Chairman and Members of the Subcommittee:
I urge prompt and affirmative action on the legislation
to approve amendment of the IMF Articles of Agreement and to
consent to an increase in our IMF quota.
This is the most important legislation in the international
finance field in many years. It represents international
agreement on a new monetary system, formulated at Rambouillet
and Jamaica, following lengthy international negotiations in
which the United States played a leading role; and it strengthens
the IMF's ability to deal with the world's problems of balance
of payments financing and adjustment by a general increase in
quotas.
The new monetary system is a more flexible, pragmatic,
market-oriented system, replacing the exchange rate rigidity
and gold emphasis of the Bretton Woods system which broke down
five years ago.
The new system discards the outmoded and unworkable elements
of Sretton Woods, but keeps and builds on the good features
of that system. Most importantly, it retains the emphasis
of the present IMF Articles on a liberal, open monetary and
trading order; the commitment to cooperation and responsible
international behavior in monetary affairs; and the central
role of a proven institution -- the IMF --as the heart and
monitor of the system.
The new system, like the Bretton Woods par value system
before it, seeks to promote monetary stability, but by a different
approach. While Bretton Woods sought to impose monetary stability
on the world by a structure of par values, the new system recognizes that monetary stability is the result not of par values
but of orderly underlying economic and financial conditions in
member countries.
&/£" IQ <tf
- 2 Reflecting that change in approach, the new system
changes the obligations of member countries. Under Bretton
Woods, a fundamental obligation of each IMF member was to
maintain a par value for its currency. No other exchange
practice -- such as floating -- was recognized or tolerated.
Under the Jamaica system, there is wide latitude for a
member country to allow its currency to float or follow
other exchange arrangements of its choice. The fundamental
obligations are that countries must direct their policies
toward fostering orderly underlying economic and financial
conditions, and that they must avoid manipulating exchange
rates to prevent balance of payments adjustment or to gain
unfair competitive advantage. The new system thus concentrates
on the real determinants of monetary stability -- stable
economic and financial conditions -- rather than on the
exchange rate consequences that were the main focus of
Bretton Woods.
The new system is organically complete and workable. ^
It has the flexibility to evolve as the world evolves, and
it can be expected to function well in the years ahead without
major revision. Its adoption has been widely accepted as
a positive and beneficial move, a major structural improvement
for the world economy. It is acceptable to 128 different^
nations of widely differing interests, needs, and attitudes,
in a period of ferment and change in monetary doctrine.
If it does not satisfy every enthusiastic reformer -- and^
any theorist tends to measure a new system against his own
subjective judgment of the ideal monetary system -- it does
certainly constitute a workable and pragmatic system that
is a major improvement on the Bretton Woods system as it
operated from 1950 to 1970. This new system is much better
suited to dealing with today's problems than any conceivable
variation of the stable but adjustable par value system.
The stable but adjustable par value system of Bretton
Woods was in retrospect a "fair weather system." It worked
fairly well in the late 1950's and early 1960's when we
experienced low rates of inflation, had no massive dependence
on expensive OPEC oil, faced only moderate capital flows,
and enjoyed a long period of world prosperity.
- 3 The new system is a "system for all seasons." It
recognizes that we can't always expect the pleasant economic
environment of that earlier period. It recognizes that
nations will not always be willing to follow the monetary
and other macro-economic policies needed to keep prices
and incomes in close harmony with their neighbors. It
recognizes there will be differing propensities to inflate -in Europe alone, price increases in the past year varied
from 5 percent in Germany to 17 percent in Italy and 33
percent in Iceland. It recognizes that there has been a
revolutionary change in exchange markets; that nations
cannot afford to risk free speculation that results when a
par value becomes unrealistic; that a nation cannot maintain
in the face of market pressures an exchange rate that does
not reflect its competitive position. And it recognizes
that different exchange policies may be preferred by and
appropriate for different countries. No single prescription
necessarily meets the needs of all nations large or small,
diversified or one-crop, manufacturing or primary producers.
The Jamaica amendment makes it legal for countries to follow
exchange practices over a wide spectrum from individual free
floating, through managed floating, group floating and trotting
pegs, all the way to pegged rates that are adjusted by infrequent
changes.
While the new system will be a tolerant system, as IMF
Managing Director Witteveen has put it "freedom of choice is
not^ freedom of behavior." The Fund is empowered to exercise
broad surveillance on all types of exchange practices of
members, to promote international cooperation and avoid
unfair competition or exchange policies that prevent
international adjustment.
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
ofthose
a country's
actions, and directed to all countries,
not
just
in deficit.
- 4 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 1
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 the new
system.
Detailed codes of behavior are not set forth in the
amended Articles. Nor should they be. The original Articles
drafted in 1944 contained specific rules and regulations -- *_
far too many of which became obsolete and unworkable as time i
passed and conditions changed. The Articles is a constitution,
not a contract. It should not prescribe detailed rules as o
these must take account of each individual case and circumstance -particularly in an institution of such diverse country membership
that the largest member is 60,000 times as big as the smallest
in terms of GNP. Moreover, the amended IMF constitution is a
flexible one, permitting a modification to a different kind of
monetary system if conditions change and a large consensus favors
such a move, and if detailed rules were to be included there
would have to be rules for more than one system.
The Fund does have sanctions which can be applied when
critical provisions of its Articles are violated -- most
importantly it can deny an offending member access to its
resources or it can exclude it from membership. But the
IMF relies more on its moral force, as voice of the international
community, and that carries considerable weight.
- 5 Some reformers have expressed concern that the new
system does not establish formal IMF control over the level
and growth of international reserves. This matter was discussed at great length in the reform negotiations. But no
group, neither the developing countries, the oil exporters,
nor the industrial nations showed any willingness to accept
the restrictions on their ability to borrow, lend, or acquire
currencies that would be necessary to establish quantitative
limits on reserves. There is in addition considerable doubt
in many quarters that placing such power of decision in an
international body would be either effective or desirable.
At the very least, the time for such a move would appear to
be well in the future, not now.
}o A second and related major change in approach in the
new system is the shift away from gold. Under the Bretton
Woods system, gold, with its supply limitations, speculative
pressures, and competing industrial demands, proved a
capricious and volatile asset, unsuitable as a basis for the
international monetary system -- just as it had earlier proved
unsuitable as a basis for the U.S. and other domestic monetary
systems. In recognition of these inadequacies, the new system
promotes a further reduction in gold's monetary role, by
eliminating gold's legal position as the central asset and
numeraire of the monetary system, by eliminating the required
use of gold in IMF transactions, and by empowering the IMF to
dispose of its remaining gold holdings.
fl£
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.
- 6 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.
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.
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 is expected to take on
an increasingly important role, not only as a unit of account
used in measurements, but also as as asset used in transactions.
With respect to its asset use, there is an obligation on
members to collaborate with the Fund toward the objective o f a j
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.
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.
- 7 Both of the two main improvements in the monetary system -the move to more flexible exchange rate arrangements and the move
to reduce gold's monetary role -- are of critical importance
to the United States. Under Bretton Woods, it was the dollar
that was pinned down at the center of the system, and our exchange
rate that could not adjust adequately in response to market
forces -- with the result, in the late 1960's and early 1970's,
not only of increased debts, but also of loss of jobs, productive
capacity and transfer of our industry abroad. The new monetary
system embodied in this legislation provides important safeguards
against such an adverse position. This is a matter of critical
importance to the strength of our economy and the prosperity of
our citizens.
The amended Articles will terminate for IMF purposes existing
par values for 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, or to authorize any change in
the'par value if one were established. The standard for the
dollar of $42.22 per fine ounce of gold in present legislation
would be retained solely with respect to gold certificates held
by tine Federal Reserve System -- the only domestic purpose for^
which a par value in terms of gold is needed. These gold certificate^ are being retired by the Treasury as its gold holding are
sold.
, I have confined my remarks to the major points. Numerous
other changes being made to improve the operation of the IMF
and the monetary system are explained in detail in material we
have submitted to the Congress.
This legislation has been approved in the House by a large
majority, and favorably reported by unanimous vote of the Senate
Foreign Relations Committee. It is urgent that the Congress
move promptly and affirmatively to complete legislative action.
Since the breakdown of Bretton Woods five years ago, international
exchange arrangements have of necessity been operating outside
the law. We must restore the structure of an equitable, workable,
lawful system. The United States has played a prominent role m
bringing about acceptance of the new arrangements, and our acceptoo 0 ooto follow so that we can
ance of them will encourage others
implement these proposals with a minimum of delay.
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE GEORGE H. DIXON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
AUGUST 31, 1976
The International Banking Act of 1976 (H.R. 13876)
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to appear before this Subcommittee
to present the Administration's position on the proposed
International Banking Act of 1976 (H.R. 13876). At the
outset, I should note that the Administration supports
the bill and urges its passage with certain modifications
which I will discuss.
Broadly speaking, we feel that the bill is an appropriate
vehicle to achieve, with respect to foreign banks operating
in the United States, (1) more equal treatment with domestic
banks and (2) the degree of supervision and control necessary
for the maintenance of sound regulatory and monetary policies.
Basic Reasons for Administration Support
During the last decade, international banking activity
has increased dramatically both overseas and in the United
States. This growth is related to the extraordinary
increase in international trade in the post-World War II
period and the reduction of international barriers to
financial and investment flows. Total assets of foreign banks
in the United States have increased ten-fold from about $6 billion
WS - 1049
- 2 at the end of 1966 to about $64 billion at the end of 1975.
During this same interval, U.S. banking activities abroad
have increased even more rapidly. The assets of foreign
branches of U.S. banks grew fourteen-fold from about $12
billion at the end of 1966 to $176 billion at the end of
1975.
This dramatic growth illustrates the increasing importance of international banking and the need to ensure equality
of operating authority for, and regulation of, foreign banks
in the United States. It also suggests that we must consider
carefully the effect that U.S. regulation of foreign banks
will have on foreign government treatment of U.S. banks,
securities firms and other financial institutions operating
abroad.
Our policy towards foreign banking in the United States
should also be considered in the context of our overall policy
on foreign investment in this country. Our basic policy is
to welcome such investment and to accord foreign investors
treatment which is comparable to treatment of domestic
enterprise. As a result, the Administration considers it
desirable and important to achieve comparable treatment of
foreign and domestic banks in the United States.
Under existing law, there are significant disparities
in treatment. For example, foreign bank branches and
agencies are not currently regulated or supervised by any
Federal banking agency, while virtually all domestic banks
come under the regulation of the Federal Reserve, the
Comptroller of the Currency, or the Federal Deposit Insurance
Corporation. This gives foreign bank branches and agencies
some advantages. On the other hand, foreign banks in the
United States are denied certain opportunities available
to domestic banks.
The International Banking Act of 1976 will, to the
extent possible, alleviate many of the existing disparities.
It will provide more comparable Federal regulation and
supervision. It will permit foreign citizens to become
majority shareholders and directors of Edge Act Corporations
and to occupy nearly half of the directorships of foreigncontrolled national banks. In addition, it will impose
restrictions on interstate branching by foreign banks which
are comparable to restrictions applied to domestic banks,
while grandfathering existing multi-state operations. Foreign
banks will also be prohibited from simultaneously engaging
in commercial banking and securities activities in the
will
United
beStates,
grandfathered
althoughtemporarily.
in this instance existing operations
- 3 Proposed Changes in the Bill
The Administration recommends that the bill be modified
in several respects.
1. Grandfathering of Securities Operations
We firmly believe that existing U.S. securities operations of foreign banks should be permanently grandfathered.
Section 8(c) of the bill requires that foreign banks now
lawfully engaged in selling and distributing securities in
the United States must terminate these activities by
December 31, 1985.
The Administration strongly supports permanent grandfathering for several reasons. First, securities affiliates
have been operating in good faith in the United States,
in some cases for over 35 years. It would be unnecessary
and unfair to force termination of existing securities
activities which have fully conformed with our laws and
have provided desirable competition and liquidity to U.S.
securities markets. Second, requiring foreign banks to
dispose of their interests could disrupt domestic securities
firms which have received infusions of capital from foreign
banks. Third, it has not been shown that domestic financial
institutions would be injured by permanent grandfathering
of the few existing securities operations of foreign banks.
Fourth, requiring foreign banks to terminate most of their
United States securities operations could adversely affect
those regional securities exchanges of which foreign bank
affiliates are members. Fifth, there is ample precedent in
banking legislation, especially Bank Holding Company Act
legislation, for permanently grandfathering existing
operations which do not conform with changes in the law.
It would be inequitable to break with that precedent in the
case of foreign banks. Finally, the absence of permanent
grandfathering could have unfortunate consequences for the
extensive activities of U.S. domestic banks and securities
firms operating overseas.
2. Special Review of Foreign Bank Applications
We recommend the elimination of Section 9 of the bill.
This section would introduce special Federal screening of
applications by foreign banks desiring to establish operations
within the United States. More specifically, Section 9
would require: (1) The Secretary of the Treasury to issue
- 4 guidelines containing general criteria for the admission
of foreign banks; (2) Federal and state bank supervisory
authorities to solicit the views of the Secretary of State,
the Secretary of the Treasury and the Federal Reserve
Board before acting on the applications; and (3) Federal
and state banking authorities to disapprove applications
unless foreign banks specifically state that they will
comply with U.S. anti-discrimination laws which apply to
domestically chartered banks.
We oppose the retention of Section 9 for several
reasons. First, the section would apply only to foreign
banks and would establish new criteria over and above those
normally applied to both foreign and domestic banks.
Second, this country has long followed an open-door policy
towards international investment, and establishing a
special screening process would conflict with this policy.
Third, the special process provides no additional protection to U.S. depositors or to national interests since
there are already adequate safeguards in existing law and
administrative procedures and in the proposed legislation.
Fourth, the creation of special guidelines and review procedures
for the banking sector could set an unfortunate precedent for
the establishment of similar procedures for investment in
other sectors of our economy and could also induce other
countries to introduce or expand restrictions on American
banking activities and investments abroad. Finally, in so
far as the review would apply to the establishment of banking
operations which do not involve depository or fiduciary
functions, this provision would appear to be contrary to
the national treatment provisions of treaties which we have
with most of the major banking nations.
3. Application of the Bank Holding Company Act
Section 8(a) of the bill applies the Bank Holding
Company Act to foreign banks having U.S. branches and
agencies. We believe this section should be amended to
exempt from Bank Holding Company Act prohibitions those
non-bank acquisitions by foreign banks that do not have a
significant impact in the United States. In order for an
acquisition or activity to have a significant impact, (1)
the parent bank would have to exercise control over the
non-bank enterprise in the United States and (2) the enterprise would have to have a substantial effect on commerce
in the United States or any relevant market thereof.
To illustrate what might occur under the current version
of Section 8(a), a foreign parent bank with a New York
branch might wish to acquire a manufacturing company in its
- 5 home country in full accordance with its own laws. If
the foreign manufacturer had an American manufacturing
subsidiary, the foreign bank would indirectly acquire the
American manufacturing subsidiary when it purchased the
foreign firm. As a result, the parent bank would
simultaneously engage in the United States in commercial
banking and manufacturing. Accordingly, under Section 8(a),
the proposed acquisition would be prohibited by the Bank
Holding Company Act, unless it qualified for a regulatory
exemption under that Act. The exemption process would
rest solely on the Federal Reserve Board's discretionary
authority with little specific statutory guidance.
We believe that it is desirable to give the Federal
Reserve Board greater statutory guidance for two reasons.
First, the existing exemption process creates considerable
uncertainty for foreign banks concerning which foreign nonbanking activities or acquisitions are permissible when
they also affect United States commerce. This uncertainty
should be reduced as much as possible, while maintaining the
broad principles*of the Bank Holding Company Act. Second,
it is desirable to assure by statute, rather than merely by
regulation, that the Bank Holding Company Act does not
apply extraterritorially. It is not our intent to prohibit
foreign banks located abroad from acquiring or providing
assistance to non-bank enterprises abroad. Yet, that
could happen under the present version of Section 8(a),
subject only to the Federal Reserve Board's discretionary
authority.
The statutory guidance incorporated in our proposal
is not designed to change the intent of the Bank Holding
Company Act as currently implemented by regulations of
the Federal Reserve Board. Rather it is designed to assure
certain, consistent application of that intent.
4. Mandatory Deposit Insurance
We recommend that Section 6 which requires deposit
insurance for U.S. branches of foreign banks be amended
(1) to make insurance optional and (2) to offer a form of
deposit insurance which will not be unduly burdensome for
foreign banks.
The Administration is concerned about two aspects of
Section 6. While we believe that deposit insurance is
desirable, foreign banks should be given the opportunity to
elect coverage as are certain domestic banks. The benefits
- 6 of FDIC insurance have been clearly demonstrated, and
insurance should prove attractive to foreign banks if its
cost is not unduly burdensome. We believe the insurance
provisions currently contained in the bill do not meet
this standard. If this insurance was made optional,
foreign banks would not likely elect coverage, and if made
mandatory, it would create an unfair burden on foreign banks.
Moreover, it could be interpreted as a departure from
national treatment of established banks and thus inconsistent
with certain of our treaty obligations.
Our proposed revision of Section 6, in addition to
making insurance optional, would increase its attractiveness
to foreign banks. Specifically, the FDIC would be given
flexibility to narrowly define "domestic deposits" and
thereby limit its risk and reduce the cost to foreign banks.
It is contemplated that this term would include deposits
of individuals who are citizens or residents of the United
States and companies having an appropriate business nexus
with this country. Further, the FDIC vjpuld be empowered to
evaluate the additional risks of insuring a foreign bank
branch in the U.S. and to adjust accordingly the requirements for any surety bond or pledge of assets.
We believe that with these changes, deposit insurance
would be a viable option.
5. Citizenship Requirements
Section 2 would end the current prohibition against
foreign citizens serving as directors of national banks.
It would permit not more than a minority of the directors
of foreign-controlled national banks to be foreign citizens.
The Administration welcomes this change as a step in the
right direction. Indeed, we would suggest the complete
elimination of any citizenship requirement for all national
banks, as has been done for Edge Act Corporations in Section
3 of this bill.
Conclusion
In summary, let me reiterate the Administration's
belief that this bill is a good vehicle for achieving more
equal treatment between foreign and domestic banks in the
United States. We favor passage of the International
Banking Act of 1976 with the modifications suggested in my
testimony today. We will be happy to provide the Subcommittee
- 7 with legislative language incorporating those modifications
Mr. Chairman, that concludes my prepared testimony
and I will be pleased to answer any questions that you '
may have.
oo 00 oo
FOR RELEASE AT 4:00 P.M.
''* *
''
August 27, 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 September 9, 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 June 10, 1976,
and to mature December 9, 1976
(CUSIP No. 912793 C5 3), originally issued in
the amount of $3,399 million, the additional and original bills to be freely
interchangeable.
f
182-day bills, for $3,400 million* or thereabouts, to be dated September 9, 1976,
and to mature March 10, 1977
(CUSIP No. $12793 E9 3).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 9, 1976,
outstanding in the amount of $5,717 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,469 million.
These accounts may exchange bills they hold for the bills now being offered at
f
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, Friday, September 3, 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-1050
-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. 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
v
*...
in part, and his action in any such respect shall be final. Subject to these
V
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 September 9, 1976, in cash or other
immediately available funds or in a like face amount of Treasury bills maturing
September 9, 1976; provided, however, that settlement for tenders submitted- to the
Federal Reserve Bank of San Francisco and the Los Angeles Branch must be completed
at that bank or branch on September 10, 1976, and must include one day's accrued
interest if settlement is made with other than Treasury bills maturing September 9,
1976.
Cash and exchange tenders will receive equal treatment.
Cash adjustments
will be made for differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
Under Sections 454(b) and 1221(5) of the Internal Revenue Code of 1954 the
amount of discount at which bills issued hereunder are sold is considered to accrue
when the bills are sold, redeemed or otherwise disposed of, and the bills are
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
actually received either upon sale or redemption at maturity during the
year for which the return is made.
Department of the Treasury Circular No. 418 (current revision) and
prescribe the terms of the Treasury bills and govern the conditions of
issue. Copies of the circular may be obtained from any Federal Reserve
Branch.
the amount
taxable
this notice,
their
Bank or
CONTACT:
GEORGE ROSS
(202) 964-5985
FOR IMMEDIATE RELEASE August 30, 1976
UNITED STATES AND HUNGARY TO DISCUSS
INCOME TAX TREATY
The Treasury Department announced today that
representatives of the United States and Hungary will meet
in Budapest during the week of September 20, 1976 for
preliminary discussions of a prospective income tax treaty
between the two countries.
The proposed convention would deal with such issues
as the taxation of income from business ventures, investment, and employment in the other country, and would include
provisions for nondiscrimination in tax treatment and for
administrative cooperation in resolving income tax questions.
Comments are invited on the income tax aspects of
doing business in Hungary. Interested persons may wish to
refer to the income tax conventions recently concluded by
the United States with Romania and Poland and to the model
draft treaty issued by the Treasury Department on
May 18, 1976. Comments should be submitted in writing to
Assistant Secretary for Tax Policy Charles M. Walker,
U.S. Treasury, Washington, D.C. 20220 as promptly as possible
so that they may be taken into account in the September
discussions.
This notice appeared in the Federal Register of
August 30, 1976.
-oOoWS-1051
For Release on Delivery
STATEMENT OF THE HONORABLE ROBERT A. GERARD
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
CONSUMER PROTECTION AND FINANCE
HOUSE COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE
AUGUST 31, 1976; 8:30 A.M.
Mr. Chairman and members of this distinguished Subcommittee:
I am pleased to have the opportunity to present the
Department of the Treasury's views on H.R. 15205, the Municipal
Securities Full Disclosure Act of 1976. Treasury strongly
supports the principles which underlie this legislation, and
with qualifications I shall discuss later in my testimony,
strongly supports this bill. Moreover, I would like to
commend the committee for its willingness to take up this
legislation so promptly. Since the implementation period
for the procedures required by this legislation is rather
lengthy, time is of the essence.
The Need for This Legislation
Perhaps the oldest cliche on Wall Street is that
"uncertainty is a condition markets do not tolerate well."
And today, as a consequence of the changes of the past two
years, uncertainty remains altogether too prevalent in the
market for the securities of state and local governments.
For many years the myth persisted that tax-exempt
securities, and particularly those general obligations
secured by the ad valorem taxing power of the issuing jurisdiction,
were risk free. This myth was reflected not only in investors'
attitudes toward new issues, but also in the behavior of the
secondary market.
Rarely, if ever, did price changes in the secondary
market for municipal securities reflect new information
concerning the financial affairs of an issuer. Rather,
price changes were normally marketwide, reflecting changing
perceptions of interest rate prospects or economic conditions.
In terms of its price behavior, the secondary market for
municipal bonds was much more similar to the government
WS-1052
- 2securities market -- where, of course, there is no principal
risk whatsoever -- than it was to the corporate markets,
where changing risk characteristics were generally reflected
in the prices of individual securities.
To be sure, the municipal market did go through the
motions of distinguishing among issuers on the basis of
risk. Many new issues, and virtually all of substantial
size, were subject to the rating process and assigned a
letter grade which attempted to define the relative risk
characteristics of the security in question. But as we
learned so forcefully during the New York City financial
crisis, no one -- not even the rating agencies themselves -believed that the levels of risk which were assigned relected
the financial realities.
Notwithstanding the fact that the rating agencies had
assigned New York City a lower rating than other issuers -thus implying there was a greater risk of default by New York
City than such other issuers -- and notwithstanding the fact
that underwriters and investors in New York City securities
demanded a higher return than they demanded from other,
higher rated issuers -- thus reflecting allegedly different
perceptions of risk -- both representatives of the rating
agencies and the financial community insisted that the
ultimate realization of the risk they had identified -default -- was unthinkable and impermissible.
In short, until last year the municipal bond market in
effect operated on two levels of awareness: the real and
the superficial. On a superficial level, the participants
behaved as if they were dealing with a real market, where
prices reflected the financial condition of the issuer. But
as a practical matter, the market operated on the assumption
that no principal risk existed: that debt service obligations
would be timely met by all issuers.
Today, there is only a single level of awareness. We
know that default is a realistic possibility. Accordingly,
we are forced to make real judgments as to the relative risk
characteristics of particular securities. Yet there is no
mechanism to insure that those judgments are made in a sound
and responsible manner. It is to provide such a mechanism -perhaps the most essential characteristic of a healthy,
properly functioning, securities market -- that we need
legislation such as that before the Subcommittee today.
As I shall discuss momentarily, I do not believe such
legislation should mirror, or even be patterned upon, the
form of regulation in the corporate securities market. I do
believe, however, that we can look at the corporate market
for guidance in addressing the threshold question of whether
- 3 legislation at the federal level is required. Our corporate
markets are the healthiest, most competitive, most efficient,
and most attractive in the world. In my view, a principal
factor in the strength of these markets has been the knowledge,
shared by all investors, that the information they are
relying upon is current, accurate, and comparable. We need
to develop a system of municipal disclosure that meets these
same criteria.
The Constitutional Parameters
Since the debate regarding municipal disclosure legislation
began in earnest approximately a year ago, there have been
those who have argued that any such legislation at the
federal level would be an unconstitutional interference with
the right of sovereign state and local jurisdictions to
conduct their own affairs. When companion legislation was
considered by this Subcommittee's counterpart subcommittee
in the Senate, the Senate requested and received legal
opinions to the effect that carefully drafted municipal
disclosure legislation would not violate the Constitution.
Since then, however, new impetus has been given to the
constitutional argument by the Supreme Court's decision last
June in National League of Cities v. Usery. That case held
that the Federal Government could not regulate the wages a
state paid its employees on the theory that the Federal
Government was probihited from interfering with a state's
conduct of essential state functions.
XL
I will leave the final legal appraisal of the impact of
the Usery decision to the practicing lawyers, and in that
respect the Committee may wish to ask those who opined on
this issue to Senator Williams' subcommittee to reappraise
their opinions in light of Usery. Let's take a moment,
however, to look at the question from a practical standpoint,
on the principle that our Constitution must be responsive to
changing needs and changing conditions.
I can accept, indeed endorse, the principle that the
Federal Government should not involve itself in the internal
affairs of a state. I do believe, however, it is quite a
different matter when a state or local government -- even in
the exercise of a governmental function so essential as
borrowing money — chooses to deal with citizens of other
states.
One of the key aspects of our Constitution is its
guarantee to every citizen, to every jurisdiction, of the
free and unfettered right to deal with citizens of other
states: the right, largely free of state or local interference,
- 4 to tap the financial resources of persons or entities
located elsewhere. Looked at in this context, I would
submit that it hardly befits a state to argue that the same
Federal authority which guarantees it access to the financial
resources of citizens of other states -- to the national
financial markets -- does not permit the Federal Government
to take action to insure that such access is on fair and
reasonable terms.
That is a practical man's view of the constitutional
principles involved. Now let me turn to the practicalities
themselves.
I believe that without a uniform nationwide system of
disclosure, the municipal bond market will become increasingly
fragmented and regionalized. Yet, if historical trends
continue, such a process of balkanization will be accompanied
by continuing growth in state and local government demands
for credit: larger needs, but smaller markets. At some 8
point -- indeed we may have reached that point in some areas
today -- these smaller, fragmented regional markets will
simply be unable to supply the credit demanded by issuersrB
within those markets. Then, given the absence of a national
market precipitated by unwillingness to adopt uniform rules
of disclosure, obtaining credit in the traditional way --by
borrowing in the public market -- will become impossible.
That in turn will inevitably lead to demands for Federal
assistance in state and local financing and, of course, far
higher levels of Federal intrusion than those contemplated
by the current proposal for municipal disclosure. It would
indeed be a Pyrrhic victory for states rights and the principles
of federalism, if a broad construction of Usery resulted
in virtual denial of access by state and local governments
to private sources of financing.
Basic Principles of Disclosure Legislation
I suggested earlier that we should not deal with the
question of municipal disclosure simply by adopting the
disclosure principles employed in the corporate markets.
From relatively simple beginnings in the early 1930's, the
issuance of corporate securities -- through judicial mandate
and regulatory action -- has come to be governed by an
extremely demanding and complex set of rules which create
potential pitfalls for issuers and intermediaries at
every turn.
The growth in these demands represents a value judgment
that the investor is entitled to have the people with whom
he deals take every conceivable step -- irrespective of how
- 5 costly, how burdensome, or how inefficient --to protect the
investor from financial loss. In dealing in corporate
securities, an issuer or an intermediary fails to dot every
"I" and cross every "T" at its own peril. Unless the proper
path is followed with absolute rigor and perfection, it is
likely that the investor will be able to recoup his investment
and more, irrespective of the investor's own contribution to
the loss or of the existence of a causal relationship
between the issuer or underwriter's conduct and the investor's
loss.
While it may be satisfying or comfortable to think of
such standards in moral terms, as a practical matter, their
ramifications are purely financial. In the corporate arena,
the need to dot "I's" and cross "T's" simply means that the
entire process must be supervised by multiple teams of
lawyers and accountants whose fees add considerably to the
costs of the capital raising process.
While I have my doubts as to the utility of these
standards in the corporate field, it is not our purpose
today to reexamine them. I do, however, strongly believe
that we must be acutely sensitive to the dangers inherent in
transposing these practices to a system of municipal disclosure.
Simply stated, the extensive corporate disclosure
requirements reflect a judgment that we should spare no
expense to give the investor every last ounce of financial
and legal protection. In the municipal area, where such
expenses must be directly paid by taxpayers, I do not believe
we can or should make a similar choice. Instead, in designing
a system of municipal disclosure we should confine the
burdens on issuers and underwriters to those required to
produce healthy and efficient markets -- thereby reducing
borrowing costs -- and resist the temptation to impose
further costs for the purpose of providing extra "insurance"
to investors, which will not be recouped out of lower borrowing
costs, but instead must be paid by the taxpayers directly.
In the corporate field the phrase "protection of investors"
has come to mean insurance for investors. In the municipal
area I believe it incumbent upon us to confine the meaning
of the term to what may well have been its original meaning:
information.
The Desired Nature of Disclosure Legislation
The fundamental goal of disclosure legislation must be
to assure that the maximum amount of relevant information is
readily available, with a minimum amount of Federal intervention
- 6 and a minimum of cost. Disclosure rules and regulations
should enhance the market, not interfere with the market
mechanism for municipal issues. Most importantly, in order
to ensure that municipal investors are able to make a concise
comparative analysis of the finances of different issuers,
disclosure legislation must standardize the presentation of
the information being disclosed.
It is the importance of standardization which requires
that a disclosure program be administered at the Federal
level. We have examined carefully the voluntary disclosure
approach. As the Committee knows, it has been argued that
since investors and underx/riters are demanding more information,
if the free market were left to its own devices, the information
would be provided by those issuers which need market access.
We concluded, however, that precisely to assure that the
free market mechanism will function smoothly with respect to
municipal issues, it is necessary to insist upon mandatory
disclosure of financial information by issuers entering the
market. It is only by mandatory disclosure that adequate,
uniform, usable information can be assured, and that its
flow to the investing public can be guaranteed.
Scope
There are many municipalities which do not enter the
capital markets frequently or to a heavy degree, and thus
present lesser concerns to the investing public or to the
proper functioning of our nation's capital markets. There
are many municipal issues which have a relatively limited
market. So that mandatory disclosure does not result in
overkill, we favor the setting of threshold limits below
which disclosure would not be required.
Once the issuers which should be subject to disclosure
standards have been identified, the information required of
them should be carefully specified and relatively comprehensive.
Some flexibility, of course, is advisable, but in general
State and local governments are entitled to clear and explicit
guidance from the Congress on the kind of information they
are required to disclose.
Comments on Pending Disclosure Bills
Based on the above principles, we oppose H.R. 11044.
By eliminating the 1933 and 1934 Act exemptions for municipal
securities, this bill would require that municipal securities
undergo the same disclosure, filing and clearance and
registration procedures as corporate securities. Such an
approach would impose burdens and costs which outweigh the
benefits derived.
- 7 As I indicated at the outset, I concur with the essential
substance of H.R. 15205. The bill provides for the preparation
of annual reports, including audited financial statements,
by issuers of municipal securities with more than $50 million
outstanding. It provides also that distribution statements
be prepared prior to public offer or sale of $5 million or
more of securities. And it requires that such reports and
statements be reliable and comparable, as well as readily
available to underwriters, dealers and investors. Finally,
it encourages State oversight by providing for exemptions
from the distribution statement requirement where a State
authority has approved the offer and sale of the issue.
From our standpoint, perhaps the most important feature
of the legislation is the requirement of an annual independent
audit. Not only does this requirement itself satisfy two of
the three fundamental criteria of disclosure legislation -insuring the accuracy and the comparability of the financial
information provided -- but it also provides the issuer with
an important management tool.
As we in the Treasury have become involved with the
activities and the structure of particular local governments,
we have come to recognize the relationship between sound
supervisory mechanisms and the care with which employees
handle the government's finances. If the public employee
knows that every action related to the fiscal affairs
of his employer will be subject to review on an annual
basis by an independent party, he is far more likely to
act in a manner consistent with the employer's best
financial interests. Thus, in addition to meeting the
fundamental need for insuring the accuracy and comparability
of reported financial information, the independent audit can
aid the issuer in its internal financial management as well.
In short, we believe the Chairman's bill strikes an
appropriate balance: requiring disclosure of as much information
as is necessary to allow the market to function properly,
without burdening our states and cities with requirements
that impose unnecessary costs.
However, we would recommend several changes in the
bill. First, I am concerned about the authority conferred
upon the Commission by subsection (d) of Section 13A. To
the extent this provision reflects the view that, in light
of inflation, it may be appropriate at some future date to
allow the Commission to adjust upward the minimum filing
requirements, such intent could be more clearly expressed by
substituting the word "increase" for the word "change" on
line 5.
- 8 If, on the other hand, the provision contemplates a
possible downward adjustment of the minimum limits, I believe
the provision constitutes an inappropriate delegation of
authority to the Commission. It is important to keep in
mind that this legislation contemplates a degree of Federal
involvement in the affairs of sovereign political units.
Accordingly, it is our strong belief that any change which
materially increases the scope of the legislation, or the
burden on entities initially subject to the legislation,
must receive the review and approval of the Congress in the
form of new legislation.
This leads directly to a second area of concern. While
we recognize the necessity for some rulemaking authority in
the Commission to implement the statutory directives, we
think the legislation, as currently drafted, goes much too
far. As I indicated earlier, while the protection of investors
is, and must be, a consideration, it is not in my view a
consideration of such paramount importance as might be the
case on the corporate side. The grant of discretion to the.
Commission to expand the type of information required must
be carefully circumscribed and should recognize expressly
the different competing considerations which exist in the
municipal securities area.
Finally, there is the complex and troublesome question
of liability. While the clamor over this issue has subsided
somewhat in the wake of the Hochfelder decision and the
return of relative calm to our municipal markets, I believe
there remains a risk that the benefits of disclosure
legislation -- healthier markets and net reduction in
borrowing costs -- may be impaired by a failure to address
the liability issue.
It is tempting to suggest deferring this question until
a more general reappraisal of the private action under the
securities laws is made. But given the emotional and financial
interests inherent in any such general reappraisal, I believe
it more desirable to take the opportunity presented by our
consideration of comprehensive new legislation in the municipal
field to develop principles applicable to this market alone.
In assessing the question of liability, it seems to me
we are again placed in the posture of imposing a balancing
test: do the benefits to the marketplace outweigh the
costs incurred by imposing full liability on dealers and
underwriters? Costs, it again must be stressed, which will
be directly paid by the taxpayers of the issuing jurisdiction.
To put it more bluntly, is requiring underwriters and dealers
to be financially responsible for the accuracy and the
completeness of an issuer's disclosures worth the price
taxpayers will pay for imposing such a responsibility?
- 9 It is important to note that it is only this narrow
question that we are considering. While the Committee may
want to confirm my judgment with representatives of the
dealer and the underwriter community, I assume that no one
is suggesting that an underwriter or a dealer should not be
liable for its own misconduct: for example, for concealing
actual knowledge of false disclosures or material nondisclosures
or for providing information to investors, other than that
provided by the issuer, which is false or misleading.
What we must ask is whether an underwriter should be
responsible for conducting an independent inquiry into the
fiscal and financial affairs of an issuer to confirm that
the issuer's disclosures are accurate.
My own judgment is in the negative. I believe the
costs of such an independent inquiry far outweigh whatever
benefits, if any, can be derived. And while there may be
some superficial appeal to issuers in the prospect of sharing
their exposure with other parties, in the final analysis no
real sharing takes place. The issuers pay, and pay dearly,
for conferring upon investors the right to seek recourse
against the financial intermediaries they have retained.
Mr. Chairman, let me briefly summarize the principles -many of which are already embodied in legislation before
us -- which I believe must guide us as we move toward enactment:
-- First, the legislation itself must set forth with
detail and clarity the specific items and methods of disclosure
required. As little as possible must be left to subsequent
regulatory interpretation.
-- Second, causes of action against an issuer must be
strictly based on violations of the above requirements and an
issuer's exposure limited to actual, out-of-pocket losses.
-- Third, the legislation should recognize the principle
that potential underwriters' liability will be directly
reflected in the issuer's borrowing costs. I personally
believe that an underwriter should be relieved by statute of
any liability with respect to disclosures by an issuer
unless (1) the underwriter conceals actual knowledge of
false disclosures or material non-disclosures or (2) it
provides information to investors other than that provided
by the issuer which is false or materially misleading.
* -k *
I am sure I need not emphasize for the Committee that
a decision to support legislation involving a greater Federal
- 10 role in the activities of a market is not one that is taken
lightly by a representative of this Department and this
Administration. But as strong advocates of free markets,
we recognize that markets function best when the best information
is available. And in our view, achieving that objective
requires prompt enactment of the legislation before us today.
0O0
MDepartmentoftheJREASURY
TELEPHONE 964-2041
&HINGTON, D.C. 20220
M
FOR IMMEDIATE RELEASE
August 30, 1976
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,500 million of 13-week Treasury bills and for $3,600 million
of 26-week Treasury bills, both series to be issued on September 2, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing December 2, 1976
High
Low
Average
Price
Discount
Rate
Investment
Rate 1/
98.721
98.710
98.713
5.20%
5.060%
5.24%
5.103%
5.23%
5.091%
26-week bills
maturing March 3, 1977
Price
97.305
97.287
97.295
Discount
Rate
5.331%
5.366%
5.351%
Investment
Rate 1/
5.55%
5.59%
5.58%
Tenders at the low price for the 13-week bills were allotted 74%.
Tenders at the low price for the 26-week bills were allotted 39%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
. Received
1
Boston
$
38,600,000
New York
3; 270,695,000
Philadelphia
21,380,000
Cleveland
31,765,000
Richmond
26,955,000
Atlanta
26,120,000
Chicago
277,360,000
St. Louis
45,455,000
Minneapolis
23,740,000
Kansas City
40,830,000
Dallas
31,860,000
San Francisco 312,960,000
TOTALS$4,147,720,000
Accepted
$
22,600,000
2,022,140,000
21,380,000
31,765,000
26,955,000
26,120,000
140,545,000
30,455,000
23,740,000
37,280,000
26,860,000
90,400,000
Received
Accepted
27,780,000
$
47,780,000 $
4,134,260,000 2,919,860,000
6,900,000
6,900,000
52,620,000
233,720,000
10,735,000
35,235,000
13,135,000
13,135,000
391,470,000
693,570,000
27,135,000
42,135,000
17,570,000
32,570,000
19,725,000
22,725,000
18,110,000
22,110,000
96,490,000
231,490,000
$2,500,240,000 a/ $5,515,630,000
$3,601,530,000 b/
a/ Includes $370,315,000 noncompetitive tenders from the public.
b/Includes $160,150,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1053
ADDRESS BY THE HONORABLE
WILLIAM E. SIMON
SECRETARY OF THE TREASURY
OIC'S OF AMERICA, INC., TWELFTH ANNUAL CONVOCATION
PHILADELPHIA, PENNA.
SEPTEMBER 1, 1976
Thank you Reverend Sullivan, ladies and gentlemen. On
behalf of all the Treasury Department Executives who have
worked to make our Department a demonstration project on how
to cooperate with maximum effectiveness as partners with
OIC, I am honored to accept this most distinguished award.
At the same time, I enthusiastically pledge to you the
continued support of the Ford administration in our combined
effort to further the objectives of OIC.
The goals of OIC are great goals. In fact, they are
the very source of our nation's strength. We strongly
support OIC's aim to build America by helping people to get
jobs so they can be independent, reliable, productive citizens.
OIC wants everybody to be somebody. It rejects the notion
of the welfare state, but strives to help people to help
themselves. We agree. That doesn't mean there is no place
for compassion. On the contrary, our government and each
one of us have a very important responsibility to help those
who cannot help themselves, but for the vast majority of our
citizens who are capable of becoming self-supporting, OIC
points the way toward the only permanent solution.
We are proud to stand shoulder to shoulder with your
organization. For during the past decade, you have convincingly
confirmed that the best way to eliminate poverty is to make
our great free enterprise system work for the benefit of
poor people. No other anti-poverty effort can match the
excellence of your record, and I am delighted to congratulate
you on your success.
Much of the credit for this success should go to your
outstanding leader, Reverend Leon Sullivan. I'd like simply
WS-1054
-2to say today that Reverend Sullivan is one of the finest
Americans I have ever known. He says he is living as God
wants him to. I believe him. For after beginning 12 years
ago with no more than an abandoned jail house in a highcrime section of North Philadelphia, just look at what he
has accomplished.
Between 1964 and 1975 the OIC program has trained
353,000 men and women, and placed 250,000 in jobs with an
impressive 85% retention rate. The OIC graduates earned
nearly $5 billion during the same period, paid $600 million
in Federal taxes and saved taxpayers $1.5 billion in potential
welfare payments. Of even greater personal value are the
economic freedom and upward mobility now enjoyed by these
OIC graduates.
In his quest to significantly improve the economic *
existence of lower income citizens, Reverend Sullivan has
built factories, housing projects, neighborhood rehabilitation
programs, and rural and urban economic developments. He has
combined capital formation with cooperative planning to
produce community capital from earned savings of thousands
of Americans who together own shopping centers and other
income-producing developments. Above all, he has demonstrated
that our free enterprise system is not only there, but rf."
waiting to be tapped for the benefit of every man, woman and
child in America, no matter what their color, creed, or „'"
national origin. And that, ladies and gentlemen, is what ^
both Reverend Sullivan and this magnificent country of ours
are all about.
We Americans are a compassionate people. And 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. The central
question today should not be who cares the most, but rather
how best we can broaden prosperity and reduce human hardship
without sacrificing our freedom, or destroying the most successful
economic system that man has ever known.
I share Reverend Sullivan's conviction that the answer
to this question lies with free enterprise. It's our strong
free enterprise system that provides the government with the
revenue to do all the things we want it to do to help people
in need. But above all, free enterprise provides opportunity -opportunity for a person to make it, to be somebody, to have
character, dignity, and to be self-supporting and free
rather
than
dependentmeans,
upon aand
capricious
government.
what
free
enterprise
that's what
OIC meansThat's
I
-3Unfortunately, there are those who would ignore the OIC
lesson and who contend instead, that our economic problems
stem from the failure of the principles of free enterprise.
I vehemently disagree. Our principles have not failed at
all; no, it is we who have failed to live up to them. Many
recent examples emphatically prove that no city or country
can hope to remain economically viable if it consistently
lives beyond its means, and allows the growth of its public
sector to overwhelm its private sector. Nevertheless, the
United States now risks committing exactly this same error.
For too many years politicians in this country have misled
our electorate into thinking that the Federal government can
immediately identify, solve and pay for every problem of
society.
Consequently, since 1962, our Federal budget has exploded
from $100 billion to a figure that will certainly top $400
billion in 1977. The government is now growing much faster
than our ability or our willingness to pay for it.
•t
1
We have had deficits in 16 of the past 17 years, and we
are currently going deeper into debt at the rate of a billion
dollars every week.
In the past ten years, the U.S. Treasury has borrowed
half a trillion dollars in the private capital markets.
That's money that was swallowed up in the Washington bureaucracy
tfHat could and should have been invested to create productive
jobs in our dynamic private sector. And such heavy government
deficit spending and subsequent borrowing only aggravates
inflation and increases interest rates, which in turn
adversely affect everyone from the businessman interested in
expanding his plant to create jobs, to the married couple
who dream of someday being able to buy a home.
Added to that, is the weight of excess government
regulations which now threaten to overwhelm many small
businesses. Government now controls over 10% of everything
we produce in the economy and indirectly controls most of
the rest. Private enterprise must now devote 130 million
man-hours a year just to fill out all the necessary Federal
forms. That translates into a cost to consumers of $125
billion, which is the equivalent of $2,000 for every American
family each year.
The Federal government is today the nation's single
biggest employer, consumer, borrower, and the biggest source
of inflation in the United States economy. And it was
-4precisely this inflation that was the underlying cause of
the worst recession our country has experienced in a generation.
The economic history of the past ten years might best
be described by that old adage, "The road to Hell is paved
with good intentions." In effect, the spiraling inflation
caused by our past excessive fiscal and monetary policies
has hurt the very people those policies were intended to
help the most: the poor, the handicapped, and those living
on fixed incomes. The issues involved here are by no means
narrowly economic. They concern fundamental principles of
equity and social stability. The trouble with encouraging
government spending at the expense of strengthening the
private sector is that however good the intentions which
underlie the governmental 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 outstanding fact is that in every country in
which government spending reaches a dominating level there
has been a tendency to move toward economic instability,
toward minority government, and toward a threat to a free
society. We must never forget that there is an inextricable
relationship between our economic freedom and our social and
political freedom.
Many of the self-proclaimed compassionate people say -*'Four Administration is callous and insensitive to be against
their proposals for massive new spending, huge deficits, an
inflated money supply, and more government control over our
economy and our lives. I am sorry, but I must respectfully
disagree.
Before we subject our economy to such crippling and
possibly fatal shocks, I think it's about time we look at some
of the things that are right about America. What are today's
poverty figures? In the last 15 years, the number of those
living under the poverty level has been sharply reduced to
10%. Of course that number is still far too high; it's
clearly unacceptable. But paradoxically it is also one of
the lowest in the world. Why? Because of the unparalleled
success of our free enterprise system. The plain truth is
that no other country --no other system -- either now or
ever before in history, has achieved such a broad degree of
economic^affluence and personal freedom for its people. And
we can do even better. We can create new opportunities and
reach that last 10%, and we are committed to that goal. But
the essential point is, we will never reach that goal by
destroying
abundance and
private
our hopes
enterprise,
for a better
the very
future.
source of our present
-5Naturally, the government has a responsibility to help
those people who cannot help themselves. But while we're
doing that, we must also assist OIC-type solutions, so that
government is indeed helping to provide a permanent answer.
One of the most critical lessons of the last ten years
is that there is no such thing as true compassion without
responsibility. To show true compassion we must take into
account not only the short-term effects of our actions, but
the long-term as well. The suggestions that we simply spend
and spend regardless of the value of programs are precisely
those which have, over the years, hurt the poor and the
disadvantaged the most. It will be a grave injustice to the
people of this nation, and especially those in need, to
continue down the same path when we can clearly see from
recent history that the short-term pleasure and promises of
prosperity will be followed by even greater hardship and
suffering.
In effect, what we have seen happen is that a cruel hoax
has been played upon the poorest people of this country. Year
after year, and still today, we are told the only way to
fight poverty is to devise new and ever more massive
governmental programs. And the American people have responded
with unquestionable generosity. Since 1960 this nation has
spent over one trillion dollars on social programs to support
people and communities that needed help. So it is fair to
ask, if the commitment was there, why was it not followed by
a new prosperity? Quite simply because unlike OIC, which
adheres to the principles of free enterprise, effectively
attacks poverty at its source and creates opportunity at the
local level, a great many of our massive Federal programs
today do little more than create bigger and bigger government.
And that just means more spending, more taxation, more
regulation, more inflation and eventually more unemployment
and a loss of the very opportunities that have been promised.
Fortunately, many leaders are starting to speak out
against this monumental ripoff that is always so appealingly
promoted in the name of compassion. Thomas Sowell,* a black,
who is a fellow at the Center for Advanced Study in the
Behavioral Sciences at Stanford California, and the author
of Race and Economics, points out that championing the
disadvantaged is not only an inspiration, but an occupation.
"To be blunt, the poor are a gold mine," he says. He points
* "A Black Conservative Dissents," N.Y. Times Sunday Magazine,
August 8, 1976
-6out that by the time they are studied, advised, administered,
and experimented with, the poor have helped many a middle-class
liberal to achieve affluence with government money. The total
amount of money the government spends on its "anti-poverty"
efforts is three times what would be required to lift every
man, woman and child in America above the official poverty line
by simply sending money to the poor. But Sowell notes that
a good deal of the taxpayers' money never reaches the poor.
It is absorbed by the administrators, the planners, the
researchers, the consultants, the staffers, in other words that
entire army of bureaucrats which has managed to achieve its
affluence by becoming caretakers of the poor. It is no
accident that the highest income counties in the United States
are in the suburbs of Washington, D.C. Poverty has created
much of that affluence. But this nonproductive army does not
just harm the poor, it adversely affects every American. And it
is obvious that this philosophy of advocating greater government
control over both our economy and our lives clearly contradicts
the fundamental principles that have given this country the
greatest prosperity and highest standard of living and* most
importantly, the greatest freedom ever known to man.
I submit to you that this question, of whether our
people -- poor and rich alike -- can be trusted to run their
own lives, or whether government must run their lives for
them, is the most critical issue we face in this year's
presidential election.
I ask that you compare the positions of the two parties
on this question. Less than a month ago, I testified to the
Platform Committee of the Republican Party that OIC provides
the perfect example of the type of rifle-shot approach to job
training and underprivileged minorities that our party espouses.
Leon understands these problems. And he knows that the only
permanent answer is the private sector approach helping people
to achieve upward mobility, and to gain control over their
own future.
And his goal of free lives, individual lives and productive
lives can only be built on capital investment, not on the red
ink and the printing press of the government. If we are going
to create the kind of jobs that will keep people permanently
employed, that will meet the needs of a growing labor force, and
that will reduce our inflation by expanding our output of goods
and services, then we must equip our workers with new and
efficient plant, machinery and tools.
Savings are the source of this needed capital. But
savings are currently being drained by excessive government
bigger
machinery
deficits.
today cannot
government
to
Resources
employ
simultaneously
and
more
absorbed
a healthy
people
bebyinvested
expanding
tomorrow.
government
inprivate
We
expanded
for
cannot
its
sector
plant
spending
haveas
both
and
-7our opponents are trying to make the American people believe.
Government doesn't create wealth -- people do. We cannot continue
to transfer each year an increasing percentage of our national
wealth from the most productive sector to the least productive
sector of our economy without endangering the economic
future, indeed the economic survival of our children.
The American people must realize that government can
only grow stronger by making private enterprise weaker.
Every dollar spent by the government comes from the pocket of
a working American. If the government wants to spend more,
then you and I will spend less. If the government wants to
employ more people, then private enterprise must employ fewer
people. And such an emphasis on bureaucratic growth inevitably
leads to a decline in the production of goods and services,
a decline in the value of people's income, and an increase in
the rate of inflation, which in turn paves the way for a new
recession and even higher unemployment.
la. Why is there such an urge to legislate these harmful
policies that so clearly make all people suffer, not just
the?poor? Professor Milton Friedman provides an explanation
which he entitles the "visible vs. the invisible" effects of
government measures:
<ie "People hired by government know who is their benefactor.
People who lose their jobs, or fail to get them because of the
government's programs do not know that that is the source of
their problem. The good effects are visible, the bad effects
are invisible. The good effects generate votes. The bad
effects generate discontent which is as likely to be directed
at.private business as at the government.
"The great political challenge is to overcome this bias,
which has been taking us down the slippery slope to even
bigger government and to the destruction of a free society."*
Sincere compassion for the unemployed dictates that we
heed economic reality, that we work for a permanent solution,
and that we avoid those bureaucratic policies that only lead
to a bigger poverty trap. Free enterprise works! Just look
at what you've accomplished at OIC. And there's no reason why
others cannot benefit from your success. Ladies and gentlemen,
we can wage a real war on poverty. And we can win that war,
if we start creating more jobs in the private sector, and stop
creating more jobs for bureaucrats. And that, I might add, is
exactly what President Ford wants to do.
And when I talk about the wonder of private enterprise
and what it can do for each of us, let me explain what I mean.
The private sector produces the food we eat, the goods we use,
* "Humphrey-Hawkins," Newsweek Magazine, August 2, 1976.
-8the dwellings 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-too-rapidly
expanding public sector.
-- It is the foundation for defense security for
ourselves and most of the free world.
--It has been, and will continue to be, the difference
between life and death for countless undernourished people
around the globe.
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 inhuman monster
caricature painted by so many political demagogues, the
"
American private sector is in reality the mightiest engine
for social progress and individual improvement ever created.
And that's why we're convinced that the stronger we can make
that engine, the more prosperous will be all our people. 'c*
This is what government's true role is, and that's what
our Administration is fighting for. We have to avoid making
false promises and just throwing money at problems. We want
to see the creation of real jobs, productive jobs, and lasting
jobs -- jobs that build character, provide upward mobility and
£
offer an even better future.
"
And yet today, there are still those who cannot resist
making more promises -- promises that certainly sound appealing,
but that in reality amount to nothing more than the already
discredited policies of runaway spending and unending deficits.
We've already seen where those policies lead. They only lead
to more government, more bureaucracy, more inflation, more
unemployment, and thus still more broken promises especially
to those who most need help. It's an insidious process because
the resulting economic instability further undermines confidence
which in turn provokes new cries for still more intervention.
And what will all these promised programs offered by
the proponents of big government actually cost the American
people? If enacted, the price tag could exceed $200 billion -that's $1,000 for every man, woman and child in this country.
The average American would have to work for half the year
just to support the Washington bureaucracy, and only then
could he start to support himself and his family. Our people
would witness a rapid erosion of an important part of their
economic freedom -- the right to keep more of the money they
earn to spend as they please. This is no guide to a new
prosperity built upon sustained non-inflationary growth. It's
-9nothing more than a blueprint for economic disaster.
Ladies and gentlemen, the question is no longer who
does or does not care. We all care very much. The only
valid question this year is who are we going to promote -individuals, with emphasis on those who need help, or
government? We cannot do both. That is the true, crucial
decision behind all the rhetoric and personalities of this
election year. And the choice we make will affect not only
our own futures, and our children's, but the future of our
country itself as America embarks on its third century as
the hope and inspiration of free people everywhere.
I hope that come Election Day a majority of you and
all Americans will vote not for a bigger Federal bureaucracy,
but for more individual opportunity. And if you do, perhaps
we might live to see the day of which Reverend Sullivan dreams
when he says:
"Every citizen ought to have the self-respect and the
pride which comes from knowing that he has a contribution
to make and that he receives a wage or an economic reward
which enables him to solve his own and his family's economic
problems, meet their social and educational needs, pay taxes
and support a better quality of life in his or her community."
Let us join together to make that America a living
reality.
+ ._ Thank you very much.
4
0O0
IheDepartmentoftheTREASURY
INGTON, D.C. 20220
TELEPHONE 964-2041
August 31, 1976
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 4-YEAR TREASURY NOTES
The Treasury has accepted $2,002 million of $5,423 million of
tenders received from the public for the 4-year notes, Series E-1980,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield
6.90%
6.94%
6.93%
1/
The interest rate on the notes will be 6-7/8%.
the above yields result in the following prices:
Low-yield price 99.903
High-yield price
Average-yield price
At the 6-7/8% rate,
99.764
99.799
The $2,002 million of accepted tenders includes 72% of amount of
notes bid for at the highest yield and $534
million of noncompetitive
tenders accepted at the average yield.
In addition, $120 million of tenders were accepted at the averageyield price from Federal Reserve Banks as agents for foreign and international monetary authorities.
1/ Excepting 1 tender of $29,000
WS-1055
tDepartmentoftheTREASURY
IN6T0N, D.C. 20220
5HING1
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
i
\i
AUGUST 31, 1976
TREASURY DEPARTMENT HONORED AT BICENTENNIAL
"3RD CENTURY AMERICA" EXPOSITION IN FLORIDA
Under Secretary of the Treasury Jerry Thomas will be
principal spokesman at day-long activities celebrating "Treasury
Day" on September 2, 19 76, at the Bicentennial Exposition on
Science and Technology at the Kennedy Space Center, Florida.
Treasury Dayat the exposition marks the 187th anniversary
of the. founding of Treasury, the second oldest Department in
the Federal Government. Under Secretary Thomas will address an
anticipated crowd of 10,000 at the Space Center, to start a
program of special events which will include the Thunderbirds
precision flying show, motion pictures, souvenir Bicentennial
medals that visitors may strike for themselves on a Bureau of
the Mint coin press, sale of Bicentennial motif Savings Bonds,
and exhibits covering various Treasury activities.
A special series of demonstrations has been scheduled for
Treasury Day visitors by the U.S. Customs Service's dog, Max,
a Brittany Spaniel, and his trainer Mike McGee. Max is an
expert at sniffing out narcotics in packages and automobiles,
and he loves to perform for an audience. Max will demonstrate
his special talents in a show in the Theatre Dome, as well as
outside both before and after the Thunderbird performance.
The Bicentennial exposition at the Kennedy Space Center
is the only government-sponsored exposition during the
Bicentennial year, and has been open to the public since May 30.
The Treasury main exhibit, which has welcomed visitors from
that date and will continue through the exposition's closing on
September 7, is located in the Launch Control Center lobby and
in the Theatre Dome.
"3rd Century America" is the theme of the exposition,
emphasizing prospects for a better life in 1976 and for the
next 100 years thereafter. Treasury's exhibit has reflected
that theme all summer in regular showings of the films, "Keys
to the Treasury," "The Granite Lady" (story of the restoration
of the San Francisco Mint), "An American Partnership" (story of
the public debt), and "Money Talks."
WS-1056
(0Ver)
*v
- 2In addition, Treasury's exhibit has offered film strips
prepared by its Bureau of Alcohol, Tobacco and Firearms and
by the Comptroller of the Currency; stamps commemorating past
achievements in science and technology, the $2 bill, and the
Centennial Bond, as well as offering for sale a specially
designed souvenir card prepared by the Bureau of Engraving
and Printing; a Bureau of the Mint exhibit of machinery that
makes coins and dies, and sale of the 40 percent silver
Bicentennial proof coin and uncirculated coin sets.
The Treasury exposition exhibit also includes a Savings
Bonds display of colorful cubes relating to the public debt
and illustrating how the Savings Bonds program has financed
America's economic development and contributed to the space
program; and a special U.S. Customs exhibit on the history
and mission of Customs.
Available free to visitors will be Treasury's 12-page
booklet on America's free enterprise system, "The Engine That
Built America."
oOo
CONTACT:
FOR IMMEDIATE RELEASE
George G. Ross
202-964-5985
August 31 1976
PROTOCOL
to the
UNITED STATES and UNITED KINGDOM
INCOME TAX TREATY
The United States Treasury Department today released
the text of a Protocol to the new income tax treaty between
the United States and the United Kingdom. The treaty was
signed by both governments on December 31, 1975 and was
amended by Notes exchanged on April 13, 1976. The treaty,
as amended, has been submitted to the United Kingdom House
of Commons for approval and to the United States Senate
for its advice and consent to ratification. A copy of the
text of the Protocol is attached.
The provisions of the new treaty were outlined in
Treasury Press Releases issued on November 4, 1975,
January 6, 1976 and May 3, 1976. Those provisions of the
treaty amended by this Protocol are paragraphs (2) and (4)
of Article 1 (Personal Scope), Article 8 (Shipping and Air
Transport), paragraph (1)(c) of Article 23 (Elimination of
Double Taxation) and paragraph (4) of Article 24 (Nondiscrimination) .
#
WS-1057
#
#
PROTOCOL
AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF THE
UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED
KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL
EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS
SIGNED AT LONDON ON 31 DECEMBER 1975, AS AMENDED BY NOTES
EXCHANGED AT LONDON ON 13 APRIL 1976
The Government of the United States of America and the
Government of the United Kingdom of Great Britain and Northern
Ireland;
Desiring to conclude a Protocol to amend the Convention
for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with respect to Taxes on Income and Capital
Gains, signed at London on 31 December 1975, as amended by
Notes exchanged at London on 13 April 1976 (hereinafter
referred to as "the Convention");
Have agreed as follows:
ARTICLE I
Paragraphs (2) and (4) of Article 1 (Personal Scope) of
the Convention shall be deleted and replaced by the following:
"(2) A corporation which is both a resident of the
United Kingdom within the meaning of paragraph (1)(a)
(ii) of Article 4 (Fiscal Residence), and a resident
of the United States within the meaning of paragraph
(l)(b)(ii) of Article 4 shall not be entitled to claim
any relief or exemption from tax provided by this
Convention except that such corporation may claim the
benefits of paragraph (2) of Article 8 (Shipping and
Air Transport), of Article 23 (Elimination of Double
Taxation) with respect to paragraph (1) (c) thereof
and the petroleum revenue tax referred to in paragraph
(2)(b) of Article 2 (Taxes Covered), of Article 24
(Non-discrimination) and of Article 28 (Entry into
Force) and the provisions of paragraph (7) of Article
11 (Interest) shall apply to it.
-2"(4) Nothing in paragraph (3) of this Article shall
affect the application by a Contracting State of:
(a) Paragraph (2) of Article 8 (Shipping
and Air Transport), and Articles 9
(Associated Enterprises), 23 (Elimination of Double Taxation), 24 (Nondiscrimination) , and 25 (Mutual Agreement Procedure); and
(b) Articles 19 (Government Service), 20
(Teachers), 21 (Students and Trainees) ,
and 27 (Effect on Diplomatic and
Consular Officials and Domestic Laws),
with respect to individuals who are
neither nationals of, nor have immigrant status in, that State."
ARTICLE II
Article 8 (Shipping and Air Transport) of the Convention
shall be deleted and replaced by the following:
"ARTICLE 8
Shipping and Air Transport
(1) Profits derived by an enterprise of a
Contracting State from the operation of ships or
aircraft in international traffic shall be taxable only in that State.
(2) Notwithstanding any other provision of
this Convention, profits which a national of the
United States not resident in the United Kingdom
or a United States corporation derives from
operating ships documented or aircraft registered
under the laws of the United States shall be exempt
from United Kingdom tax.
-3(3) For the purpose of this Article, profits
from the operation of ships or aircraft include
profits derived from the rental on a bareboat
basis of ships or aircraft if such rental income
is incidental to other income described in paragraph (1) of this Article.
(4) Notwithstanding the provisions of Article
7 (Business Profits), profits of an enterprise of
a Contracting State from the use, maintenance or
rental of containers (including trailers and related
equipment for the transport of containers) used for
the transport of goods or merchandise shall be taxable only in that State, except where such containers
are used for the transport of goods or merchandise
solely between places within the other Contracting
State.
(5) The provisions of this Article shall apply
also to profits derived by an enterprise of a Contracting State from participation in a pool, a
joint business or an international operating agency.
(6) Gains derived by an enterprise of a Contracting State from the alienation off ships, aircraft or
containers owned and operated by the enterprise, the
income from which is taxable only in that State, shall
be taxed only in that State."
ARTICLE III
Sub-paragraph (c) of paragraph (1) of Article 23 (Elimination of Double Taxation) of the Convention shall be deleted
and replaced by the following:
"(c) that amount of tax credit referred to in paragraph (2)(a)(i) of Article 10 (Dividends) which
is not paid to the United States corporation
but to which an individual resident in the United
Kingdom would have been entitled had he received
the dividend shall be treated as an income tax
imposed on the corporation paying the dividend."
-4ARTICLE IV
Paragraph (4) of Article 24 (Non-discrimination) of the
Convention shall be deleted and replaced by the following:
"(4) Paragraph (3) shall not apply to any
interest, royalties, or other disbursements to
which the provisions of Article 9 (Associated
Enterprises), paragraphs (5) and (7) of Article
11 (Interest) or paragraph (5) of Article 12
(Royalties) apply."
ARTICLE V
(1) This Protocol shall be ratified and the instruments
of ratification shall be exchanged at Washington as soon as
possible.
(2) This Protocol shall enter into force immediately
after the expiration of thirty days following the date on
which the instruments of ratification are exchanged and shall
thereupon have effect in accordance with Article 28 of the
Convention.
In witness whereof the undersigned, duly authorized thereto
by their respective Governments, have signed this Protocol.
Done in duplicate at London this
For the Government of the
United Kingdom of Great Britain
and Northern Ireland:
day of
1976.
For the Government of
the United States of
America:
FOR IMMEDIATE RELEASE
August 31, 1976
Treasury Secretary William E. Simon issued the
following statement today in response to Governor Carter's
speech before the AFL-CIO in Washington:
"I am personally appalled by Jimmy Carter's latest
suggestions, made today in Washington, that the White
House should assume much greater power over the Federal
Reserve Board.
"While Mr. Carter's words are typically vague and
general, they represent nothing less than a thinly disguised
plan to politicize the Nation's monetary system.
"Fortunately, most Americans have learned the lessons
of the 1960s — that easy money and big spending lead not
to prosperity and lower interest rates, as Mr. Carter
suggests, but to ruinous inflation and high unemployment.
"The independence of the Federal Reserve System from
political influence is one of our last remaining checks
against the relentless inflationary instincts of many
politicians in Congress. The moment the politicians get
their hands on the levers of the money supply is the moment
that we put the United States on the road to economic
disaster.
"To keep the dollar in a sound and secure position,
we have but one choice: to lock the politicians out."
0O0
WS-1058
OTA Papers
r
">v
Estimation of a Simultaneous System
of Equations W h e n the^jrhple Is
Undersized
K.R. Kadiyala
Purdue University
« James R. Nunns
U.S. Treasury IDepartment
OTA Paper 14
August 1976
T Op
/789
Department
of the
Treasury
Assistant Secretary for Tax Policy
Office of Tax Analysis
Office of Tax Analysis
U.S. Treasury Department
Washington, D.C.
20220
Issued: September 1976
ESTIMATION OF A SIMULTANEOUS SYSTEM OF
EQUATIONS WHEN THE SAMPLE IS UNDERSIZED
K.R. Kadiyala
Purdue University
James R. Nunns
U.S. Treasury Department
OTA Paper 14
August 1976
OTA Papers are circulated so that the preliminary findings of tax
research conducted by Staff members and others associated with the
Office of Tax Analysis may reach a wider audience. The views expressed are those of the author, and do not reflect Treasury policy,
Comments are invited, but OTA Papers should not be quoted without
permission from the author.
TABLE OF CONTENTS
page
I. Introduction 1
II. The Problem 2
III. Alternative Approaches to the Problem 3
IV. A Proposed Class of Estimators 6
V. Estimation of Klein's Model I - An Illustration ... 8
I. INTRODUCTION
In most large and many medium-sized econometric models, the number
of predetermined variables exceeds the number of observations on each
variable. Estimation procedures such as two-stage least squares and
other k-class (k>0) procedures, as well as three-stage least squares and
certain other full-information procedures are therefore inapplicable.
In this paper, a class of modified two-stage least squares estimators
is derived which exhibits several desirable properties in comparison to
alternative estimators which have been proposed for models with undersized samples.
II. THE PROBLEM
•t-Vi
The j
structural equation of a linear simultaneous equation system
may be written as:
y
j • Vj
+
VJ
+
C
J
(1)
or more conveniently as:
y
j"
VJ
+
5
J
(2)
where Z = (Y1 : X.), <S! = (yl : 6 ') , y. is the nxl vector of observations
on the jth dependent variable, Yi is the nxL matrix of observations on the
- 2 jointly dependent variables which are explanatory in the j equation,
X is the nxK. matrix of observations on the predetermined variables
entering the j*1*1 equation, y.» and 3 ^ are parameter vectors to be estimated,
and £. is an nxl vector of disturbances. The system contains L jointly
dependent variables, and K (>K.) predetermined variables; X is the nxK
matrix of observations on all predetermined variables in the system. It
is assumed throughout the paper that the predetermined variables are
"fixed", £. has a zero mean and covariance matrix Ojjl (0 < o.. < °°),
the jth equation is identified, and the rank of X'Z. is L +K which
requires min(K, n) > Lj+K..
Multiplying equation (2) by X1 gives:
X'y. - X'Z.6 . + X'£. . (3)
The transformed disturbance vector X'£. has mean zero and covariance
matrix a..X'X. Assuming X has rank K (which requires n>K) , the two-stage
least squares estimator of 6., 5., is derived from (3) by applying
Aitken's theorem, giving:
5\ = (ZpZ^-^Ey^j (4)
where E = XCX'X)"^'. When the rank of X is less than K, X'X is singular
and the two-stage least squares estimator (as well as all other estimators
which depend on the inverse of X'X) fails to exist. The rank of X is
always less than K when n<K, i.e., when the sample is undersized.
- 3 -
III. ALTERNATIVE APPROACHES TO THE PROBLEM
A number of estimation procedures have been proposed that do not
rely on the inverse of X'X, and are therefore at least potentially
applicable when the sample is undersized. These procedures will only be
discussed briefly here; more extensive discussions may be found in
Theil [9] and Dutta and Lyttkens [1]. Our primary interest is in those
procedures which are truly "limited-information" - requiring only
specification of the j equation and the list of predetermined variables
occurring in the system. Other procedures, while usually more efficient,
have the undesirable property of requiring a more detailed knowledge of
the entire system. Estimation of the j equation is therefore sensitive
to misspecification in the remainder of the system.
Among the limited information procedures, the following three are
widely known and illustrate the difficulties of estimation when the
sample is undersized.
1. Kloek and Mennes [3] suggested replacing X with T = (X. : P) where P
is a matrix of principal components of some linear combination of some or
all of the columns of X. This leads to the estimator:
5*= (Z!T(T,T)"1T,Z!)"1Z!T(T,T)"1T,y4 • <5)
J
j
j
j
j
A major disadvantage of this procedure is that the size of P, the columns
of X from which the full set of principal components is derived, and the
it
normalization chosen are all arbitrary.
Thus, 5 . may be highly sensitive
- 4 to the P matrix used in its estimation. A lesser disadvantage is that
the procedure requires considerably greater computational effort than
the two-stage least squares procedure. Further, as is the case with all
other limited-information procedures which we are aware of, short of
specifying and estimating the entire system no estimates of the reduced
form coefficients is possible using this procedure. Thus, projections of
the dependent variables included in Y cannot be obtained simply on the
J
basis of projections of the predetermined variables.
From Takeuchi's results [7] it is known that in certain cases,
if P is of rank r then the even moments of order less than r - L. + 3
of 6 . exist, but little else is known about its small sample properties.
It has the desirable large sample property of consistency.
2. Applying a generalization of Aitken's theorem to equation (3),
Swamy and Holmes [6] and Fischer and Wadycki [2] obtain the estimator:
5" = (ZlE'Z )_1z;E"y (6)
where E~ = X(X'X)~X' and (X'X)" is any (weak) generalized inverse of X'X.
Normally when the sample is undersized, the rank of X is n in which case
X(X'X)~X = I so that 6 . = (Z'Z ) Z'y , the ordinary least squares
J
-J J
J J
estimator for 5 ,. Since 6 7 becomes the two-stage least squares estimator
when n>K (assuming that the rank of X is then K), it does not share the
property of inconsistency with the ordinary least squares estimator.
Consistency, however, is a large sample property; it is the small sample
properties of 5 . which are relevant in the present context. Mariano [4]
- 5 has shown that in the general case, the even moments of order less than
n-(K.+L.)+l of the ordinary least squares estimator exist. However,
Sawa [5] has shown that, for an equation with L.=l, the ordinary least
squares estimator has a lower mean square error than other k-class
(0 <k <1) estimators only in rather specialized circumstances. Reduced
form parameters cannot be directly computed following this procedure. An
advantage of the procedure, however, is its computational simplicity.
3. Partitioning X as (X. I X . ) , where Xj is the nx(K-K.) matrix of observations on the predetermined variables excluded from the jth equation,
equation (3) may be written:
O')
Theil's D.-class estimator (d.) is based on constrained estimation from
the second subset of (3'), using some positive definite matrix a..D, in
place of <JJJX!XJ which is singular when n< (K-KJ).; see Theil [9], The
constraint, from the systematic part of the first subset of (3'), is
X Y
^J
= X Z
J iV
Defining C
-
=
*jDi j » d"
fZ'C Z : ZjX )
J j j
X'.Z
iJ j
J
d*
is obtained b
y solving:
[Z!C y)
J j j
(7)
0
^ j
where X^ is a vector of Lagrangian multipliers.
In practice, Theil
suggests that Dj be diagonal, with diagonal elements taken from the
diagonal of X^X_.. There are several disadvantages to the D. -class
•J
- 6 estimators. The choice of Dj is arbitrary and d* is sensitive to this
choice; Theil's suggested choice disposes of a fair amount of information
contained in X'X. The reduced form is explicitly bypassed. The computational burden is roughly the same as for the two-stage least squares
estimator. The small sample properties of d. are unknown; Theil shows
that it is a consistent estimator, but since its asymptotic covariance
matrix differs from that of two-stage least squares it is not efficient
(in the limited information sense).
IV. A PROPOSED CLASS OF ESTIMATORS
In partitioned form, we have:
XiX^ : X'.X,'
J j
3 j
X'X =
(8)
A. A. : A. A.
J J
33
Since X'.X. is positive definite by assumption, if we "disturb" XtX.
slightly by adding to it any (symmetric) positive definite matrix A.
3
(so that in Theil's notation, D^ = XlX. + A.) , a comparison of the
quadratic forms associated with X'X and
v
J
d =
J
J J
(9)
XlX. ! D.
3 3
j
shows that VJ is positive definite.
The partitioned inverse of V. may be written:
1
vT 3
(X X
x
JJ - i W
-1
: "(X'X
-(D - XlE X ) " X'X (X'X.)" 1 •;
3
JJJ
J J J J
- X'.Q.X.r^VX D"1
•J J
JJ*'
J J J
r, v-1
(D, - X'E.XJ
J
j J j
(10)
- 7 — v n"
v'
where E, = X ^ X J X j ) " ^ and (retaining
Theil's
notation) ^
= X j D j X^ .
Using (10), we define:
-i
Nj
,__
.
.=
,.
=.. =
.-1=.
= XV^X' = [Xjffpj-xjCjX^-^lti-Cj] + I V V ^ j V " Xj][l-E.]. 01)
It follows immediately from equation (11) that N is symmetric and that
N X = X ; therefore XlN. = X' . The estimator for 6 . based on N.
j j j
3 3
3
3
J
(5* ) , is obtained by simply replacing E with N. in equation (4), giving:
5~ = (ZlN.Z.^Z'N.y. . (12)
j
j J j
J J J
The estimator 6 . has several desirable properties. It is a true
•J
limited-information estimator. In terms of computational difficulty, it
is equivalent to two-stage least squares. Under the usual assumptions
(see, for example, Theil [8, Chapter 10]), it is also asymptotically
equivalent to two-stage least squares, assuming plim n A. = 0 since then
-1 -1
plim n V. = plim n
X'X.
Thus, 6 . is consistent, asymptotically efficient
(in the limited information sense) , and asymptotically normally distributed
with mean 5 . and a covariance matrix which is consistently estimated by:
i"l-7l\i XT n /«!«
n
\-l
V * W WJVWJ*
a3)
where
is, by the above, a consistent estimator for a
33
Further, a consistent (but biased) estimate of the reduced form
parameters of the system (II) is obtained from:
- 8 -
n = V ^X'Y . (15)
Let II. represent the columns of II corresponding to Y.. Note that
Xn. = N.Y, = Y. , so N.Z. = (Y. : X.). Given projections of the preJ
J j
J'
J J J
J
determined variables of the system, Xp = (X? : XP ) , we may project
Y. from
Y?
= x*n. (16)
J
J
and then, defining ZV = (Y? : X^), project y. from Z?6 .
While the proposed estimator 5 . is defined for any suitable choice
•J
of A. , in practice we suggest specifying A. = al where 0 < a < °°.
J
J
Simplicity is, of course, a major advantage of this specification. In
addition, our (quite limited) experience with this specification,
reported below, suggests that the elements of 5 . are reasonably stable
over fairly large ranges of a. Our current research is directed in
part toward finding the "optimal" value of a for a given equation. A
second direction for research is the small sample properties of 6 . .
V. ESTIMATION OF KLEIN'S MODEL I - AN ILLUSTRATION
Although the sample underlying Klein's Model I is not undersized
(n=21, K=8), it has the advantage that it has been estimated using all
of the alternative procedures previously discussed, including two-stage least
squares, so that a numerical comparison of the various procedures is
possible. The model consists of three behavioral equations:
- 9 C
t " YlPt
+ Y (W
2 t
+ W
t>
I
+
*lPt-l
t-TriPt+BiPt-i+»2^-i+»o
W
t
= Y X
lt
+ B
lXt-l
+ e
+ 5
i
2(t"1931)
+ 3
0
+
h (17>
(18
>
+ 8
0
+ C
t
(19)
where t is measured in calendar years, C is consumption, P profits,
W the private wage bill, W' the government wage bill, I net investment,
K capital stock at the end of the year, and X the output of the private
sector. The six endogenous variables are C, P, I, W, X and K; the model
is closed by three definitional equations. The eight predetermined
variables consist of three lagged endogenous variables, P ., K_1, X .
and t, W', 1 (the constant), T (business taxes), and G (government nonwage
expenditure). In (17), W+W' is considered one endogenous variable. The
underlying data is available in Theil [8, page 456],
Point estimates of coefficients, their asymptotic standard errors,
and estimated variances are shown in the accompanying table. For the
procedure proposed in this paper, coefficient point estimates are from
equation (12), standard errors are square roots of the diagonals from
equation (13), variances are from equation (14), and we have specified
A
j
= aI
'
Using the full sample (n*21), the proposed estimator with a-1 gives
results which are virtually identical to two-stage least squares. This
result is to be expected, since when n>K, the proposed procedure
converges to the two-stage least squares procedure as a-K). With a*21,
coefficients on the highly correlated variables P and P , in equations (17)
- 10 and (18) and X and X, in equation (19) diverge somewhat from the twostage least squares estimates. Standard errors, however, are quite similar.
For Theil's D.-class procedure, standard errors tend to be larger in all
equations, and the divergence of coefficients on P and P - in equations
(17) and (18) from the two-stage least squares estimates is greater than
for the proposed procedure, but there is no divergence for any coefficient
in equation (19). The Kloek and Mennes principal components procedure
performs quite well in equation (18), but the coefficient of P in
equation (17) and of X and X, in equation (19) diverge somewhat from the
two-stage least squares estimates. These results, of course, are no more
than suggestive of the relative merits of the alternative procedures.
To illustrate the proposed procedure when the sample is
undersized, Klein's Model I was estimated for n=7, where the observations
are those for 1922, 25, 28, 31, 34, 37 and 1940. These years are fairly
representative of the full 21 year observation period. Note that when
n<K, as a-K) the proposed procedure converges to ordinary least squares,
which normally coincides with the procedure of Swamy and Holmes [6]
and Fischer and Wadycki [2],
ALTERNATIVE PARAMETER ESTIMATES OF KLEIN'S MODEL I
:
•
•
•
Equal•ion 17
»1
Y2
Estimation Procedure
!(p)
(VHW')
0»-i>
CO
80 j
(1)
2
!
:
!
Y
l
(p)
Equation 18 (I)
80
*2
4
(K_i)
:
d) :
•
*i
Tl
(X)
Equation 19
S»
(x_i> (t-1931)
W
,.
(D .
o2.,;
•
.59
1.
Two-stage least squares
(n-21)
.02
(.13)
.81
(.04)
.22
(.12)
16.6.
(1.5)
1.29
.15
(.19)
.62
(.18)
-.16
(.04)
20.3
(8.4)
1.71
.44
(.04)
.15
(.04)
.13
(.03)
1.5
(1.3)
Proposed estimator
(n-21, a-1)
.02
(.13)
.81
(.04)
.21
(.12)
16.5
(1.5)
1.28
.14
(.19)
.62
(.18)
-.16
(.04)
20.5
(8.5)
1.73
.44
(.04)
.15
(.04)
.13
(.03)
1.5
(1.3)
.59
2.
Proposed estimator
(n-21, a-21)
.05
(.13)
.81
(.04)
.19
(.12)
16.4
(1.4)
1.20
.12
(.21)
.64
(.20)
-.16
(.04)
21.3
(8.9)
1.85
.41
(.04)
.17
(.05)
.14
(.03)
1.6
(1.3)
.61
3.
.82
(.04)
.15
(.16)
16.1
(1.4)
1.12
.06
(.32)
.69
(.29)
-.17
(.06)
23.0
(11.9)
2.12
.44
(.09)
.15
(.09)
.13
(.03)
1.5
(1.3)
.59
.09
(.19)
-.00
(.19)
.81
(.05)
.23
(.16)
1.35
.15
(.21)
.62
(.19)
-.16
(.04)
1.72
.40
(.05)
.18
(.05)
.14
(.03)
.12
(.13)
.83
(.06)
.26
(.18)
13.4
(2.1)
.65
.21
(.06)
.59
(.06)
-.18
(.01)
23.2
(2.8)
.04
.36
(.07)
.19
(.07)
.15
(.06)
3.9
(2.4)
.54
.08
(.16)
.82
(.07)
.30
(.20)
13.6
(2.3)
.76
.14
(.13)
.66
(.13)
-.19
(.03)
26.0
(5.6)
.07
.37
(.07)
.19
(.07)
.15
(.06)
3.8
(2.4)
.55
Ordinary least squares 1/ .19
(.12)
(n-7)
.83
(.06)
.19
(.16)
13.1
(1.9)
.59
.23
(.05)
.57
(.06)
-.17
(.01)
22.3
(2.5)
.04
.34
(.07)
.20
(.07)
.15
(.06)
4.1
(2.4)
.53
Theil's D^-class -'
(n-21)
2/
5.
Kloek and Mennes —
(n-21)
4.
6.
7.
8.
Proposed estimator
(n-7, a-1)
•
Proposed estimator
(n-7, a-7)
1/ From Theil [9], pages 123 and 124.
.64
Variances and standard errors have been corrected for degrees of freedom.
-1 From Kloek and Mennes [3], page 59. The results are those using two principal components for all three equations and their method 4,
In which principal components are computed for all predetermined variables. Variables were measured as deviation* from means and therefore
no constant was reported. Note that they report o rather than o .
1/ Sine* n<K, OLS correspond* to the procedure of Swamy and Holmes [6] and Fischer and Wadyckl [2]. Standard errors computedas If Z« contained only predetermined variable*.
- 12 -
REFERENCES
1.
Dutta, M. and E. Lyttkens, "Iterative Instrumental Variables Method
and Estimation of a Large Simultaneous System", Journal of the
American Statistical Association, 69,348 (December 1974), 977-986.
2. Fischer, Walter D. and Walter J. Wadycki, "Estimating a Structural
Equation in a Large System", Econometrica, 39,3 (May 1971), 461-465.
3. Kloek, T. and L.B.M. Mennes, "Simultaneous Equations Estimation
Based on Principal Components of Predetermined Variables",
Econometrica, 28,1 (January 1960), 45-61.
4. Mariano, Roberto S., "The Existence of Moments of the Ordinary
Least Squares and Two-Stage Least Squares Estimators", Econometrica,
40,4 (July 1972), 643-652.
5. Sawa, Takamitsu, "Finite-Sample Properties of the k-Class Estimators",
Econometrica, 40,4 (July 1972), 653-680.
6. Swamy, P.A.V.B. and James Holmes, "The Use of Undersized Samples in
the Estimation of Simultaneous Equation Systems", Econometrica,
39,3 (May 1971), 455-459.
7. Takeuchi, K., "Exact Sampling Moments of the Ordinary Least Squares,
Instrumental Variable, and Two-Stage Least Squares Estimators",
International Economic Review, 11,1 (February 1970), 1-12.
8. Theil, Henri, Principles of Econometrics, New York: John Wiley and Sons,
1971.
9. Theil, Henri, "A Simple Modification of the Two-Stage Least-Squares
Procedure for Undersized Samples", in Arthur S. Goldberger and Otis
Dudley Duncan (eds.), Structural Equation Models in the Social Sciences,
New York: Seminar Press, 1973, 113-129.
middle
Eastern
multinational
Financial
Institutions
DEPARTfTlENT OF THE TREASURY
OFFICE OF THE ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
middle
Eastern
multinational
Financial
Institutions
U.S. Department of the Treasury
Gerald L Parsky
Assistant Secretary for International Affairs
July, 1976
Prepared by the Office of Developing Nations
For sale by the Superintendent of Documents, U. S. Government Printing Office
Washington, D . C. 20402 — Price 95«
Stock N u m b e r 048-000-00286-2
Foreword
The Middle East has become an area of rapid economic growth and
increasing activity in the fields of international trade, investment and other
financial flows. N e w institutions have grown up to meet the area's enormous
domestic development requirements and to provide channels for productive
placement of funds deriving from oil exports.
A vast array of financial institutions, m a n y of which are still in the formative stages, has been created during the last few years with the participation
of the Middle East oil-producing countries. T h e national institutions are relatively accessible to the American banking and business community. T h e multinational institutions located in the Middle Kast, or in which Middle East government or private entities have an interest, are less well-known, and there has
been no central source of information for American business firms, banks and
other institutions seeking to establish relationships with them.
M a n y firms have approached the U.S. Government for assistance in identifying the appropriate institutions for potential financing of specific projects
in specific locations. T h e Treasury Department has been following the development of these institutions in order to evaluate their impact on international
capital flows, and has assembled a considerable amount of information on the
individual institutions. W e have therefore prepared this special report to put
this information at the disposal of the American business community and other
public and private institutions.
Taken as a whole, the institutions included in this directory provide financing virtually worldwide, for nearly all types of infrastructure and productive
investments, with participation ranging from concessionary aid to equity and
commercial financing. T h e capital resources they represent, combined with
the activities of the private sector, both as investors and as sources of technology
and managerial skills, will be an increasingly important factor in meeting the
investment requirements of the world economy.
W e believe that this process will be aided by the broadest possible development and dissemination of information on these important financial intermediaries. Our hope is that this report will contribute not only to the global investment and development process but also to increased cooperation between the
American business community and the people of the Middle East.
GERALD L. PARSKY r
Assistant Secretary
of the Treasury
iii
United Kingdom
France Lond^ Luxembourg
United States
of America
N # w York City
Spain
Madrid
N8therlands
Contents
I. Introduction 1
11. Institutions 3
African Development Bank 6
Afro-Arab Company for Investment and International Trade
Arab-African Bank
Arab Bank for Economic Development in Africa
Arab Bank for Investment and Foreign Trade
Arab-Brazilian Investment Company
Arab Finance Corporation
Arab Financial Consultants Company
Arab Fund for Agricultural Investment and Development
Arab Fund for Economic and Social Development
Arab Fund for Technical Assistance to Arab and African Countries
Arab International Bank
Arab International Company for Hotels and Tourism
Arab International Finance Company
Arab International Insurance Company
Arab Investment Company
Arab Investors Union
Aral) Joint Investment Company
Arab Monetary Fund
Arab and Morgan Grenfell Finance Company
Arab Petroleum Investment Company
Arab Trust Company
Banco Arabe-Espanol
Banque Franco-Algerienne
Banque Franco-Arab d'lnvestissements Internationaux
Banque Inter-Continentale Arabe
Banque dTnvestissement et de Financement S.A.L.
Banque Nationale pour le Developpement Economique
Compagnie Arabe et Internationale d'Investissement
Compagnie dTnvestissement Irano-Francaise
^Development and Investment Bank of Iran
Dubai Islamic Bank
Egypt-Kuwait Investment Company
:
First Arabian Corporation
Fund for Arab Oil Importing Countries
Gulf International Bank
Hexalon
Industrial and Mining Development Bank of Iran
Inter-Arab Investment Guarantee Corporation
International Financial Advisors S A K
v
7
7
8
10
10
11
11
12
12
14
16
16
17
18
18
20
20
21
22
23
23
24
25
25
26
26
27
27
28
29
30
30
31
32
32
33
31
34
36
Iran Overseas Investment Bank
Islamic Development Bank
Kuwait Financial Centre S A K
Kuwait International Finance Company
Kuwait-Pacific Finance Company
Misr Iran Development Bank
O P E C Special Fund
P E C Israel Economic Corporation
Saudi-Egyptian Industrial Investment Company
Saudi-Egyptian Reconstruction Company
Saudi International Bank
Solidarity Fund for Economic and Social Development in
Non-Aligned Countries
Special Arab Fund for Africa
Sudanese-Kuwaiti Investment Company Ltd.
Union de Banques Arabes et Francaises
III. Index by Location of Headquarters 49
,%
37
3j{
39
40
4,0
4]
42
43
43
44,
44
45
45
47
Introduction
The financial resources of the oil-producing countries of the Middle East
have risen dramatically in the past few years as a consequence of the sharp
increase in oil prices. In order lo channel their surplus financial resources not
needed to meet their domestic requirements into productive outlets wliich will
provide them with an adequate return, and to begin lo share in the traditional
responsibility of wealthy nations for helping to meet the needs of the poorer
nations, the Middle East oil-producing countries have created, or participated
in the creation of. a substantial n u m b e r of new financial institutions.
Although some of these have been purely national institutions, there has
been an unprecedented increase in the n u m b e r of multinational organizations
in which oil-producing countries play a major role. This grow ill seems to have
stemmed in part from the desire of the Middle East producers for greater influence over the use of their funds, or for greater political impact, than they could
achieve through existing international financial institutions.
It has also stemmed from the variety of regional and functional groupings
in which these countries participate and their desire for greater economic cooperation a m o n g themselves. Organizations such as the Gulf International Bank
are designed to foster cooperation a m o n g the Gulf States, while the objective of
the Arab Monetary Fund, the Arab Fund for Economic and Social Development
and die Arab International Bank is to foster cooperation a m o n g the Arab states.
The Islamic Development Bank operates in a still larger area, including nonArab as well as Arab Islamic countries.
The growth in multinational banking institutions with developed country
and oil-producing country participation reflects an awareness of the usefulness
of these institutions in combining capital from the Middle East with the financial expertise and experience of the developed country partner in investment
activities in main parts of the world. In some cases, such as the Saudi International Bank, specific provision is m a d e for training the nationals of the Middle
East partner in international banking practices.
Most of these multinational institutions—and all of the institutions offering
concessionary assistance—are physically located in the Middle East. Although
most of the organizations included in this Directory were established since
1971. when the rise in oil prices increased the wealth and economic responsibilities of the oil-producing countries—and several are still in the process of
formation—a few are older. T h e Industrial Mining and Development Bank of
Iran and the Banque Nationale pour le Developpement Economique in Morocco
were established in 1959. the African Development Bank and the Arab-African
Bank in 1964' and the Arab F u n d for Economic and Social Development w a s
established in 1971.
The multinational institutions covered in this directory can be broken d o w n
into groups of organizations which provide financing on either concessionary or
commercial terms. Inter-governmental institutions providing concessional financing represent total authorized capital of m o r e than $6 billion, of which, however,
only about $500 million appears to have been paid in thus far. Institutions
1
providing non-concessionary financing have authorized capital ranging from
about $2 million to $300 million. However, the capitalization of these latter institutions is not an adequate measure of theirfinancialimportance since many have
substantial borrowing capacity and operate as underwriters and as participants in syndicates to mobilize financing from other sources. They were, for
example, a m o n g the managers for several of the largest medium-term credits
arranged for governments during 1975. The Union de Banques Arabes et
Francaises ( U B A F ) and the Arab-African Bank joined American, European
and Japanese banks in managing a $500 million five-year credit to the Iraq
Central Bank. The Banque Arabe et Internationale d'Investissement and U B A F
were a m o n g the managers of a seven-year $400 million credit to the Algerian
Banque Nationale and Banque Exterieure; the U B A F , as well as the national
Libyan Arab Foreign Bank and the Kuwait Foreign Trading, Contracting and
Investment C o m p a n y helped manage a $200 million seven-year loan to Morocco.
Inter-Governmental Institutions Providing Concessionary Financing
1. Project Aid
A number of the institutions were established by the Middle East countries
to provide concessionary financing for non-oil-producing developing countries,
either as project aid or for balance of payments support. The Arab Fund for
Economic and Social Development ( A F E S D ) is the most prominent in the first
category. Established in 1971 with an initial capital of $350 million to finance
economic and social development projects and programs in the Arab countries
on concessional terms, its capital was increased to $1.4 billion in April 1975.
Its terms vary according to the economic position of the recipient from a 4
percent interest rate for the poorest countries to 6 percent for others. The terms
also take into account the type of project and degree of risk. The Fund gives
priority to financing inter-Arab development projects and stimulating public and
private investment by others in the Arab countries through joint financing
activities.
Provision of concessionary project aid is a function also of the new
Islamic Development Bank ( I D B ) , the African Development Bank, the Arab
Bank for the Economic Development of Africa ( A B E D A ) , and the Arab Petroleum Investment C o m p a n y ( A P I C ) . Several proposed n e w funds will also provide concessionary project aid. These include the O P E C Fund for Developing
Countries, for which the O P E C countries have pledged $800 million for 1976
for both project and balance of payments support, the Solidarity Fund for Economic and Social Development in Non-Aligned Countries, and the Arab Monetary
Fund.
For the most part, these institutions differ not only in membership but
also in proposed recipients for their assistance. The Islamic Development Bank
is expected to concentrate on the non-Arab Islamic countries since the Arab
countries can receive assistance from the A F E S D . For the same reason, the
A B E D A will concentrate on non-Arab African countries. There are differences
also in the contemplated operations of each. While all will provide loans on
concessional terms, the I D B will charge no interest, although it m a y apply a
service charge of 2-3 percent. T h e I D B is unusual a m o n g these institutions in
that it will provide equity capital as well as loans. T h e proposed O P E C Fund
will be unique in that it is expected to operate through national executing agen-
2
cies in m e m b e r countries and through international organizations rather than
set up a staff of its o w n for this purpose.
2. Balance of Payments Support
Concessionary aid for balance of payments purposes is being provided by
two institutions: the Fund for Arab Oil Importing Countries and the Special
Arab Fund for Africa ( S A F A ) . The former committed about $80 million
annually in 1974 and 1975 in interest-free loans solely to Arab countries for
balance of payments problems associated with the high price of petroleum; S A F A
committed 8185 million annually in 1974 and 1975 in interest-free loans, with
1 percent commission, to African countries for similar reasons and to compensate those which had broken off relations with Israel for the economic loss
incurred.
Institutions Providing Financing on Commercial Terms
The proliferation of multinational institutions providing non-concessionary
financing has been even greater, and the range of their activities more diverse
than in the concessional aidfield.Whereas the capital of all of the institutions
providing concessionary aid is contributed by governments, the capital of the
institutions providing financing on commercial and near-commercial terms m a y
be subscribed to by governments, quasi-governmental agencies, private organizations and/or private individuals.
1. Government-Owned Institutions
The Arab Investment C o m p a n y , Gulf International Bank and the Arab
African Bank are the principal examples of institutions whose capital is subscribed entirely or almost entirely by Arab Governments. The Gulf International
Bank has an unusual provision permitting up to 49 percent of each government's share to be m a d e available to individuals and companies located in that
country. The Arab Investment C o m p a n y (AIC) established in 1974 with a
capital of $300 million as of October 1975 is probably the largest institution
in this category. Its functions are to invest Arab public funds in equities preferably, or in loans on commercial terms, to develop the resources and carry out
productive projects in its m e m b e r states, giving priority to development of agribusiness, metal-working industries and tourism. AIC's first projects included a
17 percent subscription to the capital of the Kenena Sugar C o m p a n y to operate
Sudan's sugar estate project and a 10 percent subscription to the capital of the
Arab International Insurance Company. T h e A I C has also agreed to help finance
the Arab C o m p a n y for Mining and the Arab C o m p a n y for the Development of
Livestock Resources. A s was the case with the concessionary aid institutions, the
development financing of most of the institutions in this category is confined to
the Arab and African countries.
2. Bilateral Institutions
Another substantial group of joint ventures involves the institutions of
only two countries, generally one an oil-producing country and the other a
non-oil-producing developing country. M a n y of these involve Egypt—the EgyptKuwait Investment C o m p a n y , the Saudi-Egyptian Industrial Investment C o m pany, the Saudi-Egyptian Reconstruction C o m p a n y and the Misr Iran Develop-
3
ment B a n k — a n d are designed, either principally or exclusively, to promote investment in Egypt. Another bilateral institution is the Arab-Brazilian Investment
C o m p a n y , in which Brazilian and Kuwait companies are shareholders.
3. Institutions with Developed Country Partners
A substantial group of institutions combine Middle East capital with the
banking experience and skills of banks in the developed countries, generally in a
world-wide merchant banking type of operation. These include institutions, such
as the Union de Banques Arabes et Francaises ( U B A F ) , which recently set up
an affiliate in N e w York, the Arab Finance Corporation, the Arab Trust Company, and the Saudi International Bank, which engage in the management,
underwriting and placing of international bond issues, provide medium- and
long-term financing, and handle Eurocurrency loans. S o m e institutions in this
category direct their financing to specific regional areas such as the Arab
deficit countries (Banque Franco-Arab d'Investissements Internationaux); the
Arab countries generally ( U B A F ) ; the Middle East (Banque dTnvestissement
et de Financement S.A.L. and Arab and M o r g a n Grenfell Finance Company);
Southeast Asia, Australasia, Japan, Canada and Brazil (Kuwait Pacific Finance
C o m p a n y Ltd.) and Iran (the Industrial and Mining Development Bank of
Iran, Development and Investment Bank of Iran and the Iran Overseas Investment Bank (IOIB)). The IOIB is concerned also with helping the Government
of Iran invest its funds abroad.
4. Institutions Undertaking Equity Investment
A number of these merchant banking institutions are prepared to provide
equity capital as well as loans. These include the Dubai Islamic Bank, First
Arabian Corporation, the Compagnie dTnvestissement Irano-Francaise, and the
Industrial Mining and Development Bank of Iran.
5. Institutions Designed to Facilitate Investment
Another group of multinational institutions included in this report, although
they do not themselves provide financing, are designed to facilitate international
investment in a variety of ways. For example, they m a y help by providing advice,
insurance and investment guarantees or by identifying and developing project
proposals. The Arab International Insurance C o m p a n y , with capital provided
by Middle East, European and Japanese insurance companies, offers broad commercial insurance coverage to Arab and non-Arab companies, for industrial,
commercial and other development projects in free zones. The Inter-Arab Investment Guarantee Corporation, which includes all members of the Arab League
except O m a n and South Y e m e n , is designed to guarantee Arab investors against
losses from expropriation, nationalization and other non-commercial risks on
investment in another Arab country.
Information Regarding The Directory
Financial institutions were selected for inclusion in this Directory on the
basis of the following criteria: 1) the institution is multinational in that its
capital is subscribed to by two or more countries, their institutions or nationals:
2) one or more Middle East government or institution is a m e m b e r or shareholder; and 3) the institution provides equity participation, and/or medium-
4
or long-term financing. Institutions with purely commercial banking functions
are excluded. In addition, the institutions, such as the A r a b International Insurance C o m p a n y and the Inter-Arab Investment Guarantee Corporation, which
facilitate international investment, are included although they do not themselves
provide financing. While this Directory attempts to include all institutions meeting the above criteria, it is possible that s o m e institutions have been omitted
inadvertently. Several institutions were not included because too little information was available on their activities.
The material in this Directory has been compiled from a variety of published and unpublished sources including, in s o m e cases, discussions with the
institutions themselves or with some of their participants. It has not always
been possible, however, to obtain complete information on the institutions.
Figures in non-U.S. currencies have been converted to dollars on the basis
of exchange rates for 1975 as shown in the International Monetary Fund's
International Financial Statistics.
5
African Development Bank *
Headquarters:
Abidjan, Ivory Coast
Address:
B.P. 1387, Abidjan
Date Established:
1964
Administration:
President: Mr. Abdelwahab Labidi
Senior Vice President: Mr. Louis Nagre
Director of Finance: O m a r A. Ali
Director of Operations: M . E. Helw
Special Assistant to the President: Ime Ebong
Membership:
Any independent African country is eligible for membership. At present forty-one countries are members,
including eight Arab countries which accounted for
4 0 % of the Bank's total subscribed capital in 1975
including: Libya 1 3 % , Algeria 10%., Egypt 8%,
Morocco 5 % , and Sudan 3 % .
Capital:
As of December 31, 1975, $484 million was authorized;
$469 million was subscribed; and $235 million was
paid in.
Functions:
To serve as regional development bank by providing
financial assistance to its members for high priority
projects which will contribute to the borrower's economic and social advancement.
Terms:
Since 1972 the Bank has made loans at 6 % plus a 1%
commission fee with maturities from 8 to 20 years
plus a variable grace period of 3 to 6 years.
Operations:
The Bank has concentrated its resources in the transportation and public utilities sectors. During the
1965-75 period it loaned $317 million to 37 members
for 107 projects.
Other:
The African Development Fund was established in 1973
to complement the activities of the Bank by providing concessional resources to the Bank's members.
The present members of the Fund are Canada, Brazil, Japan, Saudi Arabia, twelve European donors and
the Bank itself. Authorization for U.S. membership
is currently pending before Congress. Total resources
were $152 million as of December 1975.
1
This is a regional development bank whose capital has been pledged exclusively by
African countries. It is included in this report because eight of its members are also Arab
countries.
6
Afro-Arab Company for Investment and International
Trade ( A F A R C O )
Headquarters:
Kuwait
Address:
Fahad Al-Salem Street
Aliredha Bldg., 2nd floor
P.O. Box 5024 Safat
Telephone/Telex:
423380/AFARCO 2081
Date Established:
July, 1972
Administration:
Chairman and Managing Director: Mahaud al-Hunaifi
General Manager: Dr. Mohamed A h m a d Al-Ghanem
Deputy Director for Projects: Namil Al-Gamal
Shareholders:
Kuwait Foreign Trading, Contracting and Investing Co.
( K F T C I C ) — 6 2 % ; Arab-African Bank, Misr Lebanon Bank, private investors—38^ .
Capital:
KD 2 million ($7 million).
Functions:
To finance development projects in Arab and African
countries in collaboration with local interests; to promote international trade and financial operations,
chiefly between Arab and African countries.
Operations:
Provided financing for a tanning factory in Uganda,
building construction in Abu Dhabi and Mauritania,
and contributed to establishment of the SenegaliKuwaiti Real Estate Company and the Yemeni-Kuwaiti Trading Company.
Arab-African Bank
Headquarters:
Cairo, Egypt
Address:
44, Abdel Khalek Sarwat Street
Telephone/Telex:
916710/916744//ARABFRO 2071
Date Established:
1964
Administration:
Chairman and Managing Director: Dr. Suleiman
Ahmed El Haddad of Kuwait
Deputy Chairman and Managing Director: Dr.
M a h m o u d Bahir Onsy
10 member Board of Directors
7
Arab-African B a n k — C o n t i n u e d
Shareholders:
Kuwait Ministry of Finance and Central Bank of Egypt
42.4% each; Rafidain Bank (Iraq) 10.0%; Central
Bank of Algeria 2.0%; Jordanian Ministry of Finance
1.0%; Qatari Ministry of Finance 0.5%; Arab nationals 1.7%.
Capital:
Increased from £E 10 million to £E 20 million ($51
million ) authorized in 1974 and fully paid up.
Functions:
To operate as an off-shore bank, mainly tofinanceinternational trade and development projects in the
Arab and African countries, including both direct
investment and long-term loans, and to engage in
commercial banking activities.
Terms:
Range from short-term classical business to 15 years,
generally at market rates of interest.
Operations:
As of 12/31/74, deposits totalled £E 208 million, loans
and advances £ E 148 million; portfolio investment
(securities, investments, development loans) £E 11
million: balance sheet £E 447 million. Activities included arranging £E 12 million ($25 million) 6-year
loan to Sudan for construction of a sugar plant at
Hagar Assalayn in White Nile Province; £ E 2.5
billion for transportation and tourism in Egypt; and
projects in Algeria, Chad, Ethiopia, Lebanon, Jordan, Kenya, Syria, Tunisia and Zambia.
Arab Bank for Economic Development in Africa (ABEDA)
(Arab Bank for Industrial & Agricultural Development in
Africa)
Headquarters:
Khartoum, Sudan
Address:
P.O. Box 2640 (Baladiya Street)
Telephone/Telex:
T3645/6/7//K.M. 248
Date Established:
Agreement establishing ABEDA, signed in February
1974, became effective in September 1974 upon ratification by requisite number of countries.
Administration:
Chairman of the Board and Managing Director:
Dr. Chedly Ayari of Tunisia;
Board of Governors has overall responsibility for the
Bank; Board of Directors draws up general policy
and follows up on implementation in accordance with
the establishment agreement and instructions of the
Board of Governors.
8
Arab B a n k for Economic Development in Africa ( A B E D A ) (Arab
Bank for Industrial & Agricultural Development in Africa)—Continued
Membership:
Saudi Arabia, Algeria, Kuwait, Qatar. Bahrain, Libya,
Lebanon, Egypt. Mauritania, Syria, Palestine Liberation Organization, Jordan, Sudan, Oman, Morocco,
Tunisia, Iraq, U A E .
Capital: $231 million increased to $500 million in August 1975;
largest contributors and their initial subscriptions are:
Saudi Arabia ($50 million) ; Iraq ($30 million);
Kuwait, Algeria and U A E ($20 million each) and
Libya l$l million). Paid-in capital was $55.2 million
as of July 1975. Bank can borrow up to twice its
paid-in reserves.
Functions: To promote and support economic, financial and moral
cooperation between the African and Arab countries
by:
1. providing financial and technical assistance for
the economic development of the African countries;
2. encouraging Arab funds to take part in African
development;
3. financing medium and small-size projects in cooperation with the IBRD, F A O , African Development Bank and the various Arab funds.
All black African countries which are not members of
the Arab League are eligible. Priority is to be given
to financing for national and regional development
finance institutions and to key industrial and agricultural projects, and to providing technical and
financial aid for identification of projects and acquisition of technology.
Financial Terms:
Operations:
A B E D A envisages a mixture of concessional assistance
(long-term, soft loans) and profit making. Interest
rate varies from 2 to 6 percent, depending on the
economic position of the recipient country. Goods
are to be procured by international competitive bidding: preference may be given to Arab and African
suppliers.
B Y the end of November 1975, the Bank had approved
12 loans totalling $85.5 million, representing 10-12%
of the cost of each project. Almost $55 million went
for transportation projects: highways in Madagascar,
Niger and Lesotho, railways in Upper Volta and the
Congo, and port expansion in Cameroon; most of the
balance went for industrial projects, and about 1 0 %
for the agricultural sector.
9
Arab Bank for Investment and Foreign Trade (ABIFT)
Headquarters:
A b u Dhabi
Address:
PO Box 2484
A b u Dhabi, U A E
Telephone/Telex:
42093/2455 ARBIFT AH
Date Established:
Agreement establishing ABIFT signed in Abu Dhabi,
April 1974.
Administration:
Director and General Manager: Bader Eddine Nouioua,
responsible for day to day operations; six member
Board of Directors (2 from each constituent party)
directs Bank's activities; Committee of Experts helps
the Board; General Assembly, composed of all shareholders, meets at least once each year.
Shareholders:
Abu Dhabi, Libyan Arab Foreign Bank, Algerian Foreign Bank with equal shares.
Capital:
60 million dirhams ($15 million) fully paid in. Unlimited borrowing capacity.
Functions:
To carry out all commercial banking operations: to undertake short-, medium- and long-term investment;
and to finance foreign trade. Its main purpose will
be to mobilize resources for investment in Arab and
African countries. The Bank plans to 1)financedevelopment projects in Arab countries, 2) participate
in syndicates for extending Eurocurrency loans to
Arab Governments, and 3) underwrite bond issues
of Arab Governments and institutions.
Terms:
Interest on deposits at UAE market rate, loans extended
for up tofiveyears.
Operations:
Began September 1975.
Arab-Brazilian Investment Company
Headquarters:
Rio de Janeiro, Brazil
Address:
Av. Rio Branco, 31 - 15th floor
Date Established:
July 1975 (statutes agreed upon in late 1974)
Administration:
Chairman of the Administrative Council:
Marcos Pereira Vianna
Chief Operating Officer: Roberto Procopia Lima Netto
10
4rab-Brazilian Investment C o m p a n y — C o n t i n u e d
shareholders:
Kuwait Investment Company, Kuwait International Investment Company, and Kuwait Foreign Trading,
Contracting and Investment C o m p a n y — 5 0 %
Banco Nacional do Desenvolvimento Econdmico
( B N D E , Brazil)—50%
Capital:
Raised from $40 million to $300 million, to be shared
equally by Kuwait and Brazil.
Functions:
To invest in industrial, mineral, petrochemical and
agricultural projects in Brazil only.
Operations:
Company is in operation.
Arab Finance Corporation
Headquarters:
Beirut, Lebanon
Address:
Gefinor Centre, Block D, Clemenceau St.,
P.O. Box 155-527
Date Established:
1974
Shareholders:
Manufacturers Hanover Trust Co. (U.S.), Investment
Promotion Group (Lebanon), and Banque de
l'Union Europeenne (France), and Kuwait Investment
Co. ( K u w a i t ) — 1 8 % each; Bank of Tokyo (Japan)
— 1 0 % ; Credit Libanais (Lebanon) and Beirut
Riyadh Bank ( L e b a n o n ) — 9 % each.
Capital:
£L 6 million ($2.6 million)
Functions:
Management, underwriting and placing of international
bond issues; lending operations, foreign exchange
operations.
Arab Financial Consultants Company
Headquarters:
Add ress:
Kuwait
Al-Duaij Bldg., Mubarak al-Kabir St.
P.O. B o x 23767 Safat
Telephone/Telex:
415650/415659/441747/419498//2421
Date Established:
January, 1975
Administration:
Chairman: M r . Khalid Issa Al-Saleh
Managing Director: Dr. Abdel M o n e i m Al-Tanamli
11
Arab Financial Consultants C o m p a n y — C o n t i n u e d
Shareholders:
Private Kuwait interests—51%; other private Arab
investors—25%; Taiyo Kobe Bank, Banque de Suez
et de l'Union des Mines, Arbuthnot Latham and Co.
Ltd. ( U K ) , and Philadelphia International Investment Corporation—6% each.
Capital:
K D 500,000 ($1.7 million); K D 100,000 paid up.
Functions:
To act as financial consultants for projects, including
industrial, agricultural and servicefields.To place
direct equity investment, arrange and manage public
issues, arrange portfolio investment, real estate investments or short-term money operations.
Operations:
Operations began January 1976.
Arab Fund for Agricultural Investment and Development
(AFAID)
Headquarters:
Expected to be in Khartoum, Sudan
Date Established:
Agreement reached at April 29, 1976 meeting of Arab
Finance Ministers in Rabat, Morocco, to be implemented by treaty.
Administration:
Director not yet named; Board of Governors.
Membership:
Open to all Arab countries. Thirteen had joined as of
July, 1976.
Capitalization:
K D 150 million ($525 million) authorized and expected to be subscribed.
Functions:
To promote agricultural development, with emphasis on
food production, through investment in viable production and agri-business projects, infrastructure and
other supporting activities. First priority expected to
be given to the Sudan.
Terms:
Commercial and soft loans, grants, and equity participation.
Other:
A F E S D is assisting in its formation and will later assist
as needed.
Arab Fund for Economic and Social Development(AFESD)
Headquarters:
Kuwait City, Kuwait
Address:
6th floor Kuwait Investment BIdg.
A h m a d Al-Jabar Street
P.O. Box 21923, Safat, Kuwait
12
Arab Fund for Economic and Social Development—
(AFESD ) —Continued
Telephone/Telex:
431870/2153
Date Established:
Agreement to establish Fund reached in May 1968;
established in 1971: operations started February
1972.
Administration:
President: Saeb Jaroudi of Lebanon
Director-General: Hachemi Larabi
Board of Governors, with one Governor from each
member country, meets at least once a year and sets
general framework and policies of the Fund; fulltime four member Board of Directors exercises all
rights and functions authorized by the Board of Governors and is responsible for the Fund's operations.
Membership:
All twenty-one members of the Arab League, with distinction made between net contributing and net receiving countries.
Capital:
Increased from KD 102 million ($350 million) in 1971
to K D 400 million ($1.4 billion) in April 1975; K D
102 million paid in by February 1976 with the remainder to be paid over a period of 8 years starting
in February 1977. The Fund can also borrow up to
twice the amount of its capitalization. The main contributors are: Kuwait ($102 million), Saudi Arabia
($64 million), Libya ($41 million).
Functions:
To finance economic and social development projects
and programs in the Arab countries on soft terms
(varying according to project and risk involved) to
governments, public and private authorities *and organizations. Loans not made to governments must
have a government guarantee. N o equity participation. It is intended that A F E S D give priority to economic projects vital to overall Arab development and
to inter-Arab projects fostering regional development (e.g., telecommunications and transportation
involving two or more Arab countries) and to the
poorest Arab nations.
To promote the utilization of public and private funds
for development of the Arab economy. A F E S D has
established a "Project Servicing and Promotion
Unit" to coordinate the identification and promotion
of national and regional investment projects requiring externalfinancing,to serve as a link between
Arab investors and entrepreneurs in Arab capitalimporting countries, and to encourage the issuance of
Arab government bonds by agreeing to invest in
13
Arab F u n d for Economic and Social D e v e l o p m e n t —
(AFESD)—Continued
them. The Fund has helped to mobilize Arab, industrialized country and international institution funds in
co-financing and triangular projects in the Arab
world.
To ensure the availability of technical expertise and aid
in the variousfieldsof economic development and
investment of oil revenues.
To extend long-term loans at low interest rates for infrastructure projects in Arab countries.
To provide financial and technical assistance to national development banks.
Terms: Interest rates are 4% to the poorest Arab countries
(Mauritania, Somalia, Sudan and both Yemens), and
6 % to others, with maturities generally 15-25 years
and 4-6 year grace periods.
Operations: Although established in 1971, the Fund has actually
been providingfinancingonly since 1973. From 1973
through 1975, it helpedfinance18 projects, involving
loans totalling over $1 billion, of which $321.5 million
came from the Fund. Forty percent of the $127 million committed in 1974 was for projects in the least
developed Arab countries and covered 6 0 % of their
total cost.
Typical loans include $22 million for the Talkha II fertilizer plant in Egypt, $6.8 million for the construction of underground petroleum storage tanks in Syria, $16.5 million for a microwave network and earth
satellite station in Sudan and $11 million to Algeria
and Morocco for a joint telecommunication network.
Other: The Fund also handles the $80 million special OAPEC
oil facility set up in June 1974 to help non-oil producing Arab countries finance their oil imports
(See Fund for Arab Oil Importing Countries).
Arab Fund for Technical Assistance to
Arab and African Countries
Headquarters: Cairo, Egypt
Address:
14
c /o
Secretariat of League of Arab States
Midan Al Tahir
Arab F u n d for Technical Assistance to Arab and African Countries—
Continued
Date Established:
January, 1974
Administration:
Board under ex officio chairmanship of SecretaryGeneral of League of Arab States (LAS), M a h m o u d
Riad
Executive Secretary (ex officio)—LAS Assistant
Deputy Director for Economic Affairs
Executive Secretariat is provided by LAS Economic
Division.
Membership:
Saudi Arabia, Libya, Algeria, UAE, Qatar, Egypt, Iraq,
Sudan, Tunisia, Morocco, Yemen and Palestine
Liberation Organization.
Capital:
$15 million originally, subsequently raised to $25 million, with U A E , Saudi Arabia, Iraq and Libya to
provide 2 0 % each. Probably not completely subscribed. Additional resources may be available from
contributions by Arab or recipient countries, international or Arab institutions.
Functions:
To provide technical assistance in fields of economic,
social and scientific development of Arab and African countries, including:
1. The preparation of comprehensive surveys of
development projects in the African and Arab
countries and help infindingmeans to implement
them;
2. The provision of consulting services and experts
between African and Arab countries;
3. The search for new fields for development cooperation between African and Arab countries;
4. The development of technical and administrative
capabilities by providing fellowships for training
and specialized education for nationals from Arab
and African countries;
5. Coordination with Arab and African countries
' and institutions of activities in thefieldsof development and technical assistance.
Operations:
Started at end of May 1975 when group of experts began studying methods for cooperation between this
Fund and other Arab and international financial
institutions.
15
Arab International Bank (AIB)
(Formerly Arab International Bank for Trade and Development)
Headquarters:
Cairo, Egypt
Address:
35 Abdel Khalek Sarwat Street
Telephone:
919997—919107
Date Established:
October, 1972 (reorganized as AIB in 1974)
Administration:
Chairman: Dr. Abdel Moneim Kaissouni of Egypt
Vice Chairmen: Mr. A. A. Saudi of Libya and
Mr. H. A. Zaki of the U A E
Shareholders:
Libyan Arab Foreign Bank, Egypt, U A E — £ 12 million
each; Qatar, O m a n , private A b u Dhabi investors.
Capital:
Increased from £ 24 million to £ 40 million ($90 million) authorized and paid up in 1974.
Functions:
To promote investment projects which have been studied and proved viable for one or more Arab countries
and which may also help the development and growth
of Arab or international economic relations.
To provide technical,financial,economic, managerial
and legal studies for possible projects and the necessary procedures for their establishment, through an
Arab Research and Consulting Centre. Commercial
and medium-term lending and real estate investment.
Operations:
Participated in Alexandria Marine Works, a sugar plant
and expansion of Nasr Auto Company in Egypt;
real estate, housing, development and foreign trade
companies in Sharjah, U A E ; and tourism, housing,
maritime transport, commercial and industrial fields,
within and outside Egypt. As of June 30, 1975, the
balance sheet totalled £ 273 million, with deposits
and current accounts of £ 181 milhon, loans and
advances £133 million, and investments £0.8 million.
Arab International Company for Hotels and Tourism
Headquarters:
Cairo, Egypt
Address:
c/o Arab International Bank, Cairo
35 Abdel Khalek Sarwat Street
Telephone:
919997, 919107
Date Established:
1975
Shareholders:
Arab International Bank, Kuwait Hotel Company, Abu
Dhabi, Egyptian banks and Saudi Arabian investors.
16
Arab International C o m p a n y for Hotels and T o u r i s m — C o n t i n u e d
Capital: $20 million $20
subscribed,
million subscribed,
includingincluding
$4 milion from the
Arab International Bank.
Functions:
To undertake the construction of hotels and other
tourist projects.
Operations:
The Company's first project is construction and ownership of a 900 room luxury hotel on the Nile in the
center of Cairo. A design contract and a contract
with Hilton International for management of the
hotel have both been signed.
Arab International Finance Company (ARINFI)
i
Headquarters:
Beirut, Lebanon
Address:1
P.O. Box 11-9500
St. Charles City Center
Telephone/Telex :l
369660/20328 L E
Date Established:
December 18, 1974
Administration:
Chairman of the Board and Chief Executive:
Dr. Elias Saba of Lebanon
General Manager: Mr. Peter Slocum
Shareholders:
Marine Midland Bank (U.S.) 2 5 % ; Tokai Bank
(Japan) 12.5%; A K
Holdings
(Luxembourg)
12.5%; Kuwait International Investment Company,
private and corporate Kuwaiti and Saudi Arabian investors 5 0 % .
Capital:
Swiss francs 14 million ($5.2 million) paid up.
Functions:
To merge international financial expertise of developed
country banks with Middle East resources to provide
financial and investment facilities in Middle East,
including investment management, investment banking underwritings, advisory services, money managing and money market activities.
Operations:
Became operational on January 1, 1975. Co-managers
of several Eurobond underwritings and members of
selling groups. Provided general corporate finance
advice with respect to projects in Middle East and
elsewhere.
.
!
During Lebanon turmoil, A R I N F I can be contacted at: Marine Midland Bank, London;
I 5 Lothburg, London K C 2 England. Telephone/Telex: 016068321/851884605.
17
Arab International Insurance Company (AIIC)
Headquarters:
Cairo, Egypt
Address:
7, Talaat Harb St., 7th floor
Telephone:
29141
Date Established:
January, 1975
Administration:
Dr. Don Layall, Senior Resident Advisor (British)
Mr. David Coowne, Technical Advisor (British)
Shareholders:
Misr Insurance Co. (Egypt) 29%; Araba Investment
Co. (Saudi Arabia) 1 0 % ; General Iraqi Insurance
Organizations 6 % and three Kuwaiti insurance companies 6%. Total—51%.
Commercial Union Assurance Co. ( U K ) 1 5 % ; AFIA
(US), Allianz Versicherungs-A.F. (Germany), Assieurazioni Generali (Italy), Tokyo Marine Insurance Co. (Japan), Union des Assurances de Paris
(French), and Zurich Versicherungs-Gesellschaft
(Swiss)—5% each, and Willis, Sapeo and Tuman
( U K ) 4 % . Total—49%.
Capital:
$3 million (one-half paid up). Potential capacity is
greater than indicated, however, because of arrangements for reinsurance with its foreign shareholders.
Functions:
To offer all types of commercial insurance to Arab interests; to offer insurance protection principally for
foreign companies, for industrial, commercial and
other development projects in free zones and, possibly, reinsurance for joint ventures.
Operations:
Operations started under the auspices of Misr Insurance Company while awaiting a Presidential Decree
approving the AIIC.
Arab Investment Company (AIC)
(Arab Investment Fund)
Headquarters:
Riyadh, Saudi Arabia
Address:
P.O. Box 4009, Airport Road
Telephone/Telex:
Oil—67686//2001/ARABVST
Branches:
Cairo—P.O. Box 139
Telephone/Telex: 908983/ /2303/TAIC
Khartoum—P.O. Box 2242
Telephone/Telex: 75571/2/4//624 ITAIC
18
Arab Investment Company (AIC)—Continued
Date Established:
July 16, 1974
Administration:
Chairman: Abdul Aziz Al-Rashid of Saudi Arabia;
President and Managing Director: Ibrahim al-Ibrahim
of Kuwait
Board of Directors of not more than 10 members,
elected by contributors on the basis of their shares.
Shareholders:
Saudi Arabia, Kuwait, Sudan, Egypt, Qatar, Abu Dhabi, Bahrain, Iraq, Jordan, Morocco, Algeria, Tunisia,
Libya and Oman. Membership is open to other Arab
countries.
Capital:
Initial authorized capital of $200 million, divided into
two thousand shares (paid up $31 million) was
raised to $255 million in March and to $300 million
in Oct. 1975. Major shareholders, with shares of
original capital, are: Abu Dhabi, Kuwait and Saudi
Arabia ( 1 5 % each), Iraq ( 1 2 % ) , Egypt, Syria,
Qatar and Sudan ( 8 % each).
Functions:
To invest Arab public funds on commercial terms, developing the resources and carrying out productive
projects in thefieldsof agriculture, industry, commerce, communications and services in the member
states. Priority sectors will be agribusiness, metalworking and tourism development. AIC will invest
only in member and non-member Arab countries.
Investment will include equity as well as loans with
preference for the former and for commercial rather
than infrastructure investments. Activities will also
include borrowing in thefinancialmarket, issue of
bonds and acceptance of time deposits. AIC will also
set up separate companies to establish new commercial projects and engage in all activities from production to marketing in the natural resources field,
construction and real estate. AIC will also provide
technical assistance to implement projects. The company may later be opened to private Arab investors
wishing to repatriate capital. The AIC does not intend to invest more than 1 5 % of its authorized capital and resources in any one project.
Terms:
Competitive rates
Operations:
AIC's first projects included 1) a 17% subscription to
the Sudan £10 million ($28.7 million) capital of the
Kenena Sugar Company to operate Sudan's $180
19
Arab Investment Company (AIC)—Continued
million sugar estate project, and 2) a 1 0 % subscrip.
tion to the $3 million capital of the Arab International Insurance Company. The AIC has also agreed
to help finance the Arab Company for Mining and
the Arab Company for the Development of Livestock
Resources.
Other:
AIC funds are granted full freedom of movement and
guaranteed against nationalization, expropriation and
other non-commercial risk by member countries; profits, dividends and reserves are exempted from taxes,
dues and tariffs in Saudi Arabia; projects in member
countries will be exempted from taxation for a minim u m of five years, beginning with thefirstyear in
which any such project realizes a profit.
Arab Investors Union
Headquarters:
Alexandria, Egypt
Address:
557, Avenue el Horreya
Telephone/Telex:
64735/4041
Administration:
Chairman: Mr. M o h m o u d Ismail
Shareholders/Capital:
A consortium of Saudi Arabian and Kuwaiti banks and
insurance companies, and businessmen from Jordan
and the Arab Gulf states, whosefinancialresources
have been estimated at $20 billion.
Functions:
To organize and set up industrial, agricultural and
financial enterprises, mainly in Arab states, and to
arrangefinancingfor such enterprises.
Operations:
Alexandria Shipping and Navigation Company with
capital of $50 million is Arab Investors Union's first
enterprise. Companies presently being formed are:
Food Products Ltd., Egypt; Iran and Steel Co. Ltd.,
N e w Hotels Co. Ltd., and Financial Investments Co.
Ltd.
Arab Joint Investment Company
(UAE-Egypt Investment Company)
Headquarters:
Cairo,. Egypt
Address:
None as yet
Date Established:
October 15, 1975
20
Arab Joint Investment C o m p a n y — C o n t i n u e d
Administration:
Officers have not yet been named. U A E is expected to
provide chairman and Egypt vice chairman /manager.
Shareholders:
Egypt 5 0 % , U A E 5 0 % . Partners may dispose of
their shares to a natural or juridic entity of the
same nationality.
Capital:
$50 million, with Egypt's share in Egyptian pounds,
the UAE's in dollars. Within one month of formation
of Board of Directors, 2 5 % of nominal value of the
capital is to be paid in.
Functions:
To establish andfinancedevelopment projects in Egypt
and the U A E infieldsof industry, agriculture, transport, energy, and housing and any other projects
agreed upon by partners which have economic utility.
Company may cooperate with other authorities or
institutions conducting similar activities.
Terms:
Not yet available.
Operations:
Not yet in operation. Company will be authorized to
operate for 50 years from date of publication of
Republican decrees (12/21/75), with extension possible with appropriate approvals.
Arab Monetary Fund (AMF)
Headquarters:
Abu Dhabi
Date Established:
Statutes adopted in November 1975 at meeting of Governors of Central Banks, accord signed April 27,
1976 at the meeting of Arab League Finance Ministers in Rabat, Morocco.
Administration:
Council of Governors to be named by countries and
Managing Council to be elected by the Governors and
presided over by a Director General.
Membership:
Twenty-one members of the Arab League
Capital:
250 million "Arab Dinars" ($910 million) to be subscribed by members, plus yield on loans and borrowing from member countries and international and
Arab multinational institutions. Major contributors:
Saudi Arabia and Algeria—AD 38 million each;
Egypt, Iraq and K u w a i t — A D 25 million each.
Functions:
To develop closer economic and monetary cooperation
among Arab countries, using Arab oil producers'
surpluses to finance balance of payments deficits of
other Arab countries. To assist countries with balance
21
Arab Monetary Fund (AMF)—Continued
of payments problems by granting them short- to
medium-term credit on favorable terms and by
guaranteeing their borrowings from other member
and non-member countries; to manage a multilateral
clearing among Arab countries. To facilitate investment of the reserves of member countries and to
promote inter-Arab and international trade. To
achieve Arab monetary stability and create a new
Arab unit of account, the "Arab Dinar" (1AD =
3 S D R ) . Loans granted by the A M F will be for a
maximum period of seven years.
Term:s:
Funds will be loaned on concessional terms for maxim u m of seven years. Exact rate(s) have not yet been
determined.
Operations:
A M F will become operational when 55(
scriptions have been paid in.
of the sub-
Arab and Morgan Grenfell Finance Company
Headquarters:
London, England
Address:
St. Margaret's House
9 Ironmonger Lane, London E C 2 V 8 E Y
Telephone:
01-606-7491/886318
Date Established:
January 1974
Administration:
Chairman: Mr. Abdul-Majeed Shoman Jarbar
Deputy Chairman: Mr. D.A.C. Douglas-Home
Manager: Mr. Tarik Kassem
Directors from Jordan and Iraq
Shareholders:
Morgan Grenfell Holdings ( U K ) 5 0 % , Arab Bank Ltd.
(Jordan')* 4 5 % , Arab Bank (Overseas) Ltd. (Switzerland) 5 % .
Capital:
£1 million ($2 million) authorized; £200,000 paid up
as of March 1974.
Functions:
To assist in promoting and financing projects mainly
in the Middle East; to organize joint venture companies with Arab and international partners; to give
foreign investors advice on Middle East business opportunities and to work with the local governments
to facilitate such investment; to advise Middle Eastern investors; and to participate in syndicated Eurocurrency loans.
Operations:
Operations began
writings.
22
in
1975
with Eurobond under-
Arab Petroleum Investment Company (APIC)
Headquarters:
Riyadh, Saudi Arabia
Address (Temporary) c/o Petromin, Damman, Saudi Arabia
Date Established:
Draft agreement signed July 1974; establishment announced at O A P E C oil ministers' meeting in November 1975 after necessary ratifications.
Administration:
Director General: Dr. Nur-al-din Faraj (Egyptian)
Managing Director: Mr. Jamal Jawa, Deputy Director
of Petromin (Saudi Arabian).
Shareholders:
UAE, Bahrain, Algeria, Egypt, Kuwait, Saudi Arabia,
Syria, Iraq, Qatar and Libya.
Capital:
KD 300 million (about $1,035 million) authorized;
K D 100 million ($345 million) to be subscribed as
follows: 1 7 % each for Saudi Arabia, Kuwait, and
U.A.E.; 1 5 % for Libya; 1 0 % each for Iraq and
Qatar; 5 % for Algeria; and 3 % each for Egypt, Syria, and Bahrain. K D 50 million ($172 million) paid
up as of April 23, 1975.
Functions:
To assist in financing projects in the petroleum sector
and ancillary industrial or infrastructure projects
principally in the Arab World, for the benefit of
member countries, in order to help them make
the best use of their petroleum resources and invest
their savings so as to strengthen their economic and
financial capacity. Priority will be given to joint ventures between member countries. APIC will study and
prepare project proposals, provide medium- and longterm loans, equity and portfolio investment, participate in underwriting and guaranteeing of securities
in the petroleum sector.
Terms:
Commercial Terms.
Arab Trust Company
Headquarters:
Kuwait City, Kuwait
Address:
P.O. Box 21374
Telephone/Telex:
442060/2628
Date Established:
October. 1975
23
A r a b Trust C o m p a n y — C o n t i n u e d
Administration:
Chairman: Mr. Tewfiq Abdulkarim Al-Nassar
Deputy Chairman and Managing Director: Mr. Yousif
Abdulaziz Al-Muzaini
General Manager: Mr. Arnold Shipp
Shareholders:
Commercial Bank of Kuwait 25%; Mr. Yousif Abdulaziz Al-Muzaini 2 6 % ; other Kuwaiti businessmen
2 9 % ; Chase International Investment Co. (Chase
Manhattan subsidiary) 1 0 % ; Samuel Montagu and
Co. Ltd. (Midland Bank subsidiary) 1 0 % .
Capital:
KD 1 million ($3.4 million).
Functions:
To be involved in investment management, internationalfinanceand bullion and foreign exchange dealing.
Operations:
Operations began January 1976.
Banco Arabe-Espanol (BAE)
Headquarters:
Madrid, Spain
Address:
Paseo de la Castellana 36/38,
Madrid 1
Telephone/Telex:
225—9255/AREB 43754
Date Established:
April, 1975
Administration:
Chairman: Abdulla Saudi
Director General: Luis Vano Martinez
Shareholders:
Kuwait Foreign Trading, Contracting and Investment
Corporation and Libyan Arab Foreign Bank 3 0 %
each; Spanish Banks 4 0 % (Instituto de Credito
Oficial 9.33%; Instituto Nacional de Industria
7.33%; Banco Espanol de Credito, Banco Central,
Banco Hispano-Americano, Banco de Bilboa, Banco
Popular, Banco Exterior de Espana and Banco Atlantico—3.33% each)
Capital:
Pesetas 1.5 billion ($26.1 million) authorized and paid
up.
Functions:
To channel Arab investments and capital funds into
Spain; to promote trade between Arab countries and
Spain; to increase Spain's technical contribution to
Arab projects; to participate in international and
Spanish syndicated loan operations and bond issues;
to promote joint ventures.
24
Banque Franco-Algerienne
(Union Mediterraneenne de Banques, Paris)
Headquarters: Paris, France
Address: 12, rue de Chaleaudun
75009 Paris '
Telex: 680524 (U.M.B. Paris)
Date Established: September 12, 1975
Administration: Director-General: Mr. Abdelmalek Teman
General Manager: Mr. Jean L'Herbette
Board of Directors consists of representatives of member banks and the Algerian Finance Ministry.
Shareholders: Banque Nationale d'Algerie, Credit Populaire d'Algerie 5 0 % ; 6 French banks 5 0 % .
Capital: Ffr 80 million ($18.6 million).
Functions: To support actively the development of economic relationships between France and Algeria and with
other Mediterranean countries; to offer a complete
range of general banking services including international capital market operations, participation in international bond issues, capital venture assistance,
lending and trade and foreign exchange operations.
Terms: Commercial.
Banque Franco-Arab d'Investissements Internationaux
(FRAB-BANK)
Headquarters: Paris, France
Branch in Beirut
Address: 29, Boulevard Haussmann
75008 Paris
Telephone: 553.05.69
Date Established: 1969
Administration: President-Director-General: Mr. Jean Terray
Vice Presidents: Mr. Paul Feurer, Mr. Al-Sagar
Directors General: Mr. Farge, Mr. Khayata
Administrators: Mr. Jean Richard, Mr. Al Rifai, Mr.
Al Sulaiman, Mr. Al Kharafi.
25
B a n q u e Franco-Arab d'Investissement Internationaux
—Continued
(FRAB-BANK)
Shareholders:
Arab financial institutions (predominantly Kuwaiti)
5 0 % ; Societe Gdnerale (France) 3 0 % ; Societe Generale de Banque (Belgium), Banca Nazionale del Lavoro (Italy), Societe de Banque Suisse (Switzerland)
6 % each; Banco Urquijo (Spain) and private investor, 1 % each.
Capital:
Authorized capital raised from Ffr 50 million to Ffr 70
million ($16 million) in 1973.
Functions:
To mobilize funds from Arab surplus countries to
finance projects in Arab deficit countries and elsewhere.
Operations:
Participated in loans during 1974 to Gabon, Cuba,
Venezuela, Senegal, Cameroon, South Korea, Spain,
Italy and Norway.
Banque Inter-Continentale Arabe
Headquarters:
Paris, France
Address:
67 Avenue Franklin Roosevelt
75008 Paris
Telephone / Telex:
359.61.49/640340 B I A P A
Date Established:
April, 1975
Administration:
President-Director-General: Mr. Atrash
Shareholders:
Banque Exterieure d'Algerie 5 0 % ; Libyan Arab For
eign Bank 5 0 % .
Capital:
Ffr 40 million ($9 million)
Functions:
To be involved in Euro-money market, to undertake
medium- and long-term lending.
Banque d'Investissement et de Financement S.A.L. (INFI)
Headquarters:
Beirut, Lebanon
Address:
P.O. Box 135110
Fouad Chehab Avenue
Quartier St. Nicholas
Telephone / Telex:
334114/INFI 21185 L E
Date Established:
1974
26
Banque d'Investissement et de Financement S.A.L. (INFI)—Continued
Administration:
Deputy General Manager: Fouad Abu Saleh
Shareholders:
Banque Audi (Lebanon) 35%, Arab individuals 25%;
Caisse Centrale de Banque Populaire (France),
Groupe Renault (France), Hambros Bank ( U K ) ,
Mitsui Bank, Nomura Securities (Japan) 8 % each.
Capital:
Lebanese £15 million ($6.4 million)
Functions:
To provide medium- and long-termfinancingfor development projects in the Middle East.
Terms:
Interest has ranged from 10-12% on 2-8 year loans.
Banque Nationale pour le Developpement Economique
(BNDE)
Headquarters:
Rabat, Morocco
Address:
P.O. Box 407
Place des Alaouites
Telephone:
26441-3
Date Established:
1959
Administration:
Chairman & General Manager: Mustapha Faris
Vice-Chairman: Ahmed Bennani
Shareholders:
Moroccan Government 3 7 % , Moroccan Banks 11.5%;
foreign institutions, International Finance Corp. 1 7 %
each; private Moroccan investors 17.5%.
Capital:
M D 30 million ($7.4 million) authorized and paid up
as of 1974. Moroccan Government M D 13 million;
IFC M D 7.5 million; Moroccan banks and private
investors M D 3.9 million: Morgan Guaranty M D 1
million; other foreign institutions M D 5.1 million.
Functions:
To providefinancingfor development projects in Morocco.
Compagnie Arabe et Internationale d'Investissement
(CAII)
Headquarters:
Luxembourg Ville, Luxembourg
Address:
84 Grande Rue
Date Established:
January, 1973
27
Compagnie
tinued
Arabe et Internationale d'Investissement
(CAII)
Con-
Administration:
Chairman: Abdel-Latif Al-Hamad
Managing Director: Mr. Yves Truffert
Shareholders:
Kuwait Investment Co. SAK; Bank of Kuwait and the
Middle East K S C ; A b u Dhabi; Banque du Liban et
d' Outre-mer; Saudi National Commercial BankBanque National de Tunisie—50%.
Societe" Financiere Europeenne, Luxembourg; Banque
Nationale de Paris; Banque Nationale de Paris
Intercontinentale; Banco Central SA; Union de
Banques Suisses; Oesterreichische Landerbank; Union
Bancaire pour le Commerce et l'Industrie; Canadian
Imperial Bank of C o m m e r c e — 5 0 % .
Capital:
$30 million authorized.
Functions:
Acts as holding company for Banque Arabe et Internationale d'Investissement (BAII).
Headquarters: 11 Place Vendome, Paris France 75001.
Telephone: 260-34-01, Telex: A B I N T E R 23823
Chairman and Managing Director: Mr. Yves Truffert
Capital: Ffr 50 million ($12 million) in 1973.
Functions: To manage loans to developing countries,
act as project advisor, handle private placements in
Eurobonds.
Operations: Managed Arab government-backed loans
to Sudan.
Compagnie d'Investissement Irano-Francaise
(COMINIF)
Headquarters:
Tehran, Iran
Address:
Sherkat Melli Sakhteman Bldg.,
Koucheh Saiid, Elizabeth Blvd.
Telephone/Telex:
65 95 48/215096 SOGE IR
Date Established:
October 20, 1974
Administration:
Chairman: Mr. H. E. Mehdi Samii
Vice Chairman: Mr. Louis Buttay
Managing Director: Mr. A h m a d Taghavi
Shareholders:
Societe Generate (France) 40%'; Industrial and Mining Development Bank of Iran 2 5 % ; Industrial
28
ompagnie d'Investissement Irano-Francaise
(COMINIF)—Continued
Credit Bank (Iran) 20%: Agricultural Development
Bank of Iran 1 5 % .
unctions:
To promote industrial and agricultural projects in Iran
for Iranian and French investors and to explore possibilities for Iranian investment in France. Equity
participation; C O M I N I F does not make loans.
'perations:
Equity participation in Iran Special Steel Company
(with participation of French Creusot-Loire Enterprises), Alborz Electric Industries Co. in Tehran and
two hotels. All companies are Iranian with French
participation.
Development and Investment Bank of Iran
Headquarters:
Tehran, Iran
Address:
16 Nasser Street
Sepanhbod Zahedi Avenue
Telephone/Telex:
836799/9512696
Date Established:
1973
Administration:
Chairman and Managing Director: Mr. G. Reza Moghaddan
Assistant Managing Directors: Mr. Youssef Rad, Mr.
Firouz Afrouz
Shareholders:
Individual Iranian nationals—80%; Williams & Glyn's
Bank (UK) ; Long-term Credit Bank of Japan; Mellon Bank International, Pittsburgh ( U S ) ; First Boston A G Zurich (Switzerland) ; Dressners Bank (Germ a n y ) — 20% o .
Capital:
IR 1,813 million ($26.8 million), in 1975.
Functions:
To mobilize local and foreign capital for investment in
productive operations in Iran, primarily in industry
and mining; to provide medium- and long-term
financing for fixed capital installation, and working
capital for projects in the private sector of the Iranian economy.
Terms:
Commercial.
29
Dubai Islamic Bank
Headquarters:
Dubai, U A E
Address:
P.O. Box 1080
Deira
Telephone/Telex:
85536/7/S/9//5889 ISLAMIC DB
Date Established:
September 15, 1975
Administration:
Founder: Saeed Ahmed Lootah
Advisor: Dr. Issa Abdo
Manager of Foreign Operations: Mr. S. Noor
Membership:
Private investors from Dubai and Saudi Arabia
Capital:
50 million dirhams ($12.5 million)
Functions:
To act as a merchant bank with commercial and investment functions, latter limited to project financing. Bank must be majority shareholder when
financing private sector projects.
Terms:
Interest free; costs to be covered by "handling fee",
depositors will share in bank's investment returns
instead of receiving interest.
Operations:
Almost all investments to date have been in real estate
development, but industrial and agricultural projects
are under consideration.
Egypt-Kuwait Investment Company
Headquarters:
Cairo, Egypt
Address:
34, Kasr El Nil Street
Telephone:
52312/919967/915735
Date Established:
August, 1974
Administration:
Chairman of the Board: S. Zein Rabbatt
Administrative Assistant: Mrs. Fatma el Zahraa
Shareholders:
Kuwait Foreign Trading, Contracting and Investment
Co. $17.5 million; Deposit and Investment Insurance Fund (Egypt) $6.5 million: Al Shark Insurance Co. (Egypt) $1 million.
Capital:
$25 million authorized
30
Egypt-Kuwait Investment C o m p a n y — C o n t i n u e d
Functions:
To invest in industrial concerns, transport and real
estate. Company can enter into partnerships, provide
local financing, and carry out activities within or
outside Egypt.
Terms:
Commercial
Operations:
The company is currently making feasibility studies
and researches of the local market for possible fields
for investment. It is currently concluding truck and
building material purchases from the Government,
mainly for resale.
First Arabian Corporation
Headquarters:
Paris, France
Address:
c/o Banque Pommier
86, Rue de £oupcelles
Paris 8
Telephone/Telex:
227-9504/650446 POMMIER PARIS
Branch:
Jidda: Queens Building, 21st floor
P.O. Box 1312, Jidda, Saudi Arabia
Telephone/Telex: 34561/54704//40235 SJ
Offices in Riyadh, Kuwait, Cairo, N e w York
Date Established:
1974
Administration:
Manager: Mr. Ghassan Shaker
Vice President: Mr. John G. Ives
(Jidda manager)
Shareholders:
All-Arab private bank.
Capital:
L£l million ($0.42 million)
Functions:
To bring Western technology to the Middle East in exchange for Middle East funds by:
1. taking an equity interest in projects;
2. providing long-term loans or equity financing for
major international companies.
It also underwrites Eurocurrency and Arab currency
issues for placement with Middle Eastern investors,
and offers counseling on Middle Eastern marketing
and financing strategies.
Terms:
Commercial.
31
Fund for Arab Oil Importing Countries
( O A P E C Special Account) ( O A P E C Oil Facfflty)
(Special Fund for Arab Non-Oil Producers)
Headquarters:
Kuwait
Address:
c/o Arab Fund for Economic and Social Development,
Mr. Nezhat al-Tayib, Director of Financial Department, 6th floor, Kuwait Investment Bldg., Ahmad
al-Jabar Street. P. 0. Box 21923 Safat
Telephone/Telex:
431870/2153.
Date Established:
1974
Administration:
Administered by Arab Fund for Economic and Social
Development jointly with the Secretary-General of
OAPEC.
Membership:
The 10 members of the Organization of Arab Petroleum
Exporting Countries ( O A P E C ) .
Capital:
$80 million in 19741; in May, 1975 the Ministers of
O A P E C agreed to renew the Special Account, and it
appears it will become a continuing fund.
Functions:
To provide emergency assistance to non-oil producing
Arab countries in overcoming their balance of payments difficulties caused by the increased cost of oil.
Assistance intended primarily for the most seriously
affected countries. 2
Terms:
Interest-free, 20 year loans with 10 year grace period.
Operations:
$79 million provided in 1974 * as follows: Sudan
($37.0 million), Mauritania ($4.6 million), Morocco
($8.1 million), Somalia ($7.2 million), North Yemen
($10.9 million) and South Yemen ($11.2 million).
Gulf International Bank
Headquarters:
Manama, Bahrain
Address:
c/o Bahrain Monetary Agency
P.O. Box 27, M a n a m a
Telephone:
714872
* There was a slight shortfall between amount allocated and amount actually contributed.
"North Yemen, South Yemen, Mauritania, Somalia, and the Sudan.
32
Gulf International B a n k — C o n t i n u e d
Date Established: November 13, 1975
Administration:
Chairman: Mr. Ali Khalifa-al-Sabah, Under Secretary,
Kuwait Ministry of Finance.
Board of 12 Directors, 2 from each country, to manage
the Bank.
Shareholders:
Saudi Arabia, Kuwait, UAE, Oman, Qatar and Bahrain—with equal shares. U p to 4 9 % of each state's
shares may be made available to individuals and
companies from that state.
Capital:
40 million Bahraini dinars ($101 million); 24 million B D paid up.
Functions:
To undertake, outside the member states, all banking
and commercial services for the banks of the member states or for others, or jointly with them. To
grant loans, deal in securities and participate directly in investment ventures.
To advise member countries on loan requests from
other countries and, increasingly, to participate in
such loans. The Bank may own or establish foreign
banks or take shares in existing banks in addition to
undertaking other investments.
Operations:
None to date.
Hexalon
Headquarters:
Rotterdam, Netherlands
Address:
60-68 Voompjes, Rotterdam 3001
Date Established:
February, 1975
Administration:
American adviser: Ackerman & Co.,
Atlanta, Georgia
Shareholders:
Blauwhoed BV, (Netherlands) : pension funds of Unilever-Holland and Dutch Engineering; Commercial
Union Assurance Co., Ltd. (UK) ; U B A F Ltd. (London-based subsidiary of U B A F ) .
Capital:
124 million Dutch Guilders ($49 million).
Functions:
Real estate investment consortium to invest in fully
rented commercial properties in the southwestern and
southeastern U.S.
33
Industrial and Mining Development Bank of Iran
Headquarters:
Tehran, Iran
Address:
P.O. Box 1801
133 Khiaban Hefez
Telephone/Telex:
89 32 71—79/21286 IMDBI IR
Date Established:
October 14, 1959
Administration:
Chairman: Jaffar Sharif Emami
Managing Director: Mr. Abdol Gasem Kheradjou
Deputy Managing Director: Mr. Iraj Azarm
Senior Asst. Managing Director: Mr. M. Bagher Baradar
Shareholders:
Iranian individuals and institutions: 86%
22 foreign banks and companies: 1 4 %
Capital:
As of March 20, 1975, authorized capital IR 7 billion
($100 million). Resources for lending include funds
provided by the Government of Iran and the IBRD.
Functions:
To finance industrial and commercial enterprises in
Iran by extension of term loans (over 1 yr.) and by
equity participation.
Terms:
Interest rates generally 1—2% below rates charged by
commercial banks.
Operations:
In year ending March 20, 1975 the Bank approved
financing totalling $468 million in the form of loans
($358 million), investments, government equity fund
investments, bank guarantees and underwritings.
Inter-Arab Investment Guarantee Corporation (IAIGC)
Headquarters:
Kuwait City, Kuwait
Address:
18 Al-Istiqlal Street
P.O. Box 23568 Safat
Telephone/Telex:
548369/2562
Date Established:
1971. First meeting of IAIGC Council took place in May
1974, but operations did not start until April 1975.
Administration:
A private corporation. Director-General: Dr. Abdulaziz
Al Mathari, a Tunisian economist and banker.
34
Inter-Arab Investment
Guarantee
Corporation
(IAIGC)—Continued
A Council composed of one representative from each
signatory country is the governing board.
Supervisory Committee of experts of different nationalities oversees activities of the corporation.
Shareholders:
All members of Arab League except O m a n and South
Yemen.
Capital:
Initial capital: KD 10 million (S34 million), paid in
capital was K D 1.5 million as of July 1975. Minimum
subscription is 5 % per country; some wealthy members subscribe 1 0 % each. Profits will be used to build
up reserves. Total coverage cannot exceed five times
corporation capital plus reserves.
Functions:
To guarantee Arab investors against losses resulting
from expropriation, nationalization and other noncommercial risks on investments in another Arab
country as a means of promoting private capital flows
between member countries. The investment and its
insurance by the corporation must have prior approval of the host government. Non-Arab investment
in a predominantly Arab-owned enterprise meeting
these conditions can also be covered, e.g. non-Arab
with a 1 0 % interest in a joint venture with an insured Arab company would receive 1 0 % of the compensation awarded for the venture.
To promote research relating to identification of investment opportunities and conditions for investment in
member countries.
Both direct and portfolio investments are eligible for
insurance. Special priority is to be given to investments which promote Arab economic integration and
co-operation and those which build up productive
capacities of the host country.
No single operation may exceed 10% of capital plus
reserves ( 2 0 % for Arab joint ventures).
Terms:
Low initial premium (.4%—.5%).
Operations:
In August 1975, IAIGC guaranteed its first loan: a Kuwait Foreign Trading, Contracting and Investment Co.
loan of K D 1 million ($3.4 million) to Sudan for
textile production.
35
International Financial Advisors
Headquarters:
Kuwait City, Kuwait
Address:
P.O. Box 4694 Safat,
Al Salem Street
Telephone/Telex:
442111-2/IFA 2385 K T
Date Established:
1974
Administration:
Chairman: Mr. Fawzi Sultan
Deputy Chairman: Mr. Abdul Aziz Saleh
General Manager: Mr. Euan R. MacDonald
Membership:
Private Kuwait individuals (55%)
Robert Fleming & Co. Ltd. ( U K ) (15%)
Banque W o r m s et Cie (France) (15%)
William Kent & Co. (U.S.) (15%)
Capital:
KD 500,000 ($1.7 million)
Functions:
To provide local merchant banking services for government and the private sector in Kuwait and the Middle
East area, and to help outside interests wishing to
invest capital or expertise in the Arab world.
Iran Overseas Investment Bank (IOIB) (IRANVEST)
(Formerly International Bank)
Headquarters:
London, England
Address:
120 Moorgate, London EC 2
Telephone/Telex:
01-638-4831/887285
Date Established:
September, 1973
Administration:
Managing Director: Mr. Darioush Oskoui of Iran
Deputy Managing Director: Mr. Jeffrey Bell
Secretary of Bank: Mr. L. Coles of U K
Board of Directors representing all shareholders.
Shareholders:
Bank Melli (Iran) and Industrial and Mining Development Bank of Iran—50%; Barclays Bank International, Midland Bank Ltd. ( U K ) ; Bank of America,
Manufacturers Hanover (U.S.); Bank of Tokyo Ltd.,
Industrial Bank of Japan (Japan) ; Deutsche Bank
A. G. (Germany); Societe Generale (France)-50%.
Capital:
Raised from £5 million to £10 million ($22 million) in
June 1975, with most of funds coming from Iranian
sources.
36
Iran Overseas Investment Bank (IOIB) (IRANVEST)—Continued
Functions:
T o attract foreign capital to Iran for investment purposes. T o assist the Government of Iran <GOI) and
its agencies in obtaining funds in the international
market; to serve as a catalyst in arranging technical
and financial cooperation between business firms in
Europe, U.S. and Japan on the one hand and Iranian sector on the other; to help the G O I invest its
funds abroad; to participate in syndicated loans and
bond issues to countries throughout the world.
Islamic Development Bank
Headquarters:
Jidda, Saudi Arabia
Address:
c/o Saudi Arabian Monetary Agency
P.O. Box 394
Airport Road
Telephone:
33994
Date Established:
Decision at the Second Conference of the Finance Ministers of the Islamic States, in Jidda 1974, became
effective on April 23, 1975 when notification of ratification had committed 615 million Islamic dinars to
the Bank.
Administration:
Chairman of Board of Governors: Shaikh M o h a m m e d
A b a Al-Khayl, Saudi Minister of Finance.
President and Managing Director: Dr. A h m e d Ali
Board of Governors to set broad policy and Board
of 10 Executive Directors responsible for directing
general operations. Permanent membership in Executive Directorate includes Saudi Arabia, Libya, U A E
and Kuwait. Temporary Executive Directors as of
Aug. 1975 were Algeria, Egypt, Guinea, Malaysia,
Niger and Pakistan.
Membership:
27 Islamic states
Capital:
Authorized capital: 2 billion Islamic dinars (1 ID = 1
SDR)-$2.4 billion. Initial capital: ID 750 million.
Major contributors with initial capital committed are
Saudi Arabia (ID 200 million), Libya (ID 125 million), U A E (ID 111 million) and Kuwait (ID 100
million) .*
x
All members (Algeria, Bahrain, Bangladesh, Indonesia, Jordan, Kuwait, Malaysia,
Mauritania, Morocco, O m a n , Pakistan. Qatar, Saudi Arabia, Sudan, Turkev. U A E , Syria,
Afghanistan, Niger, Egypt, Lebanon, Guinea, Somalia, Tunisia, Mali and Senegal) except
Yemen had, as of August 1975, deposited 2 0 % of their contributions.
37
Islamic Development
Functions:
Bank—Continued
To support the economic development and social progress of the Islamic countries and communities in
accordance with principles of Islamic Law by:
1. Equity participation in productive projects and
enterprises in the member countries.
2. Investing in infrastructure projects in the member
states.
3. Granting loans to both public and private sectors in
the member states tofinancethe productive projects
and programs.
4. Accepting deposits and raising funds by suitable
means.
5. Assisting in promotion of foreign trade among the
member states, particularly in producer goods.
6. Investing its idle funds in suitable ways.
7. Providing technical assistance and training facilities
to those engaged in the development field.
8. Carrying out research required for conducting economic,financialand banking activities in the Islamic states, as well as cooperating with all similar
international organizations and institutions in accordance with the provision of the Islamic Law
(Shariah).
Most of the funds are likely to go to non-Arab countries
because substantial funds are available to Arab
countries from other sources.
Functions:
Loans to be interest-free, since Islamic religion prohibits charging interest on loans, but may carry service fee, possibly 2 - 3 % . Loans will require member
government guarantee.
Operations:
Began after October 1975. Initial operations will consist
of co-financing of projects approved by other Moslem
financial institutions.
Kuwait Financial Centre S A K
Headquarters:
Kuwait City, Kuwait
Address:
Mubarak Al Kabeer St.
P.O. Box 23444, Safat
Telephone/Telex:
415791/412131-2/MARKAZ 2477 K W T
38
Kuwait Financial Centre S A K — C o n t i n u e d
Date Established: August 1974
Administration:
Chairman: Shaikh A h al-Salem al Sabah
Deputy Chairman: Mr. Abdul-Rahman Al-Ghunaim
General Manager: Mr. Vartkes M . Alahaidoyan
Shareholders:
Kuwaiti businessmen 78.6%.
International Bank of Washington 21.4%.
Capital:
KD 3.5 million ($12 million).
Functions:
To provide import-export financing, arrange banking
facilities inside and outside Kuwait; to assist in underwriting and placing bond issues; to advise and
arrange investment in medium- and long-term securities: to provide consulting services for project appraisal for potential Kuwaiti investors.
Terms:
Commercial.
Kuwait International Finance Company SAK
Headquarters:
Kuwait City, Kuwait
Address:
Hussain Makki Juma Bldg., 4th floor
Ali Salem Street
P.O. Box 23792 Safat
Telephone/Telex:
416809/416819/416821//2569 CURRENCY KWT
Date Established:
December 1, 1974.
Administration:
Chairman: Mr. Faisal Saud al-Fulaij
Vice Chairman and General Manager:
Mr. Sayed Mohamad Akbar
Membership:
Private Kuwaiti and foreign investors (33%); Bank
of Credit and Commerce International Luxembourg
(46%) ; W . J. Towel & Co. (217c).
Capital:
KD 1 million ($3.4 million).
Functions:
To provide local business and Middle East private
institutions with developmentfinance,including portfolio management andfinancialconsulting.
Operations:
Operations began in late 1975.
39
Kuwait Pacific Finance Company Ltd.
Headquarters:
Hong Kong
Address:
1405-1408 Hutchison House,
10 Harcourt Road
Telephone/Telex:
5/240041/83450 HX
Date Established:
April 25, 1975
Administration:
Chairman and Managing Director:
Mr. Bader Ali al-Dauoud
General Manager: Mr. Keisuke Yamada
Deputy General Manager: Mr. B. D. Bruce; 9 directors:
3 each from Kuwait and Japan, 1 each from Australia, Brazil and Canada.
Shareholders:
Kuwait Investment Company (35%), Industrial Bank of
Japan ( 3 2 % ) , Yamaichi Securities Company of Japan ( 3 % ) , Bank of N e w South Wales, Australia
( 1 0 % ) , Canadian Imperial Bank of Commerce
( 1 0 % ) , and Banco do Brazil ( 1 0 % ) .
Capital:
HK $25 million (US $5 million) authorized and paid
up.
Functions:
To channel funds from Kuwait and other Middle Eastern oil-producing countries into investment projects
in Southeast Asia, Australasia, Japan, Canada and
Brazil. To provide financial services of merchant
banking including:
1. placement and underwriting of securities;
2. management and syndication of medium- and
long-term Eurocurrency loans;
3. private placements;
4. investment and loan advisory services;
5, money market operations.
Misr Iran Development Bank (MIDB)
(Irano-Egypt Bank)
Headquarters:
Cairo, Egypt
Address:
8 Adly Street
Telephone:
43137 971268
Date Established:
May 1975
40
Misr Iran Development Bank (MIDB)—Continued
Administration:
Chairman: Dr. Hossein Kazem Zadah (Iranian)
Vice Chairman and Managing Director:
Mr. Fuoad Sultan (Egyptian)
General Manager: Mr. Shahrohb Zovosh (Iranian)
Shareholders:
Egypt and Iran
Capital:
$20 million authorized; divided equally between Egypt
and Iran.
Functions:
To carry out feasibility studies and provide medium
and long-termfinancingfor sound projects of private
companies to establish, expand or modernize agricultural, industrial and commercial enterprises in Iran
and Egypt. To assist foreign investors in investing
in both countries.
Terms:
Medium- and long-term loans at fixed market rates. As
of Dec. 10, 1975, 10.5% on long-term loans to foreign investors.
Operations:
MIDB is undertaking some projects in tourism and
agriculture in Egypt and providing consulting services
for foreign investors starting new projects in Egypt.
OPEC Special Fund
Headquarters
(tentative):
Vienna, Austria
Address:
c/o Organization of Petroleum Exporting Countries.
Dr. Karl Luegerring 10
1010 Vienna
Date Established:
Decided upon at O P E C Finance Ministers' meeting
November 1975; agreement signed January 1976,
awaiting ratification by the requisite number of
countries.
Administration:
A Governing Committee, composed of representatives
of the donor countries, is to set policy for use of the
Fund's resources and appoint a Director General to
organize the work of the Committee and supervise
the administration of loans. Loans are to be administered by national executing agencies of the donor
countries or by international development agencies.
Membership:
All OPEC members except Ecuador and Indonesia have
pledged to contribute.
41
O P E C Special Fund—Continued
Capital:
$800 million pledged for 1976 as follows (amounts in
$ million) : Iran—210; Venezuela—112; Saudi Arabia—202; Kuwait—72; Nigeria—52; Iraq—40;
Libya—40; U A E — 3 3 ; Algeria—20; Qatar—18;
and G a b o n — 1 .
Functions:
1. To provide concessional assistance to non-OPEC
developing countries in order to reinforce financial cooperation between O P E C members and
these countries.
2. To provide balance of payments support and
financing for development projects and programs.
3. To contribute to international development agencies
whose beneficiaries are developing countries.
Terms:
Non-interest bearing, long term loans. "*
Operations:
Not yet in operation. However, at their May 11, 1976
meeting the O P E C Finance Ministers provisionally
constituted themselves as S.F.'s governing committee
to authorize the allocation of $400 million from its
resources to the projected International Fund for
Agricultural Development (IFAD), provided that the
developing countries contribute at least $600 million.
P E C Israel Economic Corporation
Headquarters:
N e w York, N.Y., U.S.A.
Address:
511 Fifth Avenue
N e w York, N.Y. 10017
Telephone:
212-687-2400
Date Established:
1926
Administration:
Chairman of Board of Directors: Mr. Joseph Meyerhoff
Vice Chairmen: Mr. Raphael Recanati,
Mr. Herbert M . Singer
President: Mr. Albert Levinson
Shareholders:
8 4 % of stock is held by I D B (Israel Discount Bank)
Bankholding Corporation Ltd., the majority of the
balance by private U.S. investors.
Capital:
$21.5 million.
Functions:
To organize, finance and operate business enterprises
in Israel by providing loan and equity financing.
These enterprises include real estate development,
manufacturing, power and communications projects.
42
P E C Israel Economic Corporation—Continued
Terms:
Commercial.
Operations:
In 1975 commercial and residential real estate development was PEC's principal investment activity. PEC's
main equity investment is C L A L (Israel) Ltd. which
is involved in industry, construction,finance,trade
and services. P E C Israel Economic Corporation is a
subsidiary of IDB Bankholding, 27-29 Yehuda Haleve Street, Tel Aviv, Israel. Telephone/Telex:
54545/92233838.
Saudi-Egyptian Industrial Investment Company
Headquarters:
Cairo, Egypt
Address:
Office not set up as of March 1976
Date Established:
1975
Shareholders:
Saudi Arabia and Egypt
Capital:
$100 million divided equally between the two countries,
with Egypt's share in Egyptian pounds, Saudi Arabia's in U.S. dollars. Saudi Arabia will make another
$300 million available to the company in loans.
Functions:
To promote industrial projects in Egypt to be carried
out either by Egypt alone or by Egypt in collaboration with Arab or international parties.
Operations:
Not in operation as of March 1976.
Saudi-Egyptian Reconstruction Company
Headquarters:
Cairo, Egypt
Address:
Office not set up as of March 1976
Date Established:
1975
Shareholders:
Saudi Arabia and Egypt
Capital:
$50 million divided equally between the two countries,
Egypt's share in Egyptian pounds, Saudi Arabia's in
U.S. dollars. Saudi Arabia has promised an additional $100 million in loans.
Functions:
To invest in Egyptian real estate projects, especially in
the Suez area.
Operations:
Not in operation as of March 1976.
43
Saudi International Bank
(Al-Bank Al-Saudi Al-Alami Ltd.)
Headquarters:
London, U K
Address:
99 Bishops Gate EC2M 3TB
Telephone/Telex:
London 6382323//8812261/2—For Treasury and foreign exchange matters; Telephone: London 6285791/5
Date Established:
August 22, 1975
Administration:
Chairman: Shaikh Mohammed Aba Al-Khayl, Saudi
Arabian Minister of Finance.
Executive Director and Chief Executive Officer:
Mr. Edgar C. Felton, Vice President of Morgan
Guaranty International Finance Corporation.
Morgan Guaranty will provide management services
under a technical assistance agreement with the bank.
Shareholders:
Saudi Arabian Monetary Agency (SAMA) 50%: National Commercial Bank and Riyadh Bank Ltd.
(Saudi) 2.5% each; Morgan Guaranty Trust Co.
(US) 2 0 % ; Bank of Tokyo Ltd., Banque Nationale
de Paris, Deutsche Bank A.G., National Westminister
Bank Ltd., and Union Bank of Switzerland 5 % each.
Capital:
£25 million ($55 million) authorized.
Functions:
To conduct a broad range of merchant banking activities with the objective of 1) broadening Saudi Arabia's economic andfinancialinterchange with other
countries and enabling it to gain direct experience
in internationalfinancialmarkets, and 2) of training Saudis in all aspects of international banking.
Activities may include foreign exchange and money
market operations, short- and medium-term lending,
and arrangement of long-term finance through private placements.
Operations:
Bank began operations March 10, 1976.
Solidarity Fund for Economic & Social Development
in Non-Aligned Countries
Headquarters:
Expected to be in Kuwait
Date Established:
Under negotiation as of April 1976.
To be considered at Non-Aligned Ministerial Meeting
scheduled for August, 1976.
44
Solidarity F u n d for Economic &
Social Development in Non-Aligned
Countries—Continued
Membership:
Open to non-aligned countries, and their organizations
and institutions, upon approval of the respective governments.
Capital (proposed): SDR 20 million ($24 million), with additional borrowing authority.
Functions (proposed): To finance economic and social development projects;
promote investment and provide technical assistance,
all with special emphasis on, and priority to, promotion of industrialization. To lend as last resort, when
financing is not available on reasonable terms from
other sources. N o equity participation.
Terms (proposed) : Based on project considerations and beneficiary country circumstances. M a y include soft terms.
Special Arab Fund for Africa (SAFA)
(Arab Fund for the Provision of Loans to African Countries) ( A F P L A C )
Headquarters:
Cairo, Egypt
Address:
c/o League of Arab States
Tahrir Square
Telephone:
811890
Date Established:
January, 1974
Administration:
General Secretariat of the League of Arab States
(LAS), directly supervised by the Secretary-General,
acts as agent for the Fund.
Membership:
Algeria, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, U A E .
Capital:
Functions:
$200 million authorized, $185 million committed in
1974, $185 million committed for 1975. Contributors:
Saudi Arabia ($40 million), Libya, Iraq, Kuwait
($30 million each), Alegria and U A E ($20 million
each), Qatar ($10 million) and O m a n ($5 million).x
To support the purchase of oil by African countries
and help alleviate oil-related balance of payments
M i l countries paid their contributions to the L A S except Algeria, which m a d e its contribution available through the African Development Bank.
45
Special Arab F u n d for Africa ( S A F A ) — C o n t i n u e d
difficulties; develop oil resources in Africa; compensate African countries which have broken off relations with Israel for the economic loss incurred;
and meet drought-related needs. Operations limited
to non-Arab African countries.
Terms:
Original terms of no interest, one percent commission,
3-year grace period and 8-year repayment now softened to 10-year grace period and 25-year repayment
period, with commission still 1 % . Repayment to be
made to the Arab Bank for Economic Development
in Africa, but repayment is not expected to be sought
in most cases.
Operations:
Recipient countries and amounts for each were determined by the Organization for African Unity in cooperation with the LAS. The largest recipients in
1974 were Ethiopia, Tanzania, Zambia, Zaire, and
Uganda, with allocations of $11—14 million each.
Other:
As of April 1976 SAFA will be administered by the
Arab Bank for Economic Development in Africa.
Sudanese-Kuwaiti Investment Company
Headquarters:
Khartoum, Sudan
Address:
Al-Nile Street
P.O. Box 1745
Telephone/Telex:
78470/77193//INMMAA 603
Date Established:
July, 1972
Administration:
Chairman: Mr. Abdulwahab A. al-Tammar
General Manager: Mr. Jely Hamed
Shareholders:
Kuwait Foreign Trading, Contracting & Investment Co.
5 0 % ; Al-Dawlat Trading Establishment 5 0 % .
Capital:
1 million Sudanese pounds ($2.9 million).
Functions:
To act as holding company for several investments. To
undertake investments, probably equity only, and
participate in joint ventures with western firms willing to take a substantial equity position.
46
Union de Banques Arabes et Franchises ( U B A F )
Headquarters:
Paris, France
Address:
4, rue Ancelle, 92200 Neuilly-sur-Seine
Telephone /Telex:
717.72.42 610.334 and 630.687: UBAF NLLSN
Date Established:
1969
Administration:
President-Director-General: Dr. Mohammed Abu Shadi
(President of National Bank of Egypt).
Vice President: Mr. Maurice Schlogel
Director-General: Mr. Jacques Francois Merie
Administrator: Mr. Jean Sain Geours
Shareholders:
3 French banks—10%•: 26 Arab banks—60%.
Capital:
Ffr 110 million (S26 million) authorized as of 1974,
fully paid up.
Functions:
To carry on commercial banking functions and provide
short-term financing: to undertake some mediumand long-term lending, underwriting and syndication
banking, with the aim of participating in the development of the associated Arab countries and contributing to the development offinancial,commercial,
industrial and economic relations between the Arab
countries on the one hand and Europe, particularly
France, and the internationalfinancialmarkets on the
other.
Operations:
In 1974, participated in loans to Gabon, Sudan, Adela
Investment Co., American and French utilities, etc.
Assets/Liabilities totalled Ffr 8.2 billion ($1.9 billion ) at the end of 1975, including Ffr 97 million in
portfolio securities and participations and Ffr 30
million in bonds.
Affiliates and
Associates:
U.B.A.E. Italia: It. lira 5 billion (S7 million) (UBAF
51 r ;. Italian banks 4 9 % ) . P.O. Box 548. Piazza
Venezia 11-00187. Rome, Italy:
U B A F Ltd.: £5 million iSll million) (UBAF 5 0 % .
Midland Bank 2 5 % , Libyan Arab Foreign Bank
2 5 % ) . P.O. Box 169, Commercial Union Bldg. St.
Helens, 1, Undershaft, London EC3P3HT. England:
U.B.A.E. Luxembourg, Frankfort: D M 30 million ($12
million) ( U B A F 33.3%, Arab Bank Ltd. 33.3%,
German banks 3 3 . 3 % ) : 3 Blvd. Royal, P.O. Box
115. Luxembourg Ville, Luxembourg;
UBAN-Arab Japanese Finance Ltd.: ( U B A F 2 0 % , 9
Arab banks 4 0 % . 4 Japanese banks 32%c, Japanese
security company 8 % ). Hong Kong;
47
Union de Banques Arabes et Franchises (UBAF)—Continued
UBAF-Arab American Bank: (UBAF 12%, 4 American
banks 2 0 % , Arab & multinational banks 6 8 % ) ;
initial capital $25 million. Expected to open in spring
of 1976, specializing in wholesale banking and international transactions, 345 Park Avenue, New
York, N.Y. 10012; Telephone/Telex: 212-8261120/234589.
48
Index by Location of Headquarters
Page
Bahrain
Gulf International Bank (Manama)
32
Brazil
Arab-Brazilian Investment Company (Rio de Janeiro)
10
Egypt
Arab-African Bank (Cairo)
Arab Fund for Technical Assistance to Arab and African
Countries (Cairo)
Arab International Bank (Cairo)
Arab International Company for Hotels and Tourism (Cairo)
Arab International Insurance Company (Cairo)
Arab Investors Union (Alexandria)
Arab Joint Investment Company (Cairo)
Egypt-Kuwait Investment Company (Cairo)
Misr Iran Development Bank (Cairo)
Saudi-Egyptian Industrial Investment Company (Cairo)
Saudi-Egyptian Reconstruction Company (Cairo)
Special Arab Fund for Africa (Cairo)
7
14
16
16
18
20
20
30
40
43
43
45
France
Banque Franco-Algerienne (Paris)
Banque Franco-Arab dTnvestissements Internationaux (Paris)
Banque Inter-Continentale Arab (Paris)
First Arabian Corporation (Paris)
Union de Banques Arabes et Francaises (Paris)
25
25
26
31
47
Hong Kong
Kuwait Pacific Finance Company
40
Iran
Compagnie dTnvestissement Irano-Francaise (Tehran)
Development and Investment Bank of Iran (Tehran)
Industrial and Mining Development Bank of Iran (Tehran)
28
29
34
Ivory Coast
African Development Bank
(Abidjan)
6
Kuwait
Afro-Arab Company for Investment and International Trade
Arab Financial Consultants Company
49
7
11
Page
Arab Fund for Economic and Social Development
Arab Trust Company
Fund for Arab Oil Importing Countries
Inter-Arab Investment Guarantee Corporation
International Financial Advisors S A K
Kuwait Financial Centre S A K
Kuwait International Finance Company
12
23
32
34
36
38
39
Lebanon
Arab Finance Corporation (Beirut)
Arab International Finance Company (Beirut)
Banque dTnvestissement et de Financement S.A.L. (Beirut)
11
17
26
Luxembourg
Compagnie Arabe et Internationale dTnvestissement
27
Morocco
Banque Nationale pour le Developpement Economique (Rabat)
27
Netherlands
Hexalon (Rotterdam)
33
Saudi Arabia
Arab Investment Company (Riyadh)
Arab Petroleum Investment Company (Riyadh)
Islamic Development Bank (Jidda)
18
23
37
Spain
Banco Arabe-Espanol (Madrid)
24
Sudan
Arab Bank for Economic Development in Africa (Khartoum)
Arab Fund for Agricultural Investment and Development (Khartoum)
Sudanese-Kuwaiti Investment Company Ltd. (Khartoum)
8
12
46
United Arab Emirates
Arab Bank for Investment and Foreign Trade (Abu Dhabi)
Arab Monetary Fund
Dubai Islamic Bank (Dubai)
10
21
30
United Kingdom
Arab and Morgan Grenfell Finance Company (London)
Iran Overseas Investment Bank (London)
Saudi International Bank (London)
22
36
44
United States
PEC Israel Economic Corporation (New York)
Headquarters' Site Undetermined or Unknown
OPEC Special Fund
Solidarity Fund for Economic and Social Development in Non-Aligned
Countries
50
ir US- GOVERNMENT PRINTINGOTHCE:1376-626-280/351
42
41
44
Department of the Treasury
Office of the Assistant Secretary
(International Affairs)
Washington, D.C. 20220
Official Business
Penalty for Private Use $300
Postage and Fees Paid
Department of the Treasury
Treas 551
Contact; R.B. Self
Extension 8256
September 1, 19 76
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT ANNOUNCES FINAL COUNTERVAILING
DUTY DETERMINATION ON GLASS BEADS FROM
CANADA
Assistant Secretary of the Treasury David R. Macdonald
announced today a final determination under the Countervailing
Duty Law (19 U.S.C. 130 3) that bounties or grants are being
paid on imports of glass beads produced by Canasphere
Industries, Ltd., of Moose Jaw, Saskatchewan. Notice to this
effect will be published in the Federal Register of
September 2, 19 76. Glass beads are made principally for
highway strips enabling them to illuminate in the face
of a light beam in the dark.
The Countervailing Duty Law requires the Secretary of
the Treasury to assess an additional (countervailing) duty
that is equal to the size of the bounty or grant that has been
paid or bestowed on the production or exportation of merchandise.
Treasury's investigation showed that Canasphere Industries
received bounties in the form of a regional development grant
from the Dominion Government and an interest-free loan from
the Province of Saskatchewan, The investigation also revealed
that a preponderance of Canasphere's production is exported.
*
WS-1059
*
*
Contact: L.F. Potts
Extension 2951
September 1, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES TENTATIVE DISCONTINUANCE
OF ANTIDUMPING INVESTIGATION ON
AUTOMOBILE BODY DIES FROM JAPAN
Assistant Secretary of the Treasury David R. Macdonald
announced today the tentative discontinuance of antidumping
investigation on automobile body dies from Japan. Notice
of this decision will appear in the Federal Register of
September 2, 1976.
""
The Customs investigation revealed that those margins
which were found to exist were minimal in relation to the
volume of trade, and, in addition, written assurances of
no future sales at less than fair value have been received
from counsel acting on behalf of the exporter accounting
for 78 percent of the exports of the subject merchandise
from Japan, during the investigatory period.
Imports of the subject merchandise from Japan for the
first half of 1976 were valued at roughly $2.5 million.
o 0 o
WS-1060
FOR IMMEDIATE RELEASE
September 2, 1976
TREASURY TAKES FIRST STEP TOWARD CELEBRATING,
NATION'S TRICENTENNIAL - TO DEDICATE TIME CAPSULE
Secretary of the Treasury William E. Simon will
dedicate a Time Capsule to be opened in one hundred
years, in a ceremony at the Treasury Building's South
Portico on September 8, 1976 at 2:00 P.M.
The Capsule, to be opened by the Secretary of the
Treasury in the Tricentennial year 2076, will serve as
a symbol to Americans living in the 21st Century of our
faith in the Nation's future.
A message from President Ford to the future generation
will be included in the Capsule, as well as a message from
Secretary Simon to his future counterpart, and from
Treasury officials to their future counterparts. The
Capsule also will contain various Bicentennial medals,
a $2 bill signed by U.S. Treasurer Francine I. Neff and
Secretary Simon, and other contemporary memorabilia.
The idea for a Time Capsule was suggested by Treasury's
Director of Administrative Programs, Robert R. Fredlund.
The Capsule was designed by Treasury's Graphics Branch
and measures 42 inches in height, 30 inches at the base,
20 inches at the top, and its four sides are made of
reinforced concrete three inches thick.
An airtight inner chamber will preserve the contents
of the Capsule, which will stand on display in the Cash
Room of the main Treasury Building during the next century.
The Treasury Seal and the numerals "2076" are displayed on
one side of the Capsule.
Inscribed on the Capsule's bronze dedication plaque
are these words, which express the theme of Secretary Simon's
message to his counterpart in the year 2076:
WS-1061
(over)
-2-
"America's greatest resource is the
vibrant heritage of a free people.
May we have the wisdom and the vision
to nourish this birthright forever."
Copies of President Ford's message and Secretary
Simon's message and dedicatory remarks will be available
at the Treasury Building on September 8, 1976.
oOo
JkDepartmentoftheTREASURY
INGTON, D.C. 20220
TELEPHONE 964-2041
Contact: J.C.Davenport
Extension: 2951
September 2, 1976
FOR IMMEDIATE RELEASE
TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT LESS THAN FAIR VALUE WITH
RESPECT TO PORTLAND HYDRAULIC CEMENT
FROM MEXICO
Assistant Secretary of the Treasury David R. Macdonald
announced today that portland hydraulic cement, not including white non-staining cement, from Mexico is being or
is likely to be sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended. Notice
of this determination will be published in the Federal
Register of September 7, 1976.
The case has been 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 injury determination,
dumping duties will be assessed on all entries of the
subject merchandise from Mexico where dumping margins exist.
Margins beyond a minimal extent were found on the sales
of one of the three Mexican firms investigated. With
respect to the other two firms involved in the investigation,
one is being excluded from this determination based upon
no sales at less than fair value and the other is being
granted a discontinuance of the investigation because of
minimal margins in relation to its total sales. The latter
firm has offered price assurances.
A "Withholding of Appraisement Notice" published in
the Federal Register of May 28, 1976 stated that there was
reasonable cause to believe or suspect that there were sales
from Mexico at less than fair value. Pursuant to this
notice, interested persons were afforded the opportunity to
present oral and written views prior to the final determination in this case.
Imports of the subject merchandise from Mexico were
valued at approximately $3.3 million during calendar
year 1975.
*
WS-1062
*
*
FOR IMMEDIATE RELEASE
September 7, 19 76
John K. Parker Leaves Treasury
Secretary of the Treasury William E. Simon announced
today that John K. Parker, Deputy Director of the U. S.
Treasury Department's Office of Revenue Sharing will leave
the Department on September 10, 1976 to return to the private
sector.
Secretary Simon stated that "Mr. Parker has been a
major contributor to the success of the General Revenue Sharing
Program which serves 38,000 State and local governments with
efficiency and effectiveness. I regret his loss to the Treasury,
but I am pleased to know that he will continue to apply his
talents to meeting the needs of our urban society."
Mr. Parker was selected as the first Deputy Director
of the newly formed Office of Revenue Sharing in February 19 73;
and he served as Acting Director of the Office of Revenue
Sharing from August 19 75 until March 19 76. He has had major
responsibility for developing and implementing a system for
administering the General Revenue Sharing Program, which has
disbursed $27 billion to date with administrative costs of less
than 12/100ths of one percent of the funds distributed.
He participated actively in the task force that
assisted President Ford in developing the legislative proposal
for renewal of general revenue sharing which is now before the
Congress for action.
Prior to joining the Treasury Department, Mr. Parker
held senior management positions in the city of Alexandria,
Virginia and the District of Columbia government. He served
on the faculty and staff of the Wharton School of the University
of Pennsylvania where he had earned his Master's degree; and he
is the author of many articles in professional journals and
books.
WS-1063
- more -
-2-
Later this month, Mr. Parker will join Public
Technology/ Incorporated of Washington, D.C. as Director
of the Urban Consortium, a joint venture of 34 of the
nation's largest cities and urban counties formed to
apply science and technology to priority urban needs.
Mr. Leo C. Inglesby has been detailed to the position
of Acting Deputy Director of the Office of Revenue Sharing.
Mr. Inglesby has been an official of the Treasury Department
since 1958. As Director of the Facilities Management
Division of the Treasury Department's Internal Revenue
Service since March 1968, he has been responsible for all
administrative programs related to the physical operation
of Treasury's largest bureau.
- 30 -
September 8, 1976
MEMORANDUM FOR CORRESPONDENTS :
The Treasury Publication Middle Eastern Multinational
Financial Institutions was prepared by the Office of
Developing Nations under the direction of Assistant
Secretary for International Affairs Gerald L. Parsky.
Additional copies of Middle Eastern Multinationa1
Financial Institutions (Stock Number 048-000-00286-20)
can be obtained from Superintendent of Documents, U.S.
Government Printing Office, Washington, D.C. 20402.
The price is $.95.
# # #
WS-1064
FOR IMMEDIATE RELEASE
September 2, 1976
JAPAN'S VICE MINISTER OF FINANCE AND UNDER SECRETARY
FOR MONETARY AFFAIRS YEP REPORT ON DISCUSSIONS
At the conclusion of a meeting today at the Treasury
Department, Vice Minister of Finance Michiya Matsukawa of
Japan and Under Secretary for Monetary Affairs Edwin H„Yeo,III
released the following report of their discussions:
For some time, we have felt a need for closer, more
frequent consultation and contact on international economic
and financial issues between Japan and the United States -two friends that have a major stake in and responsibility
for a smoothly functioning international monetary system.
This desire to strengthen contact prompted MrQ Yeo's visit
to Japan last month. Mr0 Matsukawa's visit to Washington
is a continuation of what we expect will become a regular
process of meetings, discussions, and exchanges of views by
senior economic policy officials0 Such a process is
essential to thoughtful, deliberate analysis of problems
facing the system.
Our discussions today and over the past weeks have
disclosed a common view on the part of Japan and the
United States of current major problems in the international
monetary area and of the main outlines of corrective action
that is needed.
It is clear that a first priority is continued progress
in the development of a tenable pattern of world payments
balances, which is fundamental to a smoothly operating system
that facilitates the efficient conduct of trade and finance;
and that countries both in deficit and in surplus have a
critical role to play in the adjustments required to achieve
such a pattern. For countries in deficit internal stabilization
and exchange rate action resulting from the operations of the
market should be combined to produce sustainable balance.
Transitional multilateral financing will be needed to complement
appropriate adjustment policies on the part of countries in
structural deficit; and countries in surplus should be prepared
to accommodate adjustment through the exchange rate, for they
WS-1065
cannot be asked or expected to inflate.
- 2 -
This represents our shared analysis of the world payments
situation and is within the framework of the Rambouillet,
Jamaica and San Juan agreements. Japan and the United States
have a large responsibility for the conduct of the monetary
system and intend to work together and with others to assure
that the system operates smoothly and efficiently.
oo 00 oo
IheDepartmentoftheTREASURY
JHINGTON, DX. 20220
TELEPHONE 964-2041
September 3, 1976
FOR IMMEDIATE RELEASE
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 September 9, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing December 9, 1976
High
Low
Average
26-week bills
maturing March 10, 1977
Price
Discount
Rate
Investment
Rate 1/
Discount Investment
Price
Rate
98.719
98.711
98.714
5.068%
5.099%
5.087%
5.20%
5.24%
5.23%
97.310
97.299
97.304
5.321%
5.343%
5.333%
Rate 1/^
5.54%
5.57%
5.56%
Tenders at the low price for the 13-week bills were allotted 5%.
Tenders at the low price for the 26-week bills were allotted 59%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
|
Boston
$
38,695,000
New York
3,281,150,000
30,620,000
Philadelphia
Cleveland
87,080,000
Richmond
19,820,000
Atlanta
26,805,000
Chicago
247,970,000
St. Louis
44,565,000
32,550,000
Minneapolis
29,835,000
Kansas City
43,990,000
Dallas
San Francisco 295,800,000
TOTALS $4,178,880,000
Accepted
Received
|
Accepted
$
22,695,000 ;•$
12,345,000
57,345,000 $
1,794,400,000 :: 6,818,600,000 2,576,770,000
30,240,000
30,620,000 .:
40,740,000
87,080,000 :
22,935,000
158,435,000
41,490,000
• 19,820,000 :
69,490,000
33,300,000
26,805,000 ,:
69,900,000
20,630,000
95,830,000 :
389,830,000
27,830,000
72,185,000
28,665,000 :
3,765,000
62,320,000
29,700,000 :
47,880,000
35,355,000
27,835,000 :
13,645,000
35,645,000
19,290,000 <;
582,370,000
886,625,000
118,600,000 -:
$2,301,340,000a/$8,708,995,000
$3,400,675,000 b/
i/Includes $343,470,000 noncompetitive tenders from the public.
>/Includes $162,440,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1066
FOR RELEASE AT 4:00 P.M.
September 7, 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 , or
thereabouts, to be issued September 16, 1976, as follows:
91-day bills (to maturity date) in the amount of $2,100 million, or
thereabouts, representing an additional amount of bills dated June 17, 1976,
and to mature
December 16, 1976 (CUSIP No. 912793 C6 1), originally issued in
the amount of $3,203 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,100 million, or thereabouts, to be dated September 16, 1976,
and to mature March 17, 1977
(CUSIP No. 912793 F2 7).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 16, 1976, outstanding in the amount of $5,206 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,707 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, September 13, 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-1067
—
(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.
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 September 16, 1976, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing September 16, 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 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
STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
COMMITTEE ON FINANCE
SUBCOMMITTEE ON INTERNATIONAL TRADE
UNITED STATES SENATE
WEDNESDAY, SEPTEMBER 8, 9:30 A.M.
I am pleased to join in this review of the U.S.-Romania
Trade Agreement. Both the Department of the Treasury, and
the East-West Foreign Trade Board, chaired by Secretary
Simon, strongly favor extension of the waiver pursuant to
authority conferred by section 402 of the Trade Act. An
extension of the waiver allowing the U.S.-Romania Trade
Agreement to remain in force will promote continued
improvement in our economic and political relations with
that country and serve our national interest. It will allow
us also to build upon the important foundations laid in the
last few years.
We are grateful, Mr. Chairman, for this opportunity to
discuss the issues involved in the further expansion of
U.S.-Romanian economic and political relations. We believe
it can help create an environment of public understanding
and confidence; an environment which will permit political
and economic relations between the United States and Romania
to develop in a mutually advantageous manner.
The United States and Romania have enjoyed a special
relationship since at least 1969, when we
chose Romania as the first country in Eastern Europe to
be visited by a U.S. President since World War II. While
the U.S. now enjoys extensive relations with other Eastern
European countries, particularly in the areas of trade and
joint scientific research, our relations with Romania are
among the best with countries of the Warsaw Pact. This is
demonstrated through scientific and cultural exchanges, by
thefrequency and frankness of consultations between senior
officials, in trade and economic relations, and in other
ways.
The U.S.-Romanian Trade Agreement has marked a major
step forward in the development of our economic and political
WS-1068
relations with Romania. We are convinced that the continuation of the Agreement will contribute to the growth and
- 2stability of the economies of both countries, and to a
further increase in two-way trade.
Strengthening good U.S.-Romanian relations, both
economic and political, serve the interests of both countries. Romania has adopted a number of policy initiatives
that are aimed at providing the country with a high degree
of independence. More than any other Warsaw Pact country,
Romania has pursued friendly relations with countries of
differing political and economic systems -- with the
United States, the People's Republic of China, the developing world, and with Israel as well as Arab countries.
Romania participates actively in a number of international
organizations. It is the only COMECON country which is a
member of the IMF and the World Bank. Romania has acceded
to the GATT. It leads the COMECON countries in the proportion of its trade with the West.
Romania's economic viability is the key to its strategy
of independence. We believe that it is in our interest to
encourage Romania's independent policy orientation through
the expansion and improvement of our bilateral relations.
Continuation of the Trade Agreement with Romania is essential
to this end. Moreover, closer economic ties and expanding
trade strengthen the economies of both countries.
Trade Overview
In our desire to encourage Romania's independent
policy we have been in favor of the expansion of AmericanRomanian economic and commercial contacts for many years.
The notable increase in total U.S.-Romanian trade during
the last eleven years is a demonstration of the special
relationship we have established with that country.
U.S.-Romanian trade turnover was $8 million in 1965,
$80 million in 1970, and reached a high of over $407 million
in 1974, when the Romanians purchased relatively large
quantities of U.S. aircraft and grain (see attached table).
Although total bilateral trade declined from 1974 to 1975,
the 1975 volume of over $322 million was still almost twice
the total in 1973, and more than three times the volume
in 1972.
- 3 Throughout this period of increasing trade, the United
States has consistently sustained a positive annual trade
balance with.Romania. Our exports, composed primarily of
agricultural and manufactured goods, grew nearly thirty
times, reaching $189.3 million last year. U.S. imports
from Romania totaled $133 million in 1975, more than seventy
times the 1965 volume. The bulk of last year's imports
consisted, as in the past, of mineral fuels and related
materials.
As you know, the United States granted Most-FavoredNation (MFN) tariff status to Romania in August 1975,
as part of the U.S.-Romania Trade Agreement. And Romania
was made a beneficiary of the U.S. Generalized System of
Preferences on January 1, this year. The initial impact
of these actions on our bilateral trade is at least in
part reflected in the trade figures available for the
first half of this year.
U.S.-Romanian trade during the first six months of
1976 totaled $179 million, over 10 percent above the
$158 million in goods traded during the same period in
1975. Romanian exports to the U.S. through June of 1976
reached $90 million, about two and one-half times the
amount recorded during the same period of last year.
This large increase in U.S. imports from Romania has,
for the first time in recent years, resulted in a near
balance in our two-way trade.
While extending MFN and GSP to Romania's products
has contributed to this year's rise in our imports from
Romania, the increase should not be attributed exclusively to these actions. Many factors other than tariff
changes affect trade. In this instance, the recovery of
the U.S. economy in 1976 has led to significant increases
in our imports from many countries, including Romania.
This is especially true of our imports of products such
as fuel oil, which, in dollar terms, led the increase in
U.S. imports of Romanian goods. During the first half
of 1976, fuel oil imports from Romania reached over
$42 million, representing almost one-half of all our
imports from that country so far this year.
- 4 I would also like to point out that the trade data for
the first six months of this year dispel the often expressed
fear that the U.S. market will be flooded with large
quantities of imports disrupting U.S. domestic business
when our imports from nonmarket economy countries are given
MFN tariff treatment. This simply has not been the case
with Romania. Since granting MFN status to Romania last
year, our imports from that country have, as expected,
increased, but certainly not to levels that would be
considered disruptive for the U.S. market. To date, the
U.S. International Trade Commission has received no
petition or request under Section 406 of the Trade Act to
conduct an investigation to determine whether imports of
an article from Romania are causing market disruption,
nor has U.S. countervailing duty authority been invoked
against Romanian imports. The only case which has arisen
since Romania received MFN status is the issuance of an
Antidumping Proceeding Notice on Romanian clear sheet
glass. The issuance of such a notice, however, merely
begins the formal investigative procedure and does not
necessarily imply a formal finding of dumping.
A continuation of the increase of total U.S. imports
from Romania, stimulated further by the Trade Agreement and
the granting of GSP, can be expected in the future, but will
undoubtedly be accompanied by a continuation of the rapid
rise of Romanian purchases from the United States. Thus we
envision that both countries will continue to gain from
increased trade, resulting from our present economic policy
toward Romania, in which the U.S.-Romania Trade Agreement
is a critical element.
Prospects for U.S.-Romanian Trade
The prospects for future U.S. exports of goods and
services to Romania are good, if we maintain the normalized
trading conditions which the Trade Agreement has established.
Both Governments anticipate a pickup in our bilateral trade
during the last half of the year, bringing it to an annual
total of around $400 million, a 16 percent increase over
1975. At the first session of our Joint Economic Commission
both sides agreed to set a goal of $1 billion for our twoway trade by 1980. Romania's current Five-Year Plan projects
substantial growth in the volume of Romania's foreign trade
in support of a strong effort to expand and modernize
Romanian industry. During the next five years, imports from
the West are expected to increase by 60-70 percent over the
1971-75 period. If the U.S. share of Industrialized West
exports to Romania continues at the level it has averaged
over the past three years, we can expect to garner about
11 percent of the 60-70 percent increase.
- 5U.S. exporters can expect to increase sales of
plants, machinery and equipment in a number of industrial
sectors particularly targeted for growth. Among these
are machine building, chemicals, and petrochemicals.
While the Romanian Five-Year Plan augurs well for
increased exports of U.S. manufactured goods, we expect
that U.S. agricultural exports will continue to comprise
an important component of our total sales to Romania.
Soybeans, cotton, and to a lesser extent wheat, have
been and will continue to be leading U.S. exports in
the agricultural sector.
Many barriers to commercial contacts in Romania and to
the establishment of trading patterns and relationships
have been largely overcome in the last few years.
Knowledge that the U.S. has become an open and dependable
market for Romanian exports is causing Romania to look to
the United States as a source for high quality competitively priced manufactures, as well as important agricultural products.
MFN and Credits
Romania's ability to expand its imports from the
United States and other Western countries, which help
it to pursue its policy of independence, will of course
depend upon its ability to earn or borrow the hard
currency needed to finance these imports. To earn
hard currency, Romania's exports must have access to
Western markets, including our own. Our Western
allies have given most-favored-nation status to imports
from Romania. In granting MFN to Romania, the United
States did not of course give that country any special
privilege; we simply allowed Romania's products to
enter the U.S. market and compete on an equal footing
with the products of over 100 other nations which also
receive MFN tariff treatment from us. Without a
continuance of equal tariff treatment of Romania's
products, we will force Romania to conduct much of
its hard currency business with our West European
competitors, and we will face the possibility of
losing our potential exports to Romania in the process.
At the same time that access to Western markets
is vital for Romania to continue its import program,
sources of Western financing, both public and private, are
equally important. In the 1960's, when the Romanians
- 6began their move toward independence, this policy combined
with rapid industrialization seemed likely to get them
into political and financial trouble. In the 1970's,
however, the Romanian approach, consisting of a strong
commitment to succeed in world markets combined with
considerable investment in selected industries, has begun
to show impressive results in production and exports. But
the Romanians still have a need to borrow in the West to
help finance their ambitious import program and to service
their existing outstanding debt.
In order for Romania to adequately manage its hard
currency debt situation, the Romanian Government will
have to monitor its economy carefully to ensure that
it does not grow more rapidly than can be sustained.
In light of the continuing Romanian interest in
Western sources of financing, the availability of credits
is expected to be an important factor in Romania's purchasing decisions. Without a continuation of the Title
IV waiver for Romania, Eximbank and the Commodity Credit
Corporation would, of course, have to cease making loans
or guarantees to that country.
As of June 30, 1976, Eximbank exposure in Romania
was $75.6 million. In addition, outstanding preliminary
commitments from Eximbank total about $21 million for
proposes projects with a total export value of $49
million. While the flow of official credits from the
U.S. represents only a small fraction of the capital
available to Romania for trade in general, Eximbank credits
are nonetheless necessary to facilitate export financing
and to place U.S. firms on a competitive basis with
their industrial competitors in doing business with that
country. The inability of Romania to obtain Eximbank
credits would probably result in a cancellation of many
current and future orders for exports to Romania from
U.S. businesses. Should that occur, our mutually
beneficial trading relationship with Romania would be
placed in jeopardy over the long-term.
It is my hope that counter-productive competition
among Western industrial nations for exports through
government-supported credits will soon end. At the
end of the economic conference in November 1975, at
Rambouillet, France, the Heads of State of the
- 7 Governments of France, Germany, Italy, Japan, the United
Kingdom and the United States declared that their
Governments would intensify efforts to achieve a prompt
conclusion of discussions then underway, among themselves and Canada, concerning export credits. Renewed
discussion among these Governments resulted in a
consensus that counter-productive competition must be
avoided with respect to government-supported export
credits. While it was not possible to reach a formal
agreement to implement this consensus, all of the
Governments issued their own declarations or instituted
internal procedures to establish their own guidelines
on minimum rates and maximum terms on official export
credits. These guidelines are designed to bring
official export financing procedures closer to those
standards determined by the market and thereby reduce
the concessional element derived from government
support. This will allow exporters to compete in
world markets on the basis of price, quality, and
servicing of product rather than on artificial
incentives.
Commodity Credit Corporation (CCC) credits also
play an important role in our trade with Romania.
Since 1970, CCC has been quite active, financing a
total of $137.9 million worth of U.S. agricultural
exports to that country. Romania has been a good
customer with prompt repayment. These credits have
stimulated the growth of our agricultural exports,
and at the same time, have supported the integration
of Romania into the world community. If the waiver
for Romania is not extended, the U.S. Government
will also lose its authority to extend CCC credits
to Romania.
Conclusion
Mr. Chairman, our experience with the U.S.-Romanian
Trade Agreement has convinced us of its continued
importance. In commercial and economic terms it has been
a central propellant to the growth of U.S.-Romanian
relations.
Though the question of linkage between the Trade
Agreement and humanitarian issues is a very delicate
and sensitive one for the Romanian Government, the
record of Romanian action on humanitarian and emigration cases during the past year has contributed to
- 8the achievement of the objectives of the Act. Secretary
Simon, during his visit to Bucharest in June of this
year, held frank discussions with Romania's leaders
about the extension of the waiver pursuant to authority
under Section 402 of the Trade Act. We were encouraged
by the importance Romania's leaders place on this issue.
The pivotal role that the U.S.-Romanian Trade Agreement
plays in our bilateral relations became very apparent
during the course of our discussions.
During the last year we believe that Romania's
emigration performance has contributed to the achievement of the objectives of the Trade Act. There is no
doubt that the continuation of the waiver will provide
the climate in which we can expect the Romanian Government to continue to be responsive to our very deep
interest in human rights. On the other hand, failure
to extend the waiver could prompt a reaction by
Romania which will be inimical to the humanitarian
goals of the Trade Act.
In conclusion, then, we believe that extension of
the waiver allowing the U.S.-Romanian Trade Agreement
to remain in force is in our national interest.
oOo
U.S.-ROMANIAN TRADE TRENDS
(Millions of dollars)
Jan-Jun
1976
1965
1970
1971
1972
1973
1974
1975
Jan-Jun
1975
n. a.
18.8
15.4
18.8-
31.7
108.6
56.9
32.2
17.8
Other
n.a.
47.5
37.0
50.3
84.8
168.5
132.4
89.6
71.4
Total
6.4
66.3
52.4
69.1
116.5
277.1
189.3
121.8
89.2
U.S. Imports
1.8
13.4
13.8
31.5
55.7
130.5
133.0
35.9
90.5
Trade Turnover
8.2
79.7
66.2
100.6
172.2
407.6
322.3
157.7
179.7
U.S. Trade
Balance
4.6
52.9
38.6
37.6
60.8
56.3
85.9
-1.3
U.S. Exports:
Manufactured
goods 1/
1/
SITC 5 through 8 statistics not available (n.a.) for 1965
Source: U.S. Department of Commerce, BEWT
146.6
Summary of the Principal Points Included
in the Statement
1. Both the Department of the Treasury, and the East-West
Foreign Trade Board, chaired by Secretary Simon, strongly
favor extension of the waiver pursuant to authority
conferred by section 402 of the Trade Act.
2. We believe that continuation of the Agreement serves
our foreign policy interests. The dominant theme
of Romania's foreign policy is the desire to maintain a
high degree of independence. Continuation of the Trade
Agreement with Romania is essential to this end, as
Romania's economic viability is the key to its strategy
of independence.
3. We believe that continuation of the Agreement serves
the economic interests of both countries. We have
continued to encourage the expansion and improvement of
American-Romanian economic and commercial relations.
The increase in our contacts is reflected by U.S.-Romanian
trade figures. The $322 million in two-way trade in 1975
was 4 times that of 1970 and 40 times that of 1965.
4. Romania's current Five-Year Plan calls for substantial
increases in imports of goods traditionally supplied by
the United States. Romania's ability to expand its imports
from the United States and other Western countries, and to
continue to pursue its policy of independence, will depend
upon its ability to earn hard currency needed to finance
these imports. To earn hard currency, Romania's exports
must have access to Western markets, including our own.
Without a continuance of equal tariff treatment of
Romania's products, we will force Romania to conduct
much of its hard currency business with our West European
competitors who have granted most-favored-nation status
to imports from Romania, and we will face the possibility
of losing our potential exports to Romania in the process.
5. While access to Western markets for Romania's products
is vital for Romania to continue its import program and
its independent policy, sources of Western financing,
including U.S. Eximbank and Commodity Credit Corporation
(CCC), are equally important. Without a continuation of
the Title IV waiver for Romania, Eximbank and the CCC
would have to cease making loans or guarantees to that
country. Should that occur we will face the possibility
of losing potential exports to Romania and place in
jeopardy over the long-term our mutually beneficial
trading relationship.
- 2 6. Our experience with the U.S.-Romanian Trade Agreement
gives us no cause to question its continued usefulness.
Though the question of linkage between the Trade Agreement
and humanitarian issues is a very delicate and sensitive
one for the Romanian Government, the record of Romanian
action on humanitarian and emigration cases during the
past year has contributed to the objectives of the Trade
Act.
department of theTREASURY
(ASHINGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE AT 4:00 P.M.
September 7, 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 , or
thereabouts, to be issued September 16, 1976, as follows:
91-day bills (to maturity date) in the amount of $2,100 million, or
thereabouts, representing an additional amount of bills dated June 17, 1976,
and to mature
December 16, 1976 (CUSIP No. 912793 C6 1), originally issued in
the amount of $3,203 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,100 million, or thereabouts, to be dated September 16, 1976,
and to mature March 17, 1977
(CUSIP No. 912793 F2 7).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 16, 1976, outstanding in the amount of $5,206 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,707 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, September 13, 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-1067
(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.
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 September 16, 1976, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing September 16, 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 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
September 8, 1976
SECRETARY SIMON DEDICATES TIME CAPSULE
TO BE OPENED IN ONE HUNDRED YEARS
Secretary of the Treasury William E. Simon today
dedicated a Time Capsule to be opened in the Tricentennial
year 2076, in a ceremony on the South Plaza of the
Treasury Department building.
The Capsule, which will stand on display in the
Cash Room of the main Treasury building for one hundred
years, will serve as a symbol to Americans living in the
21st Century of our "faith in the Nation's future, its
dynamic economy, and its timeless principles of freedom,"
the Secretary said.
Sealed into the Capsule, within an airtight inner
chamber to preserve the contents, is a message from
President Ford to the citizens of the United States living
during the Tricentennial year, as well as a message from
Secretary Simon to his future counterpart and from Treasury
officials to their future counterparts. The Capsule also
contains various Bicentennial medals, a $2 bill signed by
U.S. Treasurer Francine I. Neff and Secretary Simon, and
other contemporary memorabilia.
In dedicating the Time Capsule, Secretary Simon read
the theme of his message, which is inscribed on the
Capsule's bronze dedication plaque:
"America's greatest resource is the
vibrant heritage of a free people.
May we have the wisdom and the vision
to nourish this birthright forever."
WS-1069
-2Noting that his brief communication across the
years was more than a statement of the economic philosophy of the Administration now in office, Secretary
Simon read from his message to his successor in America's
Tricentennial year: "In a larger sense it is an affirmation of our faith in the Nation's future and continuity
and a conviction that our economy, if properly managed,
will remain the most creative and productive in the
world, in your time as well as ours."
"Much of what will unfold in the intervening century
will be beyond our capacity to foretell or even imagine.
As Patrick Henry said, 'I have no way of judging the future
but by the past,'" Secretary Simon said.
"However, the same basic forces that move men and
activate their economies are rather constant," he continued.
"Many of our challenges today regarding production, living
standards, employment, inflation, the quality of life and
distribution of wealth will be yours tomorrow."
Stating in his message that for roughly 40 years the
concept that the Federal Government must continually intervene to stabilize the economy has increasingly influenced
economic policy-making, the Secretary added: "This shift
in economic policies reflected the erroneous belief that
a monolithic government could identify — solve — and pay
for all of the problems of society by cleverly manipulating
fiscal and monetary policies to control market forces."
"This trend," he continued, "has been carried beyond
the stage of economic planning and temporary assistance to
alleviate the impact of economic recessions to a degree
of intervention that has unnecessarily restricted the
creativity and productivity of the economic system. This
problem is now recognized throughout our political and
economic system."
In striving to stabilize economic policies to provide
a solid foundation for healthy economic growth both at
home and abroad, United States economic policy recognizes
four basic economic goals, the Secretary said. They are:
"•Prosperity and economic growth occurs largely through
encouragement of the private sector, which provides five out
of six jobs in the country today and generates the abundance
that supports government activities.
"•Skillful management of economic affairs requires
an environment of sustained, non-inflationary growth which
will benefit all Americans and strengthen our position abroad
in an increasingly interdependent world.
-3-
"*Better control of the momentum of government
spending is required to prevent the disruption of economic
stability resulting from inflation and unemployment.
A truly compassionate approach to economic policy-making
recognizes that inflation is the most insidious force in
our system since it destroys the purchasing power of our
people and disrupts the saving and investment needed to
provide the means of increasing output and new job opportunities.
"*Lowering of the level of taxation, so that our
economy and society are spared the stultification and
decay that have afflicted other societies where the state
has consumed an increasingly larger part of the national
product."
Assisting Secretary Simon at the colorful dedication
ceremony, which included patriotic selections by the U.S.
Marine Band, Presentation of the Colors by a Joint Armed
Forces Color Guard, and the playing of the National Anthem,
were the Honorable Francine I. Neff, Treasurer of the
United States; Richard R.' Albrecht, General Counsel
of the Treasury Department and President of the Treasury
Historical Association; and Miss Jo Creighton, under whose
supervision arrangements were completed for the official
dedication of the Capsule.
The original idea for a Time Capsule as part of the
Bicentennial celebration was suggested by Treasury's
Director of Administrative Programs, Robert R. Fredlund.
The Capsule was designed by Treasury's Graphics Branch and
measures 42 inches in height, 30 inches at the base, 20
inches at the top, and its four sides are made of reinforced
concrete three inches thick.
Copies of the texts of President Ford's message and
Secretary Simon's message are attached.
oOo
THE WHITE HOUSE
WASHINGTON
September 3, 1976
I commend Secretary Simon and the Treasury staff for the
emplacement of a time capsule in their Department. This
is a fitting act for the Bicentennial celebration and a meaningful gesture of continuity and communication with those
Americans who will celebrate the nation's Tricentennial
year. As you set aside these papers and memorabilia for
the future, you recognize that there is something about the
United States of America that is too mighty to be locked up
in a time capsule. Our real national treasure cannot be
kept under lock and key. No container is large enough to
embrace the hopes, the energies and the abilities of our
people.
The genius of America has been its capacity to improve the
lives of its citizens through a unique and successful combination of governmental and citizen activity. Significantly,
this has been accomplished in a climate of individual freedom, our most precious gift. I sense that in 2076, as in
1976, the true wealth of this nation, the legacy that passes
from generation to generation, will be this amazing power
of the free individual.
Responsible government policies, whether they deal with
the pocketbook or with human rights, must start with the
individual because the nation is no more, nor less, than a
collection of individuals. It is the combined force of the
daily decisions, daily tasks and daily struggles of free
Americans that sustains the life of this Republic. That is
the secret of our bountiful economy, of our proven experiment in self-government and of our vibrant spirit.
I am confident that in America's Tricentennial year we
will present to the world the same image that has inspired
mankind since the American Revolution -- the image of a
people united, producing abundance, improving the lot of
their fellow m e n and Sharing the good life fairly and in
freedom.
REMARKS,BY THE HONORABLE
WILLIAM E. SIMON
DEDICATION OF THE TREASURY TIME CAPSULE
SEPTEMBER 8, 197 6
Colleagues and Distinguished Guests:
It is an axiom that the Bicentennial year is a time for
looking forward as well as back, and few gestures can set
our sights so firmly on the future as the placing of this
time capsule in the Treasury Department.
This has truly been a Treasury Department project. The
design of the capsule itself is by our own Graphics Branch.
And many others, including the unit heads who have written
messages to their Treasury counterparts in 2076, have
contributed mightily to the project, making it a splendid
example of Treasury teamwork and participation. President
Ford also has graciously contributed a message to our fellow
Americans who will celebrate the nation's tricentennial
anniversary.
My own message, directed to the Secretary of the Treasury
one hundred years from now, has this theme — that America's
greatest resource is the vibrant heritage of a free people.
I should like to read that message now.
To the Secretary of the Treasury in 2076:
The purpose of this message is to share with my successor
in America's tricentennial year some of the policies and
beliefs about the U.S. economy which were held and acted on
by the nation's policy makers during our bicentennial year.
This communication across the years is more than a
brief statement of the economic philosophy of the administration
now in office. In a larger sense it is an affirmation of
our faith in the nation's future and continuity and a conviction
that our economy, if properly managed, will remain the most
creative and productive in the world, in your time as well
as ours.
-2Whether today's policies will seem plausible from the
vantage point of 2076, I don't know. Much of what will
unfold in the intervening century will be beyond our capacity
to foretell or even imagine. As Patrick Henry said, "I have
no way of judging the future but by the past."
However, the same basic forces that move men and activate
their economies are rather constant. Many of our challenges
today regarding production, living standards, employment,
inflation, the quality of life and distribution of wealth
will be yours tomorrow.
In this administration, we have a bedrock conviction,
based on two centuries of experience. We are convinced that
the most effective and the fairest way to guarantee steady,
durable growth that yields the greatest possible rewards and
fulfillment for all of our citizens is to encourage and
strengthen the private sector of our economy.
This is not to suggest that a deep division exists
in this country over which sector, private or public, should
produce the bulk of our goods and services. There is no
such classic confrontation. Ours has been and remains a
private enterprise economy. There is, however, disagreement
over how far government, particularly the Federal Government,
should go in allocating resources, and over whether we
should tip the balance more toward government or more
toward the free marketplace in organizing our economic
activity.
For roughly 40 years, the concept that the government
must continually intervene to stabilize the economy has
increasingly influenced our economic policy-making. This
shift in economic policies reflected the erroneous belief
that a monolithic government could identify - solve - and
pay for all of the problems of society by cleverly manipulating
fiscal and monetary policies to control market forces.
While these efforts were generally well intentioned, in
reality they turned out to be inefficient and poorly timed.
In fact, each successive round of policy adjustments created
additional distortions that led to cumulative inflation and
unemployment which disrupted not only the United States but
the rest of the world. In promising too much and delivering
too little these economic policies created skepticism and
confusion about the true strength of the American economy.
This trend has been carried beyond the stage of economic
planning and temporary assistance to alleviate the impact of
economic recessions to a degree of intervention that has
-3unnecessarily restricted the creativity and productivity of
the economic system. This problem is now recognized
throughout our political and economic system.
In the early 1930s, government at all levels — Federal,
State and Local — accounted for about 12 cents of every
dollar spent. Today, government accounts for more than 35
cents, and our projections indicate this will reach 60
cents of every dollar by 2000 unless the trend is deflected.
In the mid-1960s, the United States, largely because of
accelerating government spending and excessive control of
the economy, experienced a series of booms and recessions.
Serious overheating of the economy caused by the government
deficit spending and the rapid expansion of the supply of
money created severe price pressures. Accelerating inflation
dampened housing construction, personal spending and business
investment. The resulting downturns in the economy brought
unemployment which created hardship and wasted both human
and material resources. This, in turn, triggered poorly
planned and ill-timed fiscal and monetary policies which
ignited yet another round of excessive stimulus — followed
by renewed inflation, recession, serious strains on our
financial system, and even more government intervention.
Ironically, we discovered that excessive government
intervention hurt most those citizens its supporters claimed
to help: the poor, the elderly, the jobless, the dependent
and the disabled.
To break this cycle and return the U.S. economy to full
output and lasting growth, we are striving to stabilize
economic policies to provide a solid foundation for economic
growth in the future with more stable prices, less unemployment,
more efficient use of our valuable resources and responsible
leadership in the international economy. Our policies
recognize the following basic goals:
* Prosperity and economic growth occurs largely through
encouragement of the private sector, which provides five out
of six jobs in the country today and generates the abundance
that supports government activities.
* Skillful management of economic affairs requires an
environment of sustained, non-inflationary growth which will
benefit all Americans and strengthen our position abroad in
an increasingly interdependent world.
* Better control of the momentum of government spending
is required to prevent the disruption of economic stability
- 4 resulting from inflation and unemployment. A truly
compassionate approach to economic policy-making recognizes
that inflation is the most insidious force in our system
since it destroys the purchasing power of our people and
disrupts the saving and investment needed to provide the
means of increasing output and new job opportunities.
* Lowering of the level of taxation, so that our
economy and society are spared the stultification and decay
that have afflicted other societies where the state has
consumed an increasingly larger part of the national product.
When we criticize the growing intervention of bigger
government bureaucracies and escalating expenditures that
have grown much more rapidly than the underlying growth of
the total economy, it is not because we are anti-government.
We are not. We want government to succeed, and perform
well those tasks, such as protection of the public interest,
which government alone can perform and those other activities
it can properly undertake in a modern society in partnership
with the private sector.
However, the fact is that for many years, particularly
the past 10 or 15 years, the Federal Government has gotten
out of hand. It is trying to do more than our resources
allow, to do many things it cannot do well, to do other things
it should not be doing at all — and to do all of these things
at the same time. Somewhere along the line, government has
lost its way and, in so doing, has forfeited the full trust
and confidence of its citizens.
What kind of a government do people want? I venture
to say they want a government that is not afraid to examine
itself, not afraid to say "we should be doing this" or (even
more important) "we should not be doing that." We need a
government, for example, that is capable enough to nourish
the natural forces of a free economy, resolute enough to get
off the backs of our innovators and dreamers and job producers,
determined enough to reawaken the energies and drive of
millions of free men and women by strengthening their freedoms
rather than by trying to control their lives.
We need, in other words, to strike a finer balance between
citizen and government -- one that favors greater self-reliance
on both the individual and on that level of government closest
to the individual.
And, more important than anything else, we must preserve
that inextricable union between our freedoms — economic,
political, individual. For if economic freedom is lost, our
- 5other freedoms cannot be sustained. That is the real reason
for our determination to cut down the size of government and
reduce its inroads in the marketplace.
"What has made this a great nation?" Many still ask
today. What has made people throughout the world talk about
"the American dream?" It has not been only our land and
resources, which are abundant. It has not been simply the
qualities of our people, who are resourceful, talented,
adaptable and determined. It is that crucial factor, the
commitment to freedom which buoys up our people and
invigorates our institutions.
If this blessing can be preserved in our time and in
succeeding generations, then it will be the greatest legacy
that can be passed on to the Americans of 2076. America's
greatest resource is the vibrant heritage of a free people.
May we have the wisdom and the vision to nourish this
birthright forever.
And now, by placing this document along with the others
in the capsule, I hereby dedicate this Treasury Time Capsule
as a symbol of our faith in the nation's future, its dynamic
economy, and its timeless principles of freedom.
0O0
Administration Positions and
Conference Action on
H.R. 10612
Titles I and II - LAL and Other Tax Shelter Provisions
1-30 - (Open)
Title III - Minimum and Maximum Tax Changes
31-33 - (Open)
Treasury Departmen'
SeDtember 7, 1976
WS-1070
Title IV - Individual Tax Reductions
34. General tax credit
34.
Discussion: The Administration is disappointed
by the form, duration and extent of the tax cut
extension provisions in the House and Senate
bills. It continues to support greater tax reductions
coupled with a dollar-for-dollar reduction in
federal expenditures.
Conference Action: The Conferees adopted the Senate provisions
providing for a S35 per capita tax credit for individuals. The tax
credit was extended to January 1, 1978.-
35. Standard deduction
35.
Conference Action: The Conferees adopted the Senate provisions
providing for an increase in the standard deduction to a maximum of
$2400 for single returns and $2800 for joint returns. The standard
deduction chants "ere ™*de permanent.
36. Earned income credit
Conference Action;
January 1, 1978.
36
The Conferees extended the earned income credit to
37. Disregard of earned income
credi°
37. No objection to House and
Senate provisions.
Conference Action: The Conferees agreed to provision P"^d^S t*".
refunds from the earned income credit are to be disregarded m deter
mining eligibility for assistance benefits.
Title V - Tax Simplification
3b. Support provision with
Senate effective date
38. Alimony payments
Conference Action: The Committee voted to make the alimony
Seduction an above-the-line deduction for taxable years beginning after December 31,. 1976.
39. Child care expenses
39. Oppose the refundable
feature of the Senate
provision.
Discussion The credit for child care expenses
may be considered a cost of earning income. The
credit thereby performs a legitimate tax function
in determining the proper amount of tax due.
However, refundability" has nothing to do with
the determination of tax liability; it is simply
an addition to the tax system which more properly
serves a welfare function.
Conference Action:
Open
40. Support House provision.
No objection to Senate
provision for Federal
employees injured as the
result of acts of terrorism,
Discussion: The Senate floor amendment retaining
sick pay provisions of current law for taxpayers
with adjusted gross incomes of $15,000 or less is
contrary to the simplification purpose of Title V.
Also, more fundamentally, no justification exists
for treating sick pay any differently than other
wages.
40. Sick ,pay and certain military
disability pensions
Conference Action:
Open
41. Moving expenses
41. Support Senate provision.
Conference Action; The Committee adopted a December 31, 1976 effective
o'ati'i The Conferees agreed to limit the increase in the maximum
deduction for moving expenses from $2,500 to $3,000 (House provision)
and to provide special rules (Senate provision) for members of the
armed forces on active duty who are moved by military orders.
42. Tax study by Joint Committee
42. No objection to Senate
provision.
Conference Action: The House accepted the Senate provision requiring
a Joint Committee study on simplification.
43 Treasurv report on tax sinroli43. No objection to Senate
fication and integration of
provision.
corporate and individual income
'taxes
Discussion: Treasury is presently undertaking a
study on basic tax reform.
Conference Action: The Committee deleted this provision on Treasury's
assurance that it would attempt to submit its study by 12/31/76.
Title VI - Business Related Individual Provisions
44. Deductions for expenses
attributable to business use
of homes
44. Support Senate provision.
Oppose Senate floor amendment
of Senator Bartlett expanding
definition of business use of
home.
Conference Action: The Committee adopted the House provision which
would permit the deduction of expenses attributable to the business>
use of a home only where such expenses are attributable to the portion
of the home used exclusively on a regular basis as (a) the taxpayer s
principle place of business, and (b) a place of business which is
used for patients, clients, or customers in meetings or dealings with
the taxpayer in the normal course of his business. The Committee also
accepted the Senate modification which would allow a deduction for_a
separate structure not attached to the taxpayer's dwelling unit wr.ich
is used exclusively on a regular basis in the taxpayer's trade or
business.
45. Deduction for-expenses attributable to rental of vacation
homes
45. No objection to House and
Senate provisions.
Discussion: It is appropriate to replace the
present facts and circumstances test of current
law with an objective mechanical rule. The
Administration prefers the two week rule to the
alternative tests of the House and Senate provisions.
Conference Action: The Committee adopted the Senate provision, which
would limit the amount allowable for deductions attributable to the
rental of a vacation home if the home is used by a taxpayer for
personal purposes in excess of the greater of two weeks or 107o of its
actual business use. Thev also accepted the Senate de minimus rule
(with a modification) that no business deductions would be allowed
if the vacation home was actually rented for less than 15 days.
46. Deductions for attending foreign 46. Support Senate provision
conventions
(as"reported by the Finance
Committee). Oppose Senate
floor amendment retaining
present law.
Discussion: The Senate provision would curb most
of the abuse of the deduction allowed for attending foreign conventions. The House provision
contains mechanical rules which would be difficult
to administer. It also fails to deal with conventions on cruise ships. - '
The Administration believes that the
deduction for attending foreign conventions has
been abused and that current law is inadequate
to deal with the problem. The Administration,
therefore, opposes the Senate floor amendment
which would make no change in present law.
Conference Action: The Committee adopted the Senate Finance Committee
provision which would disallow a deduction for a convention held
outside North America unless, on the basis of certain factors, it
were more reasonable for the meeting to be held outside North America
than within it. It also would disallow a deduction for a convention
held on a cruise ship. The Committee decided to make the provision
Prospective only, effective with respect to meetings held after
October 1, 1977.
47. Qualified stock options
47. Support House provision.
Conference Action: The Committee voted to accept the House provision
(witn the later senate effective date) which generally repeals
qualified stock option treatment and subjects such options to the
same rules as presently apply in the case of nonqualified options.
The Committee directed that the Statement of Managers should report
that the IRS should value options granted during the lifetime of
individuals on the same basis that such options would be valued for
Federal estate tax purposes. This was prompted by the concern of
Senator Haskell that the IRS always assign a value of options for
estate tax purposes; however, for income tax purposes the IRS will
often argue that such options cannot be valued.
48. Nonbusiness guaranties 48. Support House provision.
Discussion: Current law creates an arbitrary
distinction in the treatment of guaranteed
payments depending on whether the guarantor
is an individual and on whether the obligation
is that of a corporation.
Conference Action: The Senate Conferees accepted the House provision
which would allow a taxpayer who has a loss from the guarantee of a
loan to treat such loss in the same manner as if such loss arose out
of the guarantor's trade or business.
49. Deduction for legislators travel
expenses away from home
r
J
Conference Action:
Open
49. No objection to House
proyision w * h fenate
modification that the
Secretary of Labor
(rather than IRS) establish the daily amount of
allowable living expenses
^ ^ ^ ^ J ^ c ^ u m u J ^ r i p n T r u s ts
50. Revision of Method of Taxing
Accumulation Distributions on
Trusts
50. Support Senate provisions
Discussion: The Senate provisions incorporate
perfecting amendments to the House bill" and
thus are preferable.
Conference Action:
The Conferees agreed to the Senate p
revision,
Title VIII - Capital Formation
"' « S t f S r & S ; 0 ' 0 0 0
U m i t a t i
°
n
51
-
S
^ ° «
senate provision."
Conference Action: The Senate Conferees receded from making this
Deceaber™l?ei980nd'
instead
'
ado ted the House
P
52. Extension of 10-percent investment
credit
extension through
52. Support Senate provision.
Conference Action: The Senate Conferees receded from making this
Ltem permanent and, instead, adopted the House extension throuzh
6
)ecember 31, 1980.
53. First-in-first-out treatment of 53. Support Senate provision
investment credit amounts
provided that prlslnt ™eat
ment retained for pre-1976
carryovers.
Discussion: The FIFO rule improves the incentive to
further capital investment. However, present
law should be retained for investment credit
carryovers from pre-1976 years to prevent windfalls.
5r^fH?nSe/Ctg?n: The/ouse Conferees accepted the Senate provision
providing tor First-in-first-out treatment of investment credit
Senat
two Iddir?™J
? t h e n r e c e d e d o n i t s Provision extending for
arisina ?i ? 2 L y e a ? s 5 h e c a r r y ° v e r P e r i ° d for investment credits
« i s m g m 1966, which would expire (unless used) this yea-
54. Extension of expiring investment
tax credits
54. Oppose Senate provision.
Discussion: The provision provides a windfall
for a limited number of taxpayers who have unused,
expiring credits from 1966.
Conference Action: The Conferees deleted the Senate provision.
55. ESOP investment credit provision
55. Oppose Senate provision.
Discussion: The Administration supports tax
incentives for broadened stock ownership which
are available to all taxpayers. ESOPs are
restricted to corporate employees and do not
afford diversification and investment choice.
In addition, as among corporate employees,
ESOPs tied to the investment tax credit favor
employees in capital intensive industries.
Conference Action: The Conferees accepted a compromise pursuant to
which an additional investment credit of 1% would be allowed dollarfor-dollar for amounts contributed to an ESOP. An additional credit
of up to 0.57o would be allowed to the employer for amounts contributed
by employees to an ESOP. The- special ESOP credit would apply to taxable
years through 1980.
56. Retroactive regulations on 56. Oppose Senate provision.
Employee Stock Ownership Plans
(ESOPs)
Discussion: To the extent that Congress endorses
different rules for ESOPs, it should set forth
specific criteria in legislation developed after
public hearings and comment.
Conference Action: The Conferees accepted a compromise concerning
the Senate provision prohibiting retroactive regulations relating to
ESOPs, Under the compromise, a provision would be added in the Statement of Managers detailing further the ESOP requirements.
57. Study of stock ownership expansion 57. Support Senate provision.
Conference Action: The Conferees decided that a broad based task
torce (rather than a Commission) should be convened to study broadening stock ownership.
58. Investment credit in the case of
movie and television films
58. Support Senate provision
except for "elect out".
Discussion: The provision provides a compromise
investment credit for pre-'75 years in settlement of pending litigation. The "elect out" of
the Senate provision frustrates the intent of
the compromise to dispose of this litigation.
Conference Action: The House Conferees accepted the first two Senate
provisions which delete a restriction on allowable investment credit
carryovers in the case of taxpayers electing the compromise method
only for pre-72 years and provides that the credit is available for
educational, as well as entertainment films. The Conferees agreed to
retain the Senate provision whereby certain taxpayers could "opt-out"
of the legislative compromise of their investment credit dispute and
continue their pending litigations. The Conferees also agreed to
include participations in the investment credit base. However, a
dispute arose concerning the proper amount of participations which
hould be included. The Conferees agreed to allow half allowed under
-he Senate provision.
59. Investment credit in the case of
certain ships
59. Oppose Senate provision
(including its" retroactive
effective date).
Discussion: The provision selectively overturns
the general tax concept of "basis" underlying
the allowance of depreciation and investment
credit.
Conference Action: A compromise was agreed to pursuant to which a 570
investment tax credit (rather than the regular 10% credit) would be
allowed prospectively from January 1, 1976 for vessels constructed
with capital construction funds. However, taxpayers could continue
to contest in court their eligibility for a full 107o credit for past
and future years.
60. Small fishing vessel construction
reserves
60. Oppose Senate provision.
Conference Action: The Conferees agreed to reduce the eligibility for
the capital construction funds in the case of commercial fishing vessels
from 5 tons to 2 tons.
61. Net operating loss carryover
election
61. Support Senate provision
provided that the election
be made on an annual basis
for the losses occurring
in such year.
Conference Action: The Conferees accepted a compromise whereby taxpayer would have an election to deduct their net operating losses over two
carryover periods: either three years back and then seven years forward;
or seven years forward. The Conferees agreed that the carryforward
period for regulated companies should be extended from the present period
of seven years to nine years,
62. Limitation on trafficking in
net operating loss carryovers
62. Oppose Senate provision
Discussion: The provision would significantly
alter the tax consequences of certain corporate
acquisitions where one of the parties to the
transaction has net operating loss carryovers.
The Administration strongly recommends "that no
such basic changes be made without an opportunity for study and comment by the major professional associations and other interested parties
The Internal Revenue Service has indicated that
the provision will be difficult to administer
due to its uncertainty and complexity. These
factors may also impede legitimate business
transactions.
If the provision is adopted, the
Administration recommends that its effective
date bs delayed for at least one year and that
Congress invite comments and specifically undertake to make necessary substantive and technical
modifications
prior to agreed
its effective
date. provision substanConference Action:
The Conferees
to the Senate
tially revising the present limitations on acquisitions of corporations
with net operating losses. A compromise was struck with respect to the
effective date which would be delayed until January 1, 1978.
63. Credit for artist's donations
of own work to charitable
organizations
63. Oppose Senate provision
Discussion: If a credit is allowed for artist's
donations of his own work, the Administration
prefers a 5 year holding period before the
artist is eligible for such credit.
Conference Action: The Senate provision would provide a 30-percent credit
For up to $35,000 in value of such work. The House Conferees expressed
concern about valuation problems, and that the provision might be a
precedent for charitable deductions for the value of other personal
services. The Senate Conferees agreed to drop this provision.
Title
1/i
- Small Business Provisions
64. Continuation of changes in
corporate tax rates and increase
in surtax exemption.
64. Support Senate provision.
Discussion: Making the tax changes permanent is
part o± the President's deepened tax cut proposal.
Also, the extension of the tax cuts to mutual
insurance companies corrects a clear drafting
oversight in the Tax Reduction Act.
Conference Action: The Conferees agreed to continue the changes in the
corporate tax rate and the increase in the surtax exemption until
December 31, 1977. In addition, these changes would apply to mutual
insurance companies
Title X -- Changes in the Treatment of Foreign Income
65
Income earned abroad by U.S
citizens living or residing
abroad
65-1.
Prefer the House bill,
but do not object to the
Senate version.
65-2. Do not oppose the Senate
provision.
Conference Action- The Conferees agreed on a compromise which would
thTof- ! - ? X e m p ^ i o n f r o m $20,000 to $15,000 for all persons and tight en
the eligibility for the exemption.
66.
Income tax treatment of nonresident alien individuals
who are married to citizens
or residents of the United
States
66-1. Support.
66-2. Support.
66-3. Support the Senate
provision.
Effective date. Prefer
Senate effective date.
Conference Action: The Senate provision was agreed to, effective for
taxable years beginning after December 31, 1976. A U.S. citizen or
resident married to a nonresident alien individual would now be allowed
to file a joint return provided that an election is made by both individuals to be taxed on their worldwide income. Also, where the electioi
to be taxed on worldwide income is not made, certain community property
laws are to be made inapplicable for income tax purposes.
67.
Foreign trusts having one or
more United States beneficiaries to be taxed currently
to grantor
67-1. Support. Prefer the
Senate change.
67-2. Support.
Effective date. Prefe:
Senate effective date
Conference Action: The Senate provision was agreed to but with the
House effective date of taxable years ending after December 31, 1975.
Grantors of foreign trusts will be taxed currently on the income of
the trust if the trust has a U.S. beneficiary.
68.
Interest charge on accumulation distributions from
foreign trusts
68.
Support. Prefer the
Senate version.
Effective date. Prefe:
Senate effective date.
Conference Action: The Senate provision was agreed to. An interest
charge in the form of an additional tax would be imposed on beneficiaries
receiving taxable accumulation distributions from foreign trusts. No
charge would be imposed for periods before January 1, 1977.
69.
Excise tax on transfers of
property to foreign persons
to avoid Federal income tax
69.
Support. Prefer the
Senate version.
Conference Action: The Senate amendment was agreed to. An excise tax
of 357o would be imposed on the amount of the unrecognized appreciation
of all property transferred to foreign entities. An electionto
recognize gain in lieu of paying the excise tax would be permitted.
70.
Amendment of provisions relating to investment in U.S.
property by controlled foreign corporations
70.
Support the change from
present law, and prefer
the Senate bill.
Effective date. Prefer
Senate effective date.
Conference Action: The Senate provision was agreed to. There would
be excluded from the definition of U.S. property in existing law
(1) stock or debt of a domestic corporation (other than a U.S. shareholder) which is not 257, owned by the U.S. shareholders, and (2) movable
drilling rigs when used on the U.S. continental shelf.
71.
Shipping profits of foreign
corporations
71-1. Support. Prefer the
Senate version.
71-2. Oppose the House provision.
71-3. Do not oppose Senate
provision.
Conference Action: The Senate provision was agreed to. There would be
excluded from foreign base company income, income from shipping operations within one country if the ships are registered in that country
and owned by a company which is incorporated in that country. The
House provision which would have made it clear that debt obligations
are taken into account in determining the amount invested in shipping
assets, and the Senate provision which would have excluded from a point
in a foreign country to a point offshore were not agreed to.
72.
Oppose the House provision
and support the Senate bill
which would make no change
in present law.
Discussion: The House provision would change
present law to make it more difficult to
administer.
Agricultural products
Conference Action:
was agreed to.
72.
The Senate provision which retained current law
73. Requirement that foreign
tax credit be determined
on overall basis
73.
Do not object to the elimination of the per-country
limitation. Support the
Senate version. Oppose the
House provisions which
would retain the per-country
for possession source income
and delay the effective
date for 3 years in the case
Discussion: The House provision would
single
out
of mining
companies.
possession source income and mining companies for
special treatment which discriminates against
other taxpayers. The Administration cannot find
any reason to single out these two classes of
taxpayers for this kind of special treatment.
Conference Action: The Senate amendment was agreed to. The per-country
limitation would be repealed and all taxpayers would be required to
determine their foreign tax credit limitation on an overall basis. The
House bill would have permanently retained the per-country limitation
for possession source income and would have provided a three-year transitional rule for mining companies. The latter two provisions were not
agreed to.
74.
Recapture of foreign losses
74.
Support the recapture of
foreign losses, and prefer
the Senate version.
Conference Action: The Senate provision was agreed to. Foreign losses
t^J*
R a p t u r e d through the foreign tax credit mechanism w h V f o r e L n
operations become profitable. The taxpayer may have more than 50% of §
-oreign source income recaptured in any taxable year, and the proportionate foreign tax credit disallowance rule is deleted.
proportion
75. Treatment of capital gains
for purposes of foreign
tax credit
75.
Support and prefer the
Senate version.
Conference Action: The Senate provision was agreed to. In general, the
foreign tax credit limitation would be modified so that net U.S. capital
in _the
losses would offset net foreign capital &gains,
-^..~, -..
..w wcase
^ ^ vof
^ ^corpora^v^ations, only 30/48ths of the net foreign source gain would be included
in the foreign tax credit limitation, and the gain from the sale or
exchange of personal property outside the United States would be consi
dered U.S. source income unless one of three exceptions applies.
Foreign oil and gas extraction income
a. Transitional rule for for- 76a. Oppose the House provision.
eign tax credit limit
Discussion: Generally oppose retroactive relief
granted by the House provision.
b. Definition of foreign oil- 76b. No objection to Senate
related income
provision.
Discussion: The Senate provision is consistent
with the inclusion of interest from foreign
corporations and dividends in the definition
of foreign oil related income.
c. Foreign oil and gas extraction income earned
by individuals
76c.
Support Senate provision
d. Tax credit for production-sharing contracts
76d.
Do not oppose the Senate
provision.
4
76e-.l. Support the Senate
e. Reduction in amount
provision, with
allowed as foreign tax
modifications.
credit on oil extraction
income
Discussion: The Administration supports limiting
the credit for oil and gas extraction taxes to 48
percent. However, the Administration recommends
that the limit be computed not on a country-bycountry basis, but by -applying the overall limitation separately with respect to oil extraction
income and other income using the regular section
904 rules for carryovers, etc.; that the definition of oil and gas extraction income be narrowed
to include dividends only when they are from a
foreign corporation when taxes are deemed paid
with respect to those dividends; that interest
be excluded from the definition.
76e-2. Oppose the Senate
provision.
Discussion: The Administration opposes the
attempt to define the portion of the payment
to a foreign government which is a royalty. A
new definition would only confuse the issue.
It would raise doubts as to the applicability
and the effect of recent IRS statements concerning the creditability of taxes. It would
cloud the applicability of the law m non-oil
and gas areas.
76.
Foreign oil and gas extraction income
Conference Action: A compromise was agreed to on the Hartke amendment
The amount of foreign taxes allowable as a credit with respect to
foreign oil and gas extraction income would be reduced and limited
However,
to 48% on an overall, rather than a per country, basis
deductions for losses from extraction activities would be limited to
the income from such activities.
77.
Underwriting income
77.
Support the Senate
provision.
Conference Action: The Senate amendment was agreed to. The source of
underwriting income would be the place where the risk is located.
78. Third-tier foreign tax
credit when section 951
applies
78.
Support Senate provision
Conference Action: The Conferees agreed to the Senate provision.
roviding t S same foreign tax credit rules for third-tier subsidiaries
as apply to second-tier subsidiaries.
79.
79.
Support the House proInterest on bank deposits
vision.
earned by nonresident aliens
and foreign -corporations
Discussion: The Administration strongly supports
the permanent exemption which is contained m
the House provision.
Conference Action: The Conferees agreed to make permanent the exemption
from U.S. tax for interest earned by nonresident aliens and foreign
corporations from deposits in United States banks.
80.
Changes in ruling requirements under section 367;
certain changes in section
1248
80-1. Strongly support the change
in present law, and prefer
the Senate version.
80-2. Support the change in
present law, and prefer the
Senate version.
80-3. Strongly support the change
in present law, and prefer
the Senate version.
Conference Action: The Senate provision was agreed to. The requirement
of an advanced ruling in the case of foreign reorganizations would be
eliminated and certain other technical changes in the treatment of the
sale of stock of controlled foreign corporations was made.
81.
Contiguous country branches of domestic life insurance companies
81.
Do not object to either
version.
Conference Action: The Senate provision was agreed to. A U.S. mutual
life insurance company would be permitted to elect to account for
contiguous country business separately from other business to avoid
U.S. taxation on contiguous country income to the extent such income
is not repatriated. The Senate provision extended this relief to
stock companies selling, through contiguous country subsidiaries,
policies which are similar to those sold by mutual companies.
82. Tax treatment of corpora82rl. Do not object to the change
tions conducting trade or
in present law. Prefer the
business in Puerto Rico
Senate version.
and possessions of the
82-2. Do not object.
United States
Effective date. Prefer
Senate effective date.
Conference Action: The Senate provision was agreed to. Under the
provision, a qualified corporation would be entitled to a special
foreign tax credit equal to the U.S. tax on gross income from sources
within a possession. In addition, dividends from a possession's
corporation would be eligible for the inter-corporate dividends
received deduction.
83.
Repeal of provisions relating to China Trade Act Corporations
83.
Support the phaseout
generally, and prefer the
Senate version.
Conference Action; A compromise was adopted. Under the House bill,
the China Trade Act Corporation provision would be phased out over a
four-year period while the Senate provision provided for a two-year
phase-out. The Conference action provides for three-year phase out.
84. Denial of certain tax bene- 84. Strongly oppose the
fits on international boycotts
Senate provision.
and bribe-produced income
Discussion: The Senate provision is an
inappropriate means of dealing with the
problems of boycotts and bribes. Moreover,
these provisions would create substantial
administrative problems.
Conference Action: In the case of bribes the Conferees would provide
for the amount of a bribe paid by a foreign corporation to be a deemed
distribution to the U.S. shareholders of that corporation without any
reduction in earnings and profits of the foreign corporation. A
compromise on the boycott provision was accepted by the Conferees.
- The tax benefits would be disallowed only to the extent attributable to boycott activities,
- the limitations would only apply to secondary and tertiary
^ycotts, and
- no limitations would apply to taxpayers who comply with restrictions on exporting and importing to and "from the Middle East belligerent
countries.
85. Amendments affecting DISC
7. Sale or distribution of DISC stock in certain nontaxable
transactions will result in recapture of accumulated DISC income.
8. Certain problems relating to double counting in the case
of distributions to meet qualification requirements are eliminated,
9. The provision will be effective with respect to taxable
years beginning after December 31, 1975.
Title XII - Administrative Provisions
86. Public inspection of written
determinations by Internal
Revenue Service
86. Support Senate provision.
Discussion: The Senate provision reflects a
compromise worked out among representatives
of the tax bar, the accounting profession, the
Internal Revenue Service, the Treasury Department and public interest firms. Thus, the
provision represents a publicly considered
solution to a problem which-has been the subject
of extensive and costly litigation over the past
several years. Certain technical matters, however, should be clarified by- the Conference
Committee.
inference Action: The Conferees adopted-the Senate provision under
.*nich determinations made by the IRS would be made public. However,
unlike the House provision, the names of the requesting taxpayers would
not be disclosed.
Disclosure of .returns and
return information
87. a-c. Support Senate provisions
a) In general
b) Definition of returns
and return information
c) Disclosure to Congress
d) White House (and other
Federal agencies)
d-e. Support Senate provisions
e) Civil and Criminal tax
cases
f) Nontax criminal cases
g) Nontax civil matters
f. Oppose requirement of "probable" cause" for disclosure
to Justice Department and other
Federal agencies of taxpayer information in nontax criminal cases.
Prefer Finance Committee amendment
g-h. Support Senate provisions
h) General Accounting Office
i) Statistical use
j) Other agencies -_inspection
on a general basis
k) State and local governments
1) Taxpayers with a material
interest
i-n. Support Senate provisions
with following modification:
- Tax information disclosed to
Federal, State and local welfare
agencies should be limited to
the tax information available
from the IRS individual master
files.
m) Miscellaneous disclosures
n) Procedures and records
concerning disclosure
o) Safeguards
p) Reports to Congress
q) Enforcement
o-q. Support Senate provisions
87. Disclosure of returns and return information
Conference Action: The Conferees adopted the Senate provision which
restricts the extent to which taxpayer information may be disclosed.
The Conferees agreed to modify the Senate provision so that the Justice
Department could more readily obtain tax information in non-tax criminal
cases. The Conferees agreed to an amendment of section 1202(f) of the
Senate provision which would allow the Justice Department access to tax
information in nontax criminal cases under certain prescribed circum- ..
stances.
88. Income tax return preparers 88. Support Senate provision.
Conference Action: The Conferees adopted the Senate provision placing
specific requirements (and penalties for failure to comply) on income
tax return preparers.
89. Jeopardy and Termination 89. Support Senate provision.
Assessments
Discussion: The Senate provision protects taxpayers
against any abusive use of jeopardy and termination
assessments, while providing more flexibility than
the House provision for a mutually satisfactory
disposition. Also, the Senate provision deals with
the issues presented by the Supreme Court decision
in Laing v. United States.
The Administration recommends that the
effective date be February 28, 1977 to provide the
IRS time to implement the new provision.
Conference Action: The Conferees adopted the Senate provision under
which taxpayers could be afforded an opportunity to contest a jeopardy
assessment of the IRS.
90. Administrative summons
90. Prefer Senate provision.
Discussion: The Administration recommends that
the effective date be February 28, 1977 to provide the IRS time to implement the new provision.
Certain other technical' matters should be clarified by the Conference Committee.
Conference Action: The Conferees adopted the Senate provision which^
provides the taxpayer with a course of action to contest administrative
summons issued by the IRS,
91. Assessments in case of math- Qi Snrm^.-*. c~
ematical or clerical errors
Support Senate provision.
Conference Action: The Conferees adopted the Senate provision providing
a procedure under which a taxpayer may request abatement of an assessment
attributable to mathematical or clerical errors.
92. Withholding State income taxes 92. Support House or Senate
from military personnel
provision.
Conference Action: The Conferees accepted the Senate provision.
93. Withholding of State or local 93. Support Senate provision.
income tax from members of the
National Guard or ready reserve
Conference Action: The Conferees accepted the Senate provision.
?*. Voluntary withholding of 94. Support Senate provision.
State income taxes from Federal
employees
Conference Action: The Conferees accepted the Senate provision.
95. Definition of city for purposes 95. Enacted into las (Public
Law
of withholding
**''•
96. Withholding tax on certain
gambling winnings
96. Support Senate provision but
oppose Senate floor amendment
excluding State lotteries from
withholding requirements.
Conference Action: The Conferees agreed to a compromise under which a
withholding tax would be imposed on winnings from State lotteries" in
excess of $5,000 and certain horse race winnings. The effective date
would be 60 davs after enactment of the bill.
97. Withholding of Federal
taxes on certain individuals
engaged in fishing
97. Oppose Senate provision,
Discussion: The Administration recommends that the
exemption be limited to one crewman (in addition
to the operator) to deal with the problem of fishermen who own their own boats and hire crewmen on an
intermittent basis.
Conference Action: The Conferees agreed to the Senate provision treating
as self-employed for Federal tax purposes crewmen on fishing boats with
an operating crew of less than 10.
98. Voluntary withholding of State
income taxes in the case of
certain legislative officers
and employees
Conference Action:
.98. No objection to House provision
The Conferees deleted the House provision
99. Minimum exemption from levy
for wages, salary, and other
income
99. Support Senate provision
Discussion: The Administration recommends that
the effective date be February 28, 1977 to provide the IRS time to implement the new provision
Conference Action: The Conferees adopted the Senate effective date of
January 1, 1977 for the establishment of a minimum amount of income exempt
from levy.
100. Joint Committee Refund Cases
100. Support Senate provision
Discussion: The Administration recommends that
the provision be made applicable to refunds
submitted to Joint Committee after the date
of enactment of H.R. 10612.
Conference Action: The Conferees adopted the Senate provision increasing
the jurisdictional amount for Joint Committee refund cases and adding
certain matters to its jurisdiction.
101. Use of Social Security numbers 101. Support House provision.
Discussion: The Administration recommends that
the use oF
of social security numbers be limited
to Federal, State and local tax administrative
purposes.
Conference Action: The Conferees adopted the Senate provision expanding
the use of social security numbers to include state and local taxes,
iriver's licenses and motor vehicle registration as well as for the
aurpose of locating runaway parents.
102. Interest on mathematical
errors on returns prepared
by IRS
102.
Support Senate provision,
Conference Action: The Conferees agreed to a comoromise under which
the Service would be granted authority to waive interest on mathematical
errors on returns it prepared.
103. Award of Costs and Attorneys'
Fees to Prevailing taxpayer
103. Oppose Senate provision
Discussion: With an opportunity for recovery of
attorney's fees, which are not normally awarded
the prevailing party in litigation, there will
be a greater incentive for litigation even though
the amount involved may be small and the taxpayer s
case may appear frivolous on its face.
Conference Ac tion: The Conferees agreed to delete the Senate provision
axpayers, who prevailed in a civil tax litigation, could
under which taxpay
recover a maximum of $^000'costs and legal fees in certain instances
Title XIII - Miscellaneous Provisions
104. Certain housing associations
104. Support Senate provision. .
Conference Action:, The Conferees adopted the Senate provision including
the Javits amendment treating lending institutions which obtain stock in
a cooperative housing corporation as a tenant-stockholder for up to three
years.
105. Tax treatment of certain
1972 disaster loans
105. Support provision with
April 15* 1977 date (Senate
provision) for payment of
first annual installment of
unpaid tax liability.
Conference Action: The Conferees adopted the provision with the April 15,
1977 date (Senate provision) for payment of the first annual installment
of unpaid tax liability.
106. Worthless debts of political 106. Support provision with Senate
parties
effective date.
Discussion: The Administration opposes the
retroactive application of the provision provided by the House bill.
Conference Action:
ettective date.
The Conferees adopted the provision with the Senate
107. Exemption from taxation of
interest on bonds issued to
finance certain student loans
107. Oppose Senate provision.
Discussion: The Senate provision creates an
undesirable precedent for the issuance of taxexempt bonds by private corporations having only
a minimal connection with governmental units.
The Treasury Department has proposed regulations
dealing with this question and is working on them
with state and local representatives.
Conference Action: The Conferees adopted the Senate provision.
112. Exemption from manufacturers'
tax for certain articles resold
after certain modifications
Conference Action:
The Conferees adopted the Senate provision
113. Franchise Transfers
Conference Action:
112. No objection to Senate
provision.
113. Support Senate provision
The Conferees adopted the Senate provision.
114. Oppose Senate provision,
114. Clarification of an employer's
duty to keep records and to
record tips
Discussion: Tip income has presented IRS with
chronic compliance problems due to a lack of
reliable records from which the correct amount
of tips can be verified. The Senate provision
obviates sound attempts by IRS to alleviate
these problems.
Conference Action: The Conferees deleted the Senate provision and
substituted therefor a two year moratorium on the enforcement of the
Service's latest revenue rulings in this area.
115. Support Senate provision with
certain modifications:
- section 169 should be
extended only until December
31, 1980; and
- the present definition of
pollution control facility
and the requirement that a
facility be added to a plant
etc., in operation by
January 1, 1969 should be
Discussion: As modified, the provision
carries
retained.
out the purpose of section 169 by accomodating
further upgrading of pre-1969 plants.
115. Pollution Control Facilities
5-year amortization and
investment credit
Conference Action:
Open
116 Qualification of fishing
organizations as tax-exempt
agricultural organizations
116. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision providing
that certain fishing organizations would be tax-exempt effective for
taxable years after December 31, 1975.
117. Subchapter S corporation
shareholder rules
117. Support Senate provision,
Conference Action: The Conferees adopted the Senate provision.
118. Application of section 6013(e)
118. Oppose Senate provision,
Discussion: The Senate provision extends retroactive -relief to a limited number of taxpayers.
Conference Action: The Conferees adopted the Senate provision.
119. Modifications in percentage
depletion for oil and gas
119-1,2. No objection to Senate
provision.
-3,4. Support Senate provision,
Discussion: The Administration believes that the
provisions should apply to all similarly situated
taxpayers. There is no justification for the^
exclusion of certain trusts from these provisions.
Conference Action: The Conferees agreed to accept the Senate provision
modifying the limitations on percentage depletion for oil and gas wells
to more properly conform the statute with the intent of Congress in
enacting the Tax Reduction Act of 1975.
120. No objection to Senate
120. Implementation of Federal
provision with certain
State Tax Collection Act of
modifications.
1972
Discussion: The Administration opposes the
provision precluding any user charge and opposes
reducing from two States to one the number of
States necessary to start the system.
Conference Action: The Conferees adopted the Senate provision without
making the modifications recommended by the Administration.
121. Cancellation of certain student
lo ans
121. No objection to Senate
p r o vi s i on.
Conference Action: The Conferees adopted the Senate provision.
122. Simultaneous liquidation of
parent and subsidiary corpor• ations
TOO
o
Support Senate provision,
|i||H|Sion: The Senate provision eliminates a
trap tor the unwary.
Conference Action: The Conferees adopted the Senate provision.
123. Prohibition of State-Local
123. Oppose Senate provision
Taxation of Certain Vessels
Barges, or Crafts Using
Interstate Waterways
Discussion: The Federal government has, over the
years, imposed relatively few constraints on the
power of States to impose taxes. The fact that
current State practices impose record keeping and
financial burdens upon barge operations is not a
sufficient reason for the Federal government to
prevent the States from imposing taxes on this
form of transportation.
Conference Ar.Hnn :
Oo en
124. Contributions in Aid of
Construction for Certain
Utilities
124. Oppose Senate provision.
Discussion: The Senate provision departs from
the general tax principle ths.t payments for
services constitute taxable income.
Conference Action: The Conferees agreed to allow water and sewer
utilities to treat as contributions to capital rather than as taxable
income, the payment by third parties of the costs of installing water
and sewer lines to new developments.
125. Prohibition of Discriminatory 125. No objection to Senate
State or Local Taxes on
provision.
Generation or Transmission
of Electricity
Conference Action: The Conferees adopted the Senate provision.
126. Deduction for cost of removing
architectural and transportational barriers to handicapped
and elderly
126. Oppose Senate provision
Conference Action: The Conferees adopted the Senate (Senator Dole)
provision.
.... 107 No obiection to Senate
127. Publication of statistics
of income
127. £° 0 °. J s i o n >
Conference Action: The Secretary of the Treasury is directed to publish
statistics of income based on adjusted gross income and economic income.
128. Report on tax increases
resulting from inflation
Conference Action:
128. No objection to Senate
provision.
The Conferees deleted this provision.
129. Taxation of certified
historic structures
129. Support Senate provision.
Discussion: The Senate provision provides a
variety ot measures designed to equalize the
tax treatment of new buildings and restored^ ^
historic structures and has the Administration s
full support.
Conference Action: The Conferees adopted this Senate provision which
denies certain tax benefits (accelerated depreciation, demolition and
loss deductions) to individuals who demolish historic structures.
130. Supplemental Security Income
for victims of certain natural
disasters
130. No objection to Senate
provision.
Conference Action: The Conferees adopted this provision.
131. Exclusion of countries which 131. Oppose Senate provision.
aid and abet international
terrorists from preferential
tariff treatment
Discussion: The trade laws are not an appropriate
vehicle for solving complex foreign policy
problems.
Conference Action: The Conferees adopted the Senate provision.
132. Net operating loss deduction 132. Oppose Senate provision.
for Cuban expropriation
Conference Action: The Conferees adopted the Senate provision, with the
proviso that this constitutes the very last extension of these net
operating; loss carryovers.
133. Study of tax treatment of 133. No objection to Senate
married, single persons
provision.
Conference Action: The Conferees deleted the Senate provision.
Title XIV - Capital Gains and Losses
134. Increase in amount of ordinary
income against which capital
loss may be offset
134. Support House provision.
Discussion: There has been no change in the
$1,000 offset since 1942, and the economic
value of this deduction has decreased significantly since that time.
Conference Action: A compromise was adopted providing that:
1. In 1977 the maximum amount of ordinary income that could be
offset by capital losses would be $2,000.
2. In 1978 the maximum offset amount would rise to a permanent
lev«l of $3,000.
135. Increase in holding period for
long-term capital gains
135. Support House provisi
Discussion: The reasons for.distinguishing between
long-term and short-term capital gains - the^
"bunching" problem and the need to differentiate
between assets held for investment and speculation suggest that the distinction should be drawn on the
basis of one full year.
Conference Action: A compromise substantially similar to the House
provision was adopted providing that:
1. In 1977 the minimum required holding period necessary to^
qualify gain on the sale of most capital assets for long-term capital
gains tax treatment would be 9 months .
2. In 1978 the holding period for long-term capital gains treatment would rise to a permanent period of 12 months.
An exception from these changes in holding period was made for farm
commodity future contracts which the Conferees decided to leave at the
same 6-month period applicable under current law.
Title XV - Pension and Insurance Taxation
136. Individual retirement account
(IRA) for spouse
136. No objection to Senate
provision.
Discussion: The Administration recommends a
broad study of retirement security which would
give consideration to the future protection of
housewives.
Conference Action: A compromise was agreed to pursuant to which an
individual could contribute up to $1,750 to an IRA he and his spouse
own jointly.
137. Limitation on contributions
to certain H.R. 10 plans
137. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision.
138. Deduction for retirement
savings of private and government employees - limited
employee retirement accounts
138. Support House provision.
*
No objection to Senate
provision.
Conference Action: Open
139. Retirement deductions for members 139. Support Senate provision
of Armed Forces Reserves and
National Guard
Conference Action-/ The Conferees adopted the Senate provision.
140. Tax-exempt annuity contracts 140. No objection to Senate
in closed end mutual funds
provision.
Conference Action: The Conferees adopted the Senate provision.
141. Pension fund investments in
segregated asset accounts of
life insurance companies
141. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision.
142. Extension of study of salary
reduction and cash or deferred
profit-sharing plans
142. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision.
143. Consolidated returns for life
and mutual insurance companies
143. No objection to Senate
provision.
Conference Action: Open
144. Guaranteed renewal life 144. Support Senate provision.
insurance contracts
*
Conference Action: The Conferees adopted on a prospective basis the
Senate provision which provides that the time for which a policy is
issued includes the period for which the insurer guarantees that the
policy is renewable,
145. Tax-free rollover in event of 145. Enacted into law (Public
Law
plan termination
94-267).
Conference Action: Ooen
Title XVI - Real Estate Investment Trusts
146. Deficiency dividend procedure
146. Support Senate provision
Conference Action: The Conferees adopted the Senate provision.
147. Failure to meet income source
tests
147. Support Senate provision.
rnnference Action: The Conferees adopted the Senate provision.
i48. Treatment of property held for 148. Support Senate provision.
sale to customers
Conference Action: The Conferees adopted the Senate provision.
149. Increase in 90-percent gross 149. Support Senate provision,
income requirement to 95 percent
Conference Action: The Conferees adopted the Senate provision.
150. Change in definition of "rents
from real property"
150. Support Senate provision,
Conference Action: The Conferees adopted the Senate provision.
151. Change in distribution
requirements
151. Support Senate provision
Conference Action: The Conferees adopted the Senate provision.
152. Manner and effect of termination or revocation of election
152. Support Senate provision
Conference Action: The Conferees adopted the Senate provision.
153. Excise tax on distribution
made after taxable year
153. Support.
Conference Action": The Conferees adopted the Senate provision,
154. Allowance of net operating
loss carryover
Conference Action:
154. Support Senate provision.
The Conferees adopted the Senate provision.
155. Alternative tax in case of
Capital Gains
155. Support Senate provision.
Discussion: The Senate provisions incorporate
perfecting amendments to the House bill and
thus are preferable.
Conference Action:
The Conferees adopted the Senate provision.
Title XVII - Railroad Provisions
156. Amortization-of track accounts
156. Oppose^ Senate provision.
Discussion: The retirement-replacement method
of accounting for depreciation of track already
provides significant advantages to railroads.
Conference Action: The Conferees agreed to delete the provision allowing
railroads to write off their track costs faster (10 years) than under
present law.
157. Railroad ties
157. Support Senate provision
(other than the Senate floor
amendment of Senator Stone).
Discussion: The Finance Committee amendment provides
a more uniform application of the retirementreplacement method of accounting than the House
provision or the Senate floor amendment.
Conference Action: The Conferees agreed to the Senate provision providing
special expensing rules for certain improved railroad ties. They also
adopted the Stone amendment allowing an immediate write-off for the full
cost of certain replacement ties.
158. Investment credit for railroads
158. Oppose Senate provision.
Discussion: The problems of railroads and airlines
are fundamental. Therefore, meaningful assistance
to these industries should be provided by means
other than special changes in long-established tax
principles governing the investment credit.
Conference Action: The Conferees adopted in slightly modified form
would enate p r o v i s i o n s w h l c h T r e a s ury opposed. As adopted the provisions
1. Allow railroads and airlines investment credits up to 100%
of tax liability (instead of 50% under current law) for 1976 and 1977
2. The percentage would decline by 10% each year after 1977 until
it returned to 50%.
3
;.Fve " f l ° w through" of the investment credit to leasees would
be prohibited.
159. Investment credit for airlines 159. Oppose Senate provision.
Discussion: See discussion under #158.
Conference Action: The Conferees adopted in slightly modified form
the Senate provisions which Treasury opposed. As adopted the provisions
would:
1. Allow railroads and airlines investment credits up to 1007o
of tax liability (instead of 50% under current law) for 1976 and 1977.
2. The percentage would decline by 10% each year after 197" until
it returned to 50%.
3. The "flow through" of the investment credit to leasees would
be prohibited.
Title XVIII - Tax Credit for Home Garden Tools
160. Home garden tool credit
160. Oppose House provision
Conference Action: The Conferees deleted the House provision.
Title XIX - Repeal and Revision of Obsolete,
' Rarely Used, Etc., Provisions of
Internal Revenue Code of 1954
161. "Deadwood" provisions
161. Support provision.
Discussion: The Administration recommends a
clarifying amendment to the definition of
"Secretary or his delegate".
Conference Action: The Conferees adopted the provision with the
Administration recommendation.
FINAL EVALUATION: Acceptable/Significant
Title XX - Energy-Related Provisions
162-176 - The energy-related provisions were deleted from the bill.
The provisions are to be the.subject of a separate bill.
Title XXI - Tax Exempt Organizations
177. Modification of self-dealing 177. No objection to Senate
transitional rules in 1969 Act
provision.
relating to leased property
Conference Action: The Conferees adopted the Senate provision.
178. Private foundation set-asides 178. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision.
179. Mandatory payout rate for
private foundations
179. Support Senate provision,
Discussion: The present fluctuating payout rate
is steadily eroding the endowments of private
foundations.
Conference Action: The Conferees accepted the Senate provision reducing
the mandatory payout rate to 57«.
180. Extension of Time to Amend
Charitable Remainder Trust
Governing Instrument
180. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision, with
the provisio that the extension is the very last.
181. Reduction of private foundation
excise tax on investment income
181. Support Senate provision,
Discussion: The excise tax should be limited to the
amount required to cover the'cost of auditing exempt
organizations. The 2% rate of the Senate provision will cover such costs.
Conference Action: The Conferees deleted the Senate provision which
would have reduced the excise tax on private foundations from 4% to 2%
182. Unrelated trade or business
income of trade shows, State
fairs etc.
182. Oppose Senate provision
Discussion.- The Administration would have no
objection to an exemption for trade shows that
did not change the qualification requirements
for exempt organizations.
onference Action: The Conferees accepted the Senate provision exempting
~om the unrelated business income tax fairs and expositions and accepted*
a modified version of the Senate provision providing a similar exemption
or conventions and trade shows. "The latter provision would be effective
on a prospective basis only.
„J3. Declaratory judgments regarding
tax-exempt status as charitable
etc., organization
183. Support Senate provision
with House effective date.
Conference Action: The Conferees adopted the Senate provision,
including the Senate effective date.
184. Provision for establishment of
alcoholism trust fund
184. Oppose Senate provision.
Conference Action: The Conferees agreed to delete the Senate provision
establishing an Alcoholism Trust Fund.
185. Exclusion of certain companion
sitting placement services
from employment tax
requirement s'
185. No objection to Senate'
provision.
Conference Action: The Conferees agreed to delete the Senate provision
with a comment in the Statement of Managers that the IRS should not
enforce its revenue ruling on babysitters for one year to give it time
to study the general problem of employer v. independent contractors.
186. Minimum distribution require- 186. Oppose Senate provision.
ments to include miscellaneous
distributions
Discussion: The special rule for distributions
of S200 or less for "civic or community activities"
should be clarified to cover only those activities
in furtherance of charitable purposes.
Conference Action: The Conferees deleted the Senate provision.
Title XXII - Estate and Gift Tax Provisions
187-208 - (Open)
Title XXIII - Other Amen**™*.
209. Outdoor advertising displays
209. No objection to Senate
provision.
Conference Action: The Conferees agreed to the Senate provision
providing an irrevocable election for taxpayers to treat certain
outdoor advertising displays as real property for purposes of the
condemnation provisions of the Internal Revenue Code.
210. Tax treatment of large cigars
210. Support Senate provision.
Discussion: If the bracket rate were- changed to
10%, rather than 8-1/2% (the Senate provision),
there would be no revenue loss and administration
of the tax would be facilitated.
Conference Action: The Conferees adopted the Senate provision, but
did not accept the Administration's recommendation.
211. Gain from sales or exchanges
between related parties
211. Support Senate provisi
Conference Action: The Conferees adopted the Senate provision.
212. Uniformed Services Health
Professions Scholarships
212. Support Senate provision.
Discussion: The Administration supports the
floor amendment by Senator Ford which was
adopted by the Senate.
Conference Action: The Conferees adopted the Senate provision.
213. Tax counseling for the elderly 213. Oppose Senate provision.
Discussion: Special tax assistance for the
elderly is unnecessary in light of the IRS'
current, effective taxpayer assistance program. Also, the provision for tax-free reimbursement of expenses furthers the proliferation of statutory exemptions in the tax code.
Conference Action: The Conferees deleted the Senate provision.
218
• ?2ssx;?j^?™ ber of
218
- °w°se
the senate
Commissioners
provision.
Discussion: The Administration would support
reducing -the number of Commissioners from
six to five.
Conference Action: The Conferees deleted the Senate provision.
219. Authorization of appropriations 219. No objection to Senate
provision.
Conference Action: The Conferees deleted the Senate provision.
220.
Administration of the Commission 220. Support Senate provision
Conference Action: The Conferees deleted the Senate provision.
221. Continuation of reports with 221. No objection to Senate
respect to synthetic organic
provision.
chemicals
Conference Action: The Conferees deleted the Senate provision.
Title XXV
222.
Contributions of certain
Government publications
222. No objection to Senate
provision.
*
Conference Action:
223.
The Conferees adopted the Senate provision.
Lobbying bv public charities
223. Support Senate provision
Conference Action: The Conferees adopted the Senate provision.
224. Tax liens, etc., not to
constitute "acquisition
indebtedness"
224. No objection to Senate
provision.
Discussion: The Administration recommends technical
revisions to the Senate provision to ensure that
it applies only to special assessments of a type
normally made by a State or local governmental unit
or instrumentality and cannot be utilized as a
device for financing improvements to an exempt
organization's property.
Conference Action: The Conferees adopted the Senate provision.
225. Extension of private foundation
transitional rule for sale of
business holdings
225. No objection to Senate
provision.
Conference Action: The Conferees adopted the Senate provision.
226. No objection to Senate
provision except for the
exemption of libraries
and museums from the
section 4940 tax.
Discussion: The exemption for libraries and
museums from the audit fee tax has no real
justification. It creates another species
of foundation which is especially difficult
to define.
226. Private operating foundations;
Imputed interest; Libraries and
museums
Conference Action: The Conferees agreed to the Senate provision excluding
from net income amounts of imputed interest on sales made prior to
January 1, 1970. They also agreed to delete the provision providing
f 57o payout rule for libraries and museums and the reduction in the
amount that a private operating foundation must spend for charitable
purposes to 3 percent of its noncharitable assets.
227. Study of tax incentives
Conference Action:
227. No objection to Senate
provision.
The Conferees adopted the Senate provision
Title XXVI - Other Miscellaneous Amendments
228. Credit for certain education
expenses
228.
Conference Action; The Conferees agreed to drop this Senate provision
which would have provided limited credits for expenses incurred by
full-time students in undergraduate degree or vocational certification
programs.
229. Interest on certain governmental 229. Oppose Senate provision.
obligations for hospital construction
Discussion: This selective expansion of current
law is not warranted - private hospitals vill
invest only where a profit is expected. The
precedent is bad - other private businesses will
seek similar treatment, and such proliferation
of tax-exempt industrial development bonds would.
adversely affect state and local borrowing.
Conference Action: Ooen
230. Group prepaid legal services 230. Oppose Senate provision.
Discussion: The Senate provision is contrary to
the well-established tax principle that deductions
for personal expenses are generally not allowed.
Conference Action:
W m income employer
°™UP le.§al services
extend for only five
m tour years on the
The Conferees adopted the Senate provision exclude
contributions and benefits received under qualified
plans. The provision would be prospective and
years with the Treasury and Labor reauired to report
provision.
231. Unrelated business income from
231. Oppose Senate provision
services provided by a tax»•»•««.
exempt hospital to other taxexempt hospitals
Discussion: The Senate provision will allow
certaiiTnospitals to engage in the business
of selling services to other hospitals in
competition with commercial operators
No
provision is made for passing savings'on to
small hospitals who may be charged more than
cost for the services provided. Thus, the
Administration opposes this provision.
Conference Action: The Conferees accepted the Senate provision exemptin
from the unrelated trade or business tax the income of tax-exempt hospitals received for providing certain services to small hospitals. A
modification that such services must be provided at cost was agreed to.
»
232 Clinical services of cooperative 232. No objection to Senate
' hospitals
Provision.
Conference Action: The Conferees agreed to the' Senate provision
allowing clinical services to be performed by a tax-exempt cooperative
service organization,
233. Certain charitable contributions 233. No objection to Senate
of inventory
provision.
Discussion: The limitation of the maximum deduction to twice the manufacturer's basis for the
property ensures that a company cannot profit
by manufacturing solely to make charitable contributions .
Conference Action: The Conferees agreed to allow corporations a
deduction when food, clothing, medical equipment, etc. is donated
to charity.
Title XXVII - Additional vi^
234. Tax credit for expenses fn-r
certain amateur athletes
*~-^rnr
on/ r\«
34
056 Senate
" ^P
P r o v i s i°*-
D||CHSSJ£n: The President's Commission on Amateur
Athleticslias been requested by the President to
study further the issue of incentives for amateur
eS
7 taX relief at this time is
^lll '
> therefore,
premature.
Conference Action: A compromise was agreed to. The Conferees accepted
the Senate provision making tax-exempt organizations whose primary
purpose is to foster national and international sports competition
and deleted the tax credit for certain costs incurred by individuals
in participating in certain athletic competitions.
35. Exemption of certain amateur 235. Oppose Senate provision.
athletic organizations from tax
Discussion: See discussion #234.
Conference Action: A compromise was agreed to. The Conferees accepted
the Senate provision making tax-exempt organizations whose primary
purpose is to foster national and international sports competition .
and deleted the tax credit for certain'costs incurred by individuals
in participating in certain athletic competitions.
J6. Taxable Status of Pension 236. Support Senate provision.
Benefit Guaranty Corporation
Discussion: The Senate provision rectifies an
apparent oversight in the ERISA legislation.
Conference Action: The Conferees adopted the Senate provision.
-37. Level premium plans covering 237. No objection to Senate
owner-employees
provision.
Conference Action: The Conferees adopted the Senate provision.
238. Lump-sum distributions from
pension plans
238. No objection to Senate
provision.
rnnference Action: The Conferees agreed to the Senate provision allowing
taxpayers to treat certain lump sum distributions as ordinary income, wit,
a 10 year income averaging rule,
239. Tax treatment of the grantor 239. Support H.R. 12224 with
of certain options
Senate September 1, 1976 effective date.
Discussion: In order to avoid uncertainty for
current transactions, it would be appropriate
to adopt a date of enactment effective date.
Conference Action: The Conferees agreed to H.R. 12224, which provides
that gain from the lapse of an option and gain or loss from a closing
transaction in options should be treated as short term capital gain or
loss, effective for options written after September 1, 1976.
240. Exempt-interest dividends of 240. No objection to Senate
regulated investment companies
provision.
Discussion: Will enable investors with limited
tunds to acquire tax-exempt bonds, thus helping
to provide a more efficient market for state and
local obligations.
Conference Action: The Conferees adopted this Senate provision which
permits tax-exempt interest to "flow-through" mutual funds to their
shareholders.
+1. Commission on tax simplification 241. No objection to Senate
and modernization
provision.
Conference Action:
The Conferees agreed to delete the Senate provisi
^2. Common trust fund treatment of 242. Support Senate provision
certain custodial accounts
Conference Action: The Conferees adopted the Senate provision.
on
243. Oil and Gas Depletion Rules
Relating to Transfers of Proven
Property
Conference Action:-
The Conferees adopted the Senate provision
.44. Support test for dependent
children of separated or
divorced parents
Conference Action:
243. No objection to Senate
provision.
244. No objection to Senate
provision.
The Conferees adopted the Senate provi
Z45. Deferral of gain on involuntary
conversion of real property
sion.
245. Oppose Senate provision.
SSffSSnvoC^°n"i -t ^P™"1" Yas a§reed to. The provision which
would remove the like kind" requirement for replacement real estate
property was deleted. However, the Conferees agreed to extend the
period to three years (from 2 years) within which replacement real
property could be purchased to prevent the recognition of gain
246. Exclusion from gross income of
246
gain.from sale of residence by
taxpayer who has attained age 65
Support Senate provision.
Conference Action: The Conferees agreed to the Senate provision
increasing from $20,000 to $35,000 the amount of gain elderly taxpayers
could exclude from income on the sale of their principle residence.
247, Exemption from taxation for
247. Support Senate provision
certain mutual deposit guarantee
funds
Discussion: The January 1, 1969 limitation should
be deleted. Otherwise, the provision will have to
I Q ^ u r t h e r amended for corporations organized after
1968. T h e Administration prefers the approach taken
in H.R. 13532 (94th Cong., 2d Session). *
|g||enc^c^on:
The Conferees deleted the Senate provision and
^ e e d to put the provision in a separate bill.
248. Additional changes in subchapter 248. Support Senate provision,
S shareholder rules
Conference Action: The Conferees adopted the Senate provision.
^49. Individual retirement accounts
for volunteer firemen
249. No objection to Senate
provision.
Conference Action; The Conferees adopted the Senate amendment, with
a moditication that the benefit from the private plan not exceed
$150 per month.
250 Optional taxable year of 250. Oppose Senate provision.
inclusion for sale of livestock
on account of drought
Discussion: The present tax deferral rules with
respect to livestock provided by section 1033
of the Internal Revenue Code provide adequate
relief for farmers in drought areas.
ThP Conferees agreed to the Senate provision pursuant
inig-c^ct^
g
o n e y e a r i n c 0 me from livestock sold on account of drought conditions.
251. Sense of the Senate regarding
revenue loss of bill in
conference
Conference Action:
Open
251
Tax Reform Act of 1976 (HR 10612)
SEPTEMBER 7, 1976
Evaluation of Conference Committee Action
Good: Significant (S) and Not Significant (NS) items
Bad: Significant (S) and Not Significant (NS) items
Indifferent: (Indif.)
«*-i
-H
Good
NS
Titles I and II
LAL and other tax shelter provisions
1-30 (open issues)
Title III
Minimum and Maximum Tax
31 - 33 (open,issues)
Title IV Individual Tax Reductions
34 Per capita tax credit of $35 through 1977
35 Standard deduction - Revenue Adjustment Act of 1975
increases made permanent
36 Earned income credit extended through 1977
37 Refunds from earned income credit are to be
disregarded in determining eligibiliy for
assistance benefits
Title V
Tax Simplification
38 Alimony is made an above-the-line deduction
39 Child care expense (open issue)
40 Sick pay (open issue)
41 Moving expenses - increases from $2,500 to $3,000
deduction for househunting expenses. Special
rules for military
42 Tax simplification study by Joint Committee
43 Deleted from bill. Treasury simplification study
x
Bad
NS
•o
c
Title VI
Business-related individual provisions
•44 Deduction for business use of homes - tightened
45 Deduction for expenses of rented vacation homes
- tightened
46 Deduction for attending foreign conventionstightened
47 Repeal qualified stock option rules
48 Ordinary loss treatment of nonbusiness loan
guarantees
49 Legislators' travel expenses (open issue)
Title VII
Accumulation trusts
¥
50 Accumulation trusts - Improvement of throwback
rules
r
Title VIII
Capital formation
51 Investment credit - used property limit of
$100,000 extended through 1980 'The AdministratJ.cn ur~e•' a Permanent extension.)
52 10 percent investment credit extended through 1980
(The Administration urged a oermanent extension.
53 FIFO use of investment credit carryovers
54 Deleted from bill: Extension of expiring
investment credits
55 ESOP - 1 percent investment credit plus 0.5% if
employees contribute equal amount - apply
through 1980
56 Deleted from bill: prohibition of certain ESOP
regulations
57 Task force to study stock ownership expansion
6
58
US
Investment credit for movies
59 5 percent investment credit for vessels constructed
with money from tax-free capital construction
fund
60 Eligibility for capital construction fund benefits
extended from 5 ton to 2 ton
commercial fishing vessels
61 Net operating losses: election to use for seven
years forward or for three years back and seven
years forward
62 Tighten rules to prevent trafficking in operating
loss carryovers
".63 Deleted from bill: credit for artist's donation of
art works to charity
Title IX
Small Business provisions
64 Continues corporate tax rate reduction and surtax
exemption increase through 1977 (The Administration urged a permanent extension.)
Title X
Changes in the treatment of foreign income
65 Exemption of income earned abroad - tightened and
reduced from $20,000 to $15,000
66 Joint returns may be filed by U.S. citizen married
to nonresident alien
67 Foreign trust income taxed to grantor where
beneficiary is U.S. person
68 Accumulation distribution of foreign trust bears
additional tax equivalent to interest
69 Unrecognized appreciation in assets transferred to
foreign entities subject to increased excise
tax or, at taxpayer's option, to income tax on
the gain
70 Investment in U.S. property by controlled foreign
corporations: permits portfolio investments and
investments in certain
drilling rigs
Good
S MS
71
Shipping profits of foreign corporations provisions eased
72 Deleted from bill: would have changed and made
difficult to administer rules re base company
sales income
derived from sales of agricultural
products not grown in the U.S.
73 Foreign tax credit determined on overall basis per country limitation repealed (some questions
may still be open)
74 Permits recapture of foreign losses (transition
rules for U.S. posessions and Puerto Rico may
still be open)
75 Refinement of foreign tax credit computation in the
case of capital gains
76 Foreign oil and gas extraction income - 48 percent
cap on foreign tax credit
¥
77 The source of underwriting income is the place of
risk
78 Foreign, tax credit rules of 2nd tier subs apply
also to 3rd tier subs
79 Tax exemption is made permanent for interest on
bank deposits of foreign owners
80 Transfers to foreign corporations no longer require
advance IRS ruling
81 Income from contiguous country branches of domestic
life insurance companies not taxed until
repatriated
82 Improve tax treatment of corporations conducting
business in Puerto Rico and U.S. possessions
83 Repeal provisions relative to China Trade Act
corporations - 3 year phase out
84 Denies benefits of DISC, deferral and foreign tax
credit to taxpayers participating in Arab
boycott of Isreal
Foreign
bribes deemed a distribution to U.S. parent
company and may not reduce earnings and profits
of foreign subsidiary.
Title XI
DISC
85 DISC - incremental approach adopted. About 2/3 of
DISC benefits preserved. Only 1/2 military
sales qualify. Agricultural products qualify
Title XII
Administrative provisions
86 Publication of private IRS rulings. Taxpayers
names not to be disclosed
87 Disclosure of tax return information restricted.
Justice Department access orescribed in nontax
. • criminal cases
88 Income tax return preparers - requirements imposed
89 Jeopardy assessment procedures modified - taxpayers
afforded opportunity to contest
90 Administrative 3rd party summons: taxpayers are
given right to contest. Justice Dept. objects
91 Tax abatement can be requested by taxpayer whose
assessments due to math or clerical error
92 Requires Federal withholding of state income taxes
from military personnel
93 Requires Federal withholding of state and local
income taxes from National Guard or Ready Reserve
94 Permits Federal withholding of state income taxes
from Federal employees so requesting
95 Definition of City for purposes of withholding already enacted - PL 94-355
96 Withholding on winnings from state lotteries over
$5,000 and certain horse race winnings
97 Self employment status (no withholding) for
crewmen on fishing boats with crew less than 10
«H
Good
98 Deleted from bill: withholding of state income tax
for certain legislative officers and employees
lad
SIRS
F
99 Minimum amount exempt from levy - $50/week plus $15
oer dependent
100 Jurisdictional amount for Joint Committee referred
cases raised from $100,000 to $200,000
101 Social Security numbers can be used for state and
local tax administration, drivers licences,
motor vehicle registration and for locating
runaway parents
102 IRS has authority to waive interest on math errors
on returns prepared by IRS
C
X
103 Deleted from bill: award of costs and attorney
fees (max, $10,000) to taxpayers who win tax
litigation •
Title XIII
Miscellaneous provisions
104 Cooperative housing corporation treated as taxexempt with respect to its membership dues and
assessments. Also, lending institutions which
obtain stock in such a company through foreclosure
treated as a tennant-stockholder for up to 3 years
105 Defer due date of tax owed on certain 1972 disaster
relief payments
106 Allows deduction for certain types of worthless
debts owed by political parties
107 Exemption from tax of interest on bonds issued to
finance certain student loans
X
108 Pre-publication expenses of publishers (open issue)
109 Income from intangible property leased with
tangible property is rent, not royalty income
for personal holding company purposes
X
110 Accelerates and expands work incentive credit (WIN)
111 Repeal excise tax on certain parts for light duty
trucks
X
I
»
Good
Bad
6 IHS
112 Exemption from manufacturers' excise tax for .
certain articles resold after certain modifications
113 Apply to partnerships the same tax rule applied to
proprietorships on transfer of franchises
114 Deleted from bill: Reversal of IRS ruling on employe
reporting of tip income (IRS to defer for 2 yrs
enforcement of this ruling)
115 Pollution control facilities - 5 year amortization
and investment credit (open issue)
116. Defines as "agricultural" the harvesting of aquatic
resources, thus permitting a fishing organization
to be a tax exempt agricultural organization and
to receive lower postal rates
117 Subchapter S corporation maximum stockholders
increased from 10 to 15. See also* item 248
x
118 Innocent spouse relief provision enacted in 1971
would be made retroactive to 1962 (Relief afforded
to one taxpayer) • '
119 Ease the limitations on percentage depletion in the
case of certain retail sales and intra-family
transfers - The 1975 statute left these items uncljeax
120
Make it easier for states to "piggyback" the
federal tax provisions
121 Discharge of certain student loans will not be
taxed as income
122 Tax benefit of 1 year corporate liquidation
extended to simultaneous liquidation of controllec
subsidiary
123 Prohibits state taxation of barges using navigable
waters (open issue)
124 Contributions to water and sewer utilities in aid
of construction will not be taxable to them
125 Prohibits states from taxing generation or transmission of electricity if it is discriminatory
- against out-of-state users
x
c
IS
126
Provides deduction for cost of removing architectural and transportational barriers to handicappet
and elderly (Senator Dole proposal)
127 Statistics of Income published by Treasury must
show adjusted gross income and economic income
128 Deleted from bill: report on tax increases
resulting from inflation
129 Historic structures - tax benefits provided for
rehabilitation of, and tax advantages denied to
taxpayers who demolish, historic structures
130 Supplemental Security Income is continued unreduced
.•
for an additional 12-months for certain disaster
victims
131 Exclusion of countries which aid and abet international terrorists from preferential tariff
treatment
132 Extends net operating loss carryover period for
5 additional years (to total of 20 years) in
case of losses attributable to Cuban expropriation
133 Deleted from bill: study of tax treatment of
married and single persons
Title XIV
Capital Gains and Losses
134 Increase from $1,000 to $2,000 in 1977 and to
$3,000 in 1978 the amount of ordinary income
against which capital losses may be offset
135 Increase holding period for long-term capital gains
to 9 months in 1977 and to 12 months in 1978.
The 6 month period continues for farm commodity
futures contracts. (The sliding scale provision
was not in conference; was in neither the House
nor Senate bill)
Title XVPension and Insurance Taxation
136 Individual retirement account (IRA) made available
for spouse: $1,750 for worker and spouse jointly
137 HR 10 plan percentage limitations will not apply
where adjusted gross income does not exceed
$15,000
138 IRA made available to persons inadequately covered
by an employer plan; and to certain
participants in a government plan (open issue)
139 Members of Armed Forces Reserves and National Guard
may qualify for an IRA
140 Contributions for tax-sheltered annuities can be
made to closed-end investment companies as well
as to open-end mutual funds
HI Allows a pension fund to invest in a
segregated asset account in lieu of a trust
142 Extend to 1978 a Congressional study of salary
reduction plans; meanwhile freeze
status quo
for plans established before June*27, 1974
143 Permit
consolidated returns of life insurance
companies with non-life companies (open issue)
144 For taxation of life insurance companies, the time
for which a policy is issued or renewed includes
the period for which the insurer guarantees
renewability
145 No provision - separate legislation (PL 94-267).
Pension Plan rollover to IRA
Title XVI
Real Estate Investment Trusts
146155 Real estate investment trusts - technical amendments - no controversy
Title XVII
Railroad Provisions
156 Deleted from bill: 10-year amortization of railroad
track materials and installation costs.
157 Special expensing rules for improved railroad ties
^58 Railroads may use investment credits up to
100 percent of tax liability (instead of
50 percent under current law) for 1976 and
1977, declining 10 percent per year after
1977 until returned to 50 percent in 1982
159 Airlines, same use of investment credit as
#158 for railroads
Title XVIII
Tax Credit for Home Garden Tools
160 Deleted from bill: 7 percent investment credit
for first $100 of garden tool expenses
Title XIX
..
Repeal of Obsolete Provisions
¥
161 "Deadwood" provisions adopted, including-clarified
definition of "Secretary or his delegate
Title XX
Energy Related Provisions
162—
176 Energy-related provisions were deleted from the
bill. To be the subject of a separate bill
Title XXI
Tax Exempt Organizations
177 Technical easing of self-dealing rules of private
foundations relating to property leased to
certain disqualified persons
178 Permits private foundation "set-asides without es
prior IRS approval under temporary, relaxed rul
re179 Reduces to 5 percent the mandatory payout requi
ment of private foundations
180 Extends from December 31, 1975 to December 31,1977
time in which to modify charitable bequests to
qualify for charitable remainder deduction
181 Deleted from bill: reduce from 4 percent to
2 percent excise tax on investment income of
private foundations
18
182 Exempts from unrelated business income tax the
income from fairs and expositions which promote
certain public entertainment activities; also
exempts income from certain conventions and trade
shows
183 Charitable organization may bring suit to determine
its right to tax exemption as a charity
184 Deleted from bill: establishment of alcoholism
trust fund
185 Deleted from bill: babysitters as independent
contractors and not employees of placement agency
186 Deleted from bill: private foundation qualifying
distributions could include $200 to unincorporated
groups for charitable, civic or community activities
Title XXII
Estate and Gift Tax Provisions
187208 Estate and gift tax, (open issue)
Title XXIII
Other Amendments
209 Gain on condemnation of outdoor advertising displays
need not be recognized if proceeds are reinvested in real property
210 Changes bracket system to an ad valorem excise tax
on certain cigars
211 Broadens the circumstances denying capital gain
treatment on sales between related parties:
includes commonly controlled corporations; parents
adult children; trusts, estate or partnership
in which taxpayer is a beneficiary or partner
212 Excludes from income through 1979 amounts received
under Armed Forces Health Professions Scholarship Program by members participating in program
in 1976
213 Deleted from bill: tax counseling for the elderly
214 Deleted from bill: Commission on value added tax
215 Exchange funds - Tax-free transfers to partnership
and trust funds prohibited
216 Allows distributions of previously taxed income to
shareholders of subchapter S corporations before
such shareholders will have taxable income from
distributions attributable to E & P arising from
accelerated depreciation
Title XXIV
U.S. International Trade Commission
217 International Trade Commission voting procedure
clarified - not tax policy issue
218221 Deleted from bill: These
items to be in separate bill
Title XXV
Additional Miscellaneous Amendments
222 Government publications received by taxpayers without charge will not be treated as capital assets
223 Permits- lobbying by'public charities (other than
churches), subject to certain expenditure tests
224 Exempt organizations: "acquisition indebtedness" doe
not include indebtedness for state and local
taxes secured by a lien on the property until
due and payable and the organization has had the
opportunity to pay them
225 Extends transitional rule for sale of certain nonexcess business holdings to disqualified persons
226 Excludes from a private foundations net income
amounts of imputed interest on sales made before
January 1, 1970
227 Joint Committee and Treasury to study tax
incentives
Title XXVI
Other Miscellaneous Amendments
228 Deleted from bill: credit for college tuition
expenses
229 The $5 million small issue exemption increased to
$20 million for private hospitals. (Open issue)
230 Contribution's to and benefits under qualified group
legal services will be excluded from employee's
income. Applies for 5 years only - Treasury and
Labor to report in 4 years on its effectiveness
231 Tax-exempt hospitals not taxed on unrelated income
received for providing certain services to small
hospitals, if provided at cost
232 Adds clinical services to services permitted to be
performed by cooperative service organizations
233 Permits corporations to deduct certain donations
to public charity limited to basis of donated
property plus 1/2 of appreciation of inventory
property but not to exceed twice its basis
Title XXVII
Additional Senate Floor Amendments
234 Deleted from bill: tax credit for certain "costs of
individuals participating in major national or
international sports competitions
235 Establishes tax-exempt status for organizations
whose primary purpose is to foster national
and international amateur sports competition
236 Provides that Pension Benefit Guaranty Corp. is to
be exempt from all federal taxes except social
security and unemployment taxes
237 Allows owner-employee of HR 10 plan to make level
annuity contract payments without regard to the
overall 25 percent limitation
238 Permits taxpayer to treat certain lump sum pension
distributions as ordinary income with the 10 year
income averaging rule
239 Treats gain from lapse of an option and gain or loss
from a closing transaction in options to be
treated as short-term capital gain or loss, not
as* ordinary income or loss (H.R. 12224)
240 Permits "flow-through" of tax-exempt interest to
shareholders of mutual funds
241 Deleted from bill: establishment of Commission on
Tax Simplification and Modernization
242 Extends common trust
custodial accounts,
minors act accounts
243 Permits depletion to
transferred between
fund treatment to
such as uniform gifts to
be retained on property
certain controlled groups
244 Allows noncustodial parent to receive exemption for
child if he or she contributes at least $1,200
for such child
245 Extends to 3 years (previously 2 years) period
within which replacement real property can be
purchased to prevent recognition of gain on
involuntary conversion of real property. Deleted
proposal to remove the "like kind" requirement
for such replacement property
246 Increases to $35,000 (previously $20*, 000) . amount of
gain elderly taxpayers can exclude from.income
on sale of principal residence
247 Deleted from bill: exemption from tax for certain
mutual deposit guarantee funds
248 In counting the permitted number of shareholders
for subchapter S corporations, a spouse and
estate of deceased spouse will be one if both
would have counted as one before spouse's death.
Grantor trusts and voting trusts are eligible
shareholders. Eases present law on termination
of subchapter S election. See also item 117.
249 Extends IRA availability to members of voluntary
fire departments if their pension benefit from
private plans does not exceed $150 per month
250 Permits cash method farmers to defer for one year
income from livestock sold on account of drought
conditions
t
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
September 8, 1976
To Heads of Bureaus
Department of the Treasury
SUBJECT: Designation of Deputy Director, Acting Assistant
Director (Real Property Management), and Acting
Assistant Director (Paperwork Management)
Mr. Edward W. Brooks has been designated as Deputy
Director, Office of Administrative Programs, Office of the
Secretary effective August 29, 1976.
Due to the temporary vacancies in the positions of
Assistant Director (Real Property Management) and Assistant
Director (Paperwork Management), the following individuals
are authorized to act in the positions indicated effective
immediately:
Acting Assistant Director Robert T. Harper
(Real Property Management)
Acting Assistant Director Howard S. Smith
(Paperwork Management)
Robert R. Fredlund
Director of Administrative Programs
MepartmentoftheTREASURY i
1HINGT0N, D.C. 20220
TELEPHONE 964-2041
Contact Larry Hanks
964-5512
FOR IMMEDIATE RELEASE
September 8, 1976
EMERGENCY LOAN GUARANTEE BOARD
CONSENTS TO LOCKHEED FINANCIAL RESTRUCTURING PLAN
The Emergency Loan Guarantee Board today consented to
the amendments to the 1971 Agreement between Lockheed and
its Lending Banks to permit the implementation of a financial
restructuring plan for Lockheed.
The Board also today approved changes in the 1971 Agreement to incorporate, as part of the Guarantee Agreement,
prohibitions on improper payments in connection with the use
of foreign consultants and the maintenance of funds outside
normal channels of corporate accountability.
With regard to the refinancing plan, the Board noted
that it represented the completion, with modifications, of
a refinancing plan approved by the Board in 1975, which was
not fully implemented because of disclosures concerning improper payments. The essential elements of the presently
proposed financial restructuring plan are:
1. Conversion of $50 million of the Company's
underlying $400 million nonguaranteed bank
loans under the 1971 Agreement into a new
series of preferred stock.
2. Replacing the remaining $350 million of nonguaranteed
bank l o a n s , now in the form of 90-day revolving
n o t e s , with a term loan extending into 1981.
3. Issuance of warrants for the purchase of 3-5
million shares of common stock.
4. Restatement of the 1971 Agreement and amendments to the Guarantee Agreement to reflect
changes necessary for implementation of the
refinancing p l a n .
WS-1071
-2The $50 million of nonguaranteed credit notes will be
converted to a new series of preferred stock with a dividend
rate of 9-5* payable on a cumulative basis, semiannually,
commencing February J., 1977. The preferred stock provides
for a fixed annual sinking fund amounting to 15% of the
original issue, commencing December 31, 1979, and a redemption premium of 8%.
The $350 million in nonguaranteed bank loans that will
be converted to a term loan have an interest rate of 41
through December 31, 1976, prime rate plus 1% until termination of the guarantee, then prime plus 1-1/4?. Principal
payments on the term loan will be made in eight quarterly
installments of $20 million, commencing March 31, 1979, plus
one lump-sum payment of $190 million at maturity of the loan
on March 31, 1981.
In approving the refinancing plan in 1975, the Guarantee
Board extended its guarantee commitment to December 31, 1977,
and the Board noted that this date is not changed by the
actions taken today. Lockheed's guaranteed borrowings peaked
at $245 million In September 1974 and presently stand at
$160 million. The Company has repaid $35 million in guaranteed
borrowings thus far in 1976 and current projections indicate
that by year-end an additional $40 million may be repaid.
The Board noted that the implementation of the refinancing
plan will reduce outstanding indebtedness, improve Lockheed's
equity capital base, and provide a significatn further step toward long-term stability of the Company's financial condition.
Since last summer, as a condition of the continuance of
the guarantee program, the Emergency Loan Guarantee Board
has prohibited Lockheed from making further questionable
payments. In addition, the Board has monitored the Company's
corporate policy, announced subsequently, which restricts
its relationships with foreign consultants. The Board noted
that the Amendment to the Guarantee Agreement, as approved
today, provides that the making of future improper payments,
the maintenance of any funds outside normal channels of corporate
accountability, or any other violation of Lockheed's corporate
policy will be an event of default under the 1971 Guarantee
Agreement. Officers' certificates and various reports dealing
with these matters are also required to be furnished to the
Board to facilitate the Board's
oOomonitoring efforts.
JkDepartmentoftheTREASURY
INGTON, D.C. 20220
TELEPHONE 964-2041
FOR RELEASE AT 4:00 P.M.
September 9, 1976
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders
for $2,860 million, or thereabouts, of 364-day Treasury bills to be dated
September 21, 1976, and to mature September 20, 1977(CUSIP No. 912793 H4 1).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 21, 1976.
This issue will not provide new money for the Treasury as the maturing
Issue is outstanding in the amount of $2,860 million, of which $1,816 million
is held by the public and $1,044 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, September 15, 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
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
WS-1072
(OVER}
-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 September 21, 1976,
in
cash or other immediately available funds or in a like face amount of Treasury
bills maturing September 21, 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 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
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
WORLD AFFAIRS COUNCIL OF BOSTON
SEPTEMBER 10, 1976
Thank you, Henry; Dr. Beranek, Mr. Spangler, distinguished
guests, ladies and gentlemen:
It is a special privilege to be introduced by one of our
great statesmen, Ambassador Lodge. In Congress, in the United
Nations, in the high councils of Administrations of both
political parties, and as our spokesman abroad in posts calling
for delicate negotiation, firmness and resolve, he has served
this country as have few other Americans in our time.
It is also a distinct pleasure to appear before the World
Affairs Council of Boston. Your workshops, your seminars, your
international student program and your other efforts have
contributed significantly to a greater comprehension of foreign
affairs and, in a wider sense, to a broader understanding of
the complex issues in this increasingly interdependent world.
For, while there may once have been a time when foreign
affairs seemed to be the exclusive realm of a handful of
diplomats in striped trousers, we know better today. A
nation's diplomatic interests are determined by an enormous
range of considerations — political, military even emotional
and, most of all, economic. And they are of vital interest
to every citizen in every walk of life in a free country.
While this has always been true, it is a far more obvious
and far more important fact of life today, in an age that has
both the greatest potential for human cooperation and betterment — and the greatest potential for human destruction —
in the history of mankind.
The stakes have never been higher; the risks have never
been greater. But, if we can preserve the peace and build
on the existing foundation of international understanding
and cooperation, this age of ours, as troubled and perplexing
WS-1073
-2as it sometimes seems, can give birth to a peaceful, progressive
and enduring world order —
a time of both moral and material
progress such as history has never known.
Ignorance, disease, poverty and oppression — the Four
Horsemen of the Apocalypse that have stalked the earth since
the beginning of time — are not invincible. There is nothing
mysterious or supernatural about them; they are clear and
visible foes that can be fought and vanquished. But they
cannot be fought in the dark.
They are poisons in the human system, but, for each of
these poisons there is an antidote. And today, for the first
time in history, the antidotes are within our reach.
We have the learning and the means of distributing it,
to vanquish ignorance.
We have the medical technology to wipe out many of the
diseases that were once deemed hopeless.
We have the economic strength and expertise to combat
poverty, if we chart the right economic course and stick to
it.
And oppression will surely yield to freedom — gradually
but inevitably in a stable, peaceful and open world where
people can compare and ultimately choose for themselves.
All this will not be accomplished over night. It is
not the work of a day or a year or a decade; it is the work
of generations. But our generation has made a promising
beginning.
One of the most important contributions that our country
has made in this generation, working in concert with the
world community, has been on the economic front. And it is
this aspect of the economy, domestic and international, that
I would like to explore with you today — economics as a
key to a stable, liberal world order.
For, just as economic conflicts can lead to political
and military conflicts, shared economic interests and goals
can be a strong force for peace and cooperation. To ignore
the inter-relationship of politics, diplomacy and economics,
is to ignore the lessons of history.
?*
Rome and Carthage clashed, and fought to the death, as
rival economic powers. The territorial quarrels that led
to most of the great land and naval wars of modern history
were closely related to economic rivalries. Even our own
-3Civil War which was fought on grave constitutional issues
and the human issue of slavery, also had its economic dimension —
the conflict between the industrialized, commercial North
and the agragrian economy of the South — the economic system
that made slavery feasible.
The negative role that economics can play in foreign
affairs is clear then. But what I want to stress here today
is the potential positive role, as it has developed and can
continue to develop in our lifetimes.
Many of you are probably familiar with the old Chinese
curse: "May you live in interesting times." All of us, I
believe, would agree that, from an economic as well as a
political point of view, we have been living in particularly
interesting times lately. In the past few years the world
economy has sustained a number of severe jolts — a fourfold
increase in oil prices, large-scale money movements between
nations, collapse of the old monetary order, inflation and
recession. These have had an enormous impact on the economics
of developed and developing nations alike and fluctuations
in economic fortunes have led to changes, at times abrupt, in
the political fortunes of these countries.
The role of the United States in meeting these challenges
has been vital. A quarter century ago, it was commonplace
to observe that when the U.S. sneezed, the world caught cold
and when the U.S. caught cold, the world came down with
pneumonia. While that is no longer as true today as it was
then, we are still the major economic force in the world.
With less than 6 percent of the world's population we account
for over 25 percent of its annual production, and our exports
and imports each are running at over $100 billion annually —
more than those of any other single nation.
The health of the U.S. economy, then remains vital
to the economic health of other countries. And their political
and social stability depends in large measure on their economic
health. These past years have clearly demonstrated to us and
many others that no nation or group of nations can solve their
economic problems in isolation. We have witnessed how inflation
and recession affect us all. We have observed that no country
can achieve success by attempting to export its economic troubles.
And we have come to see that the most significant contribution
we can make to economic progress in the world is to restore
durable prosperity in our own domestic economies.
For the United States this means, first, that we must
follow stable fiscal and monetary policies aimed at reducing
-4inflation and laying the foundation for durable, non-inflationary
domestic growth, and second, that we must translate these same
policies internationally to assure the existence of a free
and open world trade and investment order. That, it must
be recognized, will be America's greatest contribution to world
economic stability and — because the economy lies at the heart
of the body politic — a significant contribution to world
political stability as well.
At home, our economy is in the midst of a healthy and
balanced recovery:
— Inflation has been cut more than in half since the
beginning of 1975.
— Employment is at all-time highs;
— Industrial output, retail sales, the GNP, personal
income, the stock market have registered important gains.
And yet the decline in unemployment, though below its
recession high point, is irregular and far slower than we are
willing to tolerate. And inflation is by no means under
firm control and remains the most dangerous enemy of that durable
prosperity which we and all nations are seeking to achieve.
The ruinous inflation that crested in 1974 was the
chief cause of the recession that followed. If we embark
once again on a course of excessive fiscal and monetary
policies, we will only rekindle another round of inflation
and an even worse recession.
In our own economic interest, and in the interest of
global economic stability, our first responsibility must be
to stand by economic policies that will ensure healthy,
balanced growth and prevent a resurgence of inflation.
fhus one of the biggest contributions we can make to
global economic health begins right here at home. We uphold
not only a narrow national interest, but the economic well
being of our neighbors and trading partners around the world.
In shaping our international economic policies we must
emphasize the same principles of open markets and competition
that have served America so well during its two-hundred year
history. Our current monetary and trade reform efforts will
shape the world economic system far into the future. We can
either promote increased competition, the reduction of tariffs
and non-tariff barriers, equitable trading rules and open
-5access to markets and raw materials; or, the world economy
will develop unwanted cartels to control prices and supplies,
protectionism will once again disrupt the flow of trade and
capital, and instead of greater international cooperation and
shared progress, the world marketplace will be plagued by
negative conflicts and economic stagnation.
In the area of international monetary affairs, the
past several years have shown progress and accomplishment.
After years of difficult and sometimes contentious debate,
The United States and other IMF member nations have reached
fundamental agreement on a comprehensive reform of the
international monetary system, a reform that will bring
the system into line with today's needs and realities
and provide a flexible framework for adaptation to a
dynamic world economy.
The new monetary system builds importantly on two
critical features of the Bretton Woods framework.
— First, the central, pivotal role of the IMF as
the institutional heart and monitor of the system will be
continued and strengthened.
— Second, the essential aims of Bretton Woods, which
give cohesion and direction to the philosophy of a liberal
world monetary order, will be reaffirmed.
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
-6was 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.
It is understandable that features of a monetary system
designed to meet the problems of that world could become
obsolete and anacronistic in the conditions of today, where
the structure of the world economy has changed and the problems
have changed — where world trade has grown 2,900% since 1950 and
where capital flows have reached proportions that would astound
the men of an earlier era, Harry Dexter White and Lord Keynes,
a world in which these same men would be saddened by the
struggle of nations to get below double-digit inflation and at
the same time deal with the modern day twin of inflation, a
high level of unemployment.
Bretton Woods was based on the idea that stability could
be imposed from outside. Keynes and White, the architects
of the system, 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 credit from the International Monetary
Fund, that arrangement would provide adequate leverage — at
least on deficit members — to encourage stable economic
policies.
The system had an elegant symmetry but even in its heyday
it did not work as it was intended. Countries with a balance
of payments surplus were reluctant to permit their currencies
to appreciate. On the other hand, devaluation by countries
experiencing balance of payments deficits were frequent and
what was intended to be a system of symmetrical adjustment
became lopsided. The U.S. was at the center of the system —
pinned down. Other countries could adjust exchange rates
relative to the U.S., but we did not enjoy the same privilege.
It was during this period — the 1960'« — that we learned
that the most important single price in the U.S. is the price
of the dollar. The relationship of the dollar to other
currencies plays a significant role in determining what is
produced in the U.Sf and what is produced elsewhere. Exports,
imports, location of product facilities, and capital flows
are all in varying degrees a function of the exchange rate.
Preceeded by a series of exchange crises, hurried conferences, makeshift remedies and a pervasive "Let's keep a stiff
-7upper lip attitude" the system collapsed in 1971. The effort
to put it back together failed and the end occurred in 1973
when the dollar floated.
The new system takes a different approach. It does not
rely on the system to force stability on member countries.
Instead, it 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 rigid
rates 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 currencies if the underlying trends in various economies 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. 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 in doomed to failure. In recent years, nations
have learned this lesson time and again: and those who challenge
it do so at their peril.
To those of you who are 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 of 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 attempts 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. Then think back over the last
-8five 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 accommodate
those strains.
The new monetary system is a more flexible, pragmatic, marketoriented system, better suited to today's highly integrated
world economy. The new system 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 in underlying economic and financial conditions.
Because the new system established nations' obligations in
terms of basic policy, rather than mechanics or procedure that
obscure rather than sharpen the central issues, it is realistic
in structure and right in approach. Its success or failure
will depend ultimately — as will the success or failure of
any system — on the prudence and soundness of government
policy in the respective nations.
These agreements are now embodied in the formal legal
language of amendments to the IMF Articles of Agreement, now
before the Congress. The House of Representatives has given
overwhelming approval to the legislation to implement these
important monetary agreements. The Senate Foreign Relations
Committee has also approved the legislation and the Senate
Banking Committee is expected to complete action shortly. The
U.S. has played a prominent role in bringing about the new arrangements; and I am most hopeful that when I go to Manila next
month for the meeting of the Governors of the International
Monetary Fund I will be able to announce final approval by
the United States.
-9Just as the United States vigorously supports the
latest moves in monetary reform, we also support the
continued growth of a free and open world trading and
investment order. One of the most encouraging and
significant postwar economic developments has been the
dramatic expension of trade among market economies -from a level of $55 billion in 1950 to over $1.6 trillion
in 1975. We believe that in strengthening these bonds
of trade, we strengthen the bonds of peace, understanding
and interdependence.
The case for free trade is based on the general
concept of comparative advantage. Trade barriers
typically reduce or eliminate the exchange of goods that
would benefit all countries. Similarly, trade restrictions, which insulate domestic producers from foreign
competition, reduce the pressures for controlling price
increases and for stimulating creative productive development.
While the balance in our trade necessarily fluctuates -this year we expect a deficit in our trade account --we
should understand that, if we are to achieve international
economic and monetary stability, those countries in
relatively strong positions must be prepared to allow some
decline in their external positions. Only in this way, can
others undertake the needed adjustments. In that light,
a trade deficit for us can contribute to the stability of
the world trade and payments system. We can well view this
with equanimity. It is not contrary to U.S. interests;
rather, it may well be essential if our open and cooperative
trading system is to survive.
And the fact is that our trading system has undergone -- and survived - - a massive ordeal by fire. In the
wake of the most serious economic problems in 40 years,
inflation, recession, the energy crisis and the other
disruptions they caused, neither we nor our trade partners
resorted to potentially disastrous dog-eat-dog, beggar-thyneighbor policies.
This is an important accomplishment. We must build
on it and expand it as we move from a period of economic
recovery to a period of economic expansion.
The major thrust of U.S. trade policy as embodies
in the multilateral trade negotiation should be:
-10-- To negotiate for more open access to markets and
supplies with emphasis on equity and reciprocity;
--To increase flexibility in providing escape clause
relief and adjustment assistance for American industries,
workers and individual firms suffering injury from import
competitions;
--To diversify the types of actions the United
States can take in responding to unfair international
trade practices;
-- And to expand normal commercial relationships
with the non-market economies.
Recently, there has been some international concern
that the U.S. is drifting towards a policy of protectionism.
Let me assure you that this is not the case. As cause for
their concern, critics have cited the recent determinations
of the International Trade Commission in favor of import
relief for a few specific U.S. industries.
The justification for these limited measures is
obvious. Industries in all countries have the right to
be free from injurious international dumping of marginal
or excess production. They also have the right not to be
required to compete against government-subsidized imports.
Our antidumping and countervailing duty laws are designed
to implement those rights.
On a more practical level, I believe that equitable
administration of laws pertaining to unfair trade practices
actually assist the United States and other countries in
reducing generalized barriers to trade. Unless we in the
Administration can convince Congress and domestic interests
that the U.S. intends to provide remedies against unfair
trade practices, it will be impossible to develop the
necessary support for generalized trade liberalization.
In other words, we see no inconsistency between free trade
and fair trade and the assurance of the latter is what
enables us to progress in achieving the former. Believe
me, it is hard to convince Congress that we should cut
tariffs across the board if we just stand by while those
same imports benefit from government subsidies. Moreover,
we believe that artificial export subsidies are not in
the best interests of the nation providing them because
first, they distort market forces and interfere with the
allocation of capital where it will be most productive, and,
second, they are an expensive use of scarce government
resources. Finally, they have the effect of unilaterally
-11negating another country's tariff rate and therefore,
tempt that country to raise its tariff rate or to seek
other protection through quotas or other non-tariff
trade barriers.
Just as free trade requires open markets, it also
requires an open attitude toward foreign investment.
Foreign direct investment and short-term credit to
finance trade have played an important part in the
economic development of the Atlantic community during
the postwar period and have a vital part to play today
in the Atlantic community as well as the world at large.
The U.S. Government should, and has, set an example
by reaffirming its intention to avoid restrictions on
foreign investment in America, consistent with national
security. In general, foreign investors receive the same
treatment as domestic investors. During the period of
concern about the possibility that OPEC funds would flow
into America to buy up basic industries, various bills
were submitted in the Congress to restrict foreign investment. The Administration strongly opposed such actions,
and no additional barriers were created.
We believe this is the responsible position not only
for ourselves, but for all those who believe in a
genuinely free, open world economic order.
In summary then, the same economic principles that
have worked to create prosperity, stability and freedom
at home can also help to shape a freer, more prosperous
and liberal economic order. We desire a shared prosperity.
That prosperity can only come through increased flows of
investment. Through increased investment we achieve
greater productivity and through greater productivity we
achieve a higher standard of living for all.
As the nation that accounts for over one fourth of
the world economy, we have a special obligation to help
others to help themselves --in the marketplace and
through the strong support of international financial
and development institutions, in concert, not in competition
with, the private sector.
If we stand by these commitments, if we preserve and
expand a strong economy at home and continue to lead the
fight for a freer, more prosperous world economy, then
what was once called the American dream — the seemingly
impossible dream of a free, decent existence for all -can become not only the dream, but the reality, of the
entire human family.
Thank you.
oOo
FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE RICHARD R. ALBRECHT
GENERAL COUNSEL OF THE TREASURY DEPARTMENT
BEFORE THE NEW YORK LAW JOURNAL SEMINAR
ON
BRIBES, KICKBACKS, AND ILLEGAL PAYMENTS
LOS ANGELES, CALIFORNIA
SEPTEMBER 10, 1976
I appreciate the opportunity to talk with you this
morning about what has generally been referred to as illicit
payments.
I am sure you are all concerned about the requirements
presently imposed by our tax and securities laws, and the
requirements which may be imposed if the Administration's
or other proposed legislation passes. My colleagues will
address technical aspects of these requirements. I would like
to introduce their presentations by putting the subject of
bribery and other improper payments in a broader perspective.
We are well aware that bribery and illicit payments are
a pervasive problem in many countries. Civil servants in
some countries depend on bribes as a salary supplement. In
other countries a bribe may be the accepted way of getting
access to decision makers who award contracts. Extortion
occurs with dismaying frequency, and is often the price of
doing business in some countries. Even though antibribery
laws exist in most countries, they are often not enforced to
the extent we would hope and expect.
Let me introduce the Administration's position by making
it clear that it is not in the interest of U.S. firms to
obtain overseas business through illicit payments. A company
making such payments may possibly get a short-term gain by
concluding a contract, but it opens itself to lawsuits from
its competitors and its shareholders. The company making a
bribe 74
risks having its contract opened up if new officials or
WS-10
-2governments discover the bribe—an important risk if payment
is over a long period. Contracts may also be abrogated if a
buyer concludes it has gotten a bad bargain or bought an
inferior product because one of its officials accepted a bribe.
More significantly, many developing countries are reacting to
such scandals with expropriation and other forms of economic
retaliation.
A company may also find itself the subject of an investigation by one or more U.S. agencies. In addition to the
well-publicized investigations by the SEC, IRS and the Department of Justice, the FTC's Bureau of Competition is presently
investigating Lockheed, Northrup and others to determine if
their foreign sales activities have resulted in unfair methods
of competition in violation of Section 5 of the Federal Trade
Commission Act and Section 2(c) of the Clayton Act.
From broader policy perspectives we see bribery as causing
serious foreign policy difficulties and contributing to a
deterioration of the international investment climate. Revelations
that bribery has occurred can lead to political disruption in
host countries and create strains in our relations with them.
Reports of illicit payments have also sparked efforts to "control"
multinationals in ways which may limit the benefits associated
with foreign investment—both from the point of view of the firm
and the host country. We also see bribery as distorting the
market's allocation of resources, and rewarding inefficient
producers which have to bribe to gain a contract. Instead of
having fair and open competition determine prices, prices are
in great part determined by questionable private and closed
deals. This is not the way we want to see international
business develop.
Accordingly, the President, on March 31st of this year,
established a cabinet-level task force to conduct a sweeping
policy review of the problem. The current Administration
approach includes: (1) The pursuit of effective international
International
Initiatives
agreements, (2)
the vigorous enforcement of existing U.S. law,
andare
(3) aware
a proposal
a new law
to deal
these may
payments.
We
that for
unilateral
action
on with
our part
make
it difficult for American businessmen to compete with foreign
businessmen whose countries do not take as strict a view of
bribery as we. A foreign competitor may be able to outcompete a U.S. businessman because it can make illicit payments
to conclude business deals.
-3We have made a continuing effort to deal with this
problem, and are working to develop an international
consensus against illicit payments. Almost a year ago
Secretary Simon asked for the support of other OECD member
countries on this issue. As a first step we have negotiated
strong language condemning bribery as part of the OECD
Voluntary Code of Conduct for Multinational Enterprises,
adopted unanimously by the OECD ministers in June. The Code
states that multinationals "should not render and they should
not be solicited or expected to render any bribes or other
improper benefit, direct or indirect, to any public servant
or holder of public office." It further states that "unless
legally permissible multinationals should not make contributions to candidates for public office or to political parties
or other political organizations."
Most significantly, the U.S. has proposed negotiation in
the United Nations of a treaty on corrupt practices. The
proposal, which was forwarded to the UN Economic and Social
Council in August, envisions an agreement which would be based
on the following principles:
(1) It would apply to international trade and
investment transactions with governments;
(2) It would apply equally to those who offer
to make improper payments and to those who
request or accept them;
(3) Importing governments would agree to
establish clear guidelines concerning the
use of agents, and would establish appropriate criminal penalties for defined
corrupt practices by enterprises and officials
in their territory;
(4) All governments would cooperate and exchange
information to help eradicate corrupt practices; and
(5) Uniform provisions would be agreed upon for
disclosure by enterprises, agents and
officials of political contributions, gifts
and payments made in connection with covered
transactions.
-4-Last month -in I Geneva; H&ie UN Economic and Social Council
took the first significant s'tet> toward international action.
The CounciLiadopted a U.S.* proposed resolution which
''
1
authorizes a group'of experts (1) to draft. a treaty on corrupt
practices, and (2) to report^'that text ;back in the summer of
1911. The U.S. plans to participate in this drafting exercise
and desires;to1 have an agreed text open for signature before
:
the end I of 19 77.
' „
1
It is the view of the President and the task force t that
the ultimate1 legal basis for adequately addressing the illicit
payments problem must be an international agreement along the
lines of the U.S. proposal. '•'* This is an area in'which we. favor
action pursuant to national law and international agreement".
A coordinated effort by exporting and importing countries is
the only way to inhibit improper activities of this kind
internationally.
Enforcement of Existing Laws
On the domestic side, the investigative,enforcement
activities of government audit agencies,1 the IRS, the Federal
Trade Commission, the Department of Justice and the SEC are
ongoing, and the product of their activities is likely to
increase the deterrent effect of existing law on the subject.
The Securities and Exchange Commission has played a
leadership role in this area by taking prompt action to
discover the existence of illicit payments and to require
public disclosure of material facts relating to them. The
Internal Revenue Service has also played a lead role in this
area through its enforcement efforts to uncover any improper
deduction of these payments for tax purposes.
One widely held belief about the IRS is that it has only
recently begun its efforts to locate corporate tax fraud of
this character. This is not the case. While the IRS has
adopted new procedures in this area (as it does in any area in
which they are found to be necessary or desirable), it is
clear that the present program is part of a long-standing
effort to uncover corporate tax fraud.
In the 1950's and 1960's the tremendous growth in
corporate size caused the IRS to abandon its traditional onecase-one-agent approach to examinations. To cope with the
-5problems associated with this growth the IRS determined
that it was necessary to centralize in one district,
jurisdiction of all related returns and responsibility
for their examination.
In 1966 the Coordinated Examination Program was
initiated. The criteria for inclusion in this program has
evolved along asset lines and has, since 1973, included all
corporations (except financial institutions and utilities)
with gross assets in excess of $250 million. Financial
institutions and utilities with gross assets in excess of
$1 billion are also included. The program today encompasses
approximately 1,200 corporate taxpayers controlling about
59,000 separate entities. Audit coverage within this group
is 100$. Since this program's beginning, guidelines have
stated that one section of the audit would be devoted to
specific checks for possible areas of non-compliance including,
of course, fraud. These instructions were updated in 1973 to
state that audit plans would contain specific compliance
checks in the area of political contributions. In August 1974,
the IRS established a political campaign contributions compliance project in the national office. Under this project
the national office received and disseminated to appropriate
field offices validated information concerning possible tax
violations related to campaign contributions.
In December, 1974, the Service issued, new and expanded
guidelines regarding the examination of political organizations and committees, candidates, and contributors. These
two actions, taken in the latter part of 19 74, have relevance
to our subject because many of the corporate slush fund
schemes have been devised to create money for political
contributions and bribery, both in the United States and
abroad. Thus, although the Service's efforts to uncover
corporate tax fraud have been intensified recently, they do
have a considerable history.
In August, 1975, the Service issued new guidelines, to
be applied in all corporate examinations, designed to assist
examiners in detecting "slush funds" and other corporate
schemes used to circumvent the tax laws. These guidelines
called for the interview of top corporate officers and key
employees instead of dealing solely with corporate tax managers.
Also, they emphasized the use of the IRS' Office of International
Operations to assist in the examination of the books and records
of American companies abroad.
-6Additional instructions were issued to field offices
in the spring of this year. These instructions require
that the revenue agents in the coordinated examination audits
ask eleven specific questions of selected corporate officials
and key employees and request attestation to the responses
of these individuals by the managing partner of the corporation's accounting firms. The individuals selected for
questioning are those present or former employees or directors
who have, or had sufficient authority, control or knowledge
of corporate activities to be aware of the possible misuse of
corporate funds. At a minimum, the questions cover all tax
years under audit, whether under examination, in review or in
conference, and include all subsequent years for which
returns have been filed.
The IRS' eleven questions have sparked more controversy
than any single investigative move in some time. Several
major CPA firms have reportedly ordered their audit partners
to refuse to sign an affidavit in response to the questions,
because of a concern for the relationship between an auditor
and client.
The Taxation Section of the ABA has expressed concern
that the use of the eleven questions threatens the voluntary
self-compliance tax system and has called for their modification. Their concerns represent a serious.and genuine interest
in the integrity of our tax system—a concern we all have.
A special subcommittee of the Tax Section of the New
York State Bar Association has published a 100-page booklet
critical of the eleven questions and their use by the Service.
Like any new investigative tool, this one has produced
many critics. Balancing the desire for effective investigations
against the competing interests of those affected by the
investigation is not an easy task. Allegations of bribery are
the sort of things, however, that are not easy to prove. By
its very nature, the participants have usually made every
effort to hide the true character of their actions.
Detecting the existence of corporate slush funds is an
equally difficult task. We must note that a number of such
funds have escaped the detection of teams of independent
auditors who in the ordinary course of routine corporate audits
have not uncovered them, and have put their professional
-7reputations on the line in expressing opinions on corporate
financial statements.
I can assure you that Commissioner Alexander and other
senior Treasury officials are doing all they can to see that
the eleven questions do not become a device for improper
inquisitions and are, rather, used as they were intended—as
an important and rational part of a number of very important
tax investigations.
It is clear that the Internal Revenue Code and existing
securities laws have had an important bearing on the problem.
However, the problem of illicit payments is broader than the
collection of revenues and the interests of the investing
public.
While continuing to pursue the present policy of vigorously enforcing existing laws, and obtaining an international
agreement, the President and the task force decided that it
was nonetheless necessary to supplement current U.S. law to
address the full range of public policy and foreign relations
interests related to the problem.
New Legislation
Before outlining the Administration's legislative proposal, I believe it would be useful to outline the considerations behind such a choice.
There are two principal legislative approaches—A
disclosure approach or a criminal sanction approach. The
criminal approach would, of course, represent the most
forceful assertion of our abhorrence of such conduct. However,
such an approach would represent little more than a policy
assertion. The prosecution of offenses would depend upon our
access to information, witnesses and other evidence which may
be beyond the reach of U.S. judicial process. The application
of U.S. criminal sanctions to foreign-incorporated or foreignmanaged subsidiaries of U.S. corporations may offend other
nations, as well as reduce their willingness to cooperate in
any prosecutions. In addition, a unilateral criminalization
scheme would be counterproductive to our international efforts
to attack the problem through a treaty on corrupt practices.
Other nations would be more willing to cooperate in an international effort if the U.S. is not labeling as a crime conduct
which has occurred within that nation's territory. The U.S.
-8objective here is to discourage all forms of bribery in
international business transactions. For these and other
reasons, the task force concluded that the criminal approach
would not be an effective method to achieve this objective.
Based upon an anlysis of the adequacy of the current
laws, and an evaluation of alternative means to strengthen
deterrence, the Administration has recommended legislation
to Congress providing for full and systematic reporting and
disclosure of payments made with the intent of influencing
the conduct of foreign government officials.
The Foreign Payments Disclosure Act, which the President
submitted to Congress on August 4, 1976, encompasses the
following principles:
Reports would be required of all payments
made in connection with sales to or contracts with foreign governments or official
actions by foreign public officials where
they are for the commercial benefit of the
payor or his foreign affiliate.
Regulations issued by the Secretary of
Commerce would require that the reports
include the names of recipients of payments, and would establish a de minimus
threshold amount below which payments need
not be reported.
Reports would be required to be made to
the Department of Commerce and would be
made available to the Departments of State
and Justice, the IRS, the SEC and, upon
request, to appropriate Congressional
committees.
The Departments of State and Justice would,
in their discretion, convey the contents of
such reports to the affected foreign
governments.
The reports would become available for
public inspection after a one-year interval,
except in cases where a specific written
determination is made by the Secretary of
State or the Attorney General that considerations of foreign policy or judicial process
dictate against disclosure.
-9Since the submission of the legislation last month, the
task force has been (a) engaged in refining alternative
methods for enforcement of the proposal, (b) assessing the
kind of assistance which will be needed from foreign governments, (c) drafting regulations to apply the legislation,
and (d) studying provisions to be included in a treaty on
corrupt practices.
In addition to recommending new disclosure legislation,
the President supports the legislation which would improve
private sector internal reporting and accountability. This
approach was first proposed by the SEC and is now incorporated
as a portion of Senator Proxmire's bill, S. 3664. It would:
prohibit falsification of corporate accounting records;
— prohibit the making of false and misleading
statements by corporate officials or agents
to persons conducting audits of the company's
financial operations; and
require corporate management to establish its
own system of internal accounting controls to
provide assurances that corporate transactions
are executed in accordance with management's
authorization, and that such transactions are
properly reflected on the corporation's books.
Tax Legislation on Bribery
As a final matter, I think it would be useful to review
the actions taken by the Conference Committee on August 25
and 26 with respect to the antibribery provisions contained
in the Tax Reform Act of 1976.
At present the Internal Revenue Code does not explicitly
deal with bribes which are paid by controlled foreign corporations. Existing law, however, denies a U.S. taxpayer a
deduction for any illegal payment. The Senate bill would
have denied the benefits of DISC, deferral, and the foreign
tax credit with respect to a taxpayer's "bribe-produced income."
The Conference Committee agreed that the amount of a
bribe paid by a foreign corporation shall be treated as a
distribution to its U.S. shareholders and that the distributions shall not reduce the earnings and profits of the
foreign corporation.
-10This approach would impose a U.S. tax sanction against
bribes made by controlled foreign corporations and would
parallel the tax treatment of bribes paid in the U.S. on
domestic taxpayers. This is far preferable to the originally
drafted Senate bill. , The Administration has consistently
maintained that the tax system is not an appropriate device
for dealing with this problem.
Conclusion
I am told that businessmen from other countries take
the view that bribery is a way of life in the countries in
which they operate, and that no amount of indignation or
legislation can change this. Some American businessmen may
share this point of view, but increasing numbers are concluding that some action is necessary to deal with the
situation.
We in government have made a serious effort to provide
a comprehensive approach to the problem both domestically
and internationally. I also feel that an impressive number
of U.S. firms have contributed significantly to this effort
to curb bribery through in-house condemnation of the practice
and by voluntary compliance with the requirements of the SEC.
My point is, whether you sit on the private side or on
the public side, it is important to realize that it is in
our own interests to discourage all forms of bribery in
order to restore the confidence we have lost in our institutions, and permit competition on the merits again.
% « %
REMARKS BY THE HONORABLE GEORGE H. DIXON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
BOARD OF GOVERNORS, MORTGAGE BANKERS ASSOCIATION
STATLER HILTON HOTEL, WASHINGTON, D.C.
THURSDAY, SEPTEMBER 9, 1976
I am pleased to have this opportunity to speak with you
today concerning financial reform. It gives me a chance to
squelch the popular rumor that financial reform is dead and
to talk briefly about the e/olution which I believe will
inevitably take place in financing the housing needs of this
country. The latter point is particularly important because
of the role that the mortgage banking industry must play in
the evolutionary process.
As you know, the Government has been pursuing financial
reform since the report of the Hunt Commission in 1971. That
report led to legislation orginially called the Financial
Institutions Act of 1973 which was largely ignored by the 93rd
Congress. It was reintroduced with minor changes to the 94th
Congress as the Financial Institutions Act of 1975 and received
substantial consideration in both the House and the Senate.
Unitl late spring we were optimistic of achieving passage this
year. Now it is altogether clear it's not going to happen.
It is important to note, however, that the support, and for
that matter the opposition, to financial reform has never been
a partisan matter. Therefore, whatever the outcome of the November
election we fully expect the subject to be considered early
in the next session of Congress.
A key to financial reform is housing and the role that
financial institutions, particularly savings and loan
associations and mutual savings banks, will play in the residential mortgage markets of the future.
WS-1075
- 2 It seems clear that the savings and loan associations
are in trouble, but I don't mean at all that their solvency
is threatened. Rather it is in their ability to grow and
to keep pace with requirements for housing credit. The
success of these institutions has largely been based on 3
conditions which no longer prevail in our economy. First,n
relative stability of interest rates afforded a consistently
growing base of deposits which could safely be loaned long
term even though technically the deposits were short term.
Second, the opportunities for the consumer to safely invest
his savings dollars were limited largely to financial intermediaries. As a result, financial institutions could afford
to pay rates which were, at times, below market without fear
of substantial withdrawals. Moreover, the artificial protection of Regulation Q interest rate ceilings insulated
thrift institutions from competition from banks which, absent
Regulation Q, could afford to pay more for savings deposits
during periods of high interest rates.
Since 1966 we have seen ever-increasing volatility in
the short term interest rate structure. During this period
rates have tended higher, but I do not believe that it is
necessary to assume that this will always be the case. It
is likely, however, that above average volatility will continue.
In the same period an increasing number of opportunities
for investment of savings dollars outside the financial
institutions have been developed or come into popular use.
Money market mutual funds, commercial paper, and small
denomination Government securities are prime examples. There
is reason to expect that offerings of these alternatives will
continue.
Because of these conditions the pool of savings deposits
available to all financial institutions has become less
stable. The problem seems particularly acute for thrift
institutions.
In times when rates are high a lot of funds move out,
or at least don't go into financial institutions, and instead
go into alternative investments. Whenever this situation
occurs new alternatives are developed and savers become
sensitized to interest rate differences, so that in each
succeeding period of high rates the velocity of withdrawal or
of bypass in favor of other opportunities is greater than
before.
- 3 When interest rates retreat funds flow rapidly back
to' the institutions. This occurs because Regulation Q
interest rate ceilings tend also to act as interest rate
floors. In periods of low rates financial institutions
become more attractive as depositories not only because of
their relatively high return but also because of the safety and
convenience they offer.
For the savings and loan associations the result is a
glut of deposits which can be difficult to invest. Even
assuming good demand for mortgage credit the yield on loans
is likely to retreat, and S&L's which invest heavily in
these periods will be ill prepared to pay higher rates at a
later date or to meet withdrawals during the next period of
disintermediation. Moreover, the increase in deposits tends
to divert attention from the task of solving the fundamental
cyclical problems which continue to exist and which will
return when the cycle is next reversed.
The solution to this problem is to try to alter the
deposit mix to make deposits more stable and to alter the
asset/income characteristics of thrift institutions so that
they can better compete for deposits.
Savings and loan associations and mutual savings banks
should be able to accept demand deposits, which are relatively
stable both in volume and cost, so as to help balance the
increasing volatility of savings deposits. Thrift institutions
should also be permitted, and in fact, encouraged to invest
substantial portions of their assets in variable rate mortgages,
consumer loans, and other interest-sensitive assets without
the uneconomic and anti-consumer restrictions of state usury
laws. Once these changes have been accomplished and
portfolios have adjusted, S&L's should be fully able to compete
on a price basis for savings deposits; and Regulation Q and
other artificial barriers will no longer be required.
Variable rate mortgages should also be attractive to
other lenders such as banks and credit unions which rely on
savings deposits or other interest-sensitive sources of funds
and should lead to acceleration of mortgage lending by those
institutions.
- 4 From the consumer standpoint variable rate mortgages
open up a whole series of financing options to better
'*•
serve individual needs. Since the flexibility implicit in °'
such instruments can be incorporated by changing the maturity,
amortization rate, principal balance, monthly payment, or 'J
any combination of those factors, custom tailored mortgages;* are a real possibility.
We believe the variable rate mortgage will play
a significant role in the mortgage markets of the future, it
certainly does not represent the total solution. Fixed rate
mortgages must continue to be available. I believe that
availability is assured because of the competitive nature
of our credit markets which are responsive to consumer
demand. Further, the more stable deposit base that financial
reform will bring to thrift institutions will permit easier
accommodation of fixed rate mortgages as part of their
portfolio mix.
Thrift institutions should continue to operate as
basically specialized lenders with a substantial commitment
to mortgage credit, but their portfolio mix will likely become
more oriented to mortgages on relatively high value properties
owned by upwardly mobile individuals for whom variable rates
are likely to be most attractive. It is important, therefore,
that pension funds, life insurance companies, and others which
find fixed rates consistent with their investment objectives,
be encouraged to increase their participation in the mortgage
market.
One way to do that is through the mortgage backed
security concept which your industry has helped develop and
market. These securities have proved attractive to investors
which have neither the skill nor desire to originate,
package, or service fixed rate mortgages. They also provide
the basis for the kind of viable secondary market which has
been so sorely lacking in the mortgage field.
We are convinced that the mortgage backed securities
concept can be expanded and improved. To the extent that it
is necessary for the Government to play a role in the process
either by direct guarantee or by the establishment of
consistent rules of the game, it should do so on an actuarially
sound basis and with the objective of facilitating rather than
restricting participation.
- 5 Looking beyond the mortgage backed security, the
Government has other roles to play. First, we must eliminate
those regulations and restrictions which provide artificial
barriers to free competition and which for one reason or
another have tended to make the mortgage instrument less
attractive than alternative investments. As I mentioned
before, Regulation Q, variable rate mortgages, and state usury
laws rank high on this list.
Second, we must make some hard decisions on our housing
and mortgage priorities and then devise effective programs
to carry out the objectives which result. For example, do
we want programs with the primary objective of creating jobs
in the construction industry or do we want to create
opportunities for quality housing? Is our goal to foster
home ownership or is it equally acceptable to assure good
rental opportunities? Do we encourage ever-increasing urban
sprawl by supporting the quest for relatively low cost land
or it is more in our interest to concentrate our efforts in
our cities?
I do not mean to imply that the answers to these questions
are easy or that they are mutually exclusive. I do believe,
however, that a clear idea of what we want and where we are
going can result in better and more effective delivery of
housing assistance than currently exists.
So, to return to the beginning, I believe that financial
reform is inevitable as a result of economic forces already at
work. The only question which remains is the timing and nature
of those reforms. I hope that we will not have to survive
another crisis of disintermediation and another "mortgage crunch"
before we seriously pursue these objectives. The Administration
retains its strong commitment to move ahead during the next
session of Congress, and if that sounds like an expression of
optimism, it is. We solicit and look forward to your help and
advice.
Thank you.
0O0
Departmental theTREA$URY
TELEPHONE 964-2041
HINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
September 13, 1976
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 September 16, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing December 16, 1976
High
Low
Average
Price
Discount
Rate
98.714
98.709
98.711
5.087%
5.107%
5.099%
26-week bills
maturing March 17, 1977
Investment
Rate 1/
Price
5.23%
97.A28
Discount
Rate
CL OQg'y
DATE
Investment
Rate 1/
C
C I Si
September 13, 1976
/
TREASURY BILL RATES
Tenders at the low price for t
Tenders at the low price for t
13-WEEK
TOTAL TENDERS RECEIVED AND ACCEPTEI
District
Received
I
Boston
$
44,810,000
New York
3, 956,675,000
Philadelphia
19,330,000
Cleveland
37,020,000
Richmond
27,645,000
Atlanta
34,045,000
Chicago
228,315,000
St. Louis
52,315,000
Minneapolis
33,050,000
Kansas City
51,970,000
Dallas
32,255,000
San Francisco 297,515,000
TOTALS$4,814,945,000
Acce
$
1,6£
LAST WEEK:
TODAY:
s:33i%
>^o7f7o rt3oc/r°
HIGHEST SINCE
r.tsVlo
1C
LOWEST SINCb
$2,10
£/Includes $ 398,790,000 noncompetitive tenders from the public.
2.'Includes $171,880,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1077
26-WEEK
/. ^3o K
IbeDepartmentoftheJREASURY f
HINGTON, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
September 13, 1976
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 September 16, 1976,
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing December 16, 1976
High
Low
Average
Price
Discount
Rate
98.714
98.709
98.711
5.087%
5.107%
5.099%
Investment
Rate 1/
5.23%
5.25%
5.24%
26-week bills
maturing March 17, 1977
Discount Investment
Price
Rate
Rate 1]
97.328
97.311
97.316
5.51%
5.54%
5.53%
5.285%
5.319%
5.309%
Tenders at the low price for the 13-week bills were allotted 78%.
Tenders at the low price for the 26-week bills were allotted 83%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
|_ Accepted
44,810,000
Boston
$
New York
3, 956,675,000
19,330,000
Philadelphia
37,020,000
Cleveland
27,645,000
Richmond
34,045,000
Atlanta
228,315,000
Chicago
52,315,000
St. Louis
33,050,000
Minneapolis
51,970,000
Kansas City
32,255,000
Dallas
San Francisco 297,515,000
T0TALS$4,814,945,000
Received
I
Accepted
$
27,660,000 $
51,370,000 $
29,370,000
1,687,665,000
5,410,135,000
2,707,825,000
19,330,000
7,680,000
7,680,000
35,620,000
65,070,000
15,070,000
22,205,000
49,265,000
26,755,000
33,685,000
36,160,000
35,110,000
103,715,000
252,975,000
65,975,000
31,315,000
43,400,000
23 400,000
17,170,000
45,985,000
40,985,000
48,445,000
23,955,000
20,445,000
19,865,000
28,705,000
15,705,000
54,415,000
273,185,000
112,845,000
$2,101,090,000 a/$6,287,885,000
$3,101,165,000 b/
*/Includes $ 398,790,000 noncompetitive tenders from the public.
2.1 Includes $171,880,000 noncompetitive tenders from the public.
U Equivalent coupon-issue yield.
WS-1077
FOR IMMEDIATE RELEASE
September 7, 1976
CHARLES I. KINGSON APPOINTED
DEPUTY INTERNATIONAL TAX COUNSEL
Secretary of the Treasury William E. Simon today
announced the appointment of Charles I. Kingson as
Deputy International Tax Counsel and Deputy Director
of the Office of International Tax Affairs.
Mr. Kingson, 38, has been a partner in the New
York law firm of Willkie Farr & Gallagher since 1969.
As Deputy International Tax Counsel, Mr. Kingson
will work with the International Tax Counsel who is
the principal legal advisor to Assistant Secretary for
Tax Policy Charles M. Walker in the formulation of
policy, legislation, and regulations on international
tax matters, including the taxation of foreign source
income of U.S. taxpayers, the taxation of foreigners
receiving income from U.S. sources, and the prevention
of international tax evasion.
As Deputy Director of the Office of International
Tax Affairs, Mr. Kingson's work will include the income
and estate tax treaty program and the Treasury Department's participation in the activities of the Committee
on Fiscal Affairs of the Organization for Economic
Cooperation and Development (OECD).
A native of New York City, Mr. Kingson received
his A.B. degree from Harvard College in 1959 and his
LL.B. degree from Harvard Law School in 1963. Mr.
Kingson is married to the former Nancy Ellen Sharf.
They have a daughter, Jennifer.
-oOoWS-1078
SUMMARY STATEMENT BY J. ROBERT VASTINE
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TRADE AND RAW MATERIALS POLICY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON TRADE
UNITED STATES HOUSE OF REPRESENTATIVES
TUESDAY, SEPTEMBER 14, 8:30 A. M.
I am pleased to join in this review of the U.S.-Romania
Trade Agreement. Both the Department of the Treasury, and
the East-West Foreign Trade Board, chaired by Secretary
Simon, strongly favor extension of the waiver pursuant to
authority conferred by .section 402 of the Trade Act. An.
extension of the waiver allowing the U.S.-Romania Trade
Agreement to remain in force will promote continued
improvement in our economic and political relations with
that country and serve our national interest.' It Wi'll allow
us also^ to build up the important foundations laid in the
last few years.
We are grateful, Mr. Chairman, for this opportunity to
discuss the issues involved in the further expansion of
U.S.-Romanian economic and political relations. We believe
it can help create an environment of public understanding
and confidence; an environment which will permit political
and economic relations between the United States and Romania
to develop in a mutually advantageous manner.
The United States and Romania have enjoyed a special
relationship since at least 1969, when we chose Romania
as the first country in Eastern Europe to be visited by a
U.S. President since World War II. While the U.S. now
enjoys extensive relations with other Eastern European
countries, particularly in the areas of trade and joint
scientific research, our relations with Romania are among
the best with countries of the Warsaw Pact. This is
demonstrated through scientific and cultural exchanges, by
the frequency and frankness of consultations between senior
officials, in trade and economic relations, and in other
ways.
The U.S.-Romanian Trade Agreement has marked a major
step forward in the development of our economic and political
WS-1079
relations with Romania. We are convinced that the continuation of the Agreement will contribute to the growth and
- 2 stability of the economies of both countries, and to a
further increase in two-way trade.
Strengthening good U.S.-Romanian relations, both
economic and political, serve the interests of both countries. Romania has adopted a number of policy initiatives
that are aimed at providing the country with a high degree
of independence. More than any other Warsaw Pact country,
Romania has pursued friendly relations with countries of
differing political and economic systems -- with the
United States, the People's Republic of China, the developing world, and with Israel as well as Arab countries.
Romania participates actively in a number of international
organizations. It is the only COMECON country which is a
member of the IMF and the World Bank. Romania has acceded
to the GATT. It leads the COMECON countries in the proportion of its trade with the West.
Romania's economic viability is the key to its strategy
of independence. We believe that it is in our interest to
encourage Romania's independent policy orientation through
the expansion and improvement of our bilateral relations.
Continuation of the Trade Agreement with Romania is essential
to this end. Moreover, closer economic ties and expanding
trade strengthen the economies of both countries.
Trade Overview
In our desire to encourage Romania's independent
policy we have been in favor of the expansion of AmericanRomanian economic and commercial contacts for many years.
The notable increase in total U.S.-Romanian trade during
the last eleven years is a demonstration of the special
relationship we have established with that country.
U.S.-Romanian trade turnover was $8 million in 1965,
$80 million in 1970, and reached a high of over $407 million
in 1974, when the Romanians purchased relatively large
quantities of U.S. aircraft and grain (see attached table).
Although total bilateral trade declined from 1974 to 1975,
the 1975 volume of over $322 million was still almost twice
the total in 1973, and more than three times the volume
in 1972.
- 3 Throughout this period of increasing trade, the United
States has consistently sustained a positive annual trade
balance with.Romania. Our exports, composed primarily of
agricultural and manufactured goods, grew nearly thirty
times, reaching $189.3 million last year. U.S. imports
from Romania totaled $133 million in 1975, more than seventy
times the 1965 volume. The bulk of last year's imports
consisted, as in the past, of mineral fuels and related
materials.
As you know, the United States granted Most-FavoredNation (MFN) tariff status to Romania in August 1975,
as part of the U.S.-Romania Trade Agreement. And Romania
was made a beneficiary of the U.S. Generalized System of
Preferences on January 1, this year. The initial impact
of these actions on our bilateral trade is at least in
part reflected in the trade figures available for the
first half of this year.
U.S.-Romanian trade during the first six months of
1976 totaled $179 million, over 10 percent above the
$158 million in goods traded during the same period in
1975. Romanian exports to the U.S. through June of 1976
reached $90 million, about two and one-half times the
amount recorded during the same period of last year.
This large increase in U.S. imports from Romania has,
for the first time in recent years, resulted in a near
balance in our two-way trade.
While extending MFN and GSP to Romania's products
has contributed to this year's rise in our imports from
Romania, the increase should not be attributed exclusively to these actions. Many factors other than tariff
changes affect trade. In this instance, the recovery of
the U.S. economy in 1976 has led to significant increases
in our imports from many countries, including Romania.
This is especially true of our imports of products such
as fuel oil, which, in dollar, terms, led the increase in
U.S. imports of Romanian goods. During the first half
of 1976, fuel oil imports from Romania reached over
$42 million, representing almost one-half of all our
imports from that country so far this year.
- 4 I would also like to point out that the trade data for
the first six months of this year dispel the often expressed
fear that the U.S. market will be flooded with large
quantities of imports disrupting U.S. domestic business
when our imports from nonmarket economy countries are given
MFN tariff treatment. This simply has not been the case
with Romania. Since granting MFN status to Romania last
year, our imports from that country have, as expected,
increased, but certainly not to levels that would be
considered disruptive for the U.S. market. To date, the
U.S. International Trade Commission has received no
petition or request under Section 406 of the Trade Act to
conduct an investigation to determine whether imports of
an article from Romania are causing market disruption,
nor has U.S. countervailing duty authority been invoked
against Romanian imports. The only case which has arisen
since Romania received MFN status is the issuance of an
Antidumping Proceeding Notice on Romanian clear sheet
glass. The issuance of such a notice, however, merely
begins the formal investigative procedure and does not
necessarily imply a formal finding of dumping.
A continuation of the increase of total U.S. imports
from Romania, stimulated further by the Trade Agreement and
the granting of GSP, can be expected in the future, but will
undoubtedly be accompanied by a continuation of the rapid
rise of Romanian purchases from the United States. Thus we
envision that both countries will continue to gain from
increased trade, resulting from our present economic policy
toward Romania, in which the U.S.-Romania Trade Agreement
is a critical element.
Prospects for U.S.-Romanian Trade
The prospects for future U.S. exports of goods and
services to Romania are good, if we maintain the normalized
trading conditions which the Trade Agreement has established.
Both Governments anticipate a pickup in our bilateral trade
during the last half of the year, bringing it to an annual
total of around $400 million, a 16 percent increase over
1975. At the first session of our Joint Economic Commission
both sides agreed to set a goal of $1 billion for our twoway trade by 1980. Romania's current Five-Year Plan projects
substantial growth in the volume of Romania's foreign trade
in support of a strong effort to expand and modernize
Romanian industry. During the next five years, imports from
the West are expected to increase by 60-70 percent over the
1971-75 period. If the U.S. share of Industrialized West
exports to Romania continues at the level it has averaged
over the past three years, we can expect to garner about
11 percent of the 60-70 percent increase.
- 5U.S. exporters can expect to increase sales of
plants, machinery and equipment in a number of industrial
sectors particularly targeted for growth. Among these
are machine building, chemicals, and petrochemicals.
While the Romanian Five-Year Plan augurs well for
increased exports of U.S. manufactured goods, we expect
that U.S. agricultural exports will continue to comprise
an important component of our total sales to Romania.
Soybeans, cotton, and to a lesser extent wheat, have
been and will continue to be leading U.S. exports in
the agricultural sector.
Many barriers to commercial contacts in Romania and to
the establishment of trading patterns and relationships
have been largely overcome in the last few years.
Knowledge that the U.S. has become an open and dependable
market for Romanian exports is causing Romania to look to
the United States as a source for high quality competitively priced manufactures, as well as important agricultural products.
MFN and Credits
Romania's ability to expand its imports from the
United States and other Western countries, which help
it to pursue its policy of independence, will of course
depend upon its ability to earn or borrow the hard
currency needed to finance these imports. To earn
hard currency, Romania's exports must have access to
Western markets, including our own. Our Western
allies have given most-favored-nation status to imports
from Romania. In granting MFN to Romania, the United
States did not of course give that country any special
privilege; we simply allowed Romania's products to
enter the U.S. market and compete on an equal footing
with the products of over 100 other nations which also
receive MFN tariff treatment from us. Without a
continuance of equal tariff treatment of Romania's
products, we will force Romania to conduct much of
its hard currency business with our West European
competitors, and we will face the possibility of
losing our potential exports to Romania in the process.
At the same time that access to Western markets
is vital for Romania to continue its import program,
sources of Western financing, both public and private, are
equally important. In the 1960's, when the Romanians
- 6 began their move toward independence, this policy combined
with rapid industrialization seemed likely to get them
into political and financial trouble. In the 1970's,
however, the Romanian approach, consisting of a strong
commitment to succeed in world markets combined with
considerable investment in selected industries, has begun
to show impressive results in production and exports. But
the Romanians still have a need to borrow in the West to
help finance their ambitious import program and to service
their existing outstanding debt.
In order for Romania to adequately manage its hard
currency debt situation, the Romanian Government will
have to monitor its economy carefully to ensure that
it does not grow more rapidly than can be sustained.
In light of the continuing Romanian interest in
Western sources of financing, the availability of credits
is expected to be an important factor in Romania's purchasing decisions. Without a continuation of the Title
IV waiver for Romania, Eximbank and the Commodity Credit
Corporation would, of course, have to cease making loans
or guarantees to that country.
As of June 30, 1976, Eximbank exposure in Romania
was $75.6 million. In addition, outstanding preliminary
commitments from Eximbank total about $21 million for
proposes projects with a total export value of $49
million. While the flow of official credits from the
U.S. represents only a small fraction of the capital
available to Romania for trade in general, Eximbank credits
are nonetheless necessary to facilitate export financing
and to place U.S. firms on a competitive basis with
their industrial competitors in doing business with that
country. The inability of Romania to obtain Eximbank
credits would probably result in a cancellation of many
current and future orders for exports to Romania from
U.S. businesses. Should that occur, our mutually
beneficial trading relationship with Romania would be
placed in jeopardy over the long-term.
It is my hope that counter-productive competition
among Western industrial nations for exports through
government-supported credits will soon end. At the
end of the economic conference in November 1975, at
Rambouillet, France, the Heads of State of the
- 7Governments of France, Germany, Italy, Japan, the United
Kingdom and the United States declared that their
Governments would intensify efforts to achieve a prompt
conclusion of discussions then underway, among themselves and Canada, concerning export credits. Renewed
discussion among these Governments resulted in a
consensus that counter-productive competition must be
avoided with respect to government-supported export
credits. While it was not possible to reach a formal
agreement to implement this consensus, all of the
Governments issued their own declarations or instituted
internal procedures to establish their own guidelines
on minimum rates and maximum terms on official export
credits. These guidelines are designed to bring
official export financing procedures closer to those
standards determined by the market and thereby reduce
the concessional element derived from government
support. This will allow exporters to compete in
world markets on the basis of price, quality, and
servicing of product rather than on artificial
incentives.
Commodity Credit Corporation (CCC) credits also
play an important role in our trade with Romania.
Since 1970, CCC has been quite active, financing a
total of $137.9 million worth of U.S. agricultural
exports to that country. Romania has been a good
customer with prompt repayment. These credits have
stimulated the growth of our agricultural exports,
and at the same time, have supported the integration
of Romania into the world community. If the waiver
for Romania is not extended, the U.S. Government
will also lose its authority to extend CCC credits
to Romania.
Conclusion
Mr. Chairman, our experience with the U.S.-Romanian
Trade Agreement has convinced us of its continued
importance. In commercial and economic terms it has been
a central propellant to the growth of U.S.-Romanian
relations.
Though the question of linkage between the Trade
Agreement and humanitarian issues is a very delicate
and sensitive one for the Romanian Government, the
record of Romanian action on humanitarian and emigration cases during the past year has contributed to
- 8 the achievement of the objectives of the Act. Secretary
Simon, during his visit to Bucharest in June of this
year, held frank discussions with Romania's leaders
about the extension of the waiver pursuant to authority
under Section 402 of the Trade Act. We were encouraged
by the importance Romania's leaders place on this issue.
The pivotal role that the U.S.-Romanian Trade Agreement
plays in our bilateral relations became very apparent
during the course of our discussions.
During the last year we believe that Romania's
emigration performance has contributed to the achievement of the objectives of the Trade Act. There is no
doubt that the continuation of the waiver will provide
the climate in which we can expect the Romanian Government to continue to be responsive to our very deep
interest in human rights. On the other hand, failure
to extend the waiver could prompt a reaction by
Romania which will be inimical to the humanitarian
goals of the Trade Act.
In conclusion, then, we believe that extension of
the waiver allowing the U.S.-Romanian Trade Agreement
to remain in force is in our national interest.
oOo
U.S.-ROMANIAN TRADE TRENDS
(Millions of dollars)
1965
1970
1971
1972
1973
1974
1975
Jan-Jun
1975
n.a.
18.8
15.4
18.8
31.7
108.6
56.9
32.2
17.8
Other
n.a.
47.5
37.0
50.3
84.8
168.5
132.4
89.6
71.4
Total
6.4
66.3
52.4
69.1
116.5
277.1
189.3
121.8
89.2
U.S. Imports
1.8
13.4
13.8
31.5
55.7
130.5
133.0
35.9
90.5
Trade Turnover
8.2
79.7
66.2
100.6
172.2
407.6
322.3
157.7
179.7
U.S. Trade
Balance
4.6
52.9
38.6
37.6
60.8
56.3
85.9
-1.3
U.S. Exports:
Manufactured
goods 1/
1/
SITC 5 through 8 statistics not available (n.a.) for 1965
Source: U.S. Department of Commerce, BEWT
146.6
Jan-Jun
1976
Summary of the Principal Points Included
in the Statement
1. Both the Department of the Treasury, and the East-West
Foreign Trade Board, chaired by Secretary Simon, strongly
favor extension of the waiver pursuant to authority
conferred by section 402 of the Trade Act.
2. We believe that continuation of the Agreement serves
our foreign policy interests. The dominant theme
of Romania's foreign policy is the desire to maintain a
high degree of independence. Continuation of the Trade
Agreement with Romania is essential to this end, as
Romania's economic viability is the key to its strategy
of independence.
3. We believe that continuation of the Agreement serves
the economic interests of both countries. We have
continued to encourage the expansion and improvement of
,American-Romanian economic and commercial relations.
The increase in our contacts is reflected by U.S.-Romanian
trade figures. The $322 million in two-way trade in 1975
was 4 times that of 1970 and 40 times that of 1965.
4. Romania's current Five-Year Plan calls for substantial
increases in imports of goods traditionally supplied by
the United States. Romania's ability to expand its imports
from the United States and other Western countries, and to
continue to pursue its policy of independence, will depend
upon its ability to earn hard currency needed to finance
these imports. To earn hard currency, Romania's exports
must have access to Western markets, including our own.
Without a continuance of equal tariff treatment of
Romania's products, we will force Romania to conduct
much of its hard currency business with our West European
competitors who have granted most-favored-nation status
to imports from Romania, and we will face the possibility
of losing our potential exports to Romania in the process.
5. While access to Western markets for Romania's products
is vital for Romania to continue its import program and
its independent policy, sources of Western financing,
including U.S. Eximbank and Commodity Credit Corporation
(CCC), are equally important. Without a continuation of
the Title IV waiver for Romania, Eximbank and the CCC
would have to cease making loans or guarantees to that
country. Should that occur we will face the possibility
of losing potential exports to Romania and place in
jeopardy over the long-term our mutually beneficial
trading relationship.
- 26. Our experience with the U.S.-Romanian Trade Agreement
gives us no cause to question its continued usefulness.
Though the question of linkage between the Trade Agreement
and humanitarian issues is a very delicate and sensitive
one for the Romanian Government, the record of Romanian
action on humanitarian and emigration cases during the
past year has contributed to the objectives of the Trade
Act.
FOR RELEASE AT 4:00 P.M.
September 13, 1976
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 $1,681 million of notes held by the
public maturing September 30, 1976, and to raise $819 million
new cash. Additional amounts of these notes may be issued
at the average price of accepted tenders to Government accounts
and to Federal Reserve Banks for their own account in
exchange for $342 million maturing notes held by them, and to
Federal Reserve Banks as agents of foreign and international
monetary authorities for new cash only.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.
Attachment
oOo
WS-1080
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED SEPTEMBER 30, 1976
September 13, 1976
Amount Offered:
To the public
$2,500 million
Description of Security:
Term and type of security 2-year notes
Maturity date September 30, 1978
Call date No provision
Interest coupon rate To be determined 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 March 31 and September 30
Minimum denomination available $5,000
Terms of Sale:
Method of sale Yield auction
Accrued interest payable by investor... None
Preferred allotment Noncompetitive bid for
$500,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, September 21, 1976,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds Thursday, September 30, 1976
b) check drawn on bank within
FRB district where submitted...
Monday, September 27, 1976
c) check drawn on bank outside
FRB district where submitted...
Friday, September 24, 1976
Delivery date for coupon securities Thursday, September 30, 1976
FOR RELEASE AT 4:00 P.M.
September 14, 1975
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
two series of Treasury bills to the aggregate amount of $5,200 million »
or
thereabouts, to be issued September 23, 1976, as follows:
91-day bills (to maturity date) in the amount of $2,100 million» or
thereabouts, representing an additional amount of bills dated June 24, 1976,
and to.,mature December 23, 1976
(CUSIP No. 912793 C7 9) , 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 September 23, 1976,
and to mature March 24, 1977
(CUSIP No. 912793 F3 5).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 23, 1976 outstanding in the amount of $5,208 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,876 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, September 20, 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-1081
(OVER)
i
securities and report daily to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
'
for account of customers provided the names of the customers are set forth in .
such tenders.
own account.
Others will not be permitted to submit tenders except for their
Tenders will be received without deposit from incorporated banks
and trust companies and from responsible and recognized dealers in investment
securities.
Tenders from others must be accompanied by payment of 2 percent of
the face amount of bills applied for, unless the tenders are accompanied by an
express guaranty of payment by an incorporated bank or trust company.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.
Those submitting competitive tenders
will be advised of the acceptance or rejection thereof.
The Secretary of the
Treasury expressly reserves the right to accept or reject any or all tenders,
in whole or in part, and his action in any such respect shall be final. Subject
to these reservations, noncompetitive tenders for each issue for $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 September 23, 1976, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing September 23, 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 notice
prescribe the terms of the Treasury bills and govern the conditions of their
issue.
Branch.
oOo
Copies of the circular may be obtained from any Federal Reserve Bank or
a- ^>
E vo
a, <?
teaeraiWASHINGTON,
nnancing
DanK
D.C. 20220
FOR IMMEDIATE RELEASE
«/> Csl
a> o
September 14, 1976
SUMMARY OF LENDING ACTIVITY
August 16-August 31, 1976
The Federal Financing Bank activity for the period
August 16 through August 31, 1976 was announced as follows
by Roland H. Cook, Secretary:
The Federal Financing Bank made the following loans to
utility companies guaranteed by the Rural Electrification
Administration:
Interest
Amount
Maturity
Borrower
Date
Rate
8/16
Southern Telephone
Company
12/31/10
8.0921
8/16 United Power Association 2,000,000 12/31/10
8.092%
8/16
Seminole Electric
Association
$
100,000
379,000
12/31/10
8.092%
3,000,000
12/31/10
8.074%
10,013,000
12/31/10.
8.093%
8/20 South Mississippi
Electric Power Assn
6,065,000
8/28/78
6.787%
8/26 Big Rivers Electric
Corporation
506,000
12/31/10
8.051%
8/27 Associated Electric
Cooperative, Inc.
5,000,000
12/31/10
8.053%
8/17 Associated Electric
Cooperative, Inc.
8/20 Alabama Electric
Cooperative, Inc.
8/27 Southern Illinois Power 1,415,000 8/27/78 6.709%
Interest payments on the above REA loans are made on a
quarterly basis.
The Bank made the following loans to the United States
Railway Association (USRA):
Date Note Amount Maturity Interest Rate
WTZ
T~~
$2,850,000.00
4/30/79
8/25
6
450,000.00
12/26/90
WS-1082
6.992%
8.055%
- 2On August 29, USRA rolled over Note #3 in the amount .
of $1,029,004.05 and borrowed $4,562.01 to pay the interest
due. The loan matures November 26, 1976, and bears interest
at a rate of 5.372%. USRA borrowings from the FFB are
guaranteed by the Department of Transportation.
The FFB made the following advances to borrowers guaranteed
by the Department of Defense under the Foreign Military Sales
Act:
Interest
Date
8/16
8/20
8/20
8/25
8/26
8/30
8/31
8/31
Borrower
Amount
Maturity
Rate
Government of
Morocco
$10,367,716.,00
6/30/84
7.487%
Government of
Brazil
438,090.,10
3/15/83
7.368%
Government of
Brazil
35,700.,00
6/30/83
7.409%
Government of
Israel
124,276.,60
6/10/85
7.522%
Government of
Isreal
28,743,545.,67
6/30/06
8.080%
Government of
Nicaragua
63,000..00
6/30/80
6.948%
Government of
Brazil
24,410.,00
6/30/83
7.345%
Government of
Brazil
113,139.,79
3/15/83
7.311%
The National Railroad Passenger Service (Amtrak) made
the following drawings from the FFB:
Date Note # Amount Maturity Interest Rate
8/16 8 $10,000,000 11/15/76 5.413%
8/18
8
10,000,000
11/15/76
5.395%
8/30
8
2,000,000
11/15/76
5.329%
The Student Loan Marketing Association (SLMA) rolled over
the following principal amounts on loans previously made by
the Federal Financing Bank:
Date Amount Maturity Interest Rate
87T7
$20,000,000.00
11/23/76
8/31
10,000,000.00
11/30/76
SLMA borrowings are guaranteed by HEW.
5.4081
5.354%
- 3On August 18, the Bank purchased the following debentures
from Small Business Investment Companies:
Interest
Borrower
Amount
Maturity
Rate
J. H. Foster § Company
$1,000,000
8/1/81
7.445%
Housing Capital Corp.
2,000,000
8/1/83
7.755%
Dixie Business Investment Company
200,000
8/1/86
7.965%
Lake Success Capital Corp.
950,000
8/1/86
7.965%
New Mexico Capital Corp.
1,500,000
8/1/86
7.965%
Northeast Small Business
Investment Corp.
430,000
8/1/86
7.965%
1,000,000
8/1/86
7.965%
175,000
8/1/86
7.965%
1,000,000
8/1/86
7.965%
United Business Capital,
Inc.
Van Rietschoten Capital
Corp.
Washington Capital Corp. 1,000,000 8/1/86 7.965%
On August 20, the Federal Financing Bank purchased from
the Department of Health, Education and Welfare (HEW) Series
E notes in the amount of $1,035,000. The notes mature
July 1, 2000, and bear interest at a rate of 8.062%.
The Department had previously acquired the rates which
were issued by various public agencies under the Medical
Facilities Loan Program. The notes purchased by the Bank
are guaranteed by HEW.
On August 27, the FFB purchased a $450 million 5 year
Certificate of Beneficial Ownership from the Farmers Home
Administration. The maturity is August 27, 1981. The
interest rate is 7.552% on an annual basis.
On August 31, the Tennessee Valley Authority borrowed
$285 million to repay $260 million of notes maturing with
the Bank and to raise additional funds. The loan matures
November 30, 1976, and bears interest at a rate of 5.340%
Federal Financing Bank loans outstanding on August 31,
1976 totalled $25.1 billion.
#
#
#
FOR RELEASE UPON DELIVERY
Statement of
William M. Goldstein
before the
House Select Committee on Professional Sports
September 16, 1976
Mr. Chairman and Members of the Committee:
My name is William M. Goldstein, Deputy Assistant
Secretary for Tax Policy of the Treasury Department. I
welcome the opportunity to appear before you to comment on
the significant tax rules applicable to owners of professional
sports teams. I will first discuss the significant tax
rules under present law and then briefly summarize the
important modifications to those rules which would flow from
enactment of H.R. 10612, the Tax Reform Act of 1976, as
agreed to by the conferees only last week.
Present law
The most significant tax considerations under present
law for owners or prospective owners of professional sports
teams are generally considered to be (1) amortization or
depreciation of player contracts, (2) capital gain treatment
on the sale or exchange of a franchise, and (3) recapture of
depreciation taken on player contracts.
When a professional sports team is purchased, the most
significant assets acquired by the purchaser are the player
contracts and the league franchise. Other acquired assets
include miscellaneous equipment, including both sports
equipment and office equipment, and, in some cases, the
right to participate in television network affiliation
contracts.
WS-1083
- 2 -
Because player contracts have been determined to be
intangible assets with limited and reasonably ascertainable
useful lives extending substantially beyond the taxable year
in which they are acquired, the cost of obtaining these
contracts must be capitalized and amortized or depreciated
on a straight-line basis over their useful lives under
section 167 of the Internal Revenue Code. (Rev. Rul. 67379, 1967-2 C.B. 127 and Rev. Rul. 71-137, 1971-1 C.B. 104).
The cost of player contracts includes both amounts paid upon
their purchase and any bonuses paid to players for signing
the contracts.
Since in most professional sports the useful lives of
player contracts are generally considered to vary from 3 to
6 years, the purchaser of a team has a significant interest
in allocating a substantial portion of the purchase price to
the player contracts in order to claim during the first few
years of operations the tax benefit of significant depreciation
deductions attributable to the cost of acquiring those
contracts. Not only can such deductions be used to offset
operating income from the team itself (thus producing positive
cash flow where operating revenues exceed operating expenses),
but also, if, as is often the case during the initial years
of operation of a new team, the team does not produce enough
operating income to absorb all of those depreciation deductions,
the losses thereby produced can be used to offset or "shelter"
other income of the owner or owners where the ownership of
the team is held in the form of a sole proprietorship,
partnership, or subchapter S corporation.
Of course, to the extent that the amount of the purchase
price allocated by the purchaser to player contracts accurately
reflects the economic realities of the transaction, and to
the extent that the length of the useful lives assigned
those contracts is also realistic, the purchaser should,
under our current tax laws, be entitled to whatever tax
benefits are produced by the depreciation deductions to the
same extent that taxpayers in other businesses enjoy the
benefits of similar deductions for the cost of acquiring
other types of depreciable assets.
The league franchise acquired by the purchaser of a
professional sports team is also an intangible asset.
Unlike the player contracts, however, the league franchise
- 3does not have a limited and reasonably ascertainable useful
life, and is therefore not a depreciable asset. The cost or
basis of the league franchise is, of course, taken into
account in determining the amount of gain or loss in the
event of a subsequent sale of the team.
In this connection, section 1253(e) of the Internal
Revenue Code specifically excepts "the transfer of a franchise
torengage in professional football, basketball, baseball, or
other professional sport" from the tax treatment accorded to
the transfer of other types of franchises by section 1253.
Generally, section 1253(a) operates to exclude from treatment
as a sale or exchange of a capital asset any transfer of a
franchise (e.g., a "fast food" franchise) if the transferor
retains certain powers, rights, or continuing interests in
the subject matter of the franchise. Thus, section 1253(e),
which to my knowledge is the only provision in the Internal
Revenue Code expressly applicable to professional sports
franchises, permits the determination of whether the sale or
exchange of such a franchise qualifies for capital gain
treatment to be made under traditional rules without regard
to the special rules otherwise applicable to franchise
transfers under section 1253. Therefore, in the ordinary
case in which the holding period requirement is met, the
transferor of a professional sports franchise will obtain
the benefit of capital gain treatment on the sale or exchange
of the franchise (Rev. Rul. 71-123, 1971-1 C.B. 227).
Player contracts owned for more than 6 months by a
professional sports team are considered to be "section 1231
assets" or "property used in the trade or business". (Rev.
Rul. 67-380, 1967-2 C.B. 291, Rev. Rul. 71-137, supra and
Rev. Rul. 71-123, supra.) Therefore, to the extent that the
amount received by the transferor of a sports team which is
allocated to player contracts exceeds the adjusted basis and
depreciation recapturable under section 1245 which is applicable
to those contracts, such gain will be entitled to capital
gain treatment. Since the gain realized on the sale or
exchange of player contracts is subject to the recapture
provisions of section 1245 (that is, the gain is treated as
ordinary income to the extent of previously claimed depreciation) , it is generally more advantageous for the seller of a
sports team to allocate as much of the purchase price as
possible to the league franchise rather than the player
contracts. In situations in which most or all of the players
whose contracts have been depreciated have either retired or
been
depreciation
less cut,
significant
to therecapture
seller. is, of course, considerably
- 4 Thus, to the extent that depreciation recapture is a
significant consideration, the objectives of the purchaser
and seller of a professional sports team are normally inconsistent.
That is, the purchaser desires to allocate as much of the
purchase price as possible to depreciable player contracts,
while the seller (unless, for example, he has net operating
losses which may be carried forward to offset the ordinary
income produced by depreciation recapture) wants to allocate
as much of the purchase price as possible to the league
franchise in order to avoid depreciation recapture and
maximize capital gain treatment. There are no specific
statutory rules under present law governing the manner in
which the purchaser and seller must make their allocations.
Generally, however, the allocation of the entire purchase
price to the various assets purchased must reflect the
relative values of the assets. In some cases the purchasers
of professional sports teams have allocated what would
generally be considered to be unrealistically high percentages
(e.g., 98.57o) of purchase prices to the value of player
contracts.
H.R. 10612 modification
H.R. 10612 as agreed to by the conferees contains two
significant new provisions affecting the tax attributes of
ownership of professional sports teams. The first such
provision would add a new section 1056 to the Internal
Revenue Code limiting the amount of the purchase price which
can be allocated by the purchaser of a team to player contracts.
The new section essentially provides that on the sale or
exchange of a sports franchise, the basis of the transferee
in any player contract transferred may not exceed the sum of
the transferor's adjusted basis in the contract plus the
amount of any gain recognized by the transferor on the
transfer of the contract. Thus, the provision prohibits the
purchaser from allocating to player contracts any more of
the purchase price than is so allocated by the seller. The
section also creates a presumption that not more than 50 %
of the purchase price would be allocable to player contracts
unless the taxpayer can satisfy the Secretary of the Treasury
that a greater allocation is proper under the circumstances.
The other provision would add a new paragraph to section
1245(a) of the Internal Revenue Code altering significantly
the extent of recapture of depreciation taken on player
contracts upon the sale of a professional sports team. The
new paragraph essentially provides that on the sale or
exchange of a sports franchise the "recomputed basis" (for
- 5purposes of section 1245) of the transferor in any player
contracts transferred shall be the greater of either (1) the
previously unrecaptured depreciation with respect to player
contracts acquired by the transferor when he acquired the
franchise, or (2) the previously unrecaptured depreciation
with respect to the player contracts being transferred.
Previously unrecaptured depreciation with respect to player
contracts acquired when the franchise was acquired is defined
as the excess of the sum of the depreciation deductions
allowed or allowable to the transferor with respect to such
contracts plus the deductions allowed or allowable to the
transferor for losses (i.e., abandonment losses upon the
retirement of a player or his failure to make the team) with
respect to such contracts over the aggregate of the amounts
of depreciation already recaptured as ordinary income upon
the prior disposition of such contracts. Previously unrecaptured
depreciation with respect to the player contracts being
transferred is defined as the amount of depreciation deductions
allowed or allowable to the transferor with respect to such
contracts. Thus, this new paragraph provides generally for
the recapture as ordinary income on the sale of a sports
franchise of the greater of (1) the sum of the previously
unrecaptured depreciation and abandonment losses taken with
respect to player contracts which were acquired when the
seller initially acquired the team, or (2) the amount of
depreciation taken with respect to the player contracts
being transferred.
The provision relating to the allocation of purchase
price to player contracts is to apply to sports franchises
acquired after December 31, 1975. The provision relating to
the recapture of depreciation and abandonment losses is to
apply to the seller of a sports franchise which was acquired
by him after December 31, 1975.
The position of the Treasury Department with respect to
these and other provisions applicable to sales or exchanges
of professional sports teams which the Senate deleted from
the House bill has been that no special legislation is
necessary to curb any abuses which might arise. If the
purchaser of a team allocates an unrealistically high percentage
of the purchase price to player contracts or writes them off
over too short a period of time, such an abuse can be dealt
with administratively by the Internal Revenue Service as is
done in the case of such a misallocation in the context of
any other business property subject to amortization or
depreciation. Thus, the new rule limiting the amount of the
purchase
price
which
allocated
to
player
unnecessary,
the purchaser
although
to
the may
amount
not be
particularly
so allocated
objectionable.
by
the contracts
seller is by
- 6-
In addition, the new depreciation recapture rule,
providing for the recapture on the sale or exchange of a
sports franchise of previously unrecaptured depreciation and
abandonment losses taken on player contracts other than
those being transferred in the sale goes well beyond the
normal asset-by-asset depreciation recapture rules in the
Internal Revenue Code. There is no apparent reason for
isolating sports franchises for such special treatment.
In summary, we believe that any abuses which arise in
the context of the sale or exchange of a professional sports
team can be dealt with adequately at the administrative
level, and that no special tax legislation is required in
this respect. However, we have no strong objection to the
two new provisions in H.R. 10612 as agreed to by the conferees.
It has been a pleasure for me to appear before you
today, and I thank you for the opportunity.
IteDepartmentoftheTREASURY
WASHINGTON, D.C. 20220
|
TELEPHONE 964-2041
.
FOR IMMEDIATE RELEASE
September 15, 1976
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2,860 million of 52-week Treasury bills to be dated
September 21, 1976, and to mature September 20, 1977, were opened at the Federal
Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $5,420,000)
Price
High
Low
Average -
94.389
94.368
94.377
Discount Rate
5.549%
5.570%
5.561%
Investment Rate
(Equivalent Coupon-Issue Yield)
5.87%
5.90%
5.
Tenders at the low price were allotted 47%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$ 39,185,000
5,232,365,000
24,895,000
104,640,000
72,010,000
30,435,000
417,275,000
45,480,000
56,135,000
14,250,000
11,000,000
350,620,000
$ 6,655,000
2,657,035,000
1,895,000
4,640,000
29,465,000
9,135,000
74,245,000
17,715,000
14,135,000
7,195,000
3,000,000
36,110,000
TOTAL
$6,398,290,000
$2,861,225,000
The $2,861 million of accepted tenders includes $ 76 million of
noncompetitive tenders from the public and $948 million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities accepted at the average price.
An additional $ 50 million of the bills will be issued to Federal Reserve
Banks as agents of foreign and international monetary authorities for new cash.
WS-1084
DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220
ASSISTANT SECRETARY
September 16, 1976
Message to Treasury Employees
The recent death of Nathan N. Gordon, former Deputy to
the Assistant Secretary of the Treasury for Tax Policy, has
left me with a feeling of sorrow at the loss of a friend and
a respected colleague.
Nate Gordon retired from Treasury December 31, 1975
following a distinguished career spanning more than 25 years
as an economist in the tax policy area. For the last two
decades, Nate played a principal role in the tax treaty
program of the United States, and served as principal
representative of the United States in major international
fiscal organizations.
I knew Nate Gordon as a highly skilled treaty negotiator,
who exhibited both toughness and fairness, and whose sense
of humor often carried the day by lessening the tensions of
those on both sides of the bargaining table. The respect
and admiration of his colleagues both in the United States
and in other countries, as well as his significant contributions to tax policies, resulted in many honors. Among
these, the Treasury Department bestowed upon Nate Gordon the
"Meritorious Service Award", and the "Exceptional Service
Award". The French Government has named him an "Officier"
in the "Ordre Nationale du Merit".
Words can do little to assuage the grief of his family.
But there may be some comfort to be shared by the family in
the knowledge that Nate will be sorely missed and remembered
by his many friends at the Treasury Department.
Charles M. Walker
WS-1085
FOR RELEASE AT 4:00 P.M.
September 16, 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.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.
Attachment
WS-1086
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR NOTES
TO BE ISSUED OCTOBER 12, 1976
September 16, 1976
Amount Offered:
To the public
$2,500 million
Description of Security:
Term and type of security
5-year notes
Maturity date
November 15, 1981
Call date
• • • • No provision
Interest coupon rate
To be determined 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
May 15 and November 15
(first payment on May 15, 1977)
Minimum denomination available
$1,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by investor
None
Preferred allotment
Noncompetitive bid for
$500,000 or less
Deposit requirement
5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, September 28, 1976,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank within
FRB district where submitted
c) check drawn on bank outside
FRB district where submitted
Delivery date for coupon securities
Tuesday, October 12, 1976
Thursday, October 7, 1976
Wednesday, October 6, 1976
Tuesday, October 12, 1976
FOR IMMEDIATE RELEASE
September 17, 1976
DALE S. COLLINSON RESIGNS FROM TREASURY
TO JOIN NEW YORK LAW FIRM
Dale S. Collinson, Tax Legislative Counsel, resigned
his post September 10, 1976, to enter the private practice
of law as a partner in the New York City law firm of Willkie
Farr & Gallagher.
Secretary of the Treasury William E, Simon accepted
Mr. Collinson's resignation with a "sense of loss" and
noted Mr. Collinson's outstanding qualities "while serving
your country so well."
Referring to the Exceptional Service Award he presented
to Mr. Collinson, Secretary Simon noted that it indicated
the high esteem "which I, and the other members of the staff,
have for you.
In fact it is, if anything, an understatement
of the dedication, skill, understanding, and personal integrity
which you brought to your work here."
As Tax Legislative Counsel, Mr. Collinson played a major
role in the development of the Administration's tax cut
proposals of October 1975, and he represented the Administration during the Ways and Means Committee consideration of the
Estate and Gift Tax Reform Act of 1976. He also participated
in the Tax Reduction Act of 1975, and in the tax reform bill.
Prior to his appointment as Tax Legislative Counsel in
December 1975, Mr. Collinson served as Deputy Tax Legislative
Counsel (1975), Associate Tax Legislative Counsel (1973-74),
and Attorney-Advisor (1972-73) with the Treasury Department.
From 1966-72, Mr. Collinson was Assistant Professor and
Associate Professor of Law at Stanford Law School. From
1969-70, he was an associate in a Brussels, Belgium law firm.
WS-1087
-2Mr. Collinson, a native of Oklahoma, received an A.B.
degree (Summa Cum Laude) from Yale University in 1960, and
an LL.B. degree from Columbia University in 1963, where he
was Notes and Comments Editor of the Law Review. He and his
wife, the former Susan Waring Smith of Irvington-on-Hudson,
New York, have a son, Stuart.
#
#
#
TO BE RELEASED AT 7:00 P.M. EDST
ADDRESS BY THE HONORABLE WILLIAM E. SIMON
SECRETARY OF THE TREASURY
BEFORE THE
JOHNSON WAX GLOBAL MANAGEMENT CONFERENCE
WASHINGTON, D.C., SEPTEMBER 18, 1976
Thank you Sam, Mr. Martin, Distinguished guests, Ladies
and Gentlemen,
When your Chairman and Chief Executive Officer, Sam
Johnson invited me to speak at this conference I was delighted
to accept. I think we are fortunate indeed to have in
America a company of the calibre of Johnson's Wax, — a
company that believes that "its fundamental vitality and
strength" lies in its employees.
Thoedore Roosevelt once said: "The foundation stone of
national life is and ever must be the high individual character
of the individual citizen." This is as true of businesses
as it is of nations.
That is why it is a special pleasure for me to attend
this Global Management Conference of a corporate family that
has set an example of responsibility and high standards for
nearly a century.
For the past sixty years that example has been not only
national, but international in scope. Today, with 40 wholly
owned or controlled foreign subsidiaries, 12 manufacturing
distributors and 6,000 employees outside the United States,
Johnson Wax has a greater international presence than some
sovereign states. And with 50 percent of your corporate
sales and profits derived from your international activities,
you are almost as vulnerable to changes in the world economy
as many countries.
Before I go any further, let me tell you how favorably
impressed I am with the "This We Believe" statement that you
are considering at this conference. As an American corporation
with a major foreign presence, you have not only a narrow
business interest, but also a grave national responsibility.
Along with the thousands of other American business executives
WS-1088
-2serving overseas, those of you in Johnson's foreign operations
form a kind of unofficial American diplomatic corps. Your
standard of ethics — the corporate and personal principles
you work and live by - play an important role in shaping
what others think about America.... for better or worse.
And your "This We Believe" credo measures up to the highest
moral and ethical standards.
It isn't easy being a diplomat — much less being a
business executive at the same time. Yet, on the whole,
America's overseas executives have done an outstanding job
in the post-war era both as a major force in the economic
revival of western Europe and as pioneers in the economic
development of many struggling Third World nations.
Unfortunately, recent developments have shown us that a
few rotten apples can cause serious damage not only to the
American corporate image abroad, but to our country and our
people as well.
So the times demand an extra effort and an extra high
standard of conduct from the vast majority of decent, honest
American executives abroad — both as businessmen and as
unofficial representatives of our country.
The fact is that you have to do a little better than
many official diplomats. Official diplomacy, after all, is
sometimes a rather slippery business based on obscuring
rather than on clarifying goals and conduct. As one humorous
definition in verse puts it:
Diplomacy is to do and say
The nastiest thing in the nicest way...
(Isaac Goldberg)
Your job, on the other hand, is to conduct yourselves
as openly, honestly and efficiently as possible — to earn
the confidence and trust of your foreign hosts and customers,
and to make the American label, like the American flag, a
symbol of integrity, strength, decency, and progress.
We have seen what can happen when American business
forgets its ethical obligations overseas. And the results
have been not only economically damaging to the corporations
involved, but politically devastating to both America's
national interests and those of the host countries.
For this reason, I would like to spend my time with you
tonight in a brief economic review of where we stand as a
nation, domestically and globally, and then in discussing
-3-
/
icwith you the crucial question of business ethics, and their
importance in preserving our economic freedom at home, and
our economic vitality around the world.
A nation's foreign interests are determined by an
enormous range of consideration — political, military, even
emotional but today most of all, economic. And, in a free
country like ours, they are of vital interest to every
citizen in every walk of life.
While this has always been true, it is a far more
obvious and far more important fact of life today, in an age
that has both the greatest potential for human cooperation
and betterment — and the greatest potential for human
destruction — in the history of mankind.
Many of you are probably familiar with the old Chinese
curse: "May you live in interesting times." All of us, I
believe, would agree that, from an economic as well as a
political point of view, we have been living in particularly
interesting times lately. In the past few years the world
economy has sustained a number of severe jolts — a fourfold
increase in oil prices, large-scale money movements between
nations, collapse of the old monetary order, inflation and
recession. These have had an enormous impact on the economies
of developed and developing nations alike and fluctuations
in economic fortunes have led to changes, at times abrupt,
in the political fortunes of these countries.
The role of the United States in meeting these challenges
has been vital. A quarter century ago, it was commonplace
to observe that when the U.S. sneezed, the world caught cold
and when the U.S. caught cold, the world came down with
pneumonia, while that is no longer as true today as it was
then, we are still the major economic force in the world.
With less than 6 percent of the world's population we account
for over 25 percent of its annual production, and our exports
and imports each are running at over $100 billion annually —
more than those of any other single nation.
The health of the U.S. economy, then remains vital to
the economic health of other countries. And their political
and social stability depends in large measure on their
economic health. These past years have clearly demonstrated
to us and many others that no nation or group of nations can
solve their economic problems in isolation. We have witnessed
how inflation and recession affect us all. We have observed
that no country can achieve success by attempting to export
its economic troubles. And we have come to see that the
most significant contribution we can make to economic progress
in the world is to restore durable prosperity in our own
domestic economies.
-4For the United States this means, first, that we must
follow stable fiscal and monetary policies aimed at reducing
inflation and laying the foundation for durable, non-inflationary
domestic growth, and second, that we must translate these
same policies internationally to assure the existence of a
free and open world trade and investment order. That, it
must be recognized, will be America's greatest contribution
to world economic stability and — because the economy lies
at the heart of the body politic — a significant contribution
to world political stability as well.
;'n
At home, our economy is in the midst of a healthy and
balanced recovery;
-- Inflation has been cut more than in half since the
beginning of 1975^
— employment is at all-time highs;
— Industrial output, retail sales, the GNP, personal
income, the stock market have registered important gains.
And yet the decline in unemployment, though below its
recession high point, is irregular and far slower than we
are willing to tolerate. And inflation is by no means under
firm control and remains the most dangerous enemy of that
durable prosperity which we and all nations are seeking to
achieve.
The ruinous inflation that crested in 1974 was the
chief cause of the recession that followed. If we embark
once again on a course of excessive fiscal and monetary
policies, we will only rekindle another round of inflation
and an even worse recession.
In our own economic interest, and in the interest of
global economic stability, our first responsibility must be
to stand by economic policies that will ensure healthy,
balanced growth and prevent a resurgence of inflation.
Thus one of the biggest contributions we can make to
global economic health begins right here at home. We uphold
not only a narrow national interest, but the economic well
being of our neighbors and trading partners around the
world.
In determining our international economic policies we
must emphasize the same principles of open markets and
competition that have served America so well during its twohundred year history. Our current monetary and trade reform
-5efforts will shape the world economic system far into the
jfuture. We can either promote increased competition, the
reduction of tariffs and non-tariff barriers, equitable
trading rules and open access to markets and raw materials;
or, the world economy will develop unwanted cartels to
control prices and supplies, protectionism will once again
disrupt the flow of trade and capital, and instead of greater
international cooperation and shared progress, the world
marketplace will be plagued by negative conflicts and economic
stagnation.
In the area of international monetary affairs, the past
several years have shown progress and accomplishment. After
years of difficult and sometimes contentious debate, the
United States and other IMF member nations have reached
fundamental agreement on a comprehensive reform on the
international monetary system.
The new monetary system builds importantly on two
critical features of the Bretton Woods framework.
— First, the central, pivotal role of the IMF as the
institutional heart and monitor of the system will be
continued and strengthened.
— Second, the essential aims of Bretton Woods, which
give cohesion and direction to the philosophy of a liberal
world monetary order, will be reaffirmed.
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.
Inevitably, some of the features of a monetary system
designed to meet the problems of that world have been
rendered obsolete by today's changed conditions — when
world trade has grown by about 3000% since 1950 and capital
-6flows have reached proportions that would astound Harry
Dexter White, Lord Keynes and the other architects of the
old system. These same men would also be saddened by the
struggle of nations to get below double-digit inflation and
at the same time deal with the modern day twins of inflation,
and a high level of unemployment.
Bretton Woods was based on the idea that stability
could be imposed from without. Keynes, White, and their
followers 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 credit from the International Monetary Fund, that
arrangement would provide adequate leverage — at least on
deficit members — to encourage stable economic policies.
The system had an elegant symmetry but even in its
heyday it did not work as it was intended. Countries with a
balance of payments surplus were reluctant to permit their
currencies to appreciate. On the other hand, devaluation by
countries experiencing balance of payments deficits were
frequent and what was intended to be a system of symmetrical
adjustment became lopsided. The U.S. was at the center of
the system — pinned down. Other countries could adjust
exchange rates relative to the U.S., but we did not enjoy
the same privilege.
By the 1960's it was clearly demonstrated that the most
important single price in the U.S. was the price of the
dollar. The relationship of the dollar to other currencies
plays a significant role in determining what is produced in
the U.S. and what is produced elsewhere. Exports, imports,
location of production facilities, and capital flows are all
in varying degrees a function of the exchange rate.
Then, preceded by a series of exchange crises, hurried
conferences, makeshift remedies and a pervasive "Let's keep
a stiff upper lip attitude" the old system collapsed in
1971. The effort to put it back together failed and the end
occurred in 1973 when the dollar floated.
The new system takes a different approach. It does not
rely on the system to force stability on member countries.
Instead, it looks to the policies of member countries to
bring stability to the system. It acknowledges that we can
never assure lasting stability in exchange rates between
currencies if the underlying trends in various economies are
sharply different in pace or direction.
-7Just as the United States vigorously has supported
international monetary reform, we also support the continued
growth of a free and open world trading and investment
order. One of the most encouraging and significant postwar
'economic developments has been the dramatic expansion of
trade among market economies — from a level of $55 billion
in 1950 to over $1.6 trillion in 1975. We believe that in
strengthening these bonds of trade, we strengthen the bonds
of peace, understanding and interdependence.
The case for free trade is based on the general concept
of comparative advantage. Trade barriers typically reduce
or eliminate the exchange of goods that would benefit all
countries. Similarly, trade restrictions, which insulate
domestic producers from foreign competition, reduce the
pressures for controlling price increases and for stimulating
productivity.
Our trading system has recently undergone — and
survived — a massive ordeal by fire. In the wake of the
most serious economic problems in 40 years, inflation,
recession, the energy crisis and the other disruptions they
caused, neither we nor our trade partners resorted to potentially
disastrous dog-eat-dog, beggar-thy-neighbor policies.
This is an important accomplishment. We must build on
it and expand it as we move from a period of economic
recovery to a period of economic expansion.
The major thrust of U.S. trade policy as embodied in
the multilateral trade negotiation should be:
— To negotiate for more open access to markets and
supplies with emphasis on equity and reciprocity;
— To increase flexibility in providing escape clause
relief and adjustment assistance for American industries,
workers and individual firms suffering injury from import
competition ;
-- To diversify the types of actions the United States
can take in responding to unfair international trade practices;
— And to expand normal commercial relationships with
the non-market economies.
In summary then,
worked to create
can also help to
economic order.
the same economic principles that have
prosperity, stability and freedom at home
shape a freer, more prosperous and liberal
We desire a shared prosperity. That prosperity
-8can only come through increased flows of investment. Through
increased investment we achieve greater productivity and
through greater productivity we achieve a higher standard of
living for all.
As the nation that accounts for over one fourth of the
world economy, we have a special obligation to help others
to help themselves — in the marketplace and through the
strong support of international financial and development
institutions, in concert, not in competition with, the
private sector.
If we stand by these commitments, if we preserve and
expand a strong economy at home and continue to lead the
fight for a freer, more prosperous world economy, then what
was once called the American dream — the seemingly impossible
dream of a free, decent existence for all — can become not
only the dream, but the reality, of the entire human family.
But fiscal policy alone will not realize this noble
goal. There are other moral and ethical factors which
cannot be ignored if we are to succeed.
"Ethics" — even the word sounds stuffy and remote,
doesn't it? Yet, in a period when consumerism is foremost
in the public mind here and abroad, and when a new generation
is taking a second look at the economic system which many
of us take for granted, business ethics take on a new
importance.
Let me level with you. I'm worried. I am genuinely
concerned that, unless more of the leaders in the American
and international business communities start paying more
attention to the moral side of capitalism, capitalism
may be in very serious trouble.
It's quite true that only a very small percentage of
American businessmen engage in corrupt or unethical practices.
But the vast majority of honest business must recognize
that this tiny minority of spoilers is giving a black eye
to our whole free economic system — and providing the enemies
of our system with lethal ammunition.
Now I am well aware that for every business deception
and every corporate caper there are plenty of glib excuses.
Local customs, the need to cut corners, the belief that
"everyone else is doing it" — I'm sure you've heard them
all too.
Well, maybe I'm naive, but I don't buy any of them.
I still believe that honesty really is_ the best business
policy. It seems clear to me that corruption — whether
it involves questionable angling for overseas contracts,
illegal contributions to office holders, or any other form
of graft or payola — hampers the effective functioning of
the marketplace. It leads to higher prices, lessened
responsiveness to the consumer and lower quality of goods
and services.
-9It is the exact opposite of the capitalist ideal —
both the producer and the consumer.
for
So, when I begin to preach the gospel of business
ethics, believe me, I am preaching it for the sake of
business as well as ethics! To me, the two are inseparable.
The real question facing American business is not
whether it can "afford" stronger ethical standards, but how
much longer it can go on without them.
Our entire way of life is held together by voluntary,
society-wide bonds of mutual trust and respect. Once those
bonds are broken — once public confidence falls too low, as
the polls show it falling today — the whole social framework
collapses. And when that happens, it's all over for everything
government, democracy, free enterprise and our whole way of
life.
Now, let's ask ourselves — who has been undermining
public confidence in the free enterprise system that we all
believe in? Of course, some groups have always been opposed
to it. We take that for granted. They've always been
against it and always will be. But, in 200 years of American
history, they've never made much difference by themselves.
Our system really gets into trouble when its friends —
not its enemies — begin to sell it short.
And today, too many of the people you and I think of as
allies and fellow believers have begun to lose faith in
their beliefs. They say they believe in competition, but,
when government offers a subsidy, their competitive standards
go out the window. They say they believe in free enterprise,
but what they want most in the world is a secure, guaranteed
future.
As Adlai Stevenson once said, "... it is often easier
to fight for principles than to live up to them." Too many
leaders in American business have been talking a good fight
but — when it comes to the basics — have abandoned their
moral values for quick, easy profit.
Now that may work for a while. But it won't work
forever. The day will come when it's all over — when the
same government that has given you security takes away your
independence.
There's a very simple but very timely old Roman proverb.
It says that "A good reputation is more valuable than money."
That's an old idea, but, like so many eternal truths, it has
-10its modern application. Stanley Marcus, the grand old man
of Nieman Marcus, put it this way in his memoirs, "There is never a good sale for Nieman-Marcus, unless it's a good buy ^
for the customer."
Isn't that what capitalism is all about? ^ The age-old ^
struggle within the ranks of free enterprise has not been
between capitalists and communists. It has been, and is, p*
between honest businessmen who recognize the ethical, and
utilitarian, basis for sustained prosperity and those who
lose sight of it in pursuit of a fast buck.
Your firm has always taken the honest, honorable road —
which is also the realistic road. Besides producing good
products at good prices, Johnson Wax has also benefited
education, the arts and the humanities. You are part of
this wonderful human force — something bigger than individuals
and bigger than political theories — that we call free
enterprise. And you have helped to bring a better way of
life to millions of Americans, and millions of others
around the world. I believe in what you are doing — in
your code of conduct and the way you live up to it.
This great but sometimes confused nation of ours was
born in turmoil. Conflict and doubt are nothing new to us.
They didn't stop us 200 years ago and they shouldn't stop us
now. It is no accident or blind fate that has made America
so rich and abundant a land. You can't legislate inventiveness
or prosperity, we have no more born geniuses or natural
inventors and industrialists than any other country. But we
do have a free system in a world where many other countries
are not free. And, through-it, we encourage the talent that
lies within individuals in a way that most other societies
have failed to do.
The result has been not just profits for the few, but a
better and freer life for the many. Isn't that the acid
test — the bottom line — of so much of the idealogical
argument and speculation going on today? Compare the systems ours works. And, in large measure, it works because of
people like you, working for companies like yours — people
who believe in the value of a service or product but, even
more importantly, believe in the value of a way of life that
is uniquely American.
My time in government will soon be over. Some months
ago I decided that, regardless of the outcome of the election,
I will return to private life in January.
-11Many things helped me to make up my mind, but the
biggest reason of all was my growing conviction that it is
the private sector that makes our country what it is.
Don't get me wrong. I don't regret a moment of the
time I have spent in government. It's been a very rich and
rewarding experience.
While I have a few scars to show for
some of the stands I have taken, I'm grateful for the chance
I had to take those stands and serve my country.
But the more I have seen of government, the more I
recognize the limits of what it can do for people — as
opposed to what it can do to them.
Government can change the law, but it cannot change
human nature. Government can impede or ease the way for
individual initiative. But only the individual himself can
create, can change, can brave new horizons.
More than anywhere else, that is what happens here in
America. Our greatest progress has come through individuals
not through voter blocs or special interest groups. It
happens in company offices like yours, in schools and labs
and libraries across this great land of ours where, every
day, individuals with a better idea are solving problems and
creating new opportunities.
What we call the American experience — the American
story — is the sum total of those individual contribution.
And each of us is a small but important part of it. That,
more than any great document or charismatic leader, is what
sums up the true meaning and purpose of America. And that
is what we must preserve.
Thank you.
#
#
#
IMMEDIATE RELEASE
MONDAY, SEPTEMBER 20,1976
The Treasury Department and the Federal Reserve
System today announced arrangements with the Government
of Mexico whereby short-term drawings up to $600 million
will be available to the Bank of Mexico to counter
disorderly exchange market conditions during a transitional period pending the receipt of medium-term financing
from the International Monetary Fund. Drawings under
these arrangements will have maturities of up to 90 days.
Of this amount, and at the option of the Government
of Mexico, the Federal Reserve System will make available
amounts repaid in advance of maturity under the existing
Federal Reserve System reciprocal currency arrangements
up to $180 million.
The remaining amounts will be made available by the
Treasury through the Exchange Stabilization Fund under
swap arrangements.
#
WS-1089
#
#
September 20, 1976
MEXICO ISSUES STATEMENT ON
FINANCIAL ARRANGEMENTS WITH
UNITED STATES-IMF
The Mexican Secretary of Finance and the Bank of
Mexico have agreed with the International Monetary Fund,
the United States Treasury and the Federal Reserve System
to obtain substantial resources in support of the program
to adjust the balance of payments announced September 1
by President Luis Echeverria.
The Managing Director of the IMF, Mr. Johannes
Witteveen, addressed a letter to the Secretary of Finance
of Mexico, informing him that he finds adequate and correct
the Mexican Government's economic program that was evaluated
by an International Monetary Fund Mission in order to deal
with the balance of payments problems on the basis of a
realistic exchange rate and free convertibility and
transferability of the Mexican peso. The Managing Director
of the Fund will present and recommend to the Executive
Directors of that institution the use of the Fund's resources
by Mexico for the objectives above-mentioned for a sum that
can reach approximately $1.2 billion.
On its part, the U.S. Treasury and the Federal Reserve
System today signed with the Government of Mexico and the
Bank of Mexico agreements for a total of $600 million to be
repaid upon receipt of the IMF credit tranche drawings in
order that the Bank of Mexico can deal with unforeseen and
disorderly situations in the exchange market for the Mexican
peso. These resources are additional to the Exchange
Stabilization Fund swap agreement
of $300 million, which
# # #
«»
is now in force between the above-mentioned institutions.
FOR RELEASE UPON DELIVERY
STATEMENT BY THE HONORABLE GERALD L. PARSKY
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION AND FINANCE
HOUSE COMMITTEE ON INTERSTATE
AND FOREIGN COMMERCE
TUESDAY, SEPTEMBER 21, 1976, 9:30 a.m.
Mr. Chairman and Members of the Subcommittee:
I appreciate your invitation to present my views
on H.R. 14581 which was introduced by the Chairman and
is under consideration by the Subcommittee today.
Mr. Chairman, since the first revelations of illicit
payments abroad by American corporations, both the
Executive Branch and the Congress have been actively
involved in determining the scope of the problem and
exploring possible solutions to it. As a result, the
President has proposed legislation which would supplement
the effective work that is already being done in this area
by a number of U.S. Government departments and agencies.
Although some disagreement remains as to the most effective approach to remedy abuses in this area, all parties
share a determination to take effective action.
WS-1090
- 2Illicit payments are ethically abhorrent and undermine the functioning of a competitive free enterprise
system. When the major criterion in a buyer's choice of
a product is the size of a bribe rather than its price
and quality and the reputation of its producers, the
fundamental principles on which a market economy is based
are put in jeopardy. More specifically, the result has
to be higher prices and lower quality of goods and services to the consumer. Moreover, illicit payment practices can seriously distort international trade and
investment flows and contribute to a general deterioration
in the climate for fair and open international trade and
investment. Finally, our bilateral relations with other
governments often are adversely affected by revelations
of illicit activities by American firms in t:heir countries.
In short, there is no question that rigorous action is
needed to minimize these damaging practices.
Enforcement of Existing Law
In considering the most effective approach to the improper payments problem, we have kept in mind that there
is a substantial basis in existing law for effective action
by the U.S. Government. Moreover, the history of recent
actions by the Securities and Exchange Commission, the
- 3Internal Revenue Service, the State and Defense Departments,
and other departments and agencies is evidence that these
laws are being vigorously enforced.
The Internal Revenue Service, as part of its longstanding effort to reveal corporate tax fraud, has attempted
to uncover improper deductions of illicit payments for
tax purposes. In August of last year, the Service issued
instructions to its revenue agents which make it mandatory
for them to interview selected corporate officers and key
employees regarding the use of "slush funds" and other corporate schemes used to circumvent the tax laws. They also
provide for use of the IRS Office, of International Operations to examine the books and records of U.S. companies
abroad.
Established audit techniques, however, are frequently
not sufficient to uncover illegal payments because they are
usually handled in "off-books" transactions. Accordingly,
these instructions were supplemented earlier this year by
new guidelines that require revenue agents to ask eleven
specific questions of selected corporate officials and
request attestation of the responses by the corporation's
accounting firms. Those selected for questioning are
present or former officials that might be aware of the possible misuse of funds within their respective corporations.
- 4This latter measure has proven to be an effective audit
technique in detecting "slush fund" issues. As of June 30,
1976, the IRS used the eleven-question procedure in almost
2,000 cases (1,982) and identified the "slush fund" issue in
126 cases, many of which also were reported to the SEC.
The IRS is proceeding to determine the tax impact of these
payments to insure that every corporate taxpayer is properly
reporting its taxable income and claiming only those deductions permitted by law. In the process, some of the cases
will undoubtedly prove not to have been improper from a
tax liability point of view. The IRS is continuing vigorously to pursue this effort.
Pursuant to the International Security Assistance and
Arms Export Control Act of 1976, the State Department, in
consultation with the Department of Defense, has developed
proposed rules on the subject of agent's fee and political
contribution reporting in international arms sales. These
rules would require reporting on political contributions
and fees or commissions paid, or offered or agreed to be
paid, in connection with both governmental or commercial
sales of defense articles or services abroad. These regulations are proposed to become effective on October 1, 1976.
The Securities and Exchange Commission has also played
a particularly active role in this area through its
- 5 administration of laws that mandate full and fair disclosure of material facts concerning the business operations
of companies which are subject to the reporting requirements
of the Federal securities law. You have heard Chairman
Hills' report this morning, so I will comment only briefly
on SEC activities in this area.
Under these laws, the SEC has taken vigorous action
to discover illicit payments and to require public disclosure of material facts relating to them. It has instituted injunctive actions against a number of corporations
which have resulted in settlements with the corporate defendants. These defendants have been enjoined from further
violating the Federal securities laws and have been required
to establish special review committees to conduct full in-
vestigations of the irregularities alleged in the Commission's
complaint. This has been supplemented by a voluntary disclosure program under which a company which determines that
it may have violated existing laws, may discuss the matter
with the Commission's staff and commit to subsequent steps
to disclose its improper activities and to insure that such
practices are not repeated.
In a report it released last May, the Commission provided a detailed analysis of the disclosures U.S. firms
had made regarding their questionable or illegal payments,
under the voluntary program and as a result of SEC action.
- 6 Of the 95 companies that had made such disclosures up to
that time, 66, or more than two-thirds, were engaged in
manufacturing.
Broken down by industry, the two largest
groups were drug producers and firms involved in petroleum
refining and related services, accounting for 12 enterprises
each.
Thus, judging from the cases exposed so far, the in-
dustries that have been making questionable or illegal payments seem to be widely dispersed, so that there is no
basis for pointing a finger at any one industry.
Since that
report, some 90 additional firms disclosed instances of
questionable payments, bringing the current total to about
200 firms.
On the basis of the SEC analysis, cis well as other information, it appears that the vast majority of American
business is honest and ethical.
The evidence of corporate
wrongdoing simply does not indicate that illicit foreign
payments is a general practice uniformly followed by U.S.
businesses operating abroad.
Although I do not wish to
minimize the seriousness of the problem, the situation can
be put in the proper light by noting that the approximately
200 firms come from a total of more than 9,000 that regularly
file with the Commission.
The same point can be made if we
look at this figure in relation to the 1700 U.S. firms with
direct investments overseas valued at more than $2 million
each that report to the Commerce Department or the 20,000 or
so U.S. firms involved in exporting overseas.
- 7 Only a relatively few firms appear to have engaged
in making questionable payments abroad. The vast bulk
of our firms conduct their businesses ethically and
completely in accord with the laws of the United States
and their host countries. We should not let the activities
of a minority of U.S. firms operating abroad cast doubts
on the nature and conduct of U.S. business generally.
International Actions
In addition to vigorous enforcement of existing
domestic laws, the United States is also taking initiatives
in international organizations with the objective of
obtaining agreement for cooperative action among governments to deal with this problem. In our view, cooperation among governments is essential if we are to make
any real progress in eliminating improper practices from
international commerce. U.S. Government agencies are
taking effective action to deal with this problem
domestically, and we believe that the legislative proposals
that the Administration has made will greatly strengthen
our capabilities in this regard. But action by the
United States alone is not enough. American firms are
not the only ones who have engaged in improper practices
in international commerce. Moreover, bribery is a
- 8two-way street, and it must be deterred at the receiving
or soliciting end as well as at the source.
In March of this year, the United States proposed
that a comprehensive international agreement be negotiated
to curb corrupt practices in international commerce.
Our proposal was welcomed by many governments which share
our views about the need for effective international
action to deal with this problem. Last month the U.N.
Economic and Social Council took action to advance our
proposal by establishing an intergovernmental working
group on the problem. The group is charged with examining
the problem of corrupt practices and elaborating in
detail "the scope and contents of an international
agreement to prevent and eliminate illicit payments ...
in connection with international commercial transactions."
The first meeting of this group is scheduled for early
next month, and it is expected to report back to the
ECOSOC at its session next summer.
Also, in June the member governments of the
Organization for Economic Cooperation and Development
approved Guidelines for Multinational Enterprises which
included a provision on ethical conduct suggested by
the United States.
- 9 Administration Proposal
In March 1976, as you know, the President established
a Cabinet-level Task Force on Questionable Corporate
Payments Abroad to conduct a coordinated review of these
activities and to recommend any new actions it might
consider necessary. The Task Force — of which Secretary
Simon is a member and active participant — first undertook an exploration of the nature and extent of the
illicit payments problem as well as a review of the
activities of the U.S. Government agencies that were
dealing with it. On the basis of that investigation, we
then proceeded to refine and eventually present to the
President a number of options for measures to supplement
those already underway.
On June 14, 1976, the President announced that he
had directed the Task Force to prepare legislation that
would require reporting and disclosure of certain payments
made in relation to business with foreign governments.
The Task Force subsequently drafted legislation, the
Foreign Payments Disclosure Act, which the President
transmitted to Congress on August 3rd.
The bill requires reporting to the Department of
Commerce of certain classes of payments made by U.S.
businesses and their foreign subsidiaries and affiliates
-10-
in relation to business with foreign governments.
It
covers a broad range of payments relating to government
transactions, as well as political contributions and
payments made directly to foreign public officials.
We believe that this measure will contribute
in an important way to the restoration of confidence
in America's vital business institutions. It represents
an effective response to the problem of questionable
corporate payments abroad as it will help deter (1)
American corporations and their affiliates from making
improper payments in international commerce and (2)
foreign parties from seeking such payments. Furthermore,
it would allow the United States to present an example
both to the American people and to foreign countries
with regard to our determination to deal effectively
with this problem. We anticipate that in doing so it
would help to restore the damage that has been done to
the good reputation of American business.
The Administration has also announced its support
for legislation originally proposed by the Securities and
Exchange Commission and since incorporated in Senator
Proxmire's bill, S. 3664, and in the legislation before
us today, H.R. 15481. Insofar as this legislation would
11 -
improve the internal reporting and accountability of
registered firms, it should strengthen considerably
the Commission's capability to deal with the problem of
questionable payments by such firms.
Comments on H.R. 15481
In considering the options for action in this area,
the Task Force identified two possible legislative
approaches which appeared to offer the greatest potential
for enabling us to deal effectively with the questionable
payments problem — a reporting/disclosure requirement
and criminal sanctions. After carefully considering the
advantages and disadvantages of each, we concluded that
the reporting/disclosure option represented the most
effective approach. Accordingly, the legislation that
the Administration has proposed is based on that concept.
By contrast, H.R. 15481 — the Senate version of which
passed last week — would make certain foreign payments
criminal under U.S. law.
Rather than comment on this legislation on a sectionby-section basis, I believe it to be more useful for me
to discuss with you the general reservations we had about
the criminalization approach. in essence, we have the
following concerns with this approach:
- 12 -
1)
It would involve substantial extraterritorial
application of United States' law which could
evoke adverse reactions from foreign governments;
2) it would be particularly difficult to enforce; and
3) the criminalization approach solves only part
of the foreign payments problem in that it
fails to provide an effective sanction against
those who solicit bribes abroad.
1. Extraterritorial Application: Any attempt to apply
a U.S. criminal statute to acts consummated abroad would
involve an extraterritorial application of U.S. law.
While there are no absolute legal prohibitions on such
extraterritorial application, attempts by the U.S. to
a
PPly
our
anti-trust and export control laws in a
similar way have created substantial problems in the
past. The application of our law abroad often conflicts
with foreign laws or practices and is looked upon as an
unwarranted intrusion into the sovereignty of other
states. The history of the extraterritorial application
of our laws shows all too clearly that foreign nations
may react strongly when we attempt to enforce our laws
- 13 with respect to acts consummated in their territories.
It can be expected that similar reactions would
be forthcoming in the present instance.
2. Enforceability: In addition, the prosecution of
offenses would depend upon our access to information,
witnesses, and other evidence which may be beyond the
reach of U.S. judicial processes. In a criminal bribery
action, the intent of the payor, and possibly the payee,
would have to be proved. Proving intent is usually
difficult and would be particularly difficult where the
payee resides outside of the United States and is not a
U.S. citizen. Furthermore, the probable sensitivity of
other nations to possible extraterritorial application
of U.S. criminal sanctions may reduce their willingness
to cooperate in any prosecutions.
3. Coverage: This approach would enable us to solve
only half the problem insofar as it involves action
solely against those who make questionable payments.
As I indicated earlier, we need to get at the receiving
or soliciting end of the problem as well. The criminalization approach does not do this.
- 14 -
For these reasons, Mr. Chairman, we believe that the
Administration bill, S. 3741, offers a more effective
means of dealing with the questionable payments problem.
It does not involve the potential difficulties that the
bill before you today does.
Conclusion
In closing, I would add that, while we in the
Government condemn questionable payments and have been
actively searching for solutions to deter them, we
remain firm in the belief that the private sector has a
basic responsibility to come to grips with this problem.
It is a fact, unfortunate but true, that some corporations
have engaged in questionable payments. However, their
actions color the views of the public and possibly
foreign governments about the vast majority of the members
of the American business community who are honest businessmen and would never engage in such acts. Thus, American
business at large is denied the good reputation it
deserves because of the improper activities of only a
few of its members.
Given this situation, not only is it a moral imperative for the majority of American businessmen to act to
- 15 try to combat improper activities by those in their midst,
but also it is in their practical interest to do so. One
obvious solution is for them to make sure that their own
houses are in order, by instructing their employees or
their representatives overseas to guard against engaging
in improper practices. But this is not enough. We
believe — and Secretary Simon and I have emphasized this
repeatedly over the past year — that it is incumbent
upon all businessmen to speak out for good ethics in
business and for the business community as a whole to
take effective action to govern itself.
In this respect, the International Chamber of
Commerce has provided a good example in establishing its
Commission on Unethical Practices — a distinguished
panel of leaders in international business — to develop
guidelines for promoting ethical and proper conduct in
international commercial affairs. We certainly look
forward to receiving its findings and recommendations.
Here in this country, the U.S. Chamber of Commerce has
issued a forthright statement condemning improper payments
and making the case for ethical business practices.
Finally, a number of individual firms have taken action
internally to insure that their business affairs are
conducted in accordance with sound and ethical precepts
- 16 and publicly stated their determination to adhere to
such standards.
Such action is a clear indication that individual
enterprises and business organizations alike recognize
that they have an important responsibility. There is a
need to take further action that will convince the public
both here at home and abroad that American business is
honest. The^takes are high and the consequences of
inaction are serious. I do not believe that it would
be an overstatement to say, in fact, that not only their
individual interests but also the vitality of our free
enterprise system are at stake.
mental theJREASURY
, D.C. 20220
TELEPHONE 964-2041
September 20, 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 September 23, 1976
were opened at the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing December 23, 1976
High
Low
Average
Price
Discount
Rate
98.736
98.728
98.729
5.000%
5.032%
5.028%
Investment
Rate 1/
5.13%
5.17%
5.16%
26-week bills
maturing March 24, 1977
Discount
Rate
Price
97.364 a/
97.348
97.353
5.214%
5.246%
5.236%
Investment
Rate 1/
5.43%
5.46%
5.45%
a/ Excepting 1 tender of $3,500,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted 38%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
. Received
|
Boston
$
31,530,000
New York
3,700,235,000
Philadelphia
21,315,000
Cleveland
31,435,000
Richmond
20,995,000
Atlanta
23,090,000
Chicago
256,420,000
St. Louis
54,135,000
Minneapolis
24,855,000
Kansas City
26,575,000
Dallas
29,045,000
San Francisco 183,215,000
TOTALS$4,402,845,000
Accepted
$
Received
\
Accepted
16,530,000 .:$
26,450,000 $
11,450,000
1,870,950,000 : 4,453,050,000
2,802,050,000
20,765,000 :
8,800,000
8,800,000
30,310,000 :
63,940,000
13,940,000
15,845,000 :
17,975,000
7,475,000
19,320,000 ::
15,215,000
15,030,000
31,475,000 :
298,915,000
103,855,000
27,720,000 :
42,545,000
20,545,000
6,855,000 :
37,310,000
21,810,000
23,050,000 :
18,145,000
18,145,000
16,045,000 :
25,150,000
14,910,000
22,190,000 :
222,265,000
64,165,000
$2,101,055,000 W$5,229,760,000
$3,102,175,000 c/
b/ Includes $325,175,000 noncompetitive tenders from the public.
c/ Includes $ 162,675,000 noncompetitive tenders from the public.
1/ Equivalent coupon-issue yield.
WS-1091
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 September 30, 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 July 1, 1976,
and to mature December 30, 1976
(CUSIP No.912793 D7 8), originally issued in
the amount of $3,402 million, the additional and original bills to be freely
interchangeable.
182-day bills, for $3,400 million, or thereabouts, to be dated September 30, 1976
and to mature March 31, 1977
(CUSIP No. 912793 F4 3).
The bills will be issued for cash and in exchange for Treasury bills maturing
September 30, 1976, outstanding in the amount of $5,703 million, of which
Government accounts and Federal Reserve Banks, for themselves and as agents of
foreign and international monetary authorities, presently hold $2,778 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, September 27, 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
o
WS-1092
(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.
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 September 30, 1976, in cash or
other immediately available funds or in a like face amount of Treasury bills
maturing September 30, 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 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
September 21, 1976
RESULTS OF AUCTION OF 2-YEAR TREASURY NOTES
The Treasury has accepted $2,503 million of $5,224 million of
tenders received from the public for the 2-year notes, Series R-1978,
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.27% 1/
Highest yield
Average yield
6.32%
6.30%
The interest rate on the notes will be 6-1/4%. At the 6-1/4% rate,
the above yields result in the following prices:
Low-yield price 99.963
High-yield price
Average-yield price
99.870
99.907
The $2,503 million of accepted tenders includes 33% of amount of
notes bid for at the highest yield and $ 407 million of noncompetitive
tenders accepted at the average yield.
In addition, $681 million of tenders were accepted at
yield price from Government Accounts and Federal Reserve
own account in exchange for notes maturing September 30,
and from Federal Reserve Banks as agents for foreign and
monetary authorities for new cash ($355 million).
1/ Excepting 1 tender of $10,000
WS-1093
the averageBanks for their
1976, ($326 million)
international
STATEMENT OF JOHN WEBSTER
SPECIAL ASSISTANT TO THE SECRETARY OF TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
OF THE
HOUSE COMMITTEE ON WAYS & MEANS
SEPTEMBER 21, 1976
4r. Chairman and Members of this Distinguished Subcommittee:
_ I am pleased to have the opportunity to meet with you regarding
the implementation of the Treasury Department's Consumer Representatio
Plan. As you know, I have just assumed the position of Special Assista
to the Secretary for Consumer Affairs and may not be able to deal with
all of the detailed aspects of the plan's development and last year's
activities. Fortunately, Mr. David Lefeve, my predecessor, has agreed
to join me today and we hope that together we can give you an adequate
ifeel for the effectiveness of consumer representation at Treasury.
Let me explain at the outset that I am in this job as a Presidential
Interchange Executive on leave from IBM. The Interchange program arran
)for' managers from both the public and private sectors to work in the
opposite sector for a year to gain mutual understanding and appreciati
for one another's areas. Upon selection to the program, we participate
in a series of interviews designed to match our skills and interests w
the needs of participating departments and agencies.
In view of Secretary Simon's intention to return to private life
a
t the end of the calendar year, Treasury decided to again seek an
Interchange Executive to fill the Special Assistant's position.
- 2 -
This has the advantage of allowing the new Secretary complete freedom
in choosing a full-time Special Assistant who would not be inconvenien
by the transition.
While Mr. Lefeve and I will be happy to answer any questions you
may have, I would like to briefly share some of my early thoughts
about consumer representation at Treasury, as well as some of my
immediate priorities.
First, it is clear from my short time on the job, that Treasury
decisions are guided by a management philosophy which stressses the
importance of free markets and intense competition both domestically
and internationally.
Unfettered by responsibility for "special interests", Treasury is
free to represent the economic public interests', which provides a
supportive environment for beginning my year of consumer representatio
I have had the opportunity to review Treasury's existing consumer
plans and in my opinion it is both workable and strong. It avoids
rhetorical claims about the multitude of existing consumer programs,
and instead zeroes in squarely on the need to plug the consumer view
into the decision-making process. It is workable because it places
responsibility where it must be—in the hands of the Secretary and his
bureau and office heads; and it backs up the responsibility with
mechanisms for enhancing their awareness of consumer interests. Those
'mechanisms are the Special Assistant to the Secretary for Consumer
Affairs and Consumer Coordinators located in each bureau and office.
\
- 3 -
It is a strong plan because it has the support and full commitment
of the Secretary.
The Special Assistant reports directly to the
Secretary and his Deputy and attends his daily staff meeting of senior
Treasury officials.
Perhaps the greatest evidence of the Secretary's
commitment to consumer representation is his support of the Special
'Assistant's right to oppose him publicly if circumstances warrant
such action.
Although I am unable to anticipate all of the specific issues
which will require
my attention during the year, I can spell out a
few of my immediate priorities.
They include:
A detailed review of the current plan with all Treasury
consumer coordinators to determine its
suitability as an operational guide for the entire
department.
Individual meetings with all top level Treasury officials
to review pending actions and plans that may impact
the consumer.
A review of the current procedures for holding public
hearings with special emphasis on expanding the
public's opportunity to "meet with Treasury".
Establishment of contact with key elements of the
Public Interest community to encourage their input
on Treasury-related consumer issues.
- 4 -
A thorough review of existing advisory committees to
determine the adequacy of consumer representation.
I look forward to representing the consumer interests at Treasury
and am convinced that the basic ingredients for a successful plan are
present. They include top-level commitment, top-level accountability,
and a vehicle for top-level awareness. The task before me now is one
of picking up where Mr. Lefeve left off—by operationalizing
and fine tuning the plan in preparation for turnover to a full-time
consumer representative.
I will be happy to answer your questions at this time.
eDepartmentoftheTREASURY
HINGTON, D.C. 20220
TELEPHONE 964-2041
FOR IMMEDIATE RELEASE
STATEMENT OF DAVID MOSSO
FISCAL ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY OF THE
HOUSE COMMITTEE ON BANKING, CURRENCY AND HOUSING
WEDNESDAY, SEPTEMBER 22, 1976, 9:15 A.M.
Mr. Chairman and Members of the Committee:
I am pleased to appear in support of H.R. 14848, which would extend
until October 31, 19 78, the existing authority of the Federal Reserve Banks
to purchase directly from the Treasury up to $5 billion of public debt
obligations. In the absence of Congressional action, this direct-purchase
authority will expire at the end of October 1976.
The purpose of the direct-purchase authority is to contribute to the
efficient management of the public finances. It was first granted in its
present form in 1942, and it has been renewed for temporary periods on
nineteen separate occasions. The authority lapsed on three occasions in
recent years—from July 1 until August 14, 1973; from November 1, 1973 until
October 28, 1974; and from November 1 to November 12, 1975. In some cases,
these lapses traced to unrelated and controversial amendments which had
been attached to the borrowing authority bill. The authority itself has
never been controversial.
Since 1942, the authority has been used on only a limited number of
occasions. However, its value does not rest on the frequency or extensiveness of its use, but its availability as a backstop for Treasury cash
WS-1094
- 2 -
and debt operations, permitting more economical management of our cash
position and assuring our ability to provide needed funds almost
instantaneously in the event of any kind of emergency. During the
periods when the authority was not available, the Treasury had to maintain
higher cash balances, and a higher public debt, than would otherwise have
been the case.
The direct-purchase authority is available to provide an immediate
source of funds for temporary financing in the event of a national
emergency on a broader scale. During emergencies, it is possible that
financial markets would be disrupted at a time when large amounts of cash
had to be raised to maintain Government functions. Consequently, the
direct-purchase authority has for many years been a key element in all of
the Treasury's financial planning for a national emergency. This is a
major reason why the authority should be continued for at least $5 billion,
even though $1.3 billion is the largest amount that has ever actually been
used in the past.
The Treasury Department views the authority as a temporary accommodation
to be used only under unusual circumstances. In that connection, it is
important to emphasize that any direct recourse by the Treasury to Federal
Reserve credit under this authority is subject to the discretion and control
of the Federal Reserve itself, with that safeguard, and in view of the
fact that the authority has never been abused, the Department recommended a
five-year extension, to October 31, 1981. As introduced, however, H.R. 14848
- 3 -
provides for a two-year extension—to October 31, 1978, which we understand
reflects the position of your Committee. The Department would prefer
the longer authority and believes that it can be justified in terms of
its limited use, but in view of the Committee's position we do not object
to this change in the Treasury draft bill.
The accompanying table provides details on the instances of actual
use. The borrowings are promptly shown in the Daily Treasury Statement
and the weekly Federal Reserve Statement, assuring the widespread
publicity that is the best possible deterrent to abuse. The Federal
Reserve also includes the information in its Annual Report to the
Congress. And, of course, this borrowing, like other Treasury borrowing,
is subject to the debt limit.
As an essential backstop to our cash management operations and as
an insurance policy against financial emergency, this authority should
not be allowed to expire.
That concludes my statement, Mr. Chairman. I will be glad to
respond to any questions.
oOo
Attachment
TABLE I
DIRECT BORROWING FROM FEDERAL RESERVE BANKS
iiiSS
"
1942: TO DATE
Calendar
Year
Days
Used
1942
1943
1944
1945
1946
1947
1948
1949
19
48
none
9
none
none
none
2
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
2
4
30
29
15
none
none
none
2
none
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
none
none
none
none
none
none
3
7
8
21
1970
1971
1972
1973
1974
1975
1976
none
9
1
10
1
16
none
Maximum Amount
At Any Time
(Millions)
$ 422
1,302
Number of
Separate Times
Used
Maximum Number
Of Days Used At
Any One Time
4
6
4
28
2
2
4
2
2
1
2
9
20
13
169
153
596
1,102
1
3
3
2
3
3
6
12
610
38
485
131
1,042
1
1
3
1
4
7
1
6
1
7
484
220
180
320
811
1,172
424
207
Office of the
Fiscal Assistant Secretary
September 20, 1976
GOLD MARKET REPORT
TO THE
UNITED STATES DEPARTMENT OF THE TREASURY
by
Thomas W. Wolfe
Consultant
TREASURY DEPARTMENT
September 1976
• The attached report on the gold market was prepared for the
Treasury by Thomas W. Wolfe.
This study was undertaken by Mr. Wolfe, under contract with
the Treasury, to provide basic information on the functioning
of the world's major gold markets, including a review of trends
in the production and utilization of gold.
Before his retirement from public service, Mr. Wolfe was
Director of the Office of Domestic Gold and Silver Operations,
which administered the Gold Regulations of the Treasury. These
Regulations were terminated, under law, on December 31, 1974.
Mr. Wolfe's report contains the results of his independent
study and is not a report of the Treasury reflecting Treasury
Department views or policy.
Gerald L- Parsky
Assistant Secretary for International Affairs
Report on the Production, Marketing and Use of Gold,
Including Recommendations
on the Disposition of U. S. Gold Stock
by
Thomas W . Wolfe
Consultant
I.
The Context
II. The Production and Use of Gold
III. The Gold Supply - Demand Outlook
IV. The Gold Market
V. Government Gold Stocks
VI. Summary of Conclusions and Recommendations
that is not ultimately subject to market determination.
The bulk of the current PoU! suPPl> * P-^uccd by private entrep.-.„,m- v.ho are c o n c e n t witl. return .<:, capital investment, ,a,c
,,,,,. ami union contracts, market prices, .merest rates - the same
,„,,„,,„,* that eeneern bnsmessmen produem, other basic commou.t.es
T H E PRODUCTION, M A R K E T I N G A N D USE O F G O L D
The Context
A rational analysis and evaluation of the functioning world gold
market and the supply-demand-price outlook for gold should begin
from four basic assumptions: (1) the price of gold must ultimately
be determined by the cost of production, including allowance for return
on capital, and the demand curve of industrial consumers; (2) the
entire stock of gold, above and below ground, is in process of ultimate
conversion into end products whose economic value exceeds that of the
raw material; (3) all of the existing above-ground stock of gold bullion
-- including government reserves -- is, by definition, held for
speculative motives, apart from a minimum level of industrial inventories and the small portion of government stocks that might be justified
as a strategic industrial reserve; (4) rational holders of gold will sell
or not sell at any given time depending on the relationship between the
present price, the interest cost, and the expected range of future prices.
The above assumptions are obvious to some, absurd to others, *
but are simply truisms that apply to all world mineral resources that
exist in finite quantity. Gold will only be produced -- whether by stateowned or private enterprise -- if there is an expectation that the selling
price will exceed production costs in real terms. This has been true
in the past, is true now, and will continue to be true in the future.
There is no intangible or mystical value of gold or any other commodity
that is not ultimately subject to market determination.
The bulk of the current poU1 suppl> i* produced by private cntrepr.-jH'urr v. ho arc concerns! will, return on capital investment, wa-e
rates and union contracts, market priors, interest rates -- the same
problems thai concern businessmen producing other basic commodities.
2! -
O n the d e m a n d side industrial buyers or gold -- tbe mainstay of the
m a r k e t — are concerned with price, cost of possible substitutes, and
*narket d e m a n d for the products they sell. T h e r e is, of course, s o m e
price speculation by those holding a temporary interest in gold on
futures exchanges and elsewhere, just as there is on other c o m m o d i ties. In short, in its basic market aspects the price of gold is determined in the s a m e w a y as the price of other commodities.
The great increase in the volume of gold traded through private
markets in recent years and the institutional structure of the market
that has evolved reflects a changed situation. Only a decade ago
practically all world gold m o v e m e n t s w e r e directly or indirectly under
the control of the monetary authorities of a relatively few countries.
N o private gold bullion market of any consequence existed anywhere^
T h e major world central banks had a virtual monopoly on the world gold
trade including sales for industrial use. In recent years all that has
changed. T h e central banks no longer play a significant direct role
in the world gold market. Virtually all gold production m o v e s directly
to end use or to non-government temporary holders through the structure
of the private market. In the changed order of things governments w h o
hold gold in the form of "official" reserves are both conceptually, and
as a practical matter, in the s a m e boat with private gold holders. T h e
two-tier concept has passed into history and all producers, holders,
and users of gold are now, willy-nilly, part of the market process and
subject to its constraints and decisions.
One obvious conclusion immediately evident from the basic change
In the international structure of gold trading is that the price will be
that required to "clear11 the market, to balance supply and demand over
the long run. T h e price of gold -- like other world-traded commodities
— can be extremely volatile over the short run depending on various
temporary factors. But in a free market over the longer run (and in
the long run all markets are "free") the price of gold will be determined
by the profit to producers relative to alternative uses of capital on the
(1)
one band, end market demand for industrial use* ' on the other. H o
rational producer — public or private — will mine gold if the required
capital resources can more profitably be employed elsewhere. fJo ~
rational investor or speculator (the terms are interchangeable) will
bold gold unless the expected monetary return in real terms is at least
equal to alternative investment choices. And no rational commercial ..
user will buy gold unless it can be converted into a product which can
be sold at a profit in a competitive market. Taken together these three
fundamental factors mean that over time the price of gold will be
determined by the cost of production, including allowance for return
on capital, and the demand curve of consumers.
*!)The definition of industrial use in this report is a comprehensive one
including all purchases of bar gold for resale in other than bullion or
bullion coin form.
- 4 -
T h e Production and Use of Gold 1850-1975
A n historical overview
The production of gold in large quantities is a relatively recent
historical development. About 80 per cent of all gold production has
been mined since 1900 and nearly half of the total in the past 30 years.
In the entire history of gold production and use, three dates are particularly significant: 1849 when the California discovery began a long
era of large-scale gold production; 1933 when the coinage of gold in
quantity ended and gold ceased to be. a circulating monetary instrument;
and 1968 when the two-tier market effectively ended the international
gold standard and m a d e private gold trading at flexible prices first __
possible.
The great expansion of world gold production in the latter half
of the 19th century created a surplus sufficiently large for practical
use as coin in the world's circulating m o n e y supply. However, the
rapid rise in commercial needs during and after World W a r I outpaced
the available new supply of gold and compelled the phasing out of gold
as a circulating monetary instrument. The halting of open convertibility
by the United States in 1933 marked the practical end of the monetary
gold era. N o gold coins were minted anywhere for general circulation
after that year.
Although the surplus supply of gold was no longer sufficient for
general monetary use, the limited amounts in official stocks were
considered adequate for use as reserves in settling international balances.
The international gold exchange standard was formalized in the Bretton
W o o d s Agreement at the end of World W a r II. Under this arrangement
all currencies were in theory convertible into all others at relatively
fixed exchange rates with gold as the c o m m o n denominator for measurement. F o r the system to function, at least one country had to serve
-S-
as a link between other currencies and gold, with unlimited buy-sell
convertibility into gold at a fixed price. A s the wealthiest country at
the time, the United States volunteered to take on the job. T h e
arrangement continued through the 1960's, when a diminishing gold
reserve finally forced the United States in 1971 to resign from its
kingpin role. Since no other country w a s willing or able to take on
the job, %he international gold exchange standard c a m e to an end.
1850-1933
. Until well into the 19th century gold was an exotic mineral rare
enough to sustain a consistently high market value, although its
practical use w a s limited to decorative purposes. Gold was not available in sufficient quantity or with enough regularity of supply to function
as the basis of any organized monetary system. P r o m the beginning
of recorded history until 1850, total world gold production is estimated
at less than 150 million ounces' \ In the United States less than 2
million ounces of gold w a s produced during the entire period from 1792
until 1849
. O f this limited gold production only a minor portion was
retained in unencumbered government reserves, practically all of it
was held by individuals in the form of jewelry or coins.
In the middle of the 19th century the gold supply-demand situation
suddenly and drastically changed. -With the successive discovery of
new fields in California, Australia, Alaska and South Africa, the production of gold accelerated rapidly. F r o m 1850 until 1933 world gold.
production totaled over 900 million ounces, a third of which was produced in the United States. T h e great bulk of this gold production was
converted into coin, mainly by Great Britain and the United States.
Nearly 350 million ounces was minted into British sovereigns and some
(2)Annual Reports of the Director of the U. S. Mint.
220 million ounces into U.S. coins. T h e minting of gold coins by
other countries is estimated at about 150 million ounces.
For most of this period the rising supply of gold was sufficient
to keep pace with an expanding world economy. Although the relationship between gold supply and transaction needs w a s largely coincidental,
it gave impetus to establishing gold coinage as the basis for most of
the world monetary system. During and after World W a r I, world
economic activity accelerated rapidly and it became evident that the
new supply of gold at a fixed price was no longer consistent with money
supply needs. B y 1933 the coinage of gold had ended and gold ceased
to be a significant part of the world's circulating money supply.
Considering the supply-demand status over the entire period from
1850, when large-scale gold production began, to 1933 when its general
monetary function effectively ended, one important factor seems
obvious. T h e price of gold could not possibly have been maintained at
the established level over this long period in the absence of strong and
consistent government support — mainly by Great Britain and the United
States, the two countries which acquired and converted into coin most '
of the world's gold production until 1933. T h e open coinage price was
at a sufficient premium over production costs to encourage an expansion
of gold output while discouraging m o r e widespread commercial use.
The long period of government price-fixing created an illusion —
which to s o m e extent still persists -- that the price of gold is inherently
stable and i m m u n e from market cost factors that affect all other commodities. If the policy of unlimited government purchases at a price
well above production costs had not been adopted, gold after 1850 would
probably have behaved m u c h like silver, with new production sources
rather quickly dropping the price to marginal production cost levels.
1934-1967
F o r o v e r a century prior to 1933 a few world powers — mainly
Great Britain and the United States — pegged the price of gold at an
arbitrary fixed level substantially above production costs through open
and unlimited coinage of practically all gold production. F o r most of
this period general price indexes were rising relative to gold so that "~
the profits of gold producers, while substantial, were gradually narrowing. B y the 1920's the profit squeeze w a s taking effect and world gold
production w a s showing signs of levelling out. In 1929 commodity
prices began a deep slide. Gold alone had government price support
and gold producer profits again widened. B y early 1933 the real price
^ of gold w a s close to its historic high, m o r e than 50 per cent above the
1929 level.
In a series of actions beginning in March 1933 and ending in
January 1934, \he United States Government, for domestic policy
reasons, raised the already high gold price support level by an additional 60 per cent in current dollars. The hope was that the higher gold
price would stimulate a comparable rise in the depressed level of other
commodity prices and an expansion in domestic production.
Although the arbitrary increase in the support price of gold had
little effect on economic activity in general, it had a substantial and
prolonged impact on the production and industrial use of gold for the
next three decades. T h e 1934 gold,price, in real terms nearly.2 1/2
times the level of the 1920's, triggered an expansion in gold production
which carried into the 1-960's.
-
World gold production rose from 25 million ounces in 1933 to
nearly 40 million ounces in 1939. Restrictions on production during
World W a r U together with rising costs curtailed gold output which by
1945 had dropped to just over 26 million ounces. In the 1950»s another
surge in gold production began which reached its peak in 1970 when
world output exceeded 47 million ounces.
8-
T h e post-war rise in gold production was almost entirely concentrated in South Africa. F r o m 1947 to 1970 South African annual
gold output increased nearly three-fold from 11 million to over 32
million ounces. T h e large-scale development of new mining sources
in South Africa during a time of rising gold production costs and a fixed
market price w a s in large measure due to a plentiful supply of relatively
cheap labor. In other parts of the world gold production generally
declined.
To understand the impact of the price of gold on mining production and industrial use from 1934 to 1967 one needs to examine not the
unchanging dollar price, but the price in real terms, in constant dollars.
It is the real price of gold that determines the profits to investors, the
return to producers, and the relative profitability of gold for industrial
use compared with possible substitutes.
•
From 193.4 through 1967 the market price of gold was pegged at
$35 per ounce in current dollars, apart from a few minor and temporary
deviations. But the price of gold in real terms behaved very differently.
In 1934 the constant dollar gold price was m o r e than double the 1929
level and far above the index of related metals. In addition to stimulating
a long expansion of gold production, the high support gold price reduced
the net industrial use of gold almost to zero. F r o m 1934 until 1940
industrial gold purchases in the United States were actually negative,
that is new bullion purchases were Jess than the return from old scrap
material.
From the high point in 1934, the real price of gold began a steady
decline which w a s not halted for s o m e 35 years. By early 1970 the
price of gold in constant dollars had declined about 75 per cent from 1934.
The decline in the real gold price was reflected in the trend of
private demand. During the 1930's and 1940's the cumulative total of
government gold purchases, mainly by the United States, to support the
9-
price w a s nearly equal to total world production. Industrial demand
and speculative private investment were negligible factors.
During the 1950's the proportion of gold production acquired by
governments w a s gradually reduced and industrial demand rose steadily
until a temporary balance between gold production and private demand
was reached by the mid-1960's. T h e rise in industrial gold purchases
during this period w a s spectacular, increasing nearly three-fold between
1950 and 1965. B y the late 1960's industrial demand for gold was close
to 40 million ounces a year, approximately equal to total mine production in the non-communist world. A s a result, the historic government
floor price support for gold that had resulted in a long build-up of
official stocks turned into a price ceiling - - a development that was
inevitable at s o m e point in time. Gold was no longer profitable to produce but was increasingly attractive for industrial use. The traditional
government subsidy to gold producers had become a subsidy to industrial users.
By 1967, a continued rise in the general price level reinforced the
general belief that a fixed price for one commodity such as gold could
not long be maintained. Speculative buying increased and for the first
time in history large government gold sales were required to hold the
price at a level considered appropriate for the international exchange
standard but which had become totally inconsistent with the economic
realities of gold production costs *and industrial demand.
1968-1975
March 17, 1968 is perhaps the key.date in the relatively brief
bistory of gold as a significant part of the world monetary system.
On
that day in Washington the monetary officials of seven major industrial
powers issued a communique announcing a halt to their efforts to peg
the price of gold by purchases and/or sales through the London gold
pool. Henceforth, the price of gold for private trading would be free
10-
to seek its o w n level as determined by supply and demand in the world
market. Although official dollar-gold convertibility by the United
States continued until August 1971 and s o m e minor de jure details still
remain to be cleared up, M a r c h 17, 1968 marked the de facto end of
the international gold exchange standard and the beginning of the first
free private gold market in m o d e r n history.
—
The end of official efforts to peg the market price of gold was in
retrospect inevitable. T h e price of gold like other commodities must
ultimately be determined by the interplay between production costs
and its market value in terms of economic use. T h e high government
support price of gold, well above production costs until the 1950's,
masked this truism and created the illusion that the price of gold was
distinct from all other commodities and could be indefinitely determined
by monetary authorities entirely according to monetary considerations.
In fact, the high official support price for gold required the governments
of the world, for over a century, to buy and hold the great bulk of
total gold production. During this period the official price of gold in
effect constituted a subsidy for producers and a penalty for industrial
users.
*
B y the 1950's and m o r e clearly in the 1960's as general prices
and production costs continued upward, this situation was gradually
reversed and the traditional government support price for gold became
a price ceiling. Gold producers were now the recipients of the government penalty and industrial buyers and consumers benefited from the
subsidy. A substantial portion of world gold production could be maintained only by government financial assistance. At the s a m e time, the
arbitrary price ceiling and the declining price of gold in real terms
resulted in a rapid rise in industrial gold purchases from just over 13
million ounces in 1955 to 43 million ounces in 1970.
As would be expected, the growing imbalance between the basic
supply and demand for gold at the arbitrary ceiling price put increasing
- 12 -
authorities of the world could work out a more practical and lasting
solution to the gold problem.
«
The immediate effect of the end of official intervention was to
permit gold to be traded in the world market under essentially the same
institutional practices and procedures in effect for similar commodities
such as silver or platinum. The development of the new gold market
will be discussed in more detail later but at this point it is sufficient
to note that it had its beginning on March 17, 1968.
Contrary to general expectations, the ending of official intervention in the private market was followed by a three-year period in which
the price of gold remained relatively stable. In March and April 1968
the gold price rose rather quickly to the $40 range and in general varied
4
between $35 and $40 until the end of 1971. During this period several
major factors which tend to raise or lower the gold price were more
or less in balance. The major depressants on the price were the large
overhang of speculative holdings acquired in 1967 and early 1968; continued large gold production, and a moderate world recession in 1969
and 1970. These down factors were largely offset by strong industrial
gold demand, and a virtual halt to Soviet sales throughout this period.
In 1972 the four-year period of relative price stability in the world
gold market came to an end. T h e basic supply, demand and environmental factors which were conduciye to a flat price trend since early
1968 had substantially changed. Gold production which had peaked in
1970, began a long decline, influenced by the prolonged depression in
the real gold price as well as depleted below-ground reserves. By 1972
gold production had declined by nearly 15 per cent with even larger
reductions in sight, for the years ahead. Ax the same time low gold
prices relative to other commodities stimulated continued strength in
industrial demand which was now in excess of gold production. And
finally, the large overhang of speculative holdings, acquired prior to
March lOGT. had in large measure been worked off.
- 13 -
About this time most of the world economies entered a period
of economic expansion and 6trong price inflation. The prices of
virtually all world-traded commodities rose sharply to unprecedented
levels and gold w a s no exception. T h e gold price rose to the $65 range
in mid-1972, to $120 in 1973 and finally topped $170 in early 1974.
But it should be emphasized that while the changing gold price w a s .
loosely associated with various monetary influences during this period,
its over-all rise w a s not appreciably out of line with changing prices
in related commodities. All commodity prices rose and gold was part
of the general picture.
.However, the behavior of the gold price through most of 1974
•cannot be attributed to either basic supply-demand factors or general
commodity price inflation. While the trend of gold production continued
downward, the rate of decline was not greater than in earlier years.
Moreover, industrial gold consumption, which remained strong through
1972, dropped sharply in 1973 and 1974 due both to high prices and the
inventory risks created by wide swings in the price. The electronics
industry in particular explored ways to reduce gold use and substitute
cheaper metals wherever possible. And finally for most of the world •
economy 1974 was a time of recession with a shortage of demand rather
than supply the major problem.
Despite the general economic slowdown and evidence of weakness
in most commodity prices, the price of-gold surged to a new high,
briefly topping $190 at the end of 1974. In retrospect it seems evident
that the inflated gold price in the latter half of 1974, counter to the
trend in other commodity prices, was largely if not entirely due to a
single cause, i. e., a widespread miscalculation over the expected impact of the lifting of restraints on gold ownership in the United States.
In anticipation of strong American investor demand, gold bullion inventories were increased and speculative buying accelerated abroad. In
January 1975 the expected demand did not materialize and the price of
gold dropped sharply. A key factor generally overlooked by participants
14-
in the 1974 speculative surge w a s the de facto ending of U.S. gold
ownership restraints in December 1973 when the purchase of bullion
coins w a s first authorized. In 1974 Americans acquired over 3 million
ounces of gold in coin form and this proved to be a fairly accurate
measure of the extent of non-industrial gold demand.
In general, 1975 was a year of correctional adjustment in the gold
supply-demand situation. T h e long decline in world gold production
continued but at a slower rate. Encouraged by improved economic
conditions and lower gold prices, industrial demand showed a substantial Increase, particularly after mid-year. However, the price of gold
continued to ease and did not react to a temporary surge in other commodity prices in June and July.
The continued gold price weakness in the face of more bullish conditions can be attributed to a remaining overhang of speculative
holdings, the U:S. Treasury sale at mid-year, and the anticipation of
I M F and possibly other official sales in 1976 and beyond.
- 15 -
Gold Production in the Soviet Union
Under a widely accepted convention of statistical presentation,
gold production in the Soviet Union is customarily excluded from or
shown separate from production elsewhere. This custom is mainly a
matter of expedience. Soviet data on gold production and stocks are not
readily available and estimates of net sales in the world market are
considered to be somewhat more reliable. The net Soviet sale figure
is added to gold production in the rest of the world to arrive at the total
market supply. Net gold purchases or sales by other governments m a y
be a component of supply or demand depending on how the plus or minus
sign is applied.
•
Actually there is no sound economic reason for according Soviet
gold production and sales special treatment. Gold producers in the
Soviet Union are subject to the same capital needs and cost factors as
*
producers elsewhere. The myth that Soviet producers do not need to
turn a profit is just that - - a myth. It is simply a matter of definition.
Soviet gold output must ultimately be sold in a competitive market. If
the resources needed to produce it can more profitably (with greater
econpmic return) be used in other ways they will be.
As far as can be determined the bulk of Soviet gold production
over the past 30 years has been sold in the world market. Apart from
somewhat greater irregularity, Soviet gold marketing concepts and
procedures are not appreciably different from other major producers.
All producing entrepreneurs -- government or private, large or small -have occasional urges to outguess the market by building speculative
stocks, invariably wi'Ji adverse results. Fortunately most private gold
producers have a-limited capacity to do this, so the potential losses
are minor.
ii
i
i. ,,,,,1 iiiit •snviet rnud p r o d u c t t o n
Estimates var\ but it is generally believed that bo\n i ^ • I
• 16 -
has been rising and is now probably close to 10 million ounces a year.
Soviet gold stocks are thought to be in the neighborhood of 100 million
ounces. O v e r the past five years Soviet gold sales are estimated to
have averaged close to 6 million ounces a year.
The Soviet Union is on the average, a high-cost gold producer —
largely because of adverse climate conditions. Over the next few years
Soviet gold production is expected to show a further rise, with emphasis
on investment in m o r e temperate climate areas. Like other producers,
they will be assessing trends in supply, demand and price, and their
conclusions will have an impact on the future trend of Soviet gold production.
But whether or not Soviet gold output rises it seems reasonable
to assume, given the over-all economic situation, that their annual gold
sales over the next five years will be similar to those over the last
five years, i.e., about 6 million ounces.
-17r
The Gold Supply-Demand Outlook
Overview
In 1976 there are clear indications that the adjustment period
necessary to correct the gold supply-demand imbalances of 1973-1974
i6 coming to an end. Industrial gold demand, which had dropped
sharply because of high and uncertain prices, recovered strongly in
1975 and is doing even better in 1976. Industrial buying, at over 30
million ounces a year and rising, is now probably in approximate
balance with world gold production outside the Soviet Union. With
economic recovery accelerating in most of the world, it seems probable
that industrial gold demand over the next five years will substantially
exceed current gold production.
World gold production outside the Soviet Union has steadily
declined from about 4l million ounces in the peak year of 1970 to an
estimated 30 million ounces in 1976. The reduction in the market supply
in the form of gold bullion bars has been even greater because of the
substantial diversion of gold production into coins in recent years. The
production of gold coins, which was negligible prior to 1973, now
averages from 7 to 9 million ounces a year. Annual non-Soviet gold
production available for industrial use is, therefore, probably less than
25 million ounces, well below the most conservative estimates o£
industrial demand. The prospective supply deficiency at the present
price level provides room for a reasonable volume of gold sales from
the Soviet Union, the IMF, and other government sources in 1976 and
beyond with no resulting decline in the real price over the long run.
Production
World gold production rose steadily after World War U. leveled out
in the late 1960»s, and since 1970 bas shown a substantial decline.
• 18 -
World Gold Production
{Millions of Ounces)
1950
1955
1960
1965
1970
1975
South Africa
Soviet Union
Other Countries
Total
11.7
14.6
21.4
30.6
32.2
22.8
3.6
3.5
4.1
S.O
6.5
9.0
13.0
12.3
12.3
10.6
8.8
7.4
28.3
30.4
37.8
56.2
47.5
39.2
The reduction in the annual amount of gold bullion bars sold in the
world market since 1970 has been even greater than the decline in total
production- The difference is due to the much larger volume of gold
coins produced in recent years. From 1933 through 1968 gold coin
production was negligible. In 1970 not much over a million ounces of
gold production was diverted into coins. By 1975 this total had increased
to 7 million ounces. It is estimated that the supply of gold bullion bars
on the market in 1976 will total about 25 million ounces, exclusive of
sales by the Soviet Union and the IMF, compared with estimated indus(3)
trial demand of 35 million ounces. x ' The apparent 10 million-ounce
supply deficiency is assumed to be offset by a combination of Soviet and
IMF gold sales.
The world gold supply from all sources -- including sales from
official stocks -- appears now to be in approximate equilibrium with
demand for industrial bars and gold coins. There is very little speculative buying of bar gold. The current situation is, therefore, useful as
a base for assessing the short and long run outlook for the supply,
demand and price of gold as well as the factors which influence changes
in mining production and industrial use.
In common with other minerals, gold in its natural state tends to
(3)
'U.S. Treasury Department staff paper.
•19-
be concentrated in pockets or "reserves" throughout the world, typically
below ground, in varying accessibility and extractable at varying costs. "
The greater part of these reserves have, in broad terms, been identi- ;~
fied and classified according to estimated amounts and production costs.
What will be done with them is a matter of basic economics. The key
consideration being that below ground gold anywhere will be extracted
and processed into a marketable commodity only when and if it can be
sold in a competitive market at a price that exceeds production costs,
including an adequate return on capital. Capital resources will be
•directed into new gold production only if the expected range of future
prices indicates the investment will be profitable.
On the demand side, gold will be bought by industry only if it can
be used in products that can be sold at a profit in a competitive market.
»
Capital resources will be directed into gold using industries only If
expected future prices will allow for profitable operations.
There are, of course, other considerations which make the relationships between costs, price and gold production imprecise in the
short run. Closing down and reopening a mine can be an expensive
process. There is, therefore, a tendency for mineral producers to
keep mines operating for a reasonable time during loss periods if there
i6 an expectation that the cost-price ratio will turn favorable. If the
cost-price ratio does not improve sufficiently the producers obviously
must at some point cease operations.. Prior to World W a r II, California,
Colorado, and Alaska were important gold producers. In the 1930's,
gold was even profitably mined in the suburbs of Washington, D. C.
• These operations ceased because they were no longer profitable.
The evaluation of eurreni and prospective production costs and
market prices is a continuing process by all gold producing units as well
as by the governments directly concerned.
I nder provisions of the
Mineral.-, Policy .Act" o: 1»70, liie U.S. bureau of Mines is required to
make periodic long-range estimates of the world supply and deman 1 for
-20 -
a broad range of minerals, including gold, under various supply-price
assumptions. In its most recent estimate the Bureau concluded that
the mining of about 1. 3 billion ounces of below-ground gold reserves
is economically feasible at prices up to $200 an ounce (in 1974 dollars).
At higher prices a larger total could be mined profitably. At lower
prices the amount of extractable reserves would be less. The geographical distribution of these reserves in millions of ounces is as
follows:
Estimated Below-Ground Gold Reserves
(Millions of Ounces)
Republic of South Africa
USSR
United States
Rest of the World
800
200 -.
120
200
1,320(4)
The total remaining below-ground gold reserves are about matched
by the approximately 1. 3 billion ounces held in the vaults of governments
and international agencies:
Government Gold Stocks, June 1975
(Millions of Ounces)
u. s.
IMF
West Germany
France
USSR
Switzerland
Italy
BIS
Other Countries
<4
275
153
118
101
100 Est.
83
82
6
361
' 1,280
*U.S. Bureau of Mines: Mineral Industry Yearbook, 1
-21 -
-And finally, non-government gold holdings in coin, bullion and
other non-fabricated form, are estimated at about 500 million ounces.
The estimated breakdown of non-government gold holdings exclusive
of fabricated products is about as follows:
Estimated Private Gold Stocks, December 1975
(Millions of Ounces)
":
Coins
Private bullion holdings
Industrial inventories
400
75
25
500
*
Combining the three components, a reasonable estimate of the
total of all world gold reserves, below and above ground, is about 3
billion ounces. Collectively, this is the world's total supply of gold
and all of it can be presumed to be in process of conversion into final
consumption however far into the future the end result m a y be.
In addition to global estimates of workable gold reserves under
various price assumptions, a relevant current market factor is the
separate estimates by individual producers and would-be producers
that comprise the global figure. Comprehensive data on current gold
production costs and private projections of reserves and future costsare not readily obtainable. However, there is enough data available
to form general conclusions on the current cost picture and to hazard
4
a few conclusions on future supply-price trends.
m -
Two-thirds of the free world's gold supply is produced in South
Africa by privately owned companies operating in the expectation of
making a reasonable return on their capital investment. Decisions on
whether to expand operations or indeed whoilier to continue operating
at all are based on a contmuinp assessment of production cost, and
market prices.
In 1 07e, 3'! operating mines in South Africa produced about 'J'J
-22-
million ounces of gold. Working costs at the various mines, according to data from the Chamber of Mines, ranged from $32 to $199 per
ounce of gold with a weighted average cost of about $73 per ounce.
Adding in capital costs would increase this average figure by about
15 per cent although capital outlays will, of course, vary greatly from
mine to mine.
_
Of more immediate relevancy is the proportion of current production with costs approaching or above the current price. Seventeen
mines with about 20 per cent of the total South African output reported
working costs in 1975 in excess of $100 an ounce. Eight mines with
about 7 pe*r cent of total output required State financial aid in 1975
despite an average gold price for these mines of about $137.
i In December 1975, the U.S. Bureau of Mines completed a study
comparing production costs at three representative gold mines: the
Carlin mine, an open-pit operation in Nevada; the Homestake mine,
an underground operation in South Dakota producing 300-400, 000 ounces
a year; and the Kinross mine, a producer of similar size in South
Africa. T w o methods were used to derive comparable costs: (1) use
of company reports on sales of gold and net income, and (2) a financial
computer program simulating each operation using production data
and estimated capital and operating costs to compute depreciation
depletion, taxes and the price required to generate sufficient revenues
to obtain 0, 12 and 20 per cent rate of return on the invested capital.
The results of the study are shown in the following table.
-23 -
Summary of the Prices, Incomes, and Costs
of the
,.»
Carlin, H o m e stake, and Kinross Operations
(2)
Method 1. Use of company annual report data
Carlin Homestake Kinross
Sales price*3* $164.93 $157.85 $163.46
Less net income
67.96
53.67
56.02
Company cost deductions*4* $96.97 $104.18 $107.44
Method 2. Computer simulation to compute price to generate sufficient
revenues to obtain the indicated DCFROR..
Price© 0% ROR*5* $ 45. 31 $91.12/90. 36*6) $132.97^
Price® 12% R O R
48.64 94.64/94.77
Price® 20% R O R
51.60 96.95/97.86
138.57
142.77
^ A l l values in 1974 U.S. dollars per troy ounce gold.
Source: 1974 company annual reports.
*3*Sales price derived from total revenues of gold sales divided by total
ounces of gold sold.
*4*Cost deductions include all operating costs, depreciation depletion,
exploration, research, interest expense, taxes, and miscellaneous
costs.
5
* *These prices are sufficient to 'generate revenues to pay taxes, return
the investment, and return a profit if R O R is greater than 0.
*6)Values preceding the slash were obtained by expensing all estimated
capital costs and including these costs as operating costs. This
includes mine equipment replacement. Values following the slash
were obtained by capitalizing these estimated capital costs.
<7)
Computer routine adjusted to delete depletion, investment tax credit,
local taxes and to accommodate annual tax value listed m available
data.
Source: U.S. Department of the Interior, Bureau of Mines.
-.24-
Gold production costs have risen substantially in recent years.
M u c h of this increase is due to higher labor costs, particularly of
black workers whose wage rates have quadrupled over the past three
years. Increases in production costs at the various mines in 1975
varied from 16 to 30 per cent. Comparable increases are expected
in 1976.
In addition to higher costs for labor and capital equipment, the
substantial reduction in recovery grade in recent years has been an
important factor in raising working costs per ounce of gold produced.
Since 1970 annual ore production has remained relatively stable at
about 75 million tons. But the amount of gold obtained from the ore
milled has declined from 989 tons in 1970 to only 708 tons in 1975.
In part this was a planned reduction in recovery grades in keeping with
normal practice at higher gold prices required by the South African"
Government. * But the lower recovery rate is also due to a steady
depletion in the richer ores at m a n y of the older mines, a trend which
will continue in the years ahead.
Cost pressures on the producing mines have been somewhat
eased by the recent devaluation of the rand which has improved the
gold producer's cost-price ratio. But this is only a temporary palliative. In the longer run devaluation of the local currency tends to
increase domestic inflation which will worsen the cost problem for gold
producers.
There is no reason to expect that the producer cost situation in.
other non-Communist countries is materially different from that in
South Africa. The annual amount of such production has been declining
for years and now totals only about 7 million ounces. Gold production
* Much is made of this point in analyses of gold production trends. But
since the nominal gold price only changed once in two centuries prior to
1968, the practice is certainly not deeply rooted in tradition.
-25 -
in the United States is down to about a million ounces a year, nearly
half of which is a by-product of other metals. Most of the remainder
is from relatively high-cost deep mines. Homestake mine, the largest
American gold producer, reports production costs per ounce as very
close to the current market price and rising steadily. In Canada the
picture is m u c h the same. Most of the Canadian gold output is from
deep mines and working costs per ounce are estimated to be predomi
nately in the $120-130 range.
Among the world gold producers, only the Soviet Union has increased output in this decade. Although no precise figures are available, current Soviet gold production is considered to be increasing and
m a y now be in the area of 10 million ounces a year. A large proportion of Soviet output is placer gold mined from surface deposits.
Ordinarily this tends to be relatively low-cost production but the difficult
terrain and weather conditions under which the gold is produced probably
m a k e working costs at best comparable to western mines. A s elsewhere, h u m a n and capital resources in the Soviet Union are limited
and gold production is not likely to expand unless the cost-price ratio .
is favorable compared to other investment alternatives.
While there are ambiguities in gold production cost data and comparisons between geographical areas cannot be precise, one general
conclusion seems clearly evident. The cost of producing gold everywhere has risen sharply in recent' years, is now pressing against the
market price, and is certain to continue rising over the foreseeable
future. Setting aside for the m o m e n t the disposition of above-ground
stocks, this trend must ultimately force increases in the market
price unless offset by one of two possible; offsetting factors, both extremely unlikely. T h e first would be a major adverse shift in the industrial demand curve for gold. The second would be the discovery of a
massive new underground gold reserve. There are no present indications that either of these possibilities will occur.
-*6-
In a competitive market, a rational gold producer, whether
in South Africa, South Dakota, or Siberia, will mine gold in as m u c h
quantity as possible as long as the market price exceeds marginal
production costs. If production costs and/or market price turn
adverse, the m o r e costly operations will be curtailed until the mine
is once again profitable at the margin. If no combination of ore grade
and production volume covers working and capital costs the mine will
close down.
If producers had instant availability of correct data and perfect
flexibility in resource use, responses to cost-price changes would be
immediate. In practice of course such perfection is never achieved.
Shifts in production in response to imperfect data can be costly. The
expense of closing down and re-opening a mine is substantial. There
is therefore, a tendency to maintain production under adverse conditions in the hope that the situation will improve. Also governments are
prone to subsidize deficit operations for reasons more political than
economic, m o r e fanciful than real.
*
These factors tend to slow the response of gold producers to
changing market conditions, but they do not negate the ultimate effect
of market reality. Production costs and market prices for any commodity cannot be out of line for very long. Assuming a normal demand
curve, an across-the-board rise in production costs will ultimately be
reflected in a higher market price, temporary declines notwithstanding.
In various assessments of the current state of the gold market
and future price movements great emphasis is frequently given to the
changing attitudes of so-called "speculators and investors" -- a supposedly
volatile group whose changing m o o d can m o v e the gold price sharply
in either direction. But an objective analysis of the historical record
indicates that this belief is simply one of m a n y modern economic myths.
Over the past two centuries speculation in gold has been a significant
factor in the market in only two brief periods -- a few months prior to
- 28 -
Industrial Demand
The industrial demand for gold is usually classified in three
categories: (1) jewelry in a variety of forms, (2) dental products, and
(3) other industrial use, primarily electronics but including substantial
amounts for insulation and decorative use. Industrial buying is the
mainstay of the gold market averaging over 85 per cent of total private
demand since 1970. Any judgment of future demand for gold must,
therefore, be based primarily on the composition of industrial demand
and its response to price developments.
World industrial demand for gold rose steadily from the end
of World W a r II until the early 1970's. Stimulated by a declining real
price and an expanding range of new technical uses, industrial goldbuying more than tripled from 1950 to 1970. In the years 1970 through
1972 industrial gold demand was substantially in excess of total mine
production in the non-Communist world. The gold price surge and unsettled market conditions in 1973 and 1974, -together with a general slowdown in the world economy, resulted in a sfrarp cut-back in industrial
gold demand. The drop in industrial gold-buying was magnified by a
concurrent reduction in industrial gold inventories.
r
In 1975 with lower gold prices, more stable market conditions,"
and an improved world economy, industrial gold demand recovered
sharply. The rise in industrial buying has continued into 1976. A recent
Treasury staff study cited elsewhere estimates industrial gold demand
in 1976 at 35 million ounces -- a figure very close to'current world
gold production including the Soviet Union. -If allowance is made for
a diversion of 5 to 7 million ounces of annual gold production into coins,
the supply of gold:from current production'is now insufficient to
satisfv market demand at the present price lo\el in the absence of
supplementary nc:t sales from govv.-rr.ment stocks.
A further comment at this point on the demand for gold coins
-.29 -
might be helpful in defining the current market. Public buying af g#ld
coins ranges from very limited issues of artistic merit at a price
substantially above the value of the gold content to the so-called bullion
coins available in whatever quantity the market demands at only a
slight p r e m i u m over the gold content value. T h e first category is
generally conceded to be a form of gold consumption not very different
in concept from gold jewelry. T h e latter category is usually considered
as a form of gold speculation or investment, akin to a purchase of
bullion. Indeed, for anyone wishing to hold physical gold for whatever
purpose, bullion coins are probably as good a way to do this as any
other.
However, a conclusion that the total of bullion coin purchases
should be included in the "gold speculation and investment" category
is at least open to question. Resales of these coins are infrequent so
they tend to be firmly held by the original buyers. A m o n g certain
classes, gold coins are included in the portfolio of assets as a form of
disaster insurance with no expectation at all of speculative or investment gain. If the political or economic disaster never occurs, the cost
of holding the coins can be written off as a form of term insurance. In
certain parts of the world the purchase and holding of gold coins can
be a useful aid to avoiding income or inheritance taxes and the gain or
loss in holding the gold is a secondary consideration. The cost
alternative would be to hire a good tax lawyer.
0
T h e main point is that gold coins are to s o m e extent bought and
held for reasons only dimly related to speculation or investment.
A
reasonably solid market for bullion coins has developed in recent years
partly as a replacement for individual bullion-buying in earlier years
and partly as an add-on to total private demand. T o a considerable
extent this buying will be maintained.
But the dominant factor in the gold market in the future, as it
has been in the past, will be industrial demand.
30-
T h e price elasticity of industrial demand for gold has until very
recently received little attention in analyses of the supply, demand,
and price outlook for gold. Attention has centered on such marginal
factors as monetary disagreements, exchange rate shifts, inflationary
expectations, and political instability in this or that country. T h e s e
considerations, if they influence the price of gold at all, affect at most
10 to 15 per cent of total market demand. T h e central issue that
directly concerns the buyers of 80 to 90 per cent of gold production
has been largely ignored. It is this: Can gold at a given price be
converted into a product that can be sold in a competitive market at
a fair profit?
- Gold in all its commercial uses is a substitutable commodity;
• that is, there are alternative materials that can be used if not precisely
as well as gold, then nearly as well. Logic tells us that at higher prices
consumer resistance will set in for gold-fabricated products which
will be transmitted through industrial fabricators to the world bullion
market. At lower prices rising consumer demand will affect the
bullion market in the opposite direction. The reference here is to
prices in constant dollar terms since inflation (or deflation) simultaneously changes the whole economic context, incomes, production costs
and the prices of substitute materials.
Two recent economic analyses have been directed to the question
of whether and to what extent the industrial demand for gold is influenced by changes in the market price: one by the research staff of
the United States Treasury Department and another by Peter Fells
and Christopher Glynn of Consolidated Gold Fields Ltd. Both analyses
reach essentially the s a m e conclusion, that industrial demand for gold
to highly responsive to changes in price, rising when the real price
declines, and vice versa.
The Treasury study, cited earlier, concludes that the industrial
demand for gold Is responsive both to changes in price and income.
World industrial price elasticity for gold i6 estimated to be between
31-
-,i> and -1. 0 with -.7 a reasonable figure for working use. Income
elasticity is estimated to be within . 8 and 1. 5 with 1.0 a figure not "inconsistent with the study results. In broad terms the implications
of these figures are that at a constant real price, industrial use of gold
will increase at approximately the s a m e rate as real G N P . At lower
real prices industrial gold use will rise m o r e rapidly than G N P . At
bigher real prices industrial use will rise m o r e slowly or even at
s o m e point decline.
The Fells-Glynn conclusion is similar in substance, estimating
that for every fall of $1 in the gold price (in 1975 dollars) annual
purchases for jewelry fabrication will rise by 6 tons. The implicit
price elasticity figure would be in the upper range of the Farrell study.
The implications of their conclusions, according to Fells and Glynn,
are that at the current gold price level ($120 to 130) jewelry fabrication absorbs about 50 per cent of present gold production, with other
industrial demand and coins absorbing the remainder. At lower
prices non-speculative demand would exceed production; at higher
prices, production would exceed industrial demand. It m a y again be
noted that the reference here is to prices in constant dollars which lag
the nominal gold price by, the world rate of inflation.
The conclusions that can be drawn from these studies regarding
future trends in the supply, demand and price of gold are of some
interest and importance.
•
•
T h e most important general conclusion is that there will be an
excess of industrial demand over current production in future years,
if the price of gold remains stable in constant dollars. Moreover,
because of the income elasticity factors, the shortage of production
relative to industrial demand would steadily increase. Expressed
another w a y there will be an increasing need for gold sales or leasing
of gold from government stocks in future years within the context of
the present gold price range ($120-130) in constant 1976 dollars. If
-32 -
there is a curtailment of sales from government stocks, or if they
?
^re held at the present level (about 10 million ounces a year, including
Soviet sales) the price of gold must ri6e relative to other commedities
in order to bring current supply and demand into balance; i. e., to
induce producers to maintain output and/or force consumers to cut back
buying..
The qualitative substance of this conclusion is more important
than trying to quantify it in precise amounts. However, the elasticity
studies now available give a good clue as to the future amounts of
government gold sales that would be consistent with a fair market
value to both producers and consumers, and would not arbitrarily
disrupt the normal market process as government actions have done
in the historical past.
A reasonable projection of the Farrell and Wells-Glynn findings
in the context of the future supply outlook would allow for an annual
increment of one to three million ounces of. government gold sales over
the next decade to meet expected industrial needs at a relatively stable
price in constant dollars. By 1985, this would mean annual gold sales
from government stocks would be in the range of 25 to 30 million ounces
at a current dollar price roughly double the present level.
The key consideration here deserves repeating for emphasis.
The dynamics of gold production, industrial demand, and price over
the next decade will require either an increase in the real price or a
rising increment of supply from above-ground stocks -- government
r
or private. There is no strong possibilityithat private gold holdings
will contribute significantly to the future industrial need nor are such
stocks -- which are mostly in coin -- available in sufficient quantity
in any event. Government gold shocks no longer have a formal monetary
function and will L-radually be m a d e available lor industrial use, m
quantities sufficn ully margin.il to allow the market price to be predominantly determined by the interaction of private supply and demand.
Sales from government stocks in reasonable n m o u m s are not ibconristet,
With th.l^ objoetl; O.
-B4-
The Gold Market
A free marketplace for goods, or labor or securities or commodities is simply a communications facility where potential buyers
and sellers -- directly or indirectly, in confrontation or through
middlemen — are able to negotiate a mutually acceptable price based
on perceived self-interest. In all such markets a set of practical
procedures and customs have evolved to facilitate.the transaction and
pricing needs of the participants. The general objective of these procedures is to maximize transaction volume and enable the range of.
prices to accurately reflect the collective judgment of the market
participants.
The gold market, in its essentials, is virtually identical to those
of other world-traded, non-perishable, commodities such as silver,
platinum, or copper. These commodities are fungible, that is the
accepted trading unit i6 specifically defined as to amount and quality,
each one identical to all others. N o physical inspection is required for * a transaction to take place. Technically advanced communications
facilities have removed geographical limitations to the market for
fungible commodities. Trading and pricing can occur, therefore, continuously world-wide in a variety of currencies, at a common price
wherever artificial barriers are nqt imposed at political boundaries.
Although a transaction can occur between any two points where there
are telephone or telex facilities, major .trading centers have evolved
where there is a concentration of buyers ami sellers, an absence of
political restraints, and an historical tradition of commodity trading.
Such trading rcr.toi^arc closely linked hv:fro^crn communication facilities
and as a practical matter can
CO1)OCUYC]\
-be considered a s.nrIe world
market.
The active participants in the world gold n.arkei, in common v.iih
those of related commodities, can be grouped in four ma-,- cmegorics:
- 35 -
producers, traders, speculators, and industrial consumers.
The Producers
Gold is produced for a single purpose: to be sold at the highest
available price in excess of production costs. For centuries prior to
March 1968, when a free gold market began/ producers faced no problem in differentiating between buyers, in seeking out the highest available price. The world gold price was pegged at a fixed level with
governments the unlimited buyer and seller of last resort. The only
concern of producers was that the official price be high enough to
permit an operating profit. Their economic interest was focused almost
entirely on government gold policy and only marginally on industrial
demand. Governments were both the buyers of the bulk of gold production and the major sellers of gold for industrial use except where
marginal advantages of location or transport cost permitted sales
directly from producer to user at the prevailing fixed price.
On March 17, 1968, the governments of the major industrial
nations by agreement halted all gold dealings with the private market,
either as buyer or seller. This sudden action created momentary confusion among the gold producers who had always considered governments, if not the only buyer, the only one to which they had ever given
much thought. Attention quickly turned to resolving the questions of who
else buys gold and how is it sold.
The Sales problem of the gold producers in the United States was
quickly resolved. Since 1P33 the private gofd market had been closed
to international transactions. Gold was produced and refined for sale
either to the United Slates Treasury Department or to licensed industrial
users. Industrial users had the alternative of purchasing bar gold from
the Treasury or from a licensed refiner. Since the Treasury v. as the
residual buyer or seller, one price prevailed lor ali. The use of geld
-36 -
/
toy American industry had risen rapidly in the 1960's and by 1967
exceeded six million ounces, more than four times domestic gold
production. The large supply deficit was met entirely by sales from
the U.S. government gold stock.
hThe sudden halt to government gold sales in March 1968, *ent
the major industrial buyers on a hasty search for new sources of supply.
Unfamiliar with foreign markets, they turned to domestic producers
and negotiated supply contracts, typically based on a premium over the
London price. With world market prices relatively stable, this pattern
of marketing American gold production continued for several years.
Following the halt to government gold purchases and sales, the
Treasury quickly took three administrative actions intended to restore
viability to the United States market. First, American producers were
permitted to sell their gold anywhere in the world at the best available
price. Since the U. S. price was typically at a premium, very little
gold was exported under this provision. Second, industrial users were
permitted to acquire gold in any world market at the lowest Available price, up to the limits of the amounts they were licensed to hold. Third,
private traders were licensed to acquire gold in any market for resale
to American industrial users. This authorization was eventually
broadened to permit American branch firms abroad to deal in gold with
foreign nationals in order to maintain a competitive position in these
markets. Prior to this time private bullion dealing was permitted only
as an adjunct to refinery cperations.
•
The sudden impact of the two-tier market on South African gold
producers was even more traumatic. Since, the nineteenth century South
African production had been marketed in London either directly to the
Bank of England or through the London dealers under the general supervision of the Bank.. For reasons which are now obscure, the Bank of
England closed the London market to gold dealing for a critical two-week
period immediately after the two-tier market opened on March 18, 1968.
•87-
T h e Swiss banks quickly moved into the breach and the three largest
<Swiss Bank Corporation, Swiss Credit Bank, and Union Bank of
Switzerland) formed a pool to purchase and market all South African
gold production at prices to be regularly negotiated.
The undertaking between the South African Reserve Bank and the
Swiss pool concerned the initial transfer of title to the gold. T h e
physical delivery of South African gold continued to be m a d e to London.
In 1972, the South Africans agreed to restore a portion of their gold
sales to the London dealers. At present, South African gold sales are
divided between the Swiss pool banks and the London dealers. There are
no public figures on the proportion going to each, and opinions differ.
However a 50/50 split is probably not far from the mark.
The Soviet Union is the other major world source of gold. Although
their sales are sporadic, the total amount is substantial. Soviet gold
sales are usually m a d e in the Zurich market initially through the local
Soviet bank. Their basic objective is the same as other producers, to
obtain the highest average price. However, the Soviets are m o r e prone
to manipulate sales patterns to achieve this objective. Depending with
foreign exchange needs, they tend t« hold gold off the market when they
think a better price can be realized atanother time. This form of shortrun speculation is usually a losing proposition compared with converting
output into cash as expeditiously as possible.
4
Speculation in the gold market has not been confined to the Soviets.
Producers in other countries have on a smaller scale occasionally
gambled by temporarily building up stocks. Industrial users also from
time to time indulge in this practice although there is considerable selfdeception involved. Indeed, the largest American industrial gold cons u m e r tries to outguess the market as a matter of policy in the conviction
<doubtful) that it is better informed than the average buyer. All speculators, of course, share this conviction.
-38 -
One important point should be clearly understood. No gold
producer is irrevocably tied to any marketing locale or procedure.
All current arrangements are temporary and subject to change should
more profitable alternatives emerge. Every producer is constantly
re-assessing the market with this in mind.
No drastic changes in the marketing of gold production are likely
in the immediate future. The South Africans have had considerable
success in building a market for bullion coins. While krugerrand sales
are down somewhat from the 1975 high, demand seems to be holding at
a substantial level and is likely to rise gradually over the longer run.
The offtake of gold in the form of coin has eased the problem of bullion
sales through essentially a separate market.
The great bulk of world gold production is sold directly into the
dealer market, primarily through Zurich and London. Direct marketing
arrangements between gold producers and industrial consumers are
rare, except to a modest extent in the United States, and it is not likely
that such arrangements will expand in the future. The producer price
procedure which is used in marketing copper, platinum, palladium and
other metals is practical only when a few large industrial consumers
dominate the market. The industrial market for gold is too diversified
for such arrangements to work. And the constant possibility of sales
from above-ground stocks would make a producer price agreement on
gold precarious in any event.
The Traders
Traders, or dealers (the terms are interchangeable) play an
indispensable role in any large market with a multiplicity of widely
dispersed buyers and sellers. The trader's function, whatever the commodity -- gold, copper, oil, coffee, securities -- is to bridge the gap
between buyers and sellers who would otherwise find it difficult or
impossible to come together. The dealer in a real sense makes the market.
-39 -
T h e trader acts as a point of convergence for buyers and sellers
both in space.and time. A holder in Frankfurt m a y wish to sell spot
gold for m a r k s at the s a m e time as a buyer in Chicago wants to contract
in dollars for six-months' delivery. B y acting as principal in both
transactions, the professional gold trader links the two into a single
world market.
Although the dealer acts as a principal not a broker in all transactions with buyers or sellers, his objective is to keep his open position
at a m i n i m u m by balancing buy and sell commitments with others as
closely as possible. The trader is not a speculator, nor is he normally
a net supply or demand factor in the market. Like the second-hand
clothes dealer, the gold trader's profit comes not from price changes
but from his buy-sell spread and transactions volume.
_
In theory, anyone can become a trader in gold or any other commodity simply'by hanging out a shingle and quoting a buy and sell price.
In practice, however, the sharp competition, and the experience, skills,
and required capital, limit the profits needed for survival to a relatively
few agile participants. W h e n the two-tier market began in 1968, the
Treasury issued licenses to nearly fifty would-be gold dealers, only
four or five of which are still active. In the entire world, the gold
traders of any real consequence number less than twenty, all of w h o m
are in constant contact to deal with each other and buyers and sellers
throughout the world. In total, this group constitutes the world gold
market and virtually all gold transactions are effected through one or
another of these dealers.
There is one key factor in the gold market which makes it distinct
from the markets for other commodities r- with the possible exception
of silver. T h e market factor unique to gold is the enormous -quantity
from past production held by a diversity of government and private
speculators and hoarders throughout the world, an amount estimated to
be in excess of 1-1/2 billion ounces, most of it in government stocks.
-40 -
T h e holders of this vast stock of gold neither receive nor expect any
current return on their investment. T h e incentives for continuing to
bold this hoard are fear of other investment alternatives, the hope of
a future speculative profit, or pure lethargy.
The existence of this large above-ground widely held stock of
gold affects the dealer market in two principal ways. O n e obvious
effect is that it creates a need for a dealer service to match those w h o
want to hold less gold with those w h o want to hold m o r e gold for whatever reason. W h e n the negative attitudes outweigh the positive ones,
the price eases to a level at which they are again in balance and vice
versa. This service is roughly analogous to that performed by an art
or antiques dealer or even a dealer in used cars.
Although this is the popular notion of a gold dealer's principal
function it is doubtful if the volume of voluntary transfers between
private gold holders of differing views is sufficiently large to generate
m o r e than a modest return to a relative few except during periods of
volatile price change. While the mechanics of this traditional dealer
function m a y m a k e it appear that he is "trading for his own account,"
such trades simply reflect simultaneous changes of opinion on gold in
the external market. W h e n these changes in view are numerous and .
substantial the price m o v e s and the dealer's volume rises. W h e n there
are few differences in the public's-attitude toward gold the dealer's
business declines. But whatever the situation the dealer's own opinion
#»
on gold is irrelevant to the volume of his trading.
In addition to trading among holders of bullion, there is another
m o r e subtle way in.which the above-groutfd stock of gold affects dealer
activity in the world market. t'oueeplually, there are really two separate
stocks of geld m m i n g in different orbits. One is the vast stock held
in unchmging bullion form without expectation of current income by
individuals and j'ovornmems. A second, no less real above-ground Moek.
is the substantia! quantity in industrial and commercial hands y. Inch is
-in-
constantly changed in form to generate an income return. T h e
industrial stock changes from bullion, through semi-processed stages
into fabricated products m u c h of which eventually re-enters the cycle
as recovered scrap material. Since gold is almost indestructible very
little of it actually disappears, no matter what form in which it is held.
Historically there has been very little net transfer of gold between the
sterile stocks of governments and other hoarders on the one hand and
the income-generating stocks of commercial holders on the other. T h e
present challenge to the gold dealer market is to devise innovative
procedures by which such transfers can be m a d e attractive and feasible
given the perceived self-interest of both groups.
In persuading the gold-hoarders -- both government and private -to temporarily part with their treasure, there are two basic problems
to be overcome. First, .they collectively desire to hold title to a fixed
amount of gold at a given price, for whatever reasons. And second, the
owners require assurance that their gold assets be reasonably secure
against physical loss. Consequently, any practical techniques for moving
gold from sterile hoards into industrial processing channels must, all
other things equal, neither change the amount of gold in which there is
a private equity interest or significantly increase the risk of its physical
loss.
In basic concept, the gold investor to participate in a gold-leasing
arrangement must be willing to accede to a physical movement of part
of his stock from a bank vault to an industrial production line in return ^
for a payment or fee. It would not be feasible for most holders to
directly negotiate such an arrangement, but there is a practical way in
which the transfer can be m a d e based on the/recent development of a
large and viable futures market in gold. The procedure would operate
as follows:
A s s u m e that gold investor A desires to reduce his stock while
investor B wishes to increase his holding. T h e transfer obviously could
-.42 -
be m a d e through two concurrent spot transactions in the dealer market.
But assume further that investor B is willing to take delivery of his
added gold say six months in the future with his payment to be m a d e at
that time. In this instance the gold dealer, who has concluded separate
transactions with both A and B, will have borrowed an amount of gold
from the private investment stock which he is obligated to deliver back
at some future date.
The dealer can simply store the gold in the interim with the price
for future delivery covering his financing costs. Or, as an alternative,
he might elect to lend or lease the gold to someone, presumably an
industrial user, who can generate profit from its use. The dealer would
then receive in return a fee adequate to cover whatever additional risk
m a y be involved due to possible borrower default.
Since there are a great number of spot and future market transactions in gold,occurring continuously, any given gold lease arrangement
can be rolled over indefinitely with only the fee changing at the end of
the agreement period. The total amount of gold available for lease
depends on the attitude of gold investors expressed either in direct
negotiation or in trading volume on the various futures exchanges.
With regard to satisfying the security needs of the holders of gold
for investment, it should be recognized that no gold depository --be
it bank vault or backyard burial --is without some degree of risk that
the gold will not be readily available, or indeed not available at all.
Many holders of gold for investment have only a certificate from a
reputable bank that the gold is in fact there. If they have confidence in
the bank, they believe the quantity of gold specified will be available to
them under the terms of the certificate. And for that the gold investor
asks for no payment, indeed is willing to pay the bank a small fee for
holding gold which.he has never seen. It would seem that the risk in
lending gold to a large established industrial corporation is no greater
than the risk in lending gold to a large established commercial bank.
-43-
The difference is that the corporation is able and willing to pay a fee
for holding the gold while the bank is not.
The fee charged by the trader for leasing his gold should be
sufficient to cover (1) his out-of-pocket costs, i.e., the extent to which
the difference between the spot and futures prices is less than his
interest cost; (2) the risk that the borrower will default on his obligation, the charge for which will vary according to the credit rating of
the borrower of gold to the same extent that money-lending charges
vary; and (3) the trader's profit. The key consideration in this procedure is that the total annual leasing fee be less than the cash borrowing rate which would be the m i n i m u m cost of financing any company's
gold inventory.
The potential amount of gold under industrial lease, while sub- stantial, is not large relative to total industrial purchases. The overall limitation is the total volume of industrial gold in inventory which
is probably not over 25 million ounces world-wide. Obviously the amount
of leased gold would not reach this figure but it is possible that the
amount could exceed five million ounces within the next few years and
increase gradually thereafter.
There are two main limiting factors to the growth of industrial
gold leasing: (1) the capacity of the futures markets to handle the required
volume of hedging, and (2) the possible immediate tax liability if the
company is on a L I F O inventory basis --as most American industrial
users are. The latter problem will diminish if the price of gold holds
fairly stable for an extended period of time.
To effectively carry out these arrangements the gold trader must
have a substantial source of capital and ready access to a supply of
credit at low cost. The successful arbitrageur must operate in volume
on very small margins in which minute differences in interest costs are
critical to maintaining a competitive advantage. Consequently, all of
the major traders are either banks, owned by banks, or have close
,
--44 -
working arrangements with banks.
• But apart from financial considerations, the key attributes of a
competitive gold trader are flexibility and an innovative nature. The
competitive gold market is new and in many ways different from the
markets for other commodities. New trading practices are appearing
and the institutional structure of the market is being created by those
who are participating in the day-to-day actions.
r
Private trading in gold in the modern sense began with the formation of the London market in September, 1919. Prior to the First World
W a r the price of gold was fixed in terms of open convertibility into the
major currencies. The producers and buyers sold to or bought from
the central banks at an unchanging price so there was no purpose to a
private market for gold trading. The suspension of convertibility by~
the British Government opened the way for a gold trading market in
London with international participation and South African production as
the major source of supply. The resumption of gold purchases and sales
at fixed prices by the Bank of England in 1925 put a damper on gold
trading in the London market. In 1931 the British Government ended .
convertibility and the London market resumed active operations until
the outbreak of World W a r II. The London gold market re-opened on a
limited basis in 1954 and from 1960 to 1968 functioned as the conduit
through which the major Western powers attempted to control the gold
price within narrow limits. Since '1968 the London dealers have operated
as a major part of the free world market for gold.
A unique feature of the London market is the so-called gold "fixing"
twice daily at 10:30 and 15:00 hours G.M.T. , when for a period of
perhaps ten minutes or less the five member firms in effect deal as a
unit with the rest of the world at a single price which reflects a balance
in gold supply and demand at that point in time. At all other times when
the market is open the London firms deal in gold independently and competitively, with separate buy-sell prices just as do dealers in other market
centers.
-45-
The fixing procedure itself is fairly simple in concept. Representatives of the five London firms gather in a room in open telephone contact
with their respective trading offices. The Rothschild representative,
who is chairman, begins the proceedings by naming an opening price
which he considers in line with gold trades which may have occurred
just prior to the fixing period. Each of the five representatives immediately checks with his firm to ascertain the net of buy and sell offers
at that price. Before the fixing each firm will have received tentative
offers from other dealers or clients throughout the world to buy or sell
gold at various specified prices or perhaps at the "fixing price" itself.
These offers are added up, together with any new ones in response to
the opening fixing price (already on the Reuters wire) and a net buy or
.sell balance for each member firm is communicated back to the fixing
room. The chairman adds up the net sales and/or buy positions of the
members and if they"total zero, that price becomes the final fixing, the
session is over,> and the transactions are completed. However, if there
is an excess of buy or sell balances, the chairman names a higher or
lower tentative price and the procedure is repeated until a balance is
reached between the buy-sell positions of the five firms. Only offers to
buy or sell at the final fixing price are consummated. The profit to the
dealers is a 1/4 per cent fee on gold sales. Purchases are made at the
fixing price without additional charge.
Although the procedure is not iised in other trading centers the
London "fixing" is a useful institution in the world gold market. Although
participation is limited to large buyers and sellers, mostly other pro- '
fessional dealers, the contact is world-wide and the negotiated gold
price represents a true balance between world supply and demand at the
time of the fixing. The London fixing price is, in effect, established
through an auction in which all traders throughout the world directly
participate.
Zurich is another important gold trading center, primarily for two
reasons. First it is a sales conduit for a large share of South African
-46 -
and Soviet gold production. And second, the large private accounts at
the Swiss banks have traditionally shown an interest in gold as an
investment and are a convenient local source of funds.
While Zurich is and will continue to be an important trading center
for gold, it has one key drawback in that the major dealers are commercial banks rather than trading firms as in London and New York.
Although the Swiss banks are as competent as any in dealing with gold,
commodity trading is not a normal banking function. Like other commodities gold is now subject to substantial price variation and very few of
the larger banks anywhere have shown much interest in gold dealing
given its present commodity status. Unlike London and New York,
Zurich is not a trading center for commodities in general, so trading in
gold and silver alone makes it a rather specialized commodity market.
The Swiss banks will undoubtedly continue a gold dealing function
but are not likely to move aggressively to expand operations. As the
years pass and traditions fade it is likely that the Zurich gold market
will diminish in importance relative to other trading centers.
A number of gold trading centers operate on a regional basis elsewhere in the world. Eeirut has been the traditional center for distributing
gold throughout the Middle East. The political turmoil of the past year
or two has shifted much if not all of this trade to other centers -- notably
• Damascus and Kuwait.
Hong Kong and Singapore have long been the major centers for
gold trading in the Far East.
The recent easing of government reslrictions has increased the
potential for expanded gold trading in Tokyo and Manila.
* The United States as a gold trading center is the newest and
probably fastest growing addition to the world market. Active American
gold dealers include Mocatta Metals Corporation, Philipp Bros, (a sub-
-47 -
sidiary of Englehard), J. A r o n & Co., and two commercial banks.
Republic National Bank in N e w York and Rhode Island Hospital Trust
C o . in Providence. These dealers operate world-wide and are an
integral and important part of the world gold market. In addition,
practically all of the major European gold dealers have established
active branch operations in the United States.
The United States with principal operations in New York and
Chicago is likely to become the largest of the world gold trading centers
as it is for most of the other basic commodities. There are a number
of factors at work which m a k e this development highly probable. First,
the United States is a completely free investment market with no
, Government restraints on the flow of currency, capital or commodities
across its borders. This is a primary requisite for any country becoming a focal point for world financial activity.
Second, communications and other facilities in the United States
for dealing in securities and commodities are unmatched anywhere in
the world. N e w York is by far the largest capital market in the world
as well as the principal center for trading in most of the basic commodities, including silver. Gold would seem a natural addition to this list.
Third, the United States has for years been the largest industrial
market for gold in the world. The purchase of gold by American
industry has over the past decade been the strongest sustained factor
in the demand for gold, absorbing between 15 and 20 per cent of* the total
world supply of bullion.
Fourth, the United States has become the largest single source of
speculative and investment demand for gold in the world. This m a y seem
surprising in view of the American cool reaction to the lifting of Government restraints on gold at the end of 1974. But the supposed lack of
public interest in gold buying and speculation is only relative to the
inflated expectations and forecasts by dealers before the event. Although
minor compared with other types of investment, the increment to gold
-48 -
bolding by Americans in 1975 in the form of coins and privately held
stocks is estimated at over 2 million ounces,* an amount substantially
in excess of the increase in private holdings in any other countryIncluding net purchases for industrial use the total American demand
for gold in 1975 approached 6 1/2 million ounces. In 1976 this total
m a y well exceed 8 million ounces, a substantial share of world gold
demand.
Fifth, the great bulk of all the above-ground gold stocks of the
world are concentrated in the United States. Including holdings by the
Federal Reserve Bank of N e w York on behalf of foreign governments
and international financial institutions, over 650 million ounces of gold
.are physically stored in the United States, most of it in N e w York City.
Market sales from these gold stocks have been trending upward in
recent years and will probably exceed 8 million ounces by 1976 including
various swap and lease arrangements. Adding on mining production
and recovery from old scrap it seems likely that the supply input from
new sources in the Western Hemisphere into the world gold market in
1976 will approximate 15 million ounces and grow fairly steadily in
subsequent years. T h e expansion of the gold supply here in contrast to
a contraction or a flat trend elsewhere, will give impetus to the development of the United States as a trading center.
- Sixth, the continuing development of trading in gold futures contracts on the organized commodity exchanges in the United States and
gives an added dimension to the American gold market and the expansion
of N e w York and Chicago as trading centers. Although trading in gold'
futures is still relatively small in volume compared with silver, the
total volume of transactions approached 100 million ounces in 1975 and
is likely to increase in future years. The availability of a large and
viable futures market enables dealers to hedge their holdings and permits
* Estimate by Constantine Michalopoulos in fiold 1976, published by
Consolidated Gold Fields Ltd.
- 50 -
is a strong factor in the market. Even in periods of currency turmoil,
there is no great inducement to speculate in gold. It is more interesting and potentially lucrative to speculate in one currency against
another for those who are so inclined.
i1
However, there is one potential arena in which short-term speculation in gold m a y well expand over the foreseeable future. And that is
in gold futures trading on the large American commodity exchanges. In
January 1975 gold was included in the list of commodity futures traded
on the major exchanges in New York and Chicago. While the volume of
gold futures trading in the first year was somewhat below expectations,
and is still much less than the interest in silver futures, there is some
hope among dealers and brokers of considerable growth over the next
few years.
The spectrum of gold futures trading is similar to that of other
metals with most of the public participation based on purely speculative
motives. Hedging transactions by either producers or fabricators have
been only a minor factor. The large industrial users in particular have
avoided use of the futures market to he^dge against inventory loss and
have opted to accept the risks of changes in the market price.
A commodity exchange is in substance a forum where the participants are able to place bets that gold and other commodities will rise
or fall in price within a specified period. The role of the clearing house
association, a group of the larger brokers and dealers, is analogous
to a combine of bookmakers who accept bets on horse races or sporting
events and pay off when the bettor wins. Like good bookmakers the gold
dealers are averse to-gambling risk and consequently always seek a
neutral position between contracts v. itli long and short bettors. Since
most of the public participants in the futures exchanges bet on price
rises, i.e., contract for future delivery, the dealers, in taking the
opposite side, find it nec-:-sary to acquire ana hold plnsicc.l gob: it. o;vcr
to avoid a speculative position. T h e cost oi carrying this gold is normalb
the spread between the 'p. .1 e-'ie. ;>i.,i tl.«. r.mge o\ prices for future
-5i-
delivery. It should be noted that the clearing house members collectively
guarantee that every bet contracted by a m e m b e r firm will be honored .
in full.
But an organized exchange is more than just a forum for wagering
on trends in the price of gold. In addition to hedging facilities for producers and industrial users, a futures market offers a better procedure
for those who wish to obtain an equity interest in gold than the cumbersome alternative of buying and selling physical gold in the spot market.
O n the futures exchange the actual buying and holding of gold, for future
delivery required to balance the market, can be done more efficiently
by professional dealers, with the gold then potentially available for productive use.
The normal pattern of spot and futures prices for a non-perishable
commodity available in ample supply, such as gold, is roughly equal to
the term structure of interest rates over the contract time span. If the
spread between spot and futures prices were greater than the interest
cost, gold would be bought spot and sold forward at a certain profit (in
a given currency). If the spread were less,.those who hold gold could
sell it 6pot and buy forward at a certain profit. Professional dealers
can profitably trade in the constant small deviations from this theoretical
identity.
One caveat should be noted in the above analysis. The conclusion
that the spread between spot and future prices of a commodity such as
gold should logically equate with the term structure of interest rates is ^
valid only if all of the dealings in the transaction are in a single currency.
In that case the required assumption that cash is a risk-free asset is
correct. But in a multi-currency transaction' involving borrowing in one
currency and a futures contract commitment in another, there can be
no "locked-in ' profit. For example a West German dealing in Now York
commodity futures must factor in the possibilny of a shift in the dollar
and the mark exchange rate during the term of his contract. This eon-
-52 -
sideration deters wide-spread international participation in any single
futures market.
Futures transactions in gold in the European markets are not
under a formal procedure based on government-approved regulations
as in the United States but rather are private ad hoc arrangements
negotiated with the various dealers. Prices for future gold delivery in
all markets are, however, linked by world traders able to hedge against
changes in the price of gold and the exchange rates involved.
A comparison with the silver experience indicates how an expansion of gold futures trading can potentially change the structure of the
world gold market. Over the past decade trading in silver futures on
the American commodity exchanges has come to totally dominate the
world market." The massive volume of silver futures contracts traded,
100 million ounces or more in a single day, completely engulfs the
physical transfer of spot silver which is only a minute fraction of this
amount. A n obvious result of this broad participation in the silver
market is that the price has become highly volatile, frequently rising
o r falling 10 per cent or more over relatively brief periods of time.
There is one significant point about the behavior of prices in the.
futures market for silver as well as other commodities. It is this: the
prices will tend to oscillate widely but within a rational context based on
the realities of production costs and real industrial demand. Occasional
price movements above and below this rational trading range tend to be
short-lived. For example, over the past couple of years the spot month
price of silver has for the most part fluctuated between four and five
dollars an ounce. This is a rational 20 per cent trading range in terms
of the real industrial world and can be expected to gradual!y move upward
as production cosls rise in future years.
At present the dollar amount of trading in gold futures is only a
small fraction of silver trading, and on the a\erage is less than ihe
- 53 -
amount of physical gold transferred in the major dealing centers.
Although trading in gold futures influences the world price, it does not
yet dominate the market. But this could change .and rather quickly.
If, as in silver, gold futures trading becomes a multiple of
physical dealings the pattern of the gold price will change. In recent
years the price of gold has shown a few large changes followed by fairly
long periods of little or no movement at all. But in an active futures
market with broad speculator participation we can expect much more
frequent and larger short-run price movements within practical m a x i m u m
-and m i n i m u m limits informally set by the market participants. For
example, in the current context (mid-1976), if trading in gold futures were
two or three times the prevailing volume w e might expect the spot month
gold price to m o v e rather freely within a range of perhaps $110 to $150
per ounce, with daily movements of three or four dollars creating no
great interest except among the actual traders.
It seems likely that over the next few years trading in gold futures
on the American exchanges will grow steadily with increasing participation by the speculating public. While this will mean greater short-run
price volatility, it will on the whole be good for the gold market by contributing to a more rational pricing range in terms of realistic upper and
lower limits.
Industrial'Consumers
The great majority of industrial gold users do not deal directly
in the gold bullion market nor do they acqilfro bar gold at all. Most of
the gold for industrial use is purchased in semi-processed form -plating salts, tubing, wire, findings, various alloys -- irom a relatively
limited number of cold refiners and processors. Only the larger firms
have p.ny direct contact with the gold bullion market.
The gold refiners, processors, and sellers of gold in various semi-
- 54 -
processed forms typically base their price on the market price for
bullion on the day of shipment plus an add-on for the cost and profit of
processing the gold into the form in which it is purchased.
All industrial holders of gold, bullion or semi-processed, bear
a risk during the period in which they actually hold title to the gold.
Because the price of gold was generally on the upswing until the past
year or so, there was little incentive to minimize this risk through
hedging or leasing. In fact the reverse was true. Many industrial users
chose to maximize their equity holdings whenever possible by consigning
rather than selling scrap gold material.
Over the past year this attitude has changed. Industrial gold users
recognize that their profit depends on processing and selling a product
not on commodity speculation. They are seeking to reduce inventory
risks to the extent possible by keeping the quantity down and are exploring
other available market facilities -- hedging, leasing, consignment, any
device to shift the risk of ownership to others who are able and willing
for a modest fee to take the responsibility.
However, with the exception of the major refiners, the large
industrial users still hold substantial quantities of gold in exposed positions. Gradually many of them will reduce their equity in gold inventories
through forward sale or a sale ana" lease-back procedure. The full
development of this trend is dependent on a considerable expansion of
trading in the gold futures market to provide the necessary financing
and a ready outlet for dealers to adequately hedge their positions.
-55 -
Government Gold Stocks
The governments of the world directly or through official international financial institutions now hold nearly 1300 million ounces of
gold. This represents close to half of all the gold that has ever been
produced and about 30 years1 world production at the current rate.
Every ounce of this total has been purchased in the historical past by
one government or another at a price greater than the current private
market was willing to pay.
Like the fable of the blind men and the elephant, the significance
and potential economic impact of this great collective hoard can be
viewed in different ways. One school of thought views government gold
stocks as a perennial depressant on the market price. The potential
or actual sale of large amounts from these stocks at any time, it is
feared, will deter private investment in gold and even cause disinvestment of existing private holdings. This group tends to consider the
actions of private investors as the dominant factor in the gold market.
A second very different view sees large government holdings as
a potential support and even a possible plus factor to the market price.
"They Teas on that in order to protect the market value of their holdings
governments will when necessary buy from each other or even in the
market if necessary in order to raise the gold price tp a level that will
keep new gold production profitable. In short, this group of experts
believe that governments individually or collectively, will act to sustain
-the value-of their gold investment even if thoy have to spend every penny
in the public treasury to do so. This can be considered the "pick yourself
up by your own bootstraps'' school.
A third rather ingenious view sees the potential sale of povcrnmcat
gold as a constant stimulus to the market price. This reasoning holes
that the risk of a large government sale at any time adds a cost factor
- 56 -
to holding gold which requires a higher constant market price than
would prevail in the absence of this risk. *
A fourth down-to-earth group considers government gold
-stocks as akin to very low-cost mining reserves. A s such they would
be wheeled out of the vaults and sold in the market whenever the market
price exceeds processing costs. This view is not widely held outside
the Soviet Union and South Africa which act on this premise.
A final view, which includes most of the world's finance ministers,
gives very little thought to the price of gold at all. The gold stock, like
the office furniture, was there when the finance minister came and will
be passed on intact to his successor when he leaves. The maxim that
if a political action need not be taken it should not be taken, is on the
whole pretty good statesmanship.
Which of these diverse views is valid? To a degree they all are,
and therein lies the problem of properly assessing the ultimate relationship of government gold stocks and the world gold market.
Apart from these various theories and attitudes, it is useful to
consider what facts can be applied to and deduced from the holding of
government stocks of gold. One obvious fact is that the holding of gold
by a government or anyone else involves a cost analogous to the cost of
holding any other commodity in inventory. Gold is a non-earning asset
and the annual cost of holding it is equivalent to the interest return that
could be obtained by exchanging the gold for cash and investing the proceeds or retiring an equal amount of outstanding debt and reducing the
applicable interest cost. A more direct way.if putting this is that all
government gold stocks in effect are financed through borrowed funds.
* T h e the^i- is set forth m o r e completely in a pnner by H e n d e r s o n ami
Salant, " M a r k e t anticipations, government n.-liry, and the price ot «jold.
- 57 -
A second relevant consideration for government holders of gold
is that its nominal monetary value cannot be held constant. T h e costs
of producing gold and the demand of industrial users are the dominant
factors in determining the market price and no government gold holders
or practical combination of government holders can offset these factors
for very long even if there were any rational purpose in doing BO.
A third important fact is that government holders of gold stocks
are by definition speculators. Any holder of gold, government or private.
has an option at any time to exchange his holding for cash. Since there
is a cost to holding gold, a decision not to sell implies a speculation
that a sale at some future time will yield a return greater than the cost
of holding the gold for the interim period - which m a y or m a y not turn
out to be irue. In the real world, of course, government decisxons to
sell or not sell gold rarely have any such rational basis. The "speculation" implicit in continuing to hold gold is mainly due to political inerUa.
A n obvious exception is the South African Government which as a matter
of policy (and necessity) sells every ounce of gold that can profitably
be mined. The reason for the apparent rationality of South African gold
policy in contrast to that of other governments is that gold there xs of
suff^ent economic importance to demand the full attention of policy
makers. The South Africans simply cannot afford the cost and risk of
gold speculation.
A final relevant fact for the gold policy of any government is that
. ,. „ r n r i v a t e -- can be considered permanent.
d
no holding-of g ° - ^
; hf
u s but lt iE a point fre^enUy over*ru:c m a v seem to oe stating n"- v
This ma> seem
d i B C O U nte« present cost of holding any
lr^u-^d bv policy officials, ine a i ^ l , U M l »
looked D> pox >
innnne Ji is, therefore, not a quesnon-earnincr asset in perpetuity is infjniU .
non earn „
.
y hen and un,cr
tion of whether a given stock o« gor. is n
what conditions.
W oct of the v.-orH.'c „ w «.rnmenl, hoWI.en.d .n relatively smnl. •
-uantiti*. wh.cn individually ,ou,„ not bo sufficient to influence „ e „«r..o,
- 58 -
fcrice to any degree whatever their sales policy. A few governments,
iiowever, hold gold in large-enough quantities to be a significant or :;
«ven dominant factor in the world market. The United States is an
obvious example.
i
^The United States acquired its stock of gold prior to the early
1950's through purchases from world-wide producers and prior holders
of gold. These gold purchases were in essence an act of generosity if
not charity to the rest of the world. The dollars acquired could be used
to purchase American goods at by definition discount prices, or to invest
in American securities. In the 1950's and 1960's the United States
redeemed a large share of these dollars through gold sales but as a
further charitable act refrained from raising the price. The net result
was m u c h the same as if a very large long-term non-interest-bearing
gold cpllateral loan had been granted to the world in general.
At present the United States Government still holds a substantial
quantity of gold as a sterile asset, nearly 275 million ounces, equivalent
to 7 or 8 years' world production. In an earlier discussion of the interaction of the supply, demand, and price of gold it was concluded that at
the current price in real terms <about $125 in 1976 dollars) there is
sufficient basic private demand above mining production to absorb the .
present level of South African, Soviet, and I M F sales plus a small but
growing increment from other government stocks. Government gold
sales in larger amounts could be expected to drop the real price (but not
necessarily the nominal price). If government sales .are reduced or held
at the present level for a prolonged period of time the real price of gold
-would gradually rise as basic market demand increases along with rising
real income.
The gold stocks held by governments are roughly equal to all remaining below-ground gold reserves on this planet. Evidence indicates
that at prices as high as $200 an ounce (m 1H76 dollars) gold reserves
which could be economically exploited would not be significantly larger
-59 -
With world industrial consumption approaching 40 million ounces a year
and rising, and production rates not expected to increase even if prices
were significantly higher, gold is a m o n g the few minerals for which
.alternatives are limited to sales from government or substantial increases
in the real price.
-60-
S u m m a r y of Conclusions
Gold Production
1. Gold is among the world minerals in shortest long-range supply
in terms of below-ground reserves extractable at real prices close to
present levels.
2. The United States Bureau of Mines estimates that about 1.3
billion ounces (40, 000 tons) of gold can economically be extracted from
below-ground reserves at prices up to $200 an ounce in 1974 dollars.
3. Gold will be produced only when and if it can be sold in a competitive market at a price that exceeds production costs.
4. Capital resources will be directed into new gold production only
if the expected range of future prices indicates the investment will be
profitable.
5. Gold production costs everywhere have risen sharply in recent
years and on average are currently (mid-1976) close to the market price
level. Production costs in future years are expected to rise at a rate
at least equal to the world rate of inflation.
6. There is no reasonable prospect.of a future rise in world
gold production. Mining output has declined over 20 per cent since the
historic high of 47 million ounces in 1970 and is expected to at best hold '
relatively stable over the next decade if there is no further decline in
the real price.
Industrial Demand for Gold
1. Industrial demand is by far the majm- i:;ctor in the world geld
market, absorbing about H5 per cent oi all gold production over the past
30 \ears.
- 61 -
2. Industrial demand for gold has been highly responsive to
changes in the real price, increasing more than threefold from 1950
to 1970 when the real price of gold was in substantial decline, dropping
6harply in 1973 and 1974 when the gold price increased, and recovering
in 1975 and 1976 when the gold price again declined.
»
3. Industrial demand for gold is also responsive to changes in
real income. All other factors equal, the percent rise in industrial
gold will tend to be roughly equal to the percent rise in real income.
4. At the range of gold prices in mid-1976 ($120-$130 per ounce),
the industrial demand for gold plus the net off-take in gold coins is
approximately in balance with total world gold production outside the
Soviet Union plus all sales from official stocks. There is very little
acquisition of gold bullion for speculation and investment.
The Supply-Demand Outlook
1. At a constant real price industrial demand for gold and the offtake of gold coins is expected to gradually rise over the next decade.
With production at best holding level there should be an increasing margin
for gold sales from official stocks. The present annual volume of
government gold sales from all sources (about 10 million ounces) might
increase to perhaps 25 million ounces in 1985 with no change in the price
in constant dollars. A significantly larger volume of government sales
over the next decade would probably reduce the real price of gold. If
there were no increase in the volume of government gold sales the real
price would probably rise.
2. Over the lor:: run the :r-.erare maivo'. price
K
f gold will tend
<o crv-.d-.iaUv ripe, frecujenllv o«c!!:"m: v n k i u a ranr-. of :'U per r e m or
so l i m b e d by av.-ra-e mini!.- pro •uciioi. eos's on the lev: side and the
choke poinl of industrial c o n s u m e r s M - ihe !:•••!: ride.
-€2 -
T h e Gold Market
1. The bulk of world gold production is sold directly into the
dealer market, primarily through Zurich and London.
«
2. Direct marketing arrangements between gold producers and
industrial consumers (common in copper, aluminum, platinum, and
palladium) are rare.
3. A free gold market with prices fluctuating according to changing
supply and demand is a recent historical development dating only from
March 18, 1968. Prior to that time the price of gold was fixed or
strongly influenced by governments based on monetary considerations.
4. • Less than 20 major dealers operating out of London, Zurich,
N e w York, and Frankfurt handle virtually all gold bullion transactions in
the world market acting as a point of convergence for buyers and sellers
both in space and time.
5. World gold dealers, although they.are in constant communica-'
tion and trade extensively with one another, are highly competitive and
work on extremely close buy-sell margins.
6. The major gold dealers are not speculators, and avoid open'
positions by balancing purchase and sales commitments to the extent
possible.
7. Successful gold dealing requires a substantial source of capital
and ready access to a supply of low-cost credit. All of the major traders
are either banks, owned by banks, or have,close working arrangements
with banks.
C. The world gold market is new and in many ways different from
the markets for other commodities. New trading practices are appearing
regularly and the institutional structure of the market is being created
bv those who are participating in the day-to-day actions.
-63 -
©. An important new market development is the spread of
^'leasing" arrangements by which gold formerly held in sterile private -"'
or government stocks can be m a d e available for industrial use with a cast
return to the continuing owner.
10. The United States is the newest and fastest growing part
x>f the world gold market.
11. For reasons set forth in this report, the United States, with
principal operations in New York and Chicago, is likely to become the
largest of the world gold trading centers as it is for other commodities.
12. Speculative demand for gold has not been an important market
factor except in two brief periods at the end of 1967 and in 1974.
13. Investment demand for gold is only marginal and is largely
-concentrated in coins. Most of the residual private gold hoard has been
accumulated over a long period of time, is widely diffused among many
xelatively small holdings, and does not constitute a volatile "overhang"
to the market.
14. The largest volume of speculative -- as well as industrial -demand for gold is in the United States. In addition to annual bullion .
coin purchases of nearly 2 million ounces, American speculative interest
in gold is expressed through futures trading on the commodity exchanges.
15. Although trading in gold futures is still only a.small fraction
of silver futures trading it will probably grow steadily with increasing
participation by the speculating public.
16. The expansion in cole: future- tracking will teiul to dominate the
world price and will mean more frequent and larger short-run price
movements.
- 64 -
Government Gold "Stocks
1. Gold is among the few minerals that could reach a critical
supply situation within this century, taking account of available reserves
above and below ground.
2.* The gold stocks held by governments are roughly equal to all
remaining below-ground gold reserves on this planet and ultimately will
be essential to supplying world industrial needs.
Ihe Depanmlnt of theTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 964-2041
REMARKS BY THE HONORABLE GEORGE H. DIXON
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
ROCHESTER CHAPTER, AMERICAN INSTITUTE OF BANKING
ROCHESTER, NEW YORK
SEPTEMBER 11, 1976
Ladies and Gentlemen:
Good evening. What a stroke of good fortune it was to
receive your wonderful invitation to be with you this evening;
for in addition to this happy Bicentennial occasion, it has
meant a chance to come back to the place where I was born, went
to school, got in trouble, and learned something of the ways of
the world—at P.S. #7, Jefferson Junior High, and John Marshall
High School. So I'm especially happy to be here, and I thank
you for your invitation.
The American Institute of Banking is an organization which
performs an extraordinarily useful function for its members and
for the banking industry. You are a large audience, and your
presence attests to the support A.I.B. receives from its members
and the banks for which they work.
As Congressman Frank Horton noted in his gracious introduction, I have been a member of the Treasury team but a short time.
If this were last year, I might well be sitting at a table in an
audience much like 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 less compelling. It's remarkable
what a few months in Washington will do to one's perspective.
This being a Bicentennial celebration, may I share with you
a message from a recent event at Treasury, where we, too, are
observing our two-hundredth birthday.
Last Wednesday (September 8, 1976), Secretary Simon dedicated
a Treasury Time Capsule. It is now sealed and on display in the
Cash Room of the Main Treasury Building for the next century, to
be opened in the Tricentennial Year 2076 by the future Secretary
of the Treasury.
WS-1095
- 2 The Capsule contains a message from President Ford to Americans
living then, a message from Secretary Simon to his future counterpart, and a selection of contemporary memorabilia.
The theme of Bill Simon's message is inscribed on a bronze
plaque marking the location of the Capsule. It says:
"America's greatest resource is the vibrant
heritage of a free people. May we have the
wisdom and the vision to nourish this birthright forever."
No message could be more appropriate. American history
records, time and again, the contributions made to our society
by men and women of vision, determination, energy, and faith in
our democratic institutions. Their ideas, brought to fruition,
have provided the nucleus for the great businesses and advanced
technology of today.
But as we celebrate our Bicentennial, we are also aware of
the loss of confidence of our fellow citizens in government and
business. As you know, the last three years have been a time of
economic anxiety for all of us. We've had 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 industrial power,
our system has become vulnerable to the political pressures of
foreign nations, notably of the OPEC cartel.
If there is a silver lining in this experience—and I think
there is—it's that many people are wiser now about our economy
than they used to be. As a nation, we have a clearer understanding of fundamental economic concepts and a better appreciation of the complex nature of the problems we face. To those
who say that the old principles of frugality and free enterprise
no longer work, our answer: It's not our principles that have
failed us, but that we have failed to live up to them.
During the 1960's, you may recall there existed a popular
belief that we had outgrown the business cycle: the government,
it was thought, could simply fine-tine the economy, pulling or
pushing on its controls to assure a continually smooth upward
ride. We could spend our way to a great society, fight a costly
land war in Asia, and solve many other problems—all at the same
time. We now have learned, once again, that the economic cycle
is still a powerful reality and that no government can guarantee
smooth sailing and instant happiness for all its citizens.
We also have a better grasp of the implications of everincreasing government spending and government deficits. Only
- 3a few years ago, many respected economists thought that government pump-priming during a period of slack was a guaranteed
method for safely reviving the economy. Today we know that when
government has a very large place in our economic system, as it
does now, further deficit spending beyond a certain level produces overheating, a new round of inflation and then contraction.
The role of government in our economy should be a matter of
major concern to businesses and to citizens all across our land.
It is obvious that as inflation has taken its toll and as government has required more and more money for its own programs, there
has been less and less available to private enterprise and individuals for investment and spending purposes. Since 1960 this
country has invested less of its Gross National Product in private
enterprise than any other major industrialized nation—far less,
for instance, than Japan, West Germany, Canada, or France. Over
the past decade, the Federal Government has borrowed nearly onethird of a trillion dollars in capital markets, and during that
period the interest on our national debt has more than tripled—
to almost $38 billion this year, and it's headed quickly to
$45 billion.
Over the past fifteen years, government spending has increased
dramatically. For 185 years of our history 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; four years later, in 1973, it 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 billion each
week.
All of this has happened because over the years we have
established by edict, law and common consent some very worthy
national goals—goals which we have been working to achieve. They
include an expanded Social Security program, benefits to the underprivileged and to veterans, improved housing for our people, more
education and training, and protection of the environment. In
Fiscal Year 1977, existing laws have mandated payments for these
programs at about $170 billion—more than the entire federal budget
eight years ago—which is to suggest that we have bitten off more
than we can chew, that we've been guilty of trying to cram four
pounds of commitments into a three-pound bag. While we recognize
the value of these programs, we also learn that an effective social
system is dependent upon a stable, healthy economic system. We
learn that Washington cannot solve all of our problems at the
same time. Indeed, in trying to do so, government itself has
created some national problems—in the form of government spending,
government deficits, government bureaucracy, and government regulation.
- 4 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 in new
investment in the next decade is formidable by any standard, but
it can be found if we can just open the capital investment door
a little wider.
We are now in the midst of a healthy economic recovery.
Admittedly, what a few weeks ago was a romping, robust surge,
has slowed somewhat. But recovery it is. And it carries with it
solid grounds for believing that if reasonably good decisions are
made and implemented, we have every reason to expect that expansion will continue throughout 1976 and 1977. As we experience
this recovery, we owe some thanks to President Ford's even-handed
economic policies and forceful vetoes of expensive spending bills
that might have thrown us into 2-digit inflation again.
I've already suggested that if the future health of the economy
is to be assured, positive steps must be taken to improve our overall
business environment. There are four key areas where changes are
essential, three of them relating to government policies:
First, we must achieve a greater public understanding of basic
economic fundamentals. In the early 1960's, after serving 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."
The sad truth is that not enough Americans know the fundamentals
about our economy--about profits, capital investment, productivity,
the real sources of jobs and higher living standards. The misunderstandings about socialism and capitalism that exist in our schools
today border on a national scandal. "How," someone has asked,
"have we managed to raise a whole generation of young people who
do not know how their parents make a living?"
In my view, those who practice free enterprise should accept
more of the responsibility for getting the message across to the
American people. It is a battle where victory requires the application of steady, persistent effort, probably over a generation.
Actually, American economic fundamentals are not mysterious; the
basic principles are really quite simple. For example,
— What
is the more
result,
only the result, of
— we
We produce
cannot consume
than and
we produce.
our labor.
- 5 The product that government gives to some of us, it
must take away from others.
If government takes too much away from those among us
who produce and gives it to those who don't, our
capacity to produce will diminish, and everyone—
non-producer as well as producer, poor as well as
rich, senior citizen and urban youth—everyone—
will lose.
— A central government, directing our every activity,
insinuating itself into every nook and cranny of our
society, trying by fiat to cure every failure and ill
of mankind, and borrowing from the future to pay for
today, cannot succeed, nor can it ever be even the
ghost of a substitute for the countless individual
economic deicsions, freely made by a free society.
— And finally, to say it once more, but not too many
times: "There still ain't no such thing as a free
lunch."
Second, the government must put its own financial house in
order. The excesses of the past decade can be continued only at
the expense of price stability and a healthy economy. In the
past two years alone, federal outlays have grown by over forty
percent.
We have had an unprecedented string of budget deficits in
sixteen out of the last seventeen years. This record must be
changed. Over time our budget must be balanced, or preferably
be in surplus.
In the current fiscal year, four out of every five dollars
borrowed in the securities market will be soaked up by the
government. That dominance must end.
The third key area in which changes are essential is the
federal tax structure. It must be altered, I believe, to encourage greater investment.
In his State of the Union message, the President in January
outlined reductions in individual and corporate income taxes, plus
a series of tax incentives to encourage investments in America's
future. His tax measures were coupled with a budget proposal to
reduce federal spending. It appears that Congress will enact some
of the President's tax proposals regarding tax cuts and investment
incentives, but not all of them; nor is Congress adopting his
proposed reduction in government spending.
- 6 Adoption of these proposals is not really enough. What we
really need is a total restructuring of the federal tax system.
In trying over the years to develop a tax system that is both
equitable and fair, we have created a monster that defies understanding. Two out of every five taxpayers now seek outside help
to complete their tax forms. The exceptions and complexities
written into the tax laws make it impossible to assess its
fairness—not even the IRS understands it consistently. And
over the last seven years during an inflationary period with
greater government spending, the burden on taxpayers has increased faster than any other item in the American family budget.
The Treasury Department is currently working on a proposal that
would not only simplify the federal tax system but would truly
reform our tax structure.
Finally, a return of greater decision-making power to
private hands would ultimately serve to allocate resources more
efficiently and enable our economy to allocate capital resources
more effectively. One important step in accomplishing this goal
is to decrease the ever-increasing encroachment of government
into our personal and professional lives through federal regulation and reporting requirements. Some regulations, of course,
are necessary—but others are obsolete, wasteful, and destructive
of initiative. As President Ford has repeatedly said, those
regulations that no longer serve a useful purpose should be
eliminated, before we all strangle in our own red tape.
Bureaucratic regulations are no joke, of course, to the
businessman who must conform to them. But I do know that an
increasing number of business leaders are beginning to feel the
same way as a merchant who recently attended a seminar conducted
by one of the regulatory agencies and was told about the rules
he would have to follow. After the meeting ended, the merchant
was asked if he had profited from it. "Oh, yes," he replied,
"I've already bought the sign I'll be forced to keep out in
front of my store—the one that reads "For Sale."
As you may know, the Administration and the Congress have
also been working on some additional regulatory subjects that
affect the banking industry directly. The next two years may
well produce legislative initiatives which will materially alter
the operations and dynamics of banking. Three important subjects,
all interrelated, are under active consideration by the Banking
Committees of the Congress. These are financial institutions
reform, regulatory consolidation, and electronic banking.
In the first instance, the Administration has been working
for several years on a specific legislative proposal titled the
"Financial
Institutions
Act."
This Act
would
substantially
tutions.
increase
competition
The
increased
between
competition
various
and
types
reduction
of financial
of existing
insti-
- 7regulatory and statutory barriers would permit eventual elimination
of Regulation Q interest rate ceilings. These have been detrimental
to the consumer during periods of high interest rates and have been
ineffective in addressing the problem of disintermediation. The
President's proposal for financial institution reform failed this
year, even though for awhile it appeared that it would pass. But
the subject has never been a partisan matter, and we fully expect
the legislation to emerge from the next session of Congress. When
that occurs, the subject may be expanded to include discussion of
other issues, like the payment of interest on demand deposits, the
abolition of state usury laws, the liberalization of the McFadden
Act, and the authorization of variable rate mortgages for federallychartered institutions.
There have also been a number of proposals to consolidate or
otherwise change the functioning of the bank regulatory system.
Many of those proposals would lead to increased regulation and to
a loss of independence on the part of the Federal Reserve Board
and the other banking agencies. I assure you that the possibility
of increased regulation under the guise of regulatory reform is
very real. Yet a major thrust of the Ford Administration has
been to eliminate or to simplify the regulatory process—not to
add to it.
As you know, also, the National Commission on Electronic
Fund Transfer is studying the implications of a "checkless society."
Its final report, due in October of next year, may result in setting
ground rules for the further application of this technology. The
Department of the Treasury is in the forefront of this change,
having embarked upon a nationwide program of direct deposits,
providing cost benefits and convenience both to banks and to
recipients of government payments.
And so, leaving the issue of government regulation, let me
return to my opening message:
"America's greatest resource is the vibrant
heritage of a free people. May we have the
wisdom and the vision to nourish this birthright forever."
As we enter our third century, we do have the wisdom and
the vision to successfully pursue our challenges, to build on
our heritage and to provide hope and inspiration for free people
everywhere, certainly here in Rochester.
Will Rogers once commented about that great chewing gum
entrepreneur, P. K. Wrigley. He said, "All Wrigley had was an
idea. He saw that American jaws always had to wag, so he gave
them something to wag against."
- 8My jaws wagged long enough. Thank you, ladies and
gentlemen, for the opportunity to be with you tonight. I
wish you success in your year's A.I.B. activities.
0O0
FOR IMMEDIATE RELEASE
Contact: J.C. Davenport
Extension: 2951
September 22, 1976
TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT LESS THAN FAIR VALUE WITH
RESPECT TO MELAMINE IN CRYSTAL FORM
FROM JAPAN
Under Secretary of the Treasury Jerry Thomas announced
today that melamine in crystal form from Japan is being or
is likely to be sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended. Notice
of this determination will be published in the Federal
Register of September 23, 1976.
The case has been 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 injury determination,
dumping duties will be assessed on all entries of the
subject merchandise from Japan where dumping margins exist.
A "Withholding of Appraisement Notice" published in
the Federal Register of June 18, 1976 stated that there was
reasonable cause to believe or suspect that there were
sales of the subject merchandise from Japan at less than
fair value. Pursuant to this notice, interested persons
were afforded the opportunity to present oral and written
views prior to the final determination in this case.
Imports of the subject merchandise from Japan were
valued at approximately $1.4 million during calendar
year 1975.
* * *
WS 1096
September 22, 1976
STATEMENT BY SECRETARY OF THE TREASURY
WILLIAM E. SIMON
ON THE DEATH OF MR. ORLANDO LETELIER DEL SOLAR
The Treasury Department learned with deep regret of
the tragic death of Mr. Orlando Letelier del Solar.
Secretary Simon said, "Mr. Letelier, a former Ambassador
to the U.S. from Chile and previously a senior official
of the Inter-American Development Bank, was the victim of
a senseless and brutal act yesterday morning. I would like
to express my deep concern over his tragic death and
extend my deepest sympathies to his wife and family."
0O0
FOR IMMEDIATE RELEASE
Contact: J.C. Davenport
Extension: 2951
September 22, 1976
TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT LESS THAN FAIR VALUE WITH
RESPECT TO MELAMINE IN CRYSTAL FORM
FROM JAPAN
Under Secretary of the Treasury Jerry Thomas announced
today that melamine in crystal form from Japan is being or
is likely to be sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended. Notice
of this determination will be published in the Federal
Register of September 23, 1976.
The case has been 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 injury determination,
dumping duties will be assessed on all entries of the
subject merchandise from Japan where dumping margins exist.
A "Withholding of Appraisement Notice" published in
the Federal Register of June 18, 1976 stated that there was
reasonable cause to believe or suspect that there were
sales of the subject merchandise from Japan at less than
fair value. Pursuant to this notice, interested persons
were afforded the opportunity to present oral and written
views prior to the final determination in this case.
Imports of the subject merchandise from Japan were
valued at approximately $1.4 million during calendar
year 1975.
* * *
WS 1096
FOR IMMEDIATE RELEASE
September 23, 1976
ARTHUR BURNS HONORED AT TREASURY
DEPARTMENT
Treasury Secretary William E. Simon today presented the
Alexander Hamilton Award, Treasury's highest award, to
Dr. Arthur F. Burns, Chairman of the Board of Governors of
the Federal Reserve Board.
In presenting the award, Secretary Simon lauded Dr. Burns'
"legendary stamina. . . his courage . . . and his dedication
in placing the health and survival of this nation above all
other concerns." Secretary Simon said: "In the whole history
of the United States, I doubt that there has ever been a closer,
more rewarding personal and professional relationship between
the Secretary of the Treasury and the Chairman of the Federal
Reserve Board. The relations between us and between the members
of our respective departments have not just been cordial, they
have been warm."
Alluding to recent public suggestions by some "that it
would be a good idea to give the White House or the Congress
more control over the nation's money supply," Secretary Simon
said; "I just want to say that I think such proposals are
dangerous, and I agree completely with Chairman Burns' recent
statement that " 'such a step would create a potential for
political abuse on a larger scale than we have yet seen.' "
The Alexander Hamilton Award, established in 1955 in
honor of the first Secretary of the Treasury, consists of a
gold medal, a certificate signed by the Treasury Secretary
which is enclosed in a blue padded Morocco leather folder with
white silk lining, and a miniature Treasury flag.
It is usually conferred by the Secretary of the Treasury
on highest officials of the Department for "outstanding and
unusual leadership" in the work of the Treasury Department.
The award to Dr. Burns was only the second given to a nonTreasury official. In January, 1970, then Treasury Secretary
David M. Kennedy presented the award to William McChesney Martin,
Jr. Dr. Burns' predecessor at the Federal Reserve Board.
oOo
WS-1098
FOR IMMEDIATE RELEASE
September 2&, 1^7*
Arbitrage Profit in State and Local Refunding Bonds
The Department of the Treasury announced today its
intention to propose regulations designed to limit the
opportunity for arbitrage profits in connection with the
advance refunding of tax-exempt securities. Such regulations will apply to any refunding obligations delivered.
after 5:00 p.m. E.D.T. September 24, 1976.
Background
In 1969, Congress enacted Section 103(d) of the
Internal Revenue Code. Section 103(d) recognizes that
under many circumstances advance refundings can be a
legitimate tool of municipal finance. At the same tine,
however, Congress sought to prevent advance refundings
which generate arbitrage profits — that is, profits
based upon the difference between the cost to the issuer
of the advance refunding issue and the returns available
from investment of the proceeds in taxable issues pending
retirement of the bonds to be refunded -- and conferred
upon the Treasury broad authority to promulgate regulations
carrying out the purpose of this provision.
Section 103(d) and regulations promulgated thereunder
have been successful in preventing issuers from directly
realizing arbitrage profits on advance refunding issues.
Recently, however, cases have occurred where an issuer which
cannot directly obtain the benefit of arbitrage enters into
an arrangement or understanding to transfer the profit to
a pension fund, charity or similar oarty. Alternatively,
such a party may be selected to receive the profit by
providina "tailored" securities to the issuer. In these
transactions the issuer is retaining rights or reasonably
expects benefits which are not consistent with Section 103(d)
WS-1097
- 2 However, the existing regulations have not prevented
opportunities for arbitrage profits in other circumstances.
Whiie the specific devices vary from transaction to transaction, the principal device to generate such profits is a
sale of U.S. Government securities to the issuer at a
premium sufficiently high to reduce the yield on the
securities to a level permissible under existing law. In
the Department's view, such transactions should not be
permitted under Section 103 (d), and the forthcomina regulations are designed to prevent their future occurrence.
The Department is taking action at this time not only to
carry out the statutory purpose in light of these developing
circumstances, but also to deal with a potentially serious
threat to the viability of the tax-exempt market. In the past
year, various Department spokesmen have expressed concern over
the possibility of supply/demand imbalances in the market and
the poten
@FedFRASER