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TREASURY DEPARTMENT
partmentoftheTREASURY
;HINGTON,D.C.
20220
TELEPHONE 566-2041
FOR RELEASE - ON•DELIVERY
Expected at 11:30 a.m.
Monday, April 3, 1978
STATEMENT OF THE HONORABLE ROGER C. ALTMAN,
ASSISTANT SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE HOUSE BUDGET COMMITTEE
Mr.
Chairman and Members of the Committee:
I am pleased to appear today to discuss with you certain
of the President's urban policy initiatives. The Administration
has worked hard this past year to analyze social, economic and
fiscal conditions in American cities, the effectiveness of existing Federal policies and programs aimed at cities, and, then, to
determine the need for new program initiatives. The culmination
of this process was announced by the President last Monday.
His urban policy proposals are worthy of your support, and
we join with the other Departments in urging you to include
the related funding in the First Concurrent Budget Resolution.
The President's message presented the conceptual framework
of his urban policy. Over this next month we will be drafting
legislation on the various program initiatives in consultation
with the Congress. So today I will not describe the specific
details of initiatives, but I will address the general thrust
of three components of the President's urban policy proposal:
the National Development Bank, Supplementary Fiscal Assistance
and the tax proposals — the industrial revenue bonds, the
differential investment tax credit and the employment tax
credit. These initiatives address the following principles
of the President's urban policy:
o Involving all levels of government and the private
sector.
o Leveraging significant private sector resources.
o Increasing access to opportunities for disadvantaged
people.
o Providing flexibility to respond to diverse needs of
all cities and communities while recognizing that
certain localities will require strategic targeting
of resources.
- 2 The National Development Bank
It is clear to us that a crucial cause of urban decay
has been the decline of the private sector employment base
in central cities. This has resulted in a smaller tax base
and higher fiscal strain for city governments. While fiscal
and monetary policies are effective instruments for improving
the overall level of economic activity, we have learned that
they are not precise enough tools to address the interrelated
problems of slow growth, chronic economic decline, and the
resulting high levels of unemployment among certain groups
in many of our cities. We believe, therefore, that new Federal
incentives for the private sector to expand job opportunities
in distressed areas should be undertaken.
The National Development Bank represents a long-range
economic development strategy to rebuild the private economies
of distressed areas. Its key objective is to help create
permanent jobs.
This strategy includes a set of financing incentives
to influence businesses to remain and expand or to locate
in distressed areas. The effect of these incentives would
be to improve business and job opportunities by lowering
one element of the costs of doing business — the cost of
capital.
The package of incentives includes:
1) A program of "up-front" capital grants involving up
to 15% (or a maximum of $3 million) of an eligible
firm's capital costs for rehabilitation or fixed
asset expansion. EDA and HUD grants would be
used.
2) In coordination with the grants, a program of loan
guarantees to cover 75% of the remaining capital costs
at interest rates representing a slight premium above
Treasury rates. In special circumstances the Bank
could subsidize the interest rate down to 2.5%. The
business or project could only receive this package
of a grant and loan guarantee if it obtained the
balance of its needed financing from private sources.
3) An increase in the limit from $5 to $20 million of
tax-exempt or taxable industrial revenue bonds that
can be issued in an economically distressed area.
- 3 4)
A new secondary market for a) private loans
made directly to eligible small- and medium-sized
businesses to finance capital expenditures; and
(b) the private loans made to businesses receiving
federal financing assistance through the Development Bank.
A "private market test" will place the initial credit
decision not in the Federal bureaucracy, but in the private
market. This test will differentiate between economically
viable projects which can provide permanent private sector
jobs and those which will fail. It will also help ensure
that the Bank will be financially self-sustaining. Hence,
we think that the Bank can leverage significant private
sector investment in distressed areas with relatively small
Federal exposure.
Successful local economic development requires public and
private cooperation and careful planning at the local level.
We have designed this Development Bank as a catalyst for promoting public and private sector cooperation in distressed areas
and one which will leave maximum flexibility for economic
development planning at the local level.
This proposed Development Bank, Mr. Chairman, is the
result of an intense analysis of current Federal economic
development programs and a series of consultations with
Mayors, Governors, academicians, economic development
practitioners, and representatives of the business, labor
and financial communities. It will not duplicate existing
federal programs, but, rather, fill a gap among federal
tools aimed at local economic development. Specifically,
there is no major Federal program involving truly long term
financing incentives to affect business locational decisions.
Mr. Chairman, our combination of long term financing incentives
are strong enough to influence locational decisions. They
can reduce long term business borrowing costs significantly
and impact job creation. Local practitioners have confirmed
that it is a proposal which can be combined with other resources
to seriously attack the continuing losses of private investment
and jobs.
A crucial question in considering this proposal, of •
course, is why the Federal Goverment should influence
locational decisions at all. We think that the answer is
clear. For years, through a variety of programs, the
- 4 Federal Government has directly and indirectly encouraged
certain developmental patterns. It is only logical that
rebuilding distressed areas must be an object of Federal
policy.
The costs of doing nothing are too high — they include
the tremendous human suffering and capital waste of permitting
these areas to continue to decline. They include increased
costs for welfare, health and unemployment compensation
for the unemployed — those who cannot move to find new
jobs in growing areas. They include the inefficient use
of scarce national economic resources which flow into new
areas to build new private facilities and public infrastructure
while the old and valuable infrastructures are underutilized.
Supplementary Fiscal Assistance Program
Let me turn now to discuss the fiscal relief component
of President Carter's urban policy — our proposed Supplementary Fiscal Assistance Program. This would replace the
expiring Anti-recession Fiscal Assistance Program (frequently
called countercyclical revenue sharing), and would use the
$1.04 billion already contained in the President's fiscal
1979 budget for the countercyclical program.
The new program, Mr. Chairman, would provide relief
to local governments experiencing fiscal strain because
of underlying and long term economic decline. We are
recommending it because there are a series of local
governments which cannot withstand the impact of losing
their current countercyclical funds. These are not
governments, however, which are experiencing temporary
recession-induced fiscal strain. Instead, their fiscal
difficulties reflect shrinking urban revenue bases caused
by the long-terra out-migration of taxpayers, investment
and jobs or by underdevelopment.
During the past year, the Treasury Department studied
carefully the fiscal conditions of our largest municipalities.
Indeed, as part of this effort, some of you may be familiar
with a report we made available to Congress concerning the
fiscal impact on these municipalities of President Carter's
1977 Economic Stimulus Program. In that report, we developed
an index of "municipal fiscal strain" and ranked the 48
largest municipal governments according to that index. It
became clear to us that certain local governments are
experiencing considerable fiscal strain. Their revenues
are stagnant, and the combination of inflation, high local
unemployment and high concentrations of low income persons are
- 5 exerting upward pressure on their expenditures. The loss of
countercyclical funds would require these "high strain"
localities to implement severe fiscal austerity programs,
which would have highly negative effects on the provision
of municipal services to their citizens. These high strain
localities are precisely those who are least able to afford
the loss of monies available under the current countercyclical
programs. Many simply would be unable to balance their
budgets without it. Their only choices would be to cut
expenditures or raise taxes by the amounts of countercyclical
funds lost. Yet, in these areas, taxes already are at high
levels and raising them further would be counterproductive
to economic redevelopment. Concerning service reductions,
many of the largest cities would be forced to cut services,
such as police and fire, which are vitally needed. In
addition, they are already experiencing high unemployment
levels, and further layoffs could only worsen their economic
plight.
Tax Proposals
Industrial Development Bonds
Let me now address the three tax portions of the
President's urban policy. As part of the Development Bank
proposal, the President has recommended changes in the small
issue exemption governing the use of tax-exempt industrial
development bond (IDB) financing. Under current law, small
issue IDBs can be issued on a tax-exempt basis for financing
investment in depreciable property or land by private business
firms. The use of such tax-exempt financing within any
county is limited to the first $1 million of any project or,
alternatively, to $5 million if total capital expenditures by
the firm over a six-year period, beginning three years before
the date of bond issue and ending three years after, do
not exceed $5 million.
In the tax reform program, the Administration proposed
that the use of tax-exempt small issue IDBs be repealed
except for distressed areas and that for such areas the $5
million limit be increased to $10 million with the capital
expenditures limitation applying at this higher level. The
original IDB proposal reflected the concern of this Administration that preferential tax-exempt financing be channeled
to areas of most urgent need.
The current proposal extends the IDB recommendations in
the tax reform package. The increase of industrial development bond financing to $10 million in the tax program will
- 6 be further increased to $20 million. The urban policy
IDB proposals leave intact the recommendations in the tax
reform program to remove tax-exempt industrial development
bond financing in areas which do not qualify as distressed.
Thus, while the dollar limitations are liberalized, there
is still a strong commitment to limit the use of tax-exempt
IDB financing to those areas of the country which are having
difficulty in attracting private capital. Also these IDB's
will be eligible for the Administration's taxable bond option
proposed as part of the tax reform program. Under the taxable
bond option, state and local governments will have the choice
of issuing tax exempt or subsidized taxable bonds. The Federal
subsidy on taxable bonds will be 35 percent of the taxable
rate for bonds issued during the first two years and 40 percent
thereafter. The urban policy IDBs may also be issued on either
a tax exempt or a subsidized taxable basis.
Differential - Investment'Tax-Credit
In addition, the Administration is proposing, on a twoyear trial basis, a program of a differential investment tax
credit for private investment (including the construction
and rehabilitation of industrial buildings) for the improvement
of distressed areas. These tax credits would be administered
by the Commerce Department except that the income tax system
would be employed as a clearing mechanism for final payment
to the investor. Authority to grant the additional five
percent investment credit would total $200 million for each
of the next two years.
To become eligible, a company would apply to the Commerce
Department for a "certificate of necessity" basing its request
on financing need and employment potential for the particular
project in the distressed area. The certificate would be
attached to a firm's tax return, thus making the firm automatically eligible for the additional five percent investment
tax credit for the specified amount of the project.
This program would be similar to that which was used
and administered by the Defense Production Board during
World War II and the Korean War. The Treasury Department
would be responsible to audit the firm's net tax liability
and not its eligibility for the certificate of necessity.
Employment Tax-Credit
The Administration proposes a targeted employment tax
credit that would substitute for the new jobs tax credit in
the present law that is scheduled to expire at the end of this
- 7 year. A tax credit for employment is desirable because of
persistent problems of structural unemployment, but the existing jobs credit addresses the unemployment problem in a very
unfocused and uncertain way. That credit has been available
for the employment of workers generally and only for firms
whose employment is growing. The credit is uncertain in
application because an employer needs to predict the rate
of growth of his unemployment tax base to the end of the
year in order to judge whether a credit will be allowed.
In the case of slow growing industries and regions, the
credit is denied to most employers simply because the demand
for their products does not justify an increase of the wage
base by more than two percent over the previous year. No
employment incentive is provided to large employers that
expect to grow by more than about 50 employees in a year.
Preliminary results from a recent survey of taxpayers
conducted by the Census Department for an inter-agency
task force show that less than 3 percent of employers
report any conscious effort to increase their employment
in response to the credit. These preliminary results also
suggest that at least 80 percent of the dollar amount of
the credit will be received by employers who report no
conscious effort to increase employment.
The Administration proposal would focus the employment
incentives of the tax credit on the most serious structural
unemployment problem: the high incidence of unemployment
among disadvantaged youth and handicapped workers. The
categories of individuals who would be aided under this
proposal have a recent rate of unemployment of about 5 times
that of the remaining labor force. This proposal would
not discriminate against slow growing or declining firms
nor against firms with rapidly expanding employment opportunities. It would, however, require that all of the benefits
be targeted at a demonstrated special problem area of unemployment. As compared with the present jobs credit, this
proposal would provide a larger dollar amount of incentive
to employ each worker over a two-year period, but at less
than one-half of the total revenue cost of the present program
in a typical year.
According to the Administration proposal, a tax credit
would be allowed to employers of eligible handicapped and
disadvantaged individuals for two full years.
The major identifiable source of structural unemployment is minority and disadvantaged youth. Most other groups
within the labor market do not suffer from pervasive structural
- 8 unemployment. There are approximately 2.3 million young
Americans between the ages of 18 and 24 who live in low income
households. The recent unemployment rate among this group
is 26 percent; and this does not count the large number of
such persons who wish to work full time but can find only
part time work or who have not been seeking work because
they believe it is futile.
This program will provide strong incentives for
employers to offer employment opportunities to those
disadvantaged young people who have found it most difficult
to gain the important experience of working in the private
sector. Because the tax credit is continued for up to two
years for each employee, there is an incentive for employers
to retain these employees long enough for them to gain
sufficient work experience and training to become a part
of the regular workforce. Therefore, this program will
provide the necessary extra help to bring into our country's
workforce many young persons from low income backgrounds,
who might otherwise be denied entrance into the regular
private job market.
I appreciate this opportunity today to present the
broad outlines of some of the urban initiatives. We look
forward to working with you and the other members of Congress
to achieve the President's urban policy goals.
oOo
FOR RELEASE ON DELIVERY
April 5, 1978
10:30 a.m.
STATEMENT BY THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY FOR
ENFORCEMENT AND OPERATIONS AT THE THIRD
SOUTHWESTERN STATES CONFERENCE ON
CRIME AND THE BORDER
ALBUQUERQUE, NEW MEXICO
It is a pleasure to be here with you along the Southwest
border - a part of our country appropriately known for its dynamism and the strength and diversity of its people. Like other
regions in our country, however, it is also confronted with a
series of complicated, and difficult problems. Some of these
problems are properly viewed as being essentially social and
economic in nature: the issues raised by the presence of undocumented aliens largely fall in this category. Others, however, are
more clearly of an enforcement nature. These include the smuggling of narcotics, firearms and other commodities across the
Mexican/United States border. In the several days of this conference it is this latter group of problems—and particularly
narcotics smuggling—which are the focus of attention.
My purpose here today is to share with you our view that
meeting the enormous challenges raised by these problems requires
a unity of effort involving all of us--the states, the Federal
B-810
- 2 «
government, and our neighbor, Mexico.
I would like to discuss
with you some of the obstacles I have observed to effective
cooperation during my experiences as a Federal prosecutor, and
now as a Treasury Department official. By identifying these
obstacles, hopefully we can avoid them. Finally, I would like
briefly to share with you proposals recently made in the firearms area which could assist state and local governments in
their struggle against violent crime, and in which you may have
an interest.
This conference, with its broad base of state and federal
agency representation and with representatives from our good
neighbor, Mexico, represents an admirable recognition of certain
truisms in the world of law enforcement which are often ignored:
that crime knows no boundaries—those violating our laws do not
respect particular state, city or even international borders,
but instead carry out their activities wherever they see financial
gain; that criminals do not conform their conduct to how we write
our criminal laws and divide up our responsibilities—criminals
commit their acts for gain and usually not with specific regard
to whether the laws they break are enforced by state authorities,
the FBI, DEA, Customs, ATF, or the Albuquerque Police Department;
that a single series of acts might involve violations of laws
enforced by all of us; and the final truism, that crime—
particularly the kind of crime involved here--is too big to be
challenged by a single agency or a single level of government
standing alone.
- 3 These truisms operate everywhere in varying degrees, but
no where are they clearer than along the Southwest border. We
share 2,000 miles of border with Mexico. And through the
twenty-four ports of entry along that border some 5 million
vehicles and 170 million persons enter the United States on an
annual basis. In addition, millions of people and a huge volume
of air cargo arrive annually through our international airports
in this area.
Given these facts it is not surprising that we are confronted with a major problem of narcotics smuggling across the
border into the Southwest, and beyond the border into the rest
of the United States; and a problem of smuggling of commodities—
both otherwise licit and illicit—in both directions across the
border. And to meet this problem the total combined DEA, INS,
Customs, and ATF presence along the border, including administrative personnel, is only approximately 5,700 people.
Faced with these problems, and the reality of our own
limitations, we all, I believe, should accept another basic
truism--that we must pool our efforts and work together if we
are to have any impact at all on the enforcement problems with
which we are all concerned. But while this need is clear, it is
not always simple to implement. As a federal prosecutor in
New York, as well as in my current position in the Treasury Department, I have had first hand experience in the interaction of
- 4 federal agencies with each other, and with state agencies.
While cooperation was always the official byword, I am sad to
report it was not always a reality.
The first pitfall which I have sometimes observed
accompanying joint investigative efforts is destructive competition. Now I have used the word "destructive". Competition
is not always bad: to some degree it is the engine for greater
efforts. And by saying that such competition is a pitfall, I do
not mean to suggest that it is maliciously motivated. Competition
is largely motivated by a desire to receive credit for success.
And being able to point to success will often determine whether
we receive the budgetary resources we believe we need. Similarly,
the publicizing of one's accomplishments is a valid way to secure
necessary public support and attract potentially valuable
information.
It is precisely because of this fact—that competition
has a rational starting point—that it can become so dangerous.
It can lead to rival, not joint investigations, duplication of
efforts, withholding of witnesses and information and, on some
occasions, open confrontation. Such competition is not only
destructive of our efforts, but it ultimately causes the loss
of public support we so desperately need. By always being conscious of these risks, I hope, and believe, that we can avoid
this pitfall.
- 5 A second pitfall I have observed is distrust.
When I
was in the U. S. Attorney's Office in New York, it was not
uncommon for me to hear the refrain—you cannot trust the
"locals." And at that time there was some support for this concern. In some parts of the Police Department there was a
serious corruption problem which was being confronted by the
then Commissioner of Police. One area of corruption was narcotics and the reasons are clear. When an officer finds hundreds
of thousands of dollars and large amounts of heroin that can be
readily sold, he is faced with a real temptation which is not
always avoided.
The problem—and potential—for corruption is not, however,
governed by which side of the federal systems one works on.
Rather, it exists for federal as well as state agencies. I
know that this topic is not a pleasant one, but if we are to
avoid distrusting each other, we must articulate this problem
and deal with it by supporting the need for strong anticorruption units in all our agencies. On the other hand, and
equally as important, we must not allow paranoic distrust to
overwhelm our common sense. Only in this way—particularly
where narcotics is involved—can we remove the obstacle of distrust from the desirable goal of cooperation.
- 6 Another pitfall I would like to raise derives from
the inevitable disagreements which come in any joint investigation. Rarely in the real world is there one tactic or one
strategy which is perfect to the exclusion of all others.
Nevertheless, I have observed an "only we can be right" attitude in various investigations, particularly on the part of
federal agencies. The result is that disagreements over
tactics reach such levels that they lead ultimately to the
disruption of the entire investigative effort. By realizing
that good faith and differences of opinion can exist, however,
we will be able to compromise on differences and avoid these
consequences.
A recognition of a need for mutual interdependence and
of the dangers of destructive competition, distrust and failure
to compromise are essential elements in the program of statelocal-federal-international cooperation which is so necessary.
That is true everywhere; it is particularly important here along
the border.
The Federal government, however, should be doing more than
simply working with your investigations. It should design
programs which use its resources to enhance state and local
enforcement efforts and to do things you cannot do alone,
because activities in other jurisdictions are contributing
to the problems you face.
- 7 I would like to take a few minutes to describe some
proposals which we have made which would do exactly this.
Now these proposals, which are in a series of proposed regulations, are in the firearms area. I have been told that this
is not the part of the country where one should talk about gun
control. But violent crime is not a sectional problem—it
exists everywhere, including in New Mexico, Arizona, Texas, and
California. According to the FBI Uniform Crime Report for 1976,
in these four states alone a total of 204,963 violent crimes
were reported to the police. A high percentage of these crimes—
particularly homicides, robberies, and aggravated assaults—
involved the use of firearms. And the recently released preliminary 1977 figures show that the volume of these crimes has
continued to increase in the South and West. In addition,
during the period 1972 to 1976, 622 police officers were killed
in the United States in the line of duty. Over ninety-five
of these were from these four states. And in eighty-five
percent of these cases the officers killed were slain with
firearms.
The problem of firearms abuse thus is, unfortunately, with
us all. These proposed regulations seek to help meet that
problem. If implemented, they will provide ATF better ability
to trace firearms actually used in crime, and to identify
possible sources of firearms into the hands of criminals where
they can cause so much destruction.
- 8 What do these proposals do?
The regulations require all firearms to have a unique
serial number. While all now have some number, duplication and
the presence of more than one number on a firearm have led to
confusion for police and frustrated some efforts to trace
weapons used in crimes.
The regulations require the reporting to ATF of all commercial transactions in firearms. The manufacturers and importers
must report what they make and import and to which wholesalers,
jobbers or dealers they sell which firearms; wholesalers, jobbers and retailers must similarly report their dispositions
of firearms, unless they sell them directly to a private individual. As you know, all this information is now required
to be kept on the premises of the individual licensees—these
regulations only bring it to one place where it can be effectively
used.
The regulations require that all licesees report thefts of
firearms. Twenty percent of firearms used in crimes are stolen:
this proposal gives us a formal program to learn where they
were stolen from, so that we can take steps to act on this
problem.
What do these proposals not do?
They do not require private individuals to do anything.
They do not require the names of private individual purchasers to be reported-when a sale is made to such a person
- 9 the fact that the weapon was sold is reported, the name and
address is not. That, as now, would be retained in the files
of the dealer.
They do not create any form of registration or permit
system.
How will these proposals help you, at the state and local
level, as well as us?
First, an important thing they would do is to enhance
greatly our ability to trace firearms used in crime and found
at crime scenes or elsewhere. This would provide law enforcement officials—state, local, and federal—with important
possible leads. Now to conduct a trace ATF must call everyone
in the chain of distribution to get the name of the first retail
purchaser. That takes time—hours in an emergency, but days, a
week or longer in routine cases. Also, recent studies have shown
that large numbers of all traces are incomplete because someone
in the chain has lost, miskept, or destroyed required records.
The consequence of all this is that now ATF must limit the
number of traces it can perform to 5,000 a month. If these
proposals were fully implemented, ATF could conduct virtually
an unlimited number of traces in hours, because only a call to
the last retailer would be necessary.
- 10 These regulations will also give us a greater ability
to target our investigative resources towards those who are
abusing the system and providing an outlet of weapons for
illegal use.
Now, identifying those parts of the country
which are sources of firearms being illegally transported to
other states, requires numerous agents pursuing large numbers
of investigative leads.
The problem of identifying specific
dealers selling guns into the illegal market is even more
difficult.
The information derived from these regulations, however,
would enable us to identify those localities, and with proper
analysis, those dealers receiving unusually large numbers of
firearms and who, therefore, might be involved in diverting
weapons into the criminal market.
We could then target our
investigative resources towards these places and dealers. This
way we can bother the clearly legitimate dealer less, and
accomplish more with our existing resources.
In sum, as I said, these proposed regulations are designed
not to burden our individual citizens, but to help fight violent crime and those who are supplying guns for use in those
crimes.
I hope that over the next forty-five days you will
all feel free to send your comments to us on these proposals.
- 11 The responsibilities we all face are great: the task of
enforcing our laws is enormously difficult.
Conferences like
this can help us all meet this challenge and I appreciate the
opportunity you have given me to be here with you today.
We
at Treasury look forward to working with you in the future.
I, or my office can assist you, I hope you will feel free to
contact us.
0O0
If
DepartmenlofthtTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 566-2041
April 3, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,301 million of 13-week Treasury bills and for $3,401 million
of 26-week Treasury bills, both series to be issued on April 6, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing J u l y 6>
26-week bills
maturing October 5, 1978
1978
Price
Discount
Rate
Investment
Rate 1/
Price
98.382
98.377
98.378
6.401%
6.421%
6.417%
6.60%
6.62%
6.61%
96.610
96.601
96.604
Discount
Rate
6.705%
6.723%
6.717%
Investment
Rate 1/
7.
7.
7.05%
Tenders at the low price for the 13-week bills were allotted 84%.
Tenders at the low price for the 26-week bills were allotted 6%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location
Received
Boston
$
24,470,000
New York
3,934,705,000
24,115,000
Philadelphia
34,870,000
Cleveland
42,600,000
Richmond
37,020,000
Atlanta
342,840,000
Chicago
43,450,000
St. Louis 28,870,000
Minneapolis
28,755,000
Kansas City
19,615,000
Dallas
299,795,000
San Francisco
Treasury
TOTALS
6,325,000
$4,867,430,000
Accepted
$
:: Received
39,390,000
19,470,000 J
1. 996,000,000 \\ 5,534,980,000
8,645,000
24,060,000 :
56,725,000
34,495,000 :
52,965,000
20,965,000 :
24,750,000
30,910,000 :
252,690,000
53,860,000 :
42,125,000
15,450,000 :
31,605,000
12,870,000 :
28,415,000 :
18,075,000
10,030,000
16,615,000 :
41,270,000 j
370,495,000
• $
6,325,000 j
$
8,130,000
3,189,180,000
7,645,000
31,725,000
13,405,000
24,690,000
40,190,000
14,125,000
12,605,000
15,705,000
9,030,000
26,095,000
8,800,000
8,800,000
$2, 300,705,000 aj^$6 ,451,275,000
$3,401,325,000
a/Includes $384,755,000 noncompetitive tenders from the public.
b/Includes $186,850,000 noncompetitive tenders from the public.
^/Equivalent coupon-issue yield.
B-811
Accepted
FOR RELEASE ON DELIVERY
STATEMENT OF PAUL H. TAYLOR
DEPUTY FISCAL ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY OF THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
WEDNESDAY, APRIL 5, 1978, 8:15 A.M.
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear in support of proposed legislation
to extend until April 30, 1979 the authority of Federal
Reserve Banks to purchase directly from the Treasury up to
$5 billion of public debt obligations. Under current legislation, Public Law 95-154, approved November 7, 1977, the
authority will expire at the end of this month.
The authority has existed since 1942, and has usually
been extended for two-year periods, although there have
been some lapses in recent years. In January 1977, the Department submitted proposed legislation to the Congress to extend
the direct-purchase option to October 31, 1981. I understand,
however, that prior to taking up that measure the Subcommittee
desires to hold oversight hearings on Treasury debt management
B-812
- 2 policies, and that the one-year extension you are now considering would merely provide interim authority.
The primary purpose of the authority is as a backstop
for Treasury cash and debt operations, permitting more
economical management of our cash reserves and allowing us
to carry lower than normal balances in our checking accounts
at the Federal Reserve Banks when the need arises. The
purchase option has been used sparingly. However, it's value
does not rest on its frequency or the extensiveness of its
use, but its availability as a backstop for Treasury cash
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 normal conditions, the Treasury has wholly adequate
recourse to short-term funds through our weekly Treasury
bill auctions or the short-term cash management bills which
can provide funds to the Treasury in as few as three days.
From the close of calendar year 1975 to the present, we have
made only a single use of the option, and that use was
- 3 limited to a $2.5 billion draw to maintain a maximum cash
balance just prior to expiration of the legislation establishing the temporary ceiling on the public debt in the fall
of 1977.
In the more distant past, the authority was used during
periods when disruptions occurred in the financial markets
at the same time the Government needed to raise cash to
maintain Government functions. Usually, the authority is
not used for long periods, the average length being from 2
to 7 days? only twice in the past 35 years has the Treasury
had to draw funds in this manner for 20 days or more at any
one time. The accompanying table shows the instances of
actual use. The authority is subject to the public debt
limit and its use is reported in the Daily Treasury Statement,
the weekly Federal Reserve Statement, and in the Federal
Reserve Board's annual report to the Congress.
Thus, the 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
- 4 -
under this authority is subject to the discretion and control
of the Federal Reserve itself. The authority is an invaluable
cash-management tool, however, and the Department urges
prompt consideration of the proposed legislation to ensure
that it does not expire on April 30, 1978.
That concludes my prepared statement, Mr. Chairman.
I will be glad to respond to any questions.
oOo
Attachment
DIRECT BORROWING FROM FEDERAL RESERVE BANKS
1942 TO DATE
Maximum Amount
At Any Time
(Millions)
Calendar
Year
Days
Used
1942
1943
1944
1945
1946
1947
1948
1949
19
48
none
9
none
none
none
2
$ 422
1,302
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
1977
none
9
1
10
1
16
none
4
Note:
Number of
Separate Times
Used
Maximum Number
Of Days Used At
Any One Time
4
4
6
28
--
•
_
484
2
7
--
•
--
•
•
--
•
•
220
1
2
180
320
811
1,172
424
2
2
4
2
2
1
2
9
20
13
--
•
•
--
-
•
--
-
•
207
1
2
--
-
-
__
99
•
--
-
-
--
-
-
--
-
-
--
-
-
--
-
-
1
3
3
2
3
3
6
12
•
•
610
38
485
131
1.042
1
1
3
1
4
7
1
6
1
7
—
—
—
169
153
596
1,102
• •
2,500
1
4
Federal Reserve direct purchase authority expired
October 1, 1977, and was reinstated November 7, 1977,
until April 30, 1978.
Office of the
March 9, 1978
Fiscal Assistant Secretary
FOR RELEASE AT 4:00 P.M.
April 4, 1978
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued April 13, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,713 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
January 12, 1978,
and to mature July 13, 1978
(CUSIP No.
912793 S2 3 ) , originally issued in the amount of $3,404 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
April 13, 1978,
and to mature October 12, 1978
(CUSIP No.
912793 T7 1 ).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing April 13, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,013
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, April 10, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
/
B-813
-2Each 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 in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on April 13, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
April 13, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.
-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
FOR IMMEDIATE RELEASE
EXPECTED AT 10:00 A.M. EST
WEDNESDAY, APRIL 5, 1978
STATEMENT OF THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT INSTITUTIONS
AND FINANCE
OF THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
The Issues
Mr. Chairman, I am particularly pleased to appear
before this Subcommittee today. The purpose of my
testimony is to consult with you regarding the
amounts and shares of U.S. participation in upcoming
replenishments of the international development banks.
Such formal hearings, in advance of U.S. pledges
to replenishment negotiations, have never before taken
place. They are one more indication of the commitment
of this Administration to consult as closely as possible
with the Congress before making any new pledges to these
institutions. We greatly appreciate the opportunity
afforded us by this Subcommittee to do so, and we stand
ready to participate in similar sessions with any of
B-814
_0
the other interested committees which might wish to hold
them. Ultimate U.S. participation in the replenishments
will of course require legislative authorization and appropriation
by the Congress, but we hope to help smooth the way for
that process — which will begin in calendar 1979 for the
replenishments under consideration — through these hearings
today.
We view today's hearing as the first in a series,
which will provide an opportunity for both the Congress
and the Administration to look carefully at overall U.S.
participation in the development banks in the course of
working out the U.S. pledges to the next replenishment
of each. We will seek to relate the institutions to each
other, within the context of overall U.S. policy objectives.
The institutions which we propose to discuss this year
include the World Bank, the Inter-American Development
Bank and its Fund for Special Operations, the Asian Development
Fund and the African Development Fund. The time period
covered extends from 1979 well into the 1980s. (The next
replenishments of the capital of the Asian Development Bank,
and of the International Development Association, are still
further away and thus would not seem ripe for discussion' in 1978.
In this first consultation, I would like to confine
my comments to the replenishments of the Asian Development
-3Fund (ADF) and the African Development Fund (AFDF). The
discussions for replenishments of the capital and of the
Fund for Special Operations of the Inter-American Development
Bank, and for the general capital increase of the World
Bank, are not likely to reach an advanced stage until
this summer or fall. Consequently, thinking within the
Administration on these increases is only at a preliminary
stage and my treatment of them today will necessarily
reflect this. By contrast, final pledging sessions are
planned for the ADF on April 22-23 and the AFDF on April
30; we therefore need to adopt a final U.S. position on
each during the course of the next few weeks.
The Policy Framework
Before discussing these two replenishments in detail,
I would like to provide a brief framework by summarizing
the background of our support for the international development
banks and outlining our general recommendations on lending
levels and U.S. shares.
This Administration considers U.S. support of the
banks as fundamental to U.S. foreign policy, as indicated
by the presence with me today of the Assistant Secretaries
of State for both East Asian Affairs, Mr. Richard Holbrooke,
and African Affairs, Mr. Richard Moose. Over a period
of several years, successive Administrations and Congresses
-4have increased our reliance on the development
banks. Today, these institutions are the primary source
of development lending in the world.
They are highly effective promoters of economic growth
and social development in the less developed countries.
Their staffs are highly trained, competent and experienced.
They have established an outstanding record over time,
not only in appraising and formulating project proposals
but in fostering desirable economic policy changes in
recipient countries. The banks have been effective catalysts
for increasing the flow of private capital to the LDCs,
and for the generation of additional official capital
flows from industrial and OPEC countries. They assure
good use of our development money.
At the same time, the organization and operations
of the banks have been highly advantageous to the United
States. Through their leverage of private capital, and
their system of burden-sharing among all donor countries,
they enable U.S. Government budgetary outlays to be held
to a minimum. For example, each dollar actually paid
in by the United States to the capital of the World Bank
has produced $36 in total Bank lending. In fact, about
95 percent of the support of the banks' hard loan
windows lies outside the U.S. Treasury. For all windows
of all the banks, taken together, the U.S. share of the
-5most recent replenishments totaled just under 25 percent
— the target called for in the most recent authorizing
legislation which originated in this Subcommittee and
was passed by the Congress in 1977.
The United States also benefits from procurement
arising from projects financed by the international
development banks. Bank expenditures in the U.S. economy
have amounted to more than $2 for every $1 that we have
contributed to them in official payments throughout their
history. In the 5-year period, 1972 through 1976, average
annual U.S. payments were $303 million while receipts
averaged $758 million — or $2.50 for every dollar paid
in.
More broadly, the banks have become a key element
in our country's overall relationship with the less
developed nations. These relationships encompass
political, security, economic and humanitarian concerns.
They entail important considerations affecting our
trading position, access to critically needed raw material
(including petroleum), large amounts of our foreign
investments and the income we derive from these holdings.
In summary, we have found the international development
banks to be extremely effective and useful instruments
for helping to meet a broad range of U.S. policy objective
We firmly conclude that they merit continued U.S. support.
-6-
F u Lu r^e _Le nd i^ ng _bv__t h e ^Deve 1 qgmen t _Ban k s
Over the past five years, the average annual growth
rate in lending by the banks has been between 10 and
15 percent in real terms. This rapid growth was desirable,
in bringing the banks to a central position in the global
development process. It enabled them to develop the critical
mass which is so important to their effective functioning.
It placed them in a position where their advice will be,
and must be, heeded by recipient countries. It generated
economies of scale which are of great benefit to donor
countries and recipient countries alike.
For the future, however, the growth of development
bank lending need not be as rapid. They have already
established their central position and effectiveness
of operation.
At the same time, there is a floor on how far their
growth rates should be allowed to fall. Our conclusion
within the Administration is that this floor is represented
by an annual growth rate in real bank lending of around
five percent. Such a rate woulci permit the banks to maintain
their share of support for rates of growth which are needed
in the developing countries. It would enable them to finance
orojects directly meeting basic human needs as well as
orojects more oriented towards economic growth oer se.
It would provide some degree of insurance, particularly
-7for uoper and middle income recipient countries, against
the possibility of decreasing private capital flows.
In our judgment, a grov/th rate below 3 percent could
focus future lending too narrowly on projects which require
lower capital inputs. It would force a faster phase-down
in lending to upper income countries, such as Mexico and
3razil, and to projects which meet basic human needs and
help poor people in these countries. Very importantly,
from the viewpoint of U.S. interests, fewer bank resources
would then be available for energy and raw materials development.
There is of course room for variation, for the individual
windows of the different banks, within this overall range
which we propose. Such variations would accommodate the
different roles of the institutions, as well as the economic
conditions and prospects in different geographic areas
of the world. In the case of the Inter-American Development
Bank's soft loan window, the Fund for Special Operations,
lower lending levels may turn out to be appropriate because
almost all of its borrowers in Latin America are among
the more advanced developing economies. On that same criterion,
the Asian Development Fund could justify a somewhat higher
rate of growth in view of the fact that it lends to the
poorest countries in Asia -- with annual per capita incomes
below $300. A rate of increase higher than 5 percent
would certainly appear to be necessary for the African
-8Development Fund, because it is relatively new and thus
operating from a much lower lending base — as well as
because the countries being assisted are among the poorest
in the world.
As I said at the beginning of my statement, discussions
on increased resources for the World Bank and the
Inter-American Development Bank are now at a preliminary
stage. Informal discussions are currently under way in
the IBRD's Board of Executive Directors on a General Capital
Increase (GCI), which would become effective in about
FY 1983 -- requiring U.S. authorizing legislation perhaps
in 1980, with appropriations beginning in FY 1982. A long
lead time is necessary, because the size of the GCI will
in part determine IBRD commitment levels in the immediate
future. The major issues are how fast the IBRD should
grow, how large the capital increase should be, and whether
the increase should take place entirely in the form of
callable capital or whether some of it should be paid in.
No decision on any of the issues has been made at
this time. The United States has taken no firm positions,
pending thorough consultations with Congress. We have
indicated our view on appropriate growth rates along the
lines which I outlined above. We have also taken the
position that there should be no change in the current
U.S. share of the Bank's capital, 24.1 percent, because
-9of the difficulties which would result in adjusting shares
for other members, the fact that shares have just been
altered via a Selective Capital Increase for this purpose,
and the related need to avoid upsetting relative country
shares at the International Monetary Fund, which have
always been closely linked to shares at the IBRD.
For the Inter-American Development Bank, informal
discussions will probably begin at the Bank's annual meeting
on April 17-19 and negotiations are expected to take place
later this year. Our general thinking at this point is
to emphasize the Bank's capital lending, in view of the
relatively advanced level of development throughout the
Hemisphere. Given a reasonable replenishment size, the
U.S. shares could remain at the present level of 34.5
percent for Bank capital and 40 percent for the Fund for
Special Operations.
At this point, Mr. Chairman, let me devote the remainder
of my remarks to the immediate issues facing us in the
replenishments of the Asian Development Fund and African
Development Fund.
THE_ASIAN_DEVELqPMENT_FUND
The Asian Development Fund was established in 1974
to mobilize concessional resources, on an organized
and regular basis, to consolidate and standardize the
Asian Development Bank's lending to the smaller an3
-10poorer developing member countries in Asia.
The preponderance
of the Bank's funds has been lent to countries with incomes
per capita of less than $200.
Six member countries account for the major share
of these concessional loans: Pakistan, Burma, Nepal, Afghanistan,
Bangladesh and Sri Lanka. These six are among the poorest
countries in the world. In addition, it should be noted
that most of them have good human rights records; U.S.
support for the ADF thus helps fulfill the Congressional
mandate, which also originated in this Subcommittee, to
channel an increasing share of our multilateral development
assistance to countries which do not engage in "consistent
patterns of gross violations of internationally recognizei
human r ights . "
Beyond these six, several Pacific islands which are
of importance to U.S. policy toward the region (particularly
the Solomons and Western Samoa) receive ADF funds — our
primary channel for providing assistance to them. In addition,
we believe that the Fund may soon resume modest amounts
of lending for basic human needs projects in Indonesia,
the Philippines and Thailand. India has not received funds
from the ADF because of its large share of IDA lending.
Agriculture has been the primary sector for ADF lendinq.
Over the period of the ADF's existence, 52 percent of
total concessional lending has gone to this sector. In
-111977, 57 percent of the concessional lending went to agriculture
The second most important sector has been public utilities,
accounting for 28 percent. Lesser amounts have gone to
industry, transport and communications, and education.
Prior to the establishment of the ADF, the Bank's
concessional lending depended on contributions made at
random and frequently tied to donor procurement. The
lack of uniformity in timing and conditions impeded effective
developmental use of such funds, and posed considerable
administrative problems for the Bank.
An initial amount of $486 million (ADF I) was therefore
mobilized among fourteen regional and non-regional developed
member countries in 1974. The U.S. share was $150 million,
or 28.57 percent, second only to Japanese share of 33.71
percent. On the basis of these resources, the ADB financed
a concessional lending program over the period 1973-1975
of $457 million.
In 1975, negotiations between the Bank and the donor
countries led to an initial replenishment of the ADF (ADF II)
of $809 million. The U.S. contribution was $180 million,
or 22.24 percent — down from the original U.S. share
of 28.57, which the Fund had hoped to maintain via a proposed
U.S. contribution of $231 million.
In 1977, the Bank proposed a second replenishment of
the Asian Development Fund (ADF III) of $2.15 billion
-12to finance lending over the four-year period 1979-1982.
An initial round of negotiations was held in October 1977
in Kyoto, Japan. The U.S. delegation took no position
with respect to the total of the replenishment. It did,
however, indicate that our share would not exceed 22.24
percent — the U.S. share of the first replenishment,
and the share suggested in a sense of the Senate provision
of the FY 1978 Foreign Assistance Appropriations Act.
A second meeting was held in mid-February 1978 in
Geneva. Most countries supported the Bank's proposed
replenishment total of $2.15 billion. A few countries
either believed the total to be excessive or were not in
a position to make a definitive commitment. The U.S.
delegation stated that it was still not in a position
to make a commitment, but that it believed the U.S.
decision-making process would be completed prior to the
final replenishment meeting scheduled for late April.
The delegation also doubted that the United States could
commit to 22.24 percent of a replenishment as high as
$2.15 billion.
The Bank's proposal of $2.15 billion aims at a
steadily increasing share for concessional lending
within the overall program of the Bank over the fouryear period. It would thus raise the ratio of concessional
lending to total lending to 40 percent by 1982. A
-1322.24 percent U.S. share of that replenishment would
be $478 million, calling for annual appropriations of
almost $120 million.
The Administration does not believe a replenishment
of $2.15 billion is justified. It would imply an
annual growth rate of 10 percent in ADF lending,
which is well above our norm as outlined above.
We believe a replenishment in the $1.8-$2.0 billion range
to be a more proper figure, which implies growth rates of
6-3 Percent — sliqhtly above the norm, for the reasons
already mentioned. Although this is marginally above our
overall objectives in terms of growth we consider it justified
in this instance because of the Fund's operations in the
poorest countries of the region and its orientation toward
reaching the poor and helping meet basic human needs,
particularly in the agricultural sector. In addition our
best judgment is that this figure will promote the broadest
possible burden-sharing. It represents a significant decline
from our original share of 28.57 percent. Assuming a 22.24
percent U.S. share, a $1.8 billion dollar replenishment
would imply a U.S. contribution of about $400 million,
or annual appropriations of $100 million. A $2.0 billion
replenishment would imply a U.S. contribution of $445 million,
with annual appropriations of about $111 million.
-14THE AFRICAN DEVELOPMENT FUND
The African Development Fund (AFDF) was created in
1973 as the concessional lending affiliate of the African
Development Bank (AFDB). The Bank itself was established
in 1964 to make loans to African nations on near-market
terms; it has no non-African members.
The African Development Fund makes loans to the
poorest countries in Africa. Except under the most
unusual circumstances, loans are not granted to countries
with per capita GNP above $400. Absolute priority is
given to nations with per capita GNP of $200 or less.
Since its creation, the African Development Fund has made
loans totaling $360 million to 27 nations, of which $141
million was lent to 17 countries in 1977. Agriculture,
transportation and public utilities are the largest
components of AFDF lending.
The Fund's initial resources, consisting of contributions by fourteen non-African donor countries and the African
Development Bank itself, amounted to $89 million in 1973.
Since that time, four new contributors to the Fund (the
United States, Saudi Arabia, Kuwait and France) and further
contributions by original donors raised total AFDF
resources to $443 million as of December 31, 1977. The
current U.S. contribution of $25 million represents 5.6 percent
of total Fund resources, tying us with Norway as the sixth
largest donor in the Fund.
-15For FY 1979, the Administration is requesting an
appropriation for an additional $25 million contribution to
the AFDF — which would raise the U.S. share of total AFDF
resources to about 10 percent, and tie the United States with
Japan as the second largest donor in the Fund after Canada.
This amount would represent our contribution to the first
AFDF replenishment, which covers AFDF lending in the CY
1976-1978 period. The United States was not a member of the African
Development Fund when the first replenishment was negotiated,
and Congress itself initiated the legislation authorizing
this U.S. contribution.
The AFDF will have committed all of its loanable
resources by the end of 1978. For the Fund to continue
its lending beyond this year, management has proposed
a second replenishment to cover lending activities in
1979-81. AFDF management initially proposed a replenishment
totaling $1,010 million — sufficient to sustain an average
annual increase in real AFDF lending of more than 30 percent.
Donor countries held their first meeting to discuss
the issue in London on December 13-14. At that meeting,
no firm consensus was reached on the size of the second
replenishment. There was little support for the $1 billion
proposed by Fund management however. The United States
took no position on the size of the replenishment or the
aoprooriate U.S. share, while other donors appeared to
-16support a replenishment in the $550-$750 million range.
Discussion of the second AFDF replenishment resumed
in Geneva on March 6-7, 1978.
The U.S. delegate again took
no position on the replenishment, citing the need to await
the outcome of our internal decision-making process.
A consensus
of other donors appeared to be forming toward the upper end
of the range.
The Administration has carefully reviewed the second
replenishment of the African Development Fund, and believes
that a U.S. contribution to the replenishment of $125
million —
which would probably produce a U.S. share of
the total replenishment in the 15-18 percent range —
appropriate.
would be
The President personally mentioned his intention
to propose $125 million during his visit to Nigeria last week,
subject of course to Congressional authorization and appropriates.
Africa's great development needs are well-known.
It
is the world's least developed area, with eighteen of
the twenty-nine poorest countries in the world.
About 75 percent
of the African population is engaged in subsistence agriculture.
Africa's average per capita GNP in 1975 was only
$390; over a third of the continent's nations have a per
capita GNP of $200 or less.
In coming to a decision on the second replenishment
it is essential to examine the Fund's administrative capacity.
Two reviews of Fund administration have recently been
-17conducted, by a group of international development experts
and by a private consulting firm. While pointing out areas
where further improvement may be needed, both indicated
that the Fund has made great strides in improving its
ability to identify, process and administer sound development
projects. We have also discussed the Fund's administrative
procedures with its management, which is firmly committed
to continuing its efforts to improve Fund administration.
In short, we believe that the Fund's capacity to effectively
utilize its resources for African development has increased
markedly and will continue to increase in the future.
A U.S. contribution of $125 million, assuming a U.S.
share of 15-18 percent implies a replenishment of about
$700 million — sufficient to sustain a minimum real growth
rate in Fund lending of 10 percent during the 1979-81 period.
This is somewhat higher than our proposed rates of growth
for the other development banks. We believe, however,
that such growth is justified by Africa's endemic poverty
and by the low initial lending levels of the African Development Fund; such growth has generally characterized the early
years of the other concessional lending institutions
The proposed 15-18 percent U.S. share of the replenishment
would represent a significant increase from our current level
of under 6 percent, or even our projected 10 percent share if
Congress appropriates the additional $25 million proposed for
-18FY 1979.
This share is also above the 10.6% U.S. share
suggested for the African Development Fund in the sense
of the Senate provision of the FY 1978 Foreign Assistance
Appropriations Act.
However, such a share is still below
the level of U.S. participation in any of the other soft
loan windows of the international development banks, and
we believe it is essential to demonstrate clearly to the
nations of Africa our interest in assisting their growth
and development.
A $125 million U.S. contribution should enable the
United States to obtain the Executive Directorship in the
voting constituency —
and Yugoslavia.
which we share with the United Kingdom
The United States currently holds the
Alternate Executive Director position in this three-country
grouping.
Conclusion
In concluding, Mr. Chairman, I want to reemphasize
the importance that we place on these consultations.
Last
year, the Administration committed itself to consult
fully with the Congress before making any new pledges to
the development banks.
We believe that only through this
approach can the Administration and the Congress, working
together, produce a stable and sustainable U.S. policy
toward the banks.
-19The United States has several major policy objectives
which it seeks to promote in the international development
banks, which I believe are shared by the Congress and
the Administration: overall economic development, meeting
basic human needs, reaching the poorest and least advantaged
people in developing countries, and enhancing the observance
of human rights. Over the past year, we have made significant
progress on these issues, and on others raised by the
Congress concerning the administrative practices of the
banks (including their accountability, salary levels and
other Perquisites) as I reported to this Subcommittee
in detail on February 28. In all of these instances,
our ability to achieve our objectives of course depends
fundamentally on our willingness to contribute our fair
financial share to the institutions.
In this context, it is imperative that understandings
be worked out between the Congress and the Executive in
advance of the final negotiations on amounts and shares
of U.S. participation in these institutions. In the past,
pledges were often made solely by the Executive Branch
and presented to the Congress as fait accompli. As a result,
Congress has often expressed grave concern over the level
and percentage shares of U.S. contributions. Appropriations
of funds already authorized have lagged the contributions
and subscriptions of other member countries. It is in
-20the spirit of full consultation, and an effort to achieve
the closest possible understanding with the Congress,
that we carry out these consultations with you this morning.
FOR RELEASE ON DELIVERY
EXPECTED AT 9:00 A.M.
APRIL 5, 1978
•>
TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SOCIAL SECURITY
OF THE
SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of this distinguished Committee:
When this Administration came into office in 1977, it
was confronted with a difficult and persistent financial solvency
problem in the social security system. Briefly, the problem
had two facets: one, short-term and the other, long-term.
The short-term financial condition of the trust funds had
deteriorated as a result of the worst recession since the
Thirties, which reduced receipts below projections, and the
worst inflation since World War I, which boosted benefit
outlays above projections. The prospect of continuing
financial deterioration was present^ even though annual increases
in the waye base had already heen r:an^ated in law. Reserves
in the Disability Trust Fund were expected to be depleted by 1979,
and the Old Age and Survivors Trust Fund was expected to run
out of reserves by 1983, according to estimates by the
Funds' Trustees. Overall, the combined OASDI Trust Fund.
which had a $41.1 billion reserve at the end of 1976,
would have been exhausted by 1982.
B-815
- 2-
The longer-term solvency problem was the result, in part,
of an indexing flaw which had been introduced into the
benefit formula in 1972 and which overcompensated benefits
for inflation. About one-half of the projected long-term
deficit of the Trust Funds was the result of this inappropriate
indexing calculation.
The other half of the long-term deficit reflected changes
in the projected composition of our population over the next
75 years. Declines in birth and mortality rates are
expected to change the present three-to-one ratio of
workers to beneficiaries to a two-to-one ratio in the
next century, thus increasing the projected
growth in benefits and decreasing the projected growth
in receipts. As a consequence, for the 75-year period
running to 2051, the trust funds were expected to incur
an average deficit of 8.2 percent of future taxable payrolls. The Trustees of the Social Security Trust Funds
told the Congress,in their 1977 report,that the system was
in critical need of financial support to restore the
solvency of the system in both the short- and longer-term.
This was essentially the problem worrying the American
people, and the issue squarely faced last year by this
Administration and the 95th Congress. Both responded to the
concerns of the American public, which overwhelmingly supports
-3-
the social security system and which, clearly/
favors raising additional taxes to save the system from
insolvency.
Many proposals were made during 1977, both in the Administration and the two branches of Congress.
After considerable
debate and deliberation, the Congress enacted the Social
Security Admendments of 1977 which
effectively eliminate
the anticipated trust fund deficits, and restore
trust fund
reserves to healthy levels adequate for meeting contingencies.
This was done by increasing both payroll tax rates and the
wage base on which the taxes are levied.
It is worth noting that all of the payroll tax increases
taking place this year—amounting to $5.2 billion—are the
result of legislation enacted in 1972, even before the
financial situation of the funds reached critical levels.
And more than half of the tax increase scheduled for 197 9
($8.6 billion of the $15 billion projected rise in tax
collections) reflects pre-1977 legislation.
I emphasize this point to put the near-term problem
into perspective.
The fact is that^the need for substantial
increases in revenues for social security system has been
evident for some time.
Even without the special drain on
the trust funds resulting from the recession and inflation
of the mid-70's, the changing age structure of the population
and the desire to improve retirement benefits required
-4increased tax levies on the working population. While
the problem was exacerbated by the economic events of
1973-76, the fundamental need to "pay now to enjoy later"
has been recognized for several years and partially
accommodated by automatically raising the tax base.
The legislation enacted in 1977 wisely did not attempt
to cure the entire solvency problem in one huge step. The
rise in taxes attributable to the 1977 amendments is
relatively small for the bulk of taxpayers. For example,
the worker earning $15,000 in 1979 will pay $920 in social
security contributions. Of this, $908 reflects the social
security amendments of 1972; only $12 is attributable to
the additional taxes enacted last year. In fact, the
additional tax will not exceed $260 for any one earner
in 1979, and that top increase of $260 will only occur if
the employee earns $22,900 or more. Of the 113 million projected
contributors to social security in 1979, only 10 million
will
or 9 percent/earn $22,900 or more, whereas 103* million will earn
less than $22,900. For those below the $22,900 breakpoint,
most will have hardly any social security tax increase next year
resulting from the legislation enacted by the 95th Congress.
I emphasize this point because the public's attention has
been directed to the potential tripling in the dollar amount
of social security tax payments over the next 10 years as a
result of the recent legislation. This potential has to be put
into perspective. First, half of the prospective increase is
-5the result of legislation in force since 1972. Second, the
emphasis on the rise in potential tax payments overlooks the
rise in projected earnings. The burden of social security taxes—
that is, the share of income absorbed by these taxes--will rise
to be sure, but by far less than the dramatic tripling emphasize
in press accounts.
1979 FICA Tax (Employee)
Wage or Salary : FICA Tax "~
Income
: Prior Law
$ 5,000 302 306 + 4
10,000
15,000
20,000
25,000
605
908
1,144
1,144
:
1977 Law
:
Difference
613
920
1,226
1,404
It is important, therefore, in considering
+ 8
+ 12
+ 82
+260
the 1977
legislation, neither to overstate the impact of the
additional taxes imposed nor to underestimate the
benefits that will accrue to participants in the social
security system. The tax increases enacted by this
Congress were designed to be least burdensome on the
low and moderate income workers covered by social
security. And these increases would be more than offset
by the proposed reductions in income taxes recommended
in the President's tax program. For a four-person, one-earner
family, the proposed income tax reduction would offset the
rise in social security taxes—both those resulting from the
1977 amendments and those reflecting earlier legislation—up
-6-
to more tiian $20,000 in annual inaome. For four-person, two-earner
families, the offset is complete up to more than $30,000 in
annual income. Thus even with the scheduled rise in
social security taxes next year, the overall Federal tax burden
would be reduced, in 1979, for the vast bulk of American
taxpayers.
At the same time, the social security tax increases
have removed the immediate threat of trust fund deficits,
thereby allaying the fears of 33 million social security
beneficiaries. We believe that most Americans
are willing to pay the additional taxes levied to keep
the system solvent, an indication of how highly our
electorate values the prospect of dignity in retirement.
By virtue of the new tax schedule, the Congress has
effectively eliminated the projected short-term deficit.
Instead of having completely depleted reserves by 1982,
the 1982 reserve ratio in the OASDI fund (that is beginningof-year reserve as a percent of the 1982 outlays) would be
30 percent, a level considered reasonable to meet
contingencies.
-7-
Beginning Reserve Ratio in OASDI
Trust Fund
Year
1977
1978
1979
1980
1981
1982
Prior to 1977 Amendments
47%
36
27
18
9
0
1977 Amendments
47
37
29
26
25
30
In addition, the 1977 Amendment substantially improves
the longer range actuarial status of the trust funds, by
removing the indexing flaw which overcompensated benefits
for inflation. The OASDI trust funds will run a surplus
for the next 25 years of 0.97 percent of taxable payroll.
Over the next 75 years, it is estimated that instead of an
average deficit of 8.2 percent of taxable payroll, the
fund will have a mild deficit of 1.46 percent on the average.
-8Having developed—after careful study and long
deliberation—a system of contributions adequate to
meet the needs of this and future generations of retirees,
it would in our judgment be unwise to undo this progress
by hasty action. Such action is also unnecessary, because
the income tax reduction and reform proposals submitted by
the President—so sorely needed to meet other important
economic and social objectives—would at the same time offset the near-term scheduled rise in social security taxes.
What is needed is more careful deliberation and examination of the options available to us. The Congress will, in
coming months, have several opportunities for weighing
alternatives, since there are four separate commissions or
study groups looking at various aspects of the social security
problem. The National Commission on Social Security, which
was authorized under the 1977 Social Security Amendments and
whose members are appointed partly by the Congress and partly
by the President, has been given the mandate of studying and
reporting within two years on the fiscal status of the
Old Age, Disability and Health Insurance Trust Funds and
the adequacy of such trust funds to meet the immediate
and long-range financing needs of such programs. The
-9-
Conunission will examine the scope of coverage/ the
adequacy of benefits, the impact of social security, disability and health insurance programs on other government
income transfer programs, and alternative financing
methods.
The quadrennial Advijsory CounciJ. on Social Security is
also authorized to review the status of the social security
trust funds including the scope of coverage, methods of
financing social security problems, and the impact of
social security on public assistance programs. The Council
is required to submit reports of its findings and
recoiniTienaat ions to the Secretary of Health, Education and
Welfare by October 1, 1979.
An additional study is authorized under the 1977
Amendments. It will evaluate the integration of the
social security and the Federal Civil Service retirement
systems. In addition it will evaluate the impact of
full coverage of State and local employees under social
security. The report of this study is due by the end
of next year.
-10-
Finally, the President has proposed the establishment
of a Commission on Retirement Policy to provide a comprehensive analysis of the retirement and disability structure
of the United States, including the Nation's retirement
and disability needs for the next 60 years and the financial
ability of the existing public and private retirement
systems to meet those needs; the financing mechanisms and
benefit structures of the present public and private systems;
the overlaps and gaps in the present benefit structures; and
the role of individual savings in meeting retirement and
disability needs.
As this list of commissions and studies indicates,
the wide range of the complex issues involved in any
modification of the social security system will be
thoroughly examined in coming months.
It is clear that
decisions taken with respect to any of these issues have
wide ramifications.
For example, the issue of expanding
the coverage of the social security system through
integration of the system with other public and private
pension systems is an important element in calculating
future costs and, therefore, the necessity for additional
revenues.
-11
It may be that a reexamination of the benefits schedule
will also suggest changes in the system's financing requirements.
In this connection, it is worth noting that a
recent poll indicated that respondents were about evenly
divided when confronted with a choice between future tax
increases and limits on such increases even at the cost of
lower benefits.
To me, the poll suggests that the public
accepts and endorses the concept of a strong link between
contributions and benefits, at least for the retirement
aspects of the system.
Any actions to sever or strain
this link must keep in mind the strength of this tradition,
a factor which underlay the decisions taken by the Congress
in enacting the 19 77 amendments to the social security
system.
In light of the complexity of the issues involved,
and also in light of the coming availability of thorough,
dispassionate and highly competent examination of the social
security system, it is our conclusion that any changes
should have the benefit of these forthcoming reviews.
oOo
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 P.S.T.
APRIL 6, 1978
REMARKS BY THE HONORABLE DANIEL H. BRILL
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
AT THE CONFERENCE ON THE MIDYEAR ECONOMIC OUTLOOK
OF THE CONFERENCE BOARD
SAN FRANCISCO, CALIFORNIA
Economic policy making in a democratic society involves
an intricate balancing among contending objectives. Every
objective is, in itself, worthy. Economic growth is a legitimate objective for an expanding population with ever-rising
aspirations. So are: the achievement of more equitable
distribution of the fruits of growth, enlarged employment
opportunities to bring the disadvantaged into the main stream of
American economic life, repair of our deteriorated urban centers,
preservation of our environment, better medical care—the list is
endless.
All worthy, all achieveable—but not all at once. As
wealthy as this nation is in terms of natural resources, advanced
technology and a skilled work force, it can make only moderate
progress on all these objectives simultaneously.
Nevertheless, this should be a period in our economic cycle
when the rate of progress on many fronts could be accelerated.
There is slack in the system; we are not close to straining our
labor or capital resources. Despite the significant achievement
last year of creating over 4 million new jobs and reducing the
number of unemployed by 1.2 million, we still have 6 percent of
B-816
-2-
labor force unemployed.
And despite a real growth in output
of 5-3/4 percent, there is still about one-sixth of industrial
plant idle. Why can't we move faster toward satisfying the
whole range of legitimate social and economic objectives?
In my judgment, the principal barrier is our recent history
of inflation and the current widespread expectation of accelerating
inflation. The roller-coaster experience of the past decade—
soaring inflation followed by deep recession—has apparently
made us a nation of risk-averters. Private investment opportunities now require a much higher premium to induce the required
capital inflow, the pay-back time horizon for research and for
new investment embodying research results has been so shortened
as to threaten our technological superiority, and government
initiatives are limited and debilitated by inflation.
Even when the economy has slowed, we have been locked
into an unacceptably high rate of inflation. During the
second half of the 60's and into the early 1970's, the
inflation rate—as measured by the GNP deflator—averaged
over 4-1/2 percent per year, two and a half times as rapid
as in the first half of the 60's.
Prices soared in 1973 and 74, in response to food shortages,
the oil situation and the surge in raw materials demands during
the worldwide investment boom. In 1974, added impetus to prices
-3came from "catchup" efforts after the removal of wage and
price controls.
As the worldwide economic contraction set in in 1975,
cost and price advances began to subside from the peak rates of
1974. The pattern of unwinding continued into 1976, though the
decline reflected principally further easing in farm and food
prices and some Federally mandated rollbacks in energy prices
early in the year. Throughout 1976, and again during 1977, the
underlying rate of inflation—as measured by the rise in consumer prices excluding food and fuel—averaged around 6 percent,
up about one-half frcm the pace of the late 1960's and early 1970's. Si
wholesale prices—other than for farm products, foods and energy—rose
at a 6 percent rate during both 1976 and 1977. Basically, the
inflation unwinding process stopped at 6 percent.
It is bad enough to be unable to bring down the rate of
inflation below 6 percent even with unemployment in the 7 to 8
percent range. It is more disturbing that as significant improvement has taken place in the unemployment picture, signs have
emerged that the inflation rate is accelerating. To be sure,
recent price figures are distorted by temporary factors such as
adverse weather and the coal strike, but it does appear that the
underlying rate of price rise has moved up to at least the
6-1/2 percent range as unemployment has dipped to 6 percent.
This is not a viable relationship. We cannot tolerate the
waste of resources—nor the social and economic tensions—implied
by a 6 percent level of unemployment. But neither can we succeed
-4with programs to encourage fuller employment of resources
if high inflation persists or accelerates.
' This is not a matter of lack of will, or of demons lurking
at the central bank. The fact is that inflation and inflationary
expectations induce economic behavior in the private sector perverse
to the success of stimulatory efforts. With the scars of 1973-4
still fresh in executive suites, the prospect of accelerating
inflation no longer brings forth the "build now before costs go up"
reaction. More often, the reaction is to delay expansion in fear
that inflation will inevitably result in recession; who wants to
initiate an investment project today—at today's high costs--that
might come on stream just as the economy nosedives? Similarly,
consumers appear to respond negatively to their anticipations of
inflation; buying now to beat the price rise is not a common
reaction, except perhaps in the area of housing. It all adds up,
to me, to the simple conclusion that the economy can't get where
we want it to go, if the path it takes is inflationary.
To find a safer route requires, first, an analysis of the
nature of contemporary inflationary forces. What kind of inflation
do we have? I find it easier to stress what kind we do not have.
We do not have an excess demand inflation with "too much money
chasing too few goods." We do not have a wage or profit inflation,
with one group or sector carving out exorbitant gains. Instead,
we have what for want of a better term I will describe as "tailchasing" inflation. Let me explain the need for this new
analytical category.
-5Ultimately, the rate of growth of real income is
dependent upon the rate of growth of output per unit of input.
This sets the limits. Beyond this, one sector can gain at the
expense of another only by a shift in relative factor shares,
brought about by market forces or by exercise of market or
political power. The shares of the "pie" available to labor
and capital are also limited by redistribution of shares from
the private to the public sector and from the producing to the
nonproducing elements of society—retirees, welfare recipients, and
others. Such redistribution means a smaller share to those
currently engaged in the production process. But the limits for
all are set by the rate of growth in productivity.
Unfortunately, the rate of growth in U.S. productivity has
slowed down perceptibly in the last decade. From 1950 through
1968 private nonfarm productivity expanded by about 2.6 percent
annually. From 1968 through 1977 it rose by about 1.4 percent
per year—roughly one-half as much. Even after cyclical adjustment, a wide disparity remains. The causes of this slowdown in
productivity growth are complex, but seem to center around a
slower growth in capital per worker in recent years. Whatever
the cause—or causes—the fact is that the "pie" to be shared
has grown more slowly over the past decade than the rate of
growth earlier in the postwar period.
-6Moreover, during recent years, a larger share of the
'k>ie" has been going to those not participating in the production process.
Total government transfer payments to individuals
have risen from 6-1/2 to 7 percent of national income in
the early 1960's to the 13 to 14 percent range in recent
years.
In the division of the remainder of the "pie", neither
labor nor capital has measurably benefited.
The share of
labor compensation in the gross product of the corporate
sector has a slight upward tilt over the postwar period, but
if supplements to wages are subtracted to leave only wages
and salaries this is converted to a slight declining trend.
For the other factor of production, capital, profits adjusted
to put the cost of inventories and capital consumed in the
production process on a replacement cost basis have represented
a much lower share of corporate gross product in the 1970's
than in the earlier postwar decades.
What is clear then, is that neither labor nor capital has been
able to gain, relatively, during this last inflationary decade.
This is not only true in relative terms; neither labor nor
capital has made much progress in absolute terms.
The tail-
chasing process has speeded up and has thrown off ever higher
money wages and profits, but forward progress in real terms
has slowed down to the vanishing point.
-7First, take the case of labor. Employee compensation
per man-hour rose by 95 percent in the 1968-77 period,
exceeding the 51 percent gain in the 1959-1968 period. But
that is almost all tail-chasing. Corrected for inflation,
real compensation per man-hour rose only 12 percent between
1968 and 1977—just a little more than 1 percent a year—and
well below the 27 percent gain of the earlier period. And,
because of a decline in hours worked, real compensation per
week rose only about 8 percent between 1968 and 1977—less
than 1 percent a year.
Second, take the case of capital. Corporate profits after
tax—as reported under current accounting conventions—rose
by 122 percent between 1968 and 1977, exceeding the 65 percent
gain between 1959 and 1968. Correction for inflation requires
several adjustments to the reported figures. A first step is
to adjust inventories and capital consumption allowances to a
replacement-cost basis. This cuts the profit increase about
in half, and leaves a rise of 52 percent in the 1968 to 1977
period. If these adjusted profits are then expressed in dollars
of constant purchasing power, there was actually a decline of
11 percent in real profits during the 1968-1977 period. This
contrasts with a rise of 61 percent, on the same inflation
adjusted basis in the previous period. Can anyone doubt that
both labor and capital would be better off by a return to
lower rates of inflation?
-8The crucial question is how we phase down to lower rates
of inflation. Granted that no one is gaining much from the
tail-chasing process, how do we slow down the process without
slowing down the economy? If demands were pressing on resource
availability, the answer would be relatively simple—turn loose
the conventional tools of stabilization policy and let fiscal/
monetary restraint bring demands into better balance with supply.
But the situation in which we now find ourselves, with demands
inadequate but prices buffeted by everyone's desire to catch
up with rising costs and prices, and all highly sensitized by
a decade of inflation, is not easily amenable to conventional
tools of stabilization.
There is a sense in which we are prisoners of the past.
Inflation has now continued for a decade in this country at
rates that are much higher than most of our previous experience.
As a result, markets have adjusted to some considerable degree,
building on an expectation, too often validated, that inflation
is more likely to continue than to stop, and more likely to
accelerate than to decelerate.
This leaves markets exceedingly vulnerable to any signs of
intensification of inflationary pressures. The tangible signs
of a rise in the rate of inflation would lead to higher rates
of interest. Given the state of expectations, an effort by the
monetary authorities to prevent or reverse such an inflationinduced rise in interest rates could be self-defeating. The
-9-
markets' interpretation of a significantly faster rate of
monetary expansion would only push prices and interest rates
up all the more rapidly.
This would be tail-chasing with a
vengeance.
I might note that monetary policy-makers were once
accused of "money market myopia", i.e., resting policy too
heavily on movements of interest rates.
Perhaps today, financial
market participants can be charged with "aggregates astigmatism",
i.e., too much preoccupation with jiggles in the monetary
aggregates. Whether the contemporary preoccupation is sound
economics or not—and I'm afraid my biases show--it has to be
reckoned with in the formulation of policy.
ception becomes reality.
In markets, per-
As a result, policy approaches which
might once have been open to us are no longer available after
a decade of inflation.
Instead,our economic and financial
policies must be shaped so as to reduce inflationary expectations,
not to magnify them.
Since no major group is currently benefitting from the
inflation process and since we all stand to lose in the long run,
the sensible course is to chase our tails a little more slowly.
In that way--and perhaps only in that way—the current inflationary
process can gradually be slowed down and inflationary expectations
reversed.
This was, and is, the compelling logic underlying the
deceleration strategy outlined earlier this year by the President
in his Economic Message.
-10The strategy rests on the hypothesis that the rate of
wage and price escalation can be reduced in every market,
that businessmen assured of some moderation in the rate
of cost increases can moderate their price increases accordingly, and that labor negotiators assured of moderation in
the rise in the cost of living can temper their wage demands.
In other words, if we can all "cool it" in concert, everyone
will benefit.
Because this program is voluntary, rather than mandatory
or coercive, and because it does not rely on a single standard
of wage and price behavior, it has been dismissed by some as
probably ineffective. We disagree. In light of the foregoing
analysis of the inflation process—the process in which wages
have been vainly chasing prices which have been vainly chasing
wages, in an escalating cycle with no one the victor for long—
we think the self-interest of all participants in the success
of the program will be evident and a powerful force in
achieving some abatement of inflationary pressures.
0O0
CONTACT:
ROBERT W. CHILDERS
(202)634-5248
FOR IMMEDIATE RELEASE April 7, 1978
REVENUE SHARING FUNDS DISTRIBUTED
The Department of Treasury's Office of Revenue Sharing (ORS)
distributed more than $2.0 billion in general revenue sharing
and antirecession fiscal assistance payments today to more than
37,000 State and local governments.
General revenue sharing funds accounted for most of today's
payments, totaling $1.7 billion to 37,203 State and local governments. One thousand thirty-one governments did not receive funds
because they did not file necessary forms, in spite of reminders
from the Office of Revenue Sharing.
Today's Antirecession Fiscal Assistance (ARFA) payments
totaled over $305 million to 17,033 State and local governments
and were based on a quarterly national unemployment rate of 6.6
percent for the quarter beginning October 1, 1977. Only governments whose individual jurisdictions had unemployment rates in
excess of 4.5 percent for the calendar quarter beginning October 1,
1977 were eligible for the ARFA payments.
B-817
-2-
Current legislation authorizes the Office of Revenue Sharing
to provide quarterly Revenue sharing payments to State and local
governments through the end of Federal fiscal year 1980.
Quarterly payments under the Antirecession Fiscal Assistance
Program are authorized through September 30, 1978.
- 30 -
FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
STATEMENT OF DONALD C. LUBICK
ACTING ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
ON INTEGRATION OF THE CORPORATE AND INDIVIDUAL INCOME TAX
BEFORE THE CO.MMITTEE ON WAYS AND MEANS
OF THE HOUSE OF REPRESENTATIVES
April 7, 1978
INTRODUCTION
There is widespread agreement that changes in our tax
laws are needed to strengthen and maintain the current
economic expansion and to assure the future productivity of
the economy. In particular, changes are needed to stimulate
business investment.
One technique suggested by many for achieving these
goals is integration of the corporate and individual tax
systems. Under present law, income earned from activity
conducted in corporate form is subject to taxation twice if
distributed to shareholders. First, the income is taxed at
the corporate level at rates up to 48 percent. In addition,
if the after-tax income of a corporation is distributed to
individual shareholders as dividends, it is subject to a
B-818
- 2 second tax at rates of 14 to 70 percent. Integration would
eliminate or reduce one of these levels of tax.
During his 1976 campaign for the Presidency, President
Carter called for an end to the double taxation of corporate
dividends. Over the past year, the Treasury has studied
integration extensively. We have analyzed the economic
effects of the present tax laws and considered a number of
possible integration systems in great detail. One approach
which we developed and considered carefully was substantially
similar to the proposal which Chairman Ullman has introduced.
As you know, we ultimately decided not to recommend an
integration proposal. Instead, the President proposed other
incentives for business, principally in the form of individual
and corporate rate cuts and liberalization of the investment
credit. The rate cuts will benefit both small and large
businesses and will reduce corporate taxes by $6 billion in
1979 and $8.5 billion in 1980.^ The individual rate cuts
will benefit unincorporated businesses. Needed business
investment also will be encouraged by improvements in the
investment tax credit. mhe present 10 percent rate will be
made permanent—rather than reverting to the 7 percent level
that is now scheduled to apply after 1980. In addition, the
ability of taxpayers to utilize the investment credit will
- 3be increased, and the credit will be made available for a
broader range of investments.—'
Jn my testimony today, I would like to explain why the
President ultimately decided not to recommend corporate
integration and instead proposed these other forms of business
tax relief.
There are two broad reasons underlying this decision.
First, integration is a fundamental structural reform of our
tax system and raises a wide range of policy issues. There
must be an opportunity for the implications of these issues
to be considered by the Administration and Congress, as well
as by the various groups in our society which will be
affected. Given the pressing need for a tax bill this
year, we simply did not feel that there was sufficient time
for these issues to be adequately considered. I will devote
the major portion of my testimony to describing these issues.
Second, due to the fact that the form of integration affects
the competitive position of some sectors of the business
community vis-a-vis others, we found an absence of broad
business support for any single plan. The business community in general favored other forms of business tax reductions such as those which we have included in our program.
- 4 I would like to mention, however, two factors which did
not underlie the decision. First, the Administration did
not conclude that integration should be rejected because of
undesirable economic effects. We believe integration has
merit and deserves further study. Second, the Administration
did not conclude that integration is technically infeasible.
In fact, we concluded that a plan of integration could be
made to work technically and even could allow various collateral
simplifications of the tax system to be adopted.
PROPOSALS WHICH SHOULD BE CONSIDERED
IN CONJUNCTION WITH INTEGRATION
Before describing policy issues raised by integration
itself, I would like to discuss certain changes in the tax
laws which we believe should be considered at the same time
as integration.
The Administration considered integration in conjunction
with two related proposals: reduction of the top individual
marginal rate to a rate which approximates the top corporate
rate, and taxation of capital gains as ordinary income.^
These proposals are linked to integration for two reasons.
First, they relate to the basic structural elements
involved in the taxation of income from corporations. We
believe integration should be considered only as part of a
- 5 more general reform of the tax treatment of corporate income
that would move towards taxing all income once at appropriate
individual marginal rates. Integration for dividends does
not remove the incentive for high bracket taxpayers to
accumulate income within corporations. For these taxpayers
corporations provide a form of tax shelter. Even with integration they can save taxes by accumulating money within a
corporation rather than paying currently one tax on the
earnings at their appropriate marginal rate. This tax
shelter effect can be eliminated only by reducing the maximum individual rate to approximately the top corporate rate
and taxing capital gains as ordinary income.
Second, a very substantial portion of the tax reduction
resulting from integration is distributed to wealthy individuals
since these are the individuals who own the most stock. In
other words, integration as an isolated proposal is regressive.
For the same reason elimination of the capital gains preference
is progressive and therefore is an appropriate revenue
offset to integration.
We continue to believe that integration should be
considered only in conjunction with these other proposals.
- 6 POLICY CONSIDERATIONS RAISED BY INTEGRATION IN GENERAL
I would like to turn now to policy considerations
raised by integration proposals in general. Many specific
advantages have been claimed for corporate integration in
comparison to other methods of stimulating capital formation.
At the same time, some of these claims have been challenged
both by tax professionals and by representatives of private
groups. I would like to describe the claimed advantages and
the areas of uncertainty which we believe require further
study.
The following four arguments have been raised in favor
of integration proposals to reduce the double tax on dividends,
such as the one introduced by Chairman Ullman:
(1) integration would reduce the bias against equity
financing and in favor of debt that characterizes
the present tax system;
(2) integration would promote better use of scarce
capital resources by reducing a bias against
investment in the corporate sector and against
industries with high dividend payout ratios;
- 7 (3)
integration would improve the capital market by
reducing the current bias in favor of corporate
retentions relative to distributions; and
(4) integration would give relatively more benefits to
low-income taxpayers and so be less regressive
than other forms of stimulus to capital formation.
Encouraging Corporate Equity Financing
Under present law, corporations, in computing taxable
income, are allowed a deduction for interest but not for
dividends. This means that a corporation pays interest with
pre-tax dollars and pays dividends with after-tax dollars.
Thus, corporations are encouraged to finance their operations
with debt instead of equity. The proportion of debt in the
corporate financial structure has increased over the past 15
years, giving rise to concern about increased corporate
vulnerability to business risks such as cyclical downturns.
Many economists believe that reducing the double tax on
dividends would encourage a greater relative use of equity
financing. However, some recent economic research has
challenged this traditional view. According to this research,
the bias of the current system is only against raising new
- 8equity and is not against corporate reinvestment of retained
earnings.
Since most corporate investment currently is out
of retained earnings, the bias of the present system may be
narrower than is generally believed.
If. this is so it may
be more cost effective to provide relief from double taxation
solely for dividends on newly invested equity capital.
In any case, it should be noted that the corporate tax
cuts proposed in the President's tax program will also
reduce the relative costs of equity financincr by reducing
the "corporate" portion of the double tax.
The relative
effectiveness of integration and corporate rate cuts in
encouraging new investments in corporate equity remains an
open question.
Reducing the Bias Against Investment in the Corporate Sector
Another reason advanced for adopting integration is to
correct a bias against investments in the corporate sector.
Corporate income distributed to shareholders is taxed twice.
Income from investments in unincorporated enterprises is
only taxed once.
For nontax reasons, the corporate form of
organization is more prevalent in some industries than in
others.
Because of the double taxation of corporate income,
owners of industries organized in corporate form (such as
- 9basic industries) incur substantially higher tax on capital
income than owners of industries conducted in noncorporate
form (such as real estate). Such differentials in tax rates
result; in inefficiency in the use of capital. Relatively
too much investment is channelled to unincorporated enterprises because choices among investments are affected by tax
considerations.
The Administration agrees that gains in economic
efficiency could be realized from reduction of the double
tax on dividends. However, moving towards equalization of
rates of tax on capital income will cause some industries
and firms to receive much bigger tax reductions than others
and will change the relative value of investments as between
industries. We believe that these consequences should be
carefully considered by Congress and affected groups within
the society.
Reducing the Bias Against Distributions
Another reason advanced for adopting integration is to
reduce the bias of current law against corporate distributions. Retained corporate earnings are taxed once, whereas
distributed corporate earnings are taxed twice. Accordingly,
it is argued that corporations are encouraged to retain
- 10 earnings.
Of course, retained earnings are reflected in
higher share prices, and a selling shareholder is taxed on
this appreciation.
However, tax on this appreciation is
deferred until the shareholder sells the stock and appreciation
is taxed at capital gain rates.
Corporate integration, it is argued, will reduce this
bias against retention, thus reducing the advantage of large
and established firms which can generate capital internally.
These corporations will be forced to compete in the open
market for investment funds, and new enterprises will be
able to compete for these funds. The stock of capital
within the economy thus will be distributed with greatest
efficiency.
There are two issues relating to this claimed advantage
of integration which deserve substantially more consideration
and debate. First, the extent to which the current tax
system actually discourages distributions has not been
resolved.
It is open to question on both theoretical and
empirical grounds. For example, while some econometric
research suggests that dividend payout ratios should increase
because of integration, dividend payout ratios appear to
have remained roughly constant in European countries that
have integrated.
Further analysis is required before one
- 11 can confidently predict the effect of integration on distributions. Second, even assuming that dividend payout
ratios would increase because of integration, there is
substantial disagreement as to whether this result is good
or bad for the economy. In contrast to the favorable
arguments presented above, some experts argue that if
shareholders receive more dividends they will increase
consumption, thereby reducing funds available for business
investment. Also, raising capital in equity markets involves
substantial transactional costs. Retention of earnings, of
course, does not involve these costs. By this line of
argument, tax reductions designed to stimulate capital
formation should not encourage shareholder pressure on
corporations for increased distributions.
Progressivity Relative to Other Forms of Business Tax Reduction
The final argument in favor of integration is that it
is less regressive than other techniques for reducing the
tax burden on capital income. Integration through dividend
relief in effect reduces the corporate tax on taxable income
distributed to shareholders. Integration results in shareholders receiving relatively more income, which is then
taxed at each shareholder's marginal rate. In contrast, at
least a portion of the benefits of a corporate tax rate cut
- 12 will be retained by corporations and thus will not be subject
to current tax at individual marginal rates. Thus, integration is relatively less regressive than a system which
reduces the tax on all corporate income, whether or not
distributed.
In the absence of other tax changes, the relative
progressivity of reduction of the double tax on dividends,
compared to other forms of business tax relief, would be an
important consideration. While the Administration is not
proposing integration at this time, the business tax cuts in
the tax program are balanced by provisions that limit deductions used mostly by the wealthy and provisions that provide
substantial tax cuts for lower and middle-income families.
If integration is adopted in addition to the other elements
of the Administration's program, it would distort in favor
of wealthy taxpayers the distribution of tax reductions
which the Administration's program is designed to achieve.
POLICY ISSUES RAISED BY INTEGRATION
DEVELOPMENT OF A SPECIFIC PROPOSAL—
In developing an integration proposal we became aware
of the fact that resolution of technical issues often involved
significant policy judgments. Various categories of corporations and shareholders could receive significant relative
advantages or disadvantages depending on how these issues
- 13 were resolved.
As the specifics of a proposal developed, we
found that various businesses and shareholder groups became
concerned with the effects of integration and many advocated
instead the business tax cuts which the President ultimately
recommended. We became convinced that if integration were
to be proposed, these issues should not be left to the
draftsmen, but should be fully explored with Congress and
affected groups within the society.
I would like to describe some of the more significant
issues which we identified.
Form of Integration Proposal
Integration can take one of two basic forms. It can
treat the corporation like a partnership and tax all income
to the shareholders currently, regardless of whether or not
the income is distributed. This is generally referred to as
full integration. Alternatively, it can provide relief from
double tax only to the extent corporate income is in fact
distributed. This is referred to as partial integration or
dividend relief. Chairman Ullman's proposal takes the
latter form, that is, it provides relief from double tax
only to the extent corporate income is in fact distributed
as dividends. The Treasury Department concluded that full
- 14 -
integration was infeasible because of its administrative
problems. We agree with Chairman Ullman that partial
integration is technically feasible.
There are various mechanisms which can be utilized to
achieve partial integration. All of them are similar in
that economically they provide relief by reducing or eliminating the corporate tax on income which the corporation
distributes to its shareholders. It is possible, however,
to formulate partial integration either as a reduction of
the corporate tax or as shareholder relief. If partial
integration takes the form of relief from corporate tax, the
corporation receives a deduction for dividends which it
pays, a credit against its tax liability on account of
dividends which it pays, or a lower rate of tax on distributed
earnings. If partial integration takes the form of shareholder relief, shareholders include in income all or a
portion of the tax which the corporation paid on income
distributed as dividends and take a credit against their
individual tax liability for such amount. Significant
short-term consequences flow from the form utilized.
If integration takes the form of a reduction of the
corporate tax, the tax savings resulting from integration
will be received in the first instance by the corporation.
This means that the corporation will have more cash and may
- 15 be able to retain some of the integration tax savings for
internal generation of capital. On the other hand, if
integration takes the form of shareholder relief, the tax
savings of integration initially will be in the hands of the
shareholders. The corporation will be able to obtain benefits
from integration for the internal generation of capital only
if it can convince its shareholders that on account of this
change in law it is appropriate for the corporation to
reduce the level of its cash distributions. Thus, the form
in which integration is proposed may have an important
impact on the extent to which corporations in the short run
are able to capture at least a portion of the integration
benefits for internal capital formation. In the long run,
the choice between corporate tax reduction and shareholder
relief may not affect the retention rate.
A second significant impact of the form involves the
calculation of corporate income for financial accounting
purposes. If integration takes the form of reduction of
corporate tax, corporations probably will be able to report
lower tax costs and consequently higher after-tax profits.
If integration, on the other hand, takes the form of shareholder relief, corporations will probably have to report the
same tax costs as they do today. An integration system
which resulted in higher reported profits for financial
- 16 accounting purposes could have a wide range of psychological
effects from stock pricing to wage increases for employees.
Another important impact of the form involves our
treaty obligations with foreign countries. Frequently,
under these treaties the United States agrees not to withhold more than a specified amount from dividends paid to
residents of the treaty country. If integration takes the
form of reduction of the corporate tax, it may be argued
that we are in violation of treaty obligations if the benefits of integration are denied to foreign shareholders. If,
however, integration takes the form of shareholder relief
there is a stronger argument that we have not violated
treaty obligations if foreign shareholders are denied the
benefits of corporate integration. Because of this factor,
European countries which have adopted integration have
chosen the shareholder relief form.
Treatment of Tax Preferences
Development of an integration proposal also requires
major policy decisions with respect to the treatment of tax
preferences. Tax preferences are created by special provisions included in the Internal Revenue Code to encourage
taxpayers to undertake activities which are deemed to be
- 17 socially desirable. In general, preferences are of four
types: (1) credits, such as the investment credit; (2)
artificial deductions, such as percentage depletion, (3)
accelerated deductions, such as rapid amortization of
pollution control facilities; and (4) exclusions from gross
income, such as interest on state and local government
obligations.
Under present law, corporate tax preferences give rise
to economic income which is not subject to corporate tax.
This income, however, is taxed to shareholders if distributed
as dividends.
Insofar as preferences already serve to eliminate the
corporate tax, integration may provide no benefit unless the
favorable treatment of the preferences is preserved when
corporate income is distributed to shareholders. An example
of this preservation under current law is the treatment of
tax-exempt interest earned by mutual funds. Under certain
circumstances tax-exempt income retains its tax-exempt
character when distributed to shareholders of the mutual
fund. If the preference were not "flowed through," the
mutual fund shareholders would be taxed on the income when
distributed.
- 18 If preferences are not flowed through, integration will
provide a greater benefit to corporations in those industries
which currently have fewer preferences and consequently pay
relatively high effective rates of tax relative to economic
income. Thus, integration could have an effect on the
competitive position of different industries in attracting
capital investment. The treatment of preferences thus
presents a fundamental question: should integration be
limited to relieving double taxation only to the extent that
a corporate tax is actually paid, or should it attempt to
pierce the corporate veil and pass through the benefit of
corporate tax preferences to shareholders. Chairman Ullman's
proposal does not pass tax preferences through to shareholders.
In the event that the decision is made not to flow
through the benefit of preferences it will be necessary to
provide some rules to determine the source of any dividend
distributions. A corporation with preferences has, in
effect, two pools of income; income with respect to which
tax has been paid (after-tax taxable income) and preference
income with respect to which no tax has been paid. There
are three options for determining the source of dividends:
all distributions may be treated as first coming out of
after-tax taxable income until such income is exhausted; all
distributions may be treated as first coming out of preference
- 19 income until such income is exhausted; or all distributions
may be deemed to be partially out of each pool, presumably
on a pro rata basis. Treating after-tax taxable income as
distributed first will provide the greatest benefit to
industries with relatively high levels of preference income
and distributions, while treating preference income as
distributed first will provide the least benefit.
Chairman Ullman's proposal treats distributions as
coming first out of after-tax taxable income. Also, to some
extent his proposal allows shareholders the benefits of
integration even when their corporation has distributed all
of its after-tax taxable income and is making distributions
out of preference income. (This results from the fact that
under the proposal the amount which a corporation is permitted to add to the shareholder credit account for a
taxable year exceeds the maximum amount of shareholder
credits the corporation could have declared for such
taxable year if it distributed all of its fully taxed income.)
In other words, his proposal provides tax relief even when
the distributed income has not incurred any corporate tax.
This treatment makes preferences more valuable to a corporation than they are under current law. Under current law
corporate preference income is not subject to corporate tax.
Under Chairman Ullman's proposal, preference income can, in
effect, give rise to a refund of corporate tax paid on other
- 20 income. This treatment is most serious during the proposal's
10-year phase-in period. To a lesser degree it continues to
4/
be present even after the proposal is fully phased in.-
Foreign Tax Credit
An issue similar to that presented by preferences
arises with respect to the foreign tax credit. The United
States generally taxes the worldwide income of its residents
and domestic corporations. The United States, however,
allows a credit against U.S. tax liability for taxes paid to
foreign countries. The foreign tax credit is intended to
insure that the tax law is neutral with respect to foreign
and domestic investment. That neutrality has been a cornerstone of United States tax policy.
In designing an integration proposal, it is necessary
to reexamine this policy of neutrality. Some argue that
neutrality should be the basic principle underlying international tax policy. Neutrality is achieved when an enterprise
pays the same total rate of tax on foreign profits as on
domestic profits. This would require the integration of
foreign corporate and domestic individual income taxes.
That is, an individual would receive credit for corporate
taxes irrespective of whether they were paid to the U.S. or
- 21 the foreign country.
Others, mindful of revenue considerations
point out that allowing a shareholder credit for foreign
corporate taxes can be a significant revenue drain on the
U.S. Treasury because it may require the. refund to sharehold
5/
of taxes paid by the corporations to foreign treasuries.—
In addition, some argue that a flow through of the foreign
tax could weaken our treaty bargaining leverage with other
countries having integrated tax systems since those countries
typically do not flow foreign taxes through to their shareholders.
Traditional practice within a classical system has
given the source country the major portion of the tax
revenue from foreign investment with only residual taxing
rights accruing to the residence country. It is not clear
how the tax revenue from foreign investment should be
divided between the source and residence countries within an
integrated system. Whether the revenue split should be "SOSO" or something else is an open question. It is very
clear, however, that giving more than 100 percent of the tax
revenue to the source country is unacceptable. But this is
precisely the effect that full flow through of foreign taxes
to individual shareholders would often have.
- 22 -
There are a variety of possible solutions.
Foreign
corporate taxes could be allowed as a credit at the individual
shareholder level, but limited to the individual shareholder's
effective tax on his foreign source income.
This would
avoid the refund of foreign taxes by the United States, but
would be administratively complex since each individual
shareholder would be required to compute a foreign tax
credit limit. Another possibility would be for the United
States to allow a full credit at the shareholder level for
foreign corporate taxes, but require the foreign "source"
country to finance the credit.
This would entail an EEC
type "clearing house" payment.
A third possibility would be
for the United States to deny a part or all of the flow
through of foreign taxes, but, like France, Germany, and the
United Kingdom, soften the impact through favorable dividend
ordering or tracing rules.
Special Categories of Shareholders
A number of major issues arise in connection with the
treatment under integration of special categories of shareholders.
The most important of these categories is tax-
exempt institutions. Many integration proposals (apparently
including that of Chairman Ullman) effectively exclude taxexempt institutions from participating in the benefits of
- 23 integration by denying these shareholders a refund of any
corporate tax attributable to their dividends. It is frequent!
argued that this exclusion will reduce the revenue cost of
integration.
Theoretically, a strong argument can be made that taxexempt entities should be entitled to the benefits of integration. Such entities arguably are equivalent to taxpayers
with a zero marginal tax rate. If tax-exempt entities do
not receive the benefits of integration, then taxable shareholdi
with very low marginal tax rates will be left with more
dividend income after tax than charities. This anomaly led
a tax law professor to ask us: "at what rate of tax are
tax-exempts tax exempt?" In other words, denying charities
the benefits of integration is equivalent to subjecting them
to tax.
The exact effect of denying the benefits of integration
to tax-exempt shareholders is hard to predict. There is
considerable concern that over a period of years this treatment might lead to a major shift of tax-exempt investors out
of the equities market in favor of debt instruments at least
with respect to new investments. Thus, as taxable and taxexempt shareholders readjust their portfolios, the anticipated
revenue saving would not be realized and there would be
significant transactional costs. In addition, this shift in
- 24 -
portfolios may undermine the positive impact on equity
markets expected in connection with integration.
Also, denial of the benefits of integration to charities
will cause these institutions, to the extent they continue
to own corporate equity, to exert pressure on corporations
to continue high levels of cash dividend payouts. (Taxable
shareholders might be willing to accept lower cash payouts
because they would be receiving tax credits as a result of
integration.) This will tend to force corporations to pass
the entire benefit of integration through to shareholders.
Such a result has been a major concern to corporate managers.
In particular, tax-exempt pension trusts present difficult
technical problems. It can be argued that it is appropriate
to treat these trusts like other exempt organizations to the
extent they receive dividends attributable to contributions
made with pre-tax dollars. (Taxable income earned with
respect to pre-tax dollars is mathematically equivalent to
tax-exempt income earned with respect to after-tax dollars.)
However, this argument is inapplicable to the extent these
trusts receive dividends attributable to contributions made
with after-tax dollars such as voluntary employee contributions. Any mechanism for allocating dividends between these
sources would be extremely complex.
- 25 A second category of shareholders presenting special
considerations are financial intermediaries. These include
mutual funds and real estate investment trusts for which a
dividends paid deduction form of integration is provided
under current law. In addition, there are life and casualty
insurance companies, both mutual and investor owned, as well
as commercial banks and other stock and mutual depository
institutions. The tax treatment of these institutions has
been developed over a period of many years and has been
designed to insure that the tax system does not disrupt the
competitive balance which exists among the different classes
of institutions. Inclusion of these institutions in an
integration program in such a way as to insure maintenance
of that balance will require extensive study.
Transactions
Finally, there are a number of provisions under current
law which in effect mitigate the effects of the present
system of double taxation. These include the ability to
liquidate a corporation, or make certain noncash dividend
distributions, without recognizing unappreciated gain at the
corporate level. These provisions introduce a substantial
amount of complexity into the law and provide the impetus
for much tax planning. These provisions should be studied
- 26 in the context of an integration proposal, since integration
is intended to provide an overall solution to the problems
of double taxation.
CONCLUSION
We believe that integration has considerable merit. As
the discussion indicates, however, experts are divided on
some of the potential effects of the proposal, and various
segments of the business community are divided on the technical
aspects of its implementation. We believe further analysis
and debate of these issues is essential.
- 27 Footnotes
1/ Under the proposal, effective October 1, 1978, the
corporate tax rate will be reduced from 20 percent to 18
percent of the first $25,000 of income, from 22 percent to
20 percent on the next $25,000 and from 48 percent to 45
percent on income exceeding $50,000. The maximum rate will
be reduced by an additional point, to 44 percent, on January
1, 1980.
2/ The principal changes in the investment credit are (1)
extension of its application to industrial structures, (2)
extension of its application to pollution control facilities
which are subject to rapid 5-year amortization, and (3) increase, generally from 50 to 90 percent, in the amount of
tax liability which may be offset by the investment credit.
3/ In connection with its consideration of integration,
the Administration also considered repeal of the $100 dividend
exclusion allowed to individuals under current law.
4/ For example, assume corporations X and Y each earns
$100 of taxable income on which each pays $48 of corporate
tax, and in addition corporation Y earns $20 of preference
income on which it pays no corporate tax. Assume further
that each corporation has a sole shareholder in the 40
percent tax bracket to whom it distributes all of its aftertax income.
Current Law
X Corp.
Y Corp.
$100 economic income
-48 corporate tax on $100
"52"
$120 economic income
-48 corporate tax on $100
72
Shareholder of X Corp.
Shareholder of Y Corp.
$ 72.00 dividend income
$ 52.00 dividend income
-28.80 tax (c*t 40% rate)
-20.80 tax (at 40% rate)
43.20 cash after tax
31.20 cash after tax
The value to the shareholder of the $20 preference income is
$12 ($43.20 - $31.20).
- 28 Ullman Proposal Fully Phased in
X Corp.
$100 economic income
-48 corporate tax on $100
52
Shareholder Credit
Account
Corp
$120 economic income
-48 corporate tax on $100
72
Shareholder Credit
Account
$14.40 ($48 x .30)
$14.40 ($48 x .30)
Shareholder of X Corp.
Shareholder of Y Corp.
$ 72.00 dividend income
$ 52.00 dividend income
+14.40 gross up ($72 x .20)
+10.40 gross up ($52 x .20)
86.40
62.40
34.56 tax (at 40% rate)
24.96 tax (at 40% rate)
-14.40 credit
-10.40 credit
20.16
51.84 net
cashtax
after tax
14.56
37.44 net
cashtax
after tax
($72 dividend - $20.16 tax
($52 dividend - $14.56 tax)
The value to the shareholder of the $20 of preference income
is $14.40 ($51.84 - $37.44). As illustrated above, the value
of the preference is $12 under current law. The Ullman
proposal makes preferences more valuable. Even though the
preference income is not taxed at the corporate level the
Ullman proposal provides tax relief when the preference
income is distributed. As a result, the income is bearing
less than one full level of tax.
5/ For example, assume a domestic corporation's only taxable
income was $100 earned in a foreign country which imposed
a $48 income tax, and that the corporation paid the remaining
$52 to its U.S. shareholder who had a 30 percent marginal
tax rate. Under current law the corporation will be allowed
a $48 foreign tax credit and will owe no U.S. tax. If the
entire $48 were treated as U.S. taxes paid under a system of
integration which provided full dividend relief the results
would be as follows: The shareholder would gross his dividend
up by $4 8 (the taxes deemed paid by the corporation) and
report $100 of taxable income. The shareholder would incur a
$30 tax, offset by a $48 credit, and so would receive an $18
refund. The U.S. Treasury would be refunding taxes which
were, in fact, paid to a foreign government.
FOR'RELEASE -ON - DELIVERY
Expected at 10:00 a.m.
Friday, April 7, 1978
Statement of
Roger C. Altman
Assistant Secretary for Domestic Finance,
before the
HUD—Independent Agencies Subcommittee
of the
Senate Appropriations Committee
Mr. Chairman and members of this distinguished Subcommittee:
I appear before you today to discuss the plans of
the Department of the Treasury as they relate to the administrative expenses of the Office of New York Finance.
My testimony this morning will cover three major areas:
first, a review of the New York City Seasonal Loan Program
and the administration of that program; next a brief discussion regarding the Administration's proposal for federal
financing assistance to New York beyond June 30, 1978;
and finally, the level of appropriations we believe necessary
to enable us to effectively administer and oversee this
new proposal.
History of-the"Loan-Program
Under the New York City Seasonal Financing Act of 1975,
the Treasury Department was authorized to extend up to $2.3
billion in short-term loans to the City to meet the cash
flow imbalance occurring within the City's fiscal year.
During its 1976 fiscal year, New York borrowed $1.26 billion
and repaid it with interest, either on time or ahead of
schedule. In fiscal 1977, $2.1 billion was borrowed and
again repaid punctually. During this current year, the
City has borrowed $1,875 billion and we expect payment on
time or ahead of schedule.
B-819
- 2 As you know, the Act requires Treasury to charge New
York City one percent more than the rate on outstanding
U. S. Government obligations of comparable maturity. As
a result, this year's seasonal loans to New York will
yield a net surplus of approximately $13 million which
will be returned to Treasury's general fund. The aggregate
net surplus received by Treasury during the course of the
program should exceed $30 million.
The administrative expenses associated with our
monitoring of the Seasonal Financing program will aggregate approximately $3.5 million — $1,235 million in FY 1976,
$1.09 million in FY 1977 and approximately $1.15 million in
FY 1978.
One could argue, therefore, that this seasonal program
has not cost the U.S. taxpayers anything. Indeed, the U.S.
Government has substantially profited from it.
Recent ~Developments
Under this program, the City has made significant progress toward financial independence, but its ability to
borrow on its own has not been restored. Therefore, a
primary purpose of the Seasonal Financing Act — to restore
New York's access to conventional credit markets — has not
been achieved.
At Secretary Blumenthal's request, the City submitted a
four year budget and financing plan to Treasury on January 20
of this year. The City's plan calls for the attainment of a
balanced budget — according to GAAP — over the plan period.
From a financing viewpoint, it also calls for an extension,
on a declining level, of federal seasonal loans as well as
long term federal loan guarantees.
Without dwelling on the specifics of the City's financing plan, to which Secretary Blumenthal testified at great
length before the House Subcommittee on Economic Stabilization, our judgment is that the budget plan is relatively
sound. We do have certain reservations, however, concerning
the financing plan. First, our analysis of the Plan leads
us to conclude that the City can adequately provide for
its capital requirements by selling somewhat less — perhaps
$4 1/2 billion — than the $5.1 billion in long term securities
provided in their plan between the years 1979-1982. Second,
-3we believe that this reduced level of long-term financing
can be assured with a more modest amount of federal financing
assistance than the City has asked for.
However, we have concluded that the City's solvency
would not be assured in the absence of any federal lending
assistance beyond June 30 of this year. While it is conceivable that if every contingency is favorably resolved,
then no additional federal lending assistance to the City
would be required. Yet, we do not believe it would be
responsible to risk bankruptcy should events prove this
judgment wrong. New York City in bankruptcy will prove far
more expensive to this Nation than the modest form of federal
assistance we have proposed for New York City.
The'Administration-Financing-Proposal
Therefore, in order to assure the financial solvency of
New York City and eventually its financial independence, we
have proposed that Congress (i) authorize the Secretary of the
Treasury in the four years ending June 30, 1982, to guarantee
for no more than fifteen years up to $2 billion in aggregate
principal amount of taxable NYC or MAC securities with a
minimum annual guarantee fee of 1/2% per annum payable on
any outstanding guaranteed securities; and (ii) amend PL
94-236 to permit the City and State employee pension funds to
purchase City or MAC securities during the 1979-1982 period.
This financing proposal is based on three principles:
that major responsibility must be assumed by local parties
in the financing needs of New York City; that the City's
budget be truly balanced by the end of the plan; and that
the New York City financing crisis be resolved once and for
all, restoring New York's ability to finance itself.
I believe that, with the cooperation of the relevant
local parties, this plan will lead New York City to a truly
balanced budget by 1982 which should enable them to regain
access to the public credit markets and return to financing
themselves.
Outside Legal-Services
I think it might be appropriate for me to mention certain
matters that have received this Committee's attention recently.
I am referring to Treasury's retention of the law firm of
Debevoise, Plimpton, Lyons & Gates and our utilization of
staff resources. As you may know, the law firm was retained
in order to assist Treasury in analyzing the numerous complex
legal issues that arise in connection with any New York City
- 4 financing plan. The amount and difficulty of the work
required to analyze those issues was, in the judgment
of the General Counsel, beyond the capacity of Treasury's
existing staff, and it was not possible to expand our inhouse capacity, even on an interim basis, within the appropriate time frame. Therefore, Treasury decided to retain
an outside law firm and the Debevoise firm was chosen.
The circumstances surrounding those decisions are generally
set forth in the letter of February 24, 1978 from Treasury's
General Counsel to Mr. Frederick W. Rhodes of the Senate
Appropriations Committee Staff, which with your permission
I offer for the record.
The Treasury continues to be satisfied that no
improprieties or conflict-of-interest were involved. But
in response to concerns that have been expressed about the
importance of appearances in this area, Treasury and the
Debevoise firm agreed to limit their contract to coverage
of work-to-date and all work was completed last month.
With regard to our utilization of staff resources, it
is true that a small number of individuals were detailed
elsewhere or otherwise not working exclusively on matters
relating to New York City. Yet, the amount of man-hours
devoted to the New York City financing issue by Treasury
personnel has consistently exceeded, and by substantial
amounts, the amount paid for from the administrative funds
of the Office of New York Finance.
Yet, because our use of personnel in this fashion
might be considered by some not in conformance with the
purpose of the New York City administrative fund, we have
chosen to reassign those individuals who, though funded
through the Office of New York Finance, worked on unrelated
matters. All individuals funded through that account will
spend a majority of their time on the New York City
financing issue.
Administrative-Expenses
Our appropriation under the New York City Seasonal
Financing Act, in fiscal 1978, is $1.15 million. The
Administration is requesting that you appropriate the
same amount for fiscal 1979.
We would continue to exercise considerable management
and oversight responsibilities if our guarantee proposal is
enacted into law. In its present form, our proposal authorizes the Secretary of the Treasury to guarantee up to $2
billion of NYC or MAC securities. Yet Federal guarantees
- 5 would be issued only to the extent that the public markets
and private lenders do not provide the necessary funds on
an unguaranteed basis. In other words, we will require the
City to use its "best efforts" to borrow from unguaranteed
sources, before any guarantees would be issued. A key
responsibility of the Office of New York Finance, therefore,
will be to administer this "best efforts" test.
In general, I believe that the monitoring requirements
involved in this type of guarantee agreement, are no less
important than those requirements mandated through the
seasonal loan program.
Specifically, even though a credit agreement has not
yet been drafted, we obviously will require the City to
continue to submit to Treasury detailed financial reports
on a regular basis — perhaps monthly, quarterly and annually.
The analysis of this information will be important to assist
the Secretary of the Treasury in assessing the extent to
which New York City's financial problems are being solved
in the post-1978 period.
In addition, while we do not expect that the entire
$2 billion of proposed guarantees will be used during the
1979-1982 period of authorization; a portion probably will
be necessary. It is clear, therefore, that Treasury must
maintain an active role in monitoring the finances of New
York City at least through 1982. I am developing management
plans for the Office of New York Finance, therefore, which
are aimed at ensuring a four-year capability.
As you recall, during the early stages of the Seasonal
Financing Act, Treasury decided not to develop an in-house
capacity to perform all of the functions involved in administering the loan program. Given the many imponderables
at the time, the decision to rely on the expertise of outside consultants was sound. When I assumed responsibility
for the Seasonal loan program in March of 1977, it made
little sense to alter the administration of the program
inasmuch as the existing authority expired on June 30, 1978.
Yet, as the Seasonal Financing Act expires, and a new
federal program takes its place, I believe it would make
more sense and would be more cost-effective to expand on
our in-house capacity and place less dependence on outside
consultants.
Let me turn now to our specific personnel and expense
requirements. Presently, our professional, secretarial
and clerical staff totals nineteen. As I previously
mentioned, our fiscal '78 appropriation is $1.15 million.
- 6 Of this amount, we have allocated approximately $400,000
for personnel compensation and benefits, nearly $675,000
for consultants, $25,000 for travel, $15,000 for rent,
communication and utilities, and the remaining $35,000 or
so for contingencies and miscellaneous items such as
printing, equipment and supplies.
For the two largest budget items — personnel and
consultants it is my recommendation that, at a minimum,
these dollar amounts be reversed — that we increase our
staff to approximately 24 persons and reduce our dependency
on outside consultants to a lower level, perhaps $400,000.
Furthermore, this latter figure should decline in subsequent years.
Regarding the location of our staff, I believe we
should continue to maintain offices both in New York and
Washington.
The personnel located in New York City will take
primary responsibility for reviewing the City's budget
progress and audit its cash flow. This division will
audit and verify the reports received from the City and,
if necessary, recommend changes and improvements to the
reports. It also will inspect accounts, books, records
and other financial documents of the City or any financing
agency participating in the financing needs of New York
City in the post-1978 period.
The Washington staff will continue to assess the City's
financing progress and will advise the Secretary as to the
use of any guarantees. In particular, it must find that
there are adequate prospects of repayment on any guaranteed
bonds. In order to execute this function, this office must
maintain continuing liaison with other Federal agencies,
the General Accounting Office, the private sector, representatives of the City and State and other agencies of New York,
and, of course, the legislative branch. The Washington
Office will be responsible for responding to legislative
and constituent inquiries, Congressional testimony, preparing briefing papers and other policy documents to keep the
Secretary, as well as other appropriate parties well
informed.
Let me close by saying that our recommendations on
continued federal financing assistance for New York City
are modest. Consistent with this approach, we have proposed a modest budget for the Administration of the
o 0 o
program.
kpartmentoftheTREASURY
ASHINGTON,D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
EXPECTED AT 10:00 A.M., MST
APRIL 7, 1978
' REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
1978 FINANCIAL CONFERENCE OF
THE AMERICAN MINING CONGRESS
ARIZONA BILTMORE HOTEL, PHOENIX, ARIZONA
U. S. COMMODITY POLICY: THE INTEGRATION OF
DOMESTIC AND INTERNATIONAL REQUIREMENTS
It is a great pleasure for me to address the 1978 AMC
Financial Conference on the commodity policy of the Carter
Administration. Over the past fourteen months, we have sought
to develop a comprehensive approach to this issue which can
provide substantial benefits to both consumers and producers of
primary commodities, in the United States and in other countries
That policy seeks to integrate domestic and international
elements into a single, coherent approach. In so doing, it has
focussed on four interrelated, complementary policy instruments:
— international commodity agreements between
producers and consumers, to reduce excessive price
volatility in world commodity markets;
— promotion of increased productive capacity abroad for
key raw materials through greater activity by
the World Bank, the regional development banks, and
our own Overseas Private Investment Corporation (OPIC);
B-820
-2a
strategic stockpile policy based on revised strategic
objectives and implemented in ways which are consistent
with our national and international economic goals;
•7- support for the stabilization of export earnings
of producing countries through the Compensatory
Finance Facility of the International Monetary Fund.
Acting OPIC President Poats will be discussing the invest-
ment issues with you later in the program, and export earnings
stabilization relates only indirectly to our own national needs.
Hence I will focus today on our approach to international
commodity agreements (ICAs), and on the relationship between
U.S. domestic and international commodity policies as reflected
in our current management of the strategic stockpile.
International Commodity Agreements
The prices of primary commodities are exceptionally
unstable. It is not unusual for commodity prices to double
or even triple within a year or two and then plummet back
toward previous levels, though such behavior is extremely
rare for manufactured or processsed goods.
During the 1970's, commodity prices have been even more
unstable than usual —
particularly with the extraordinary
surge which took place in 1973-74 and the subsequent decline
during the 1975-76 recession.
Recent price instability
seems also to have been aggravated by commodity
-3speculation and inventory buying, spurred by inflationary
expectations and fears of impending shortages.
The U.S. economy experiences real costs from such price
instability. On the one hand, price surges for key raw materials
spread throughout the economy, resulting in upward pressure
on the general price level. On the other hand, precipitate
and lasting declines in prices can deter investment in new
productive capacity, leading to longer run price increases
and even eventual shortages.
Price fluctuations also increase the costs of producing and processing primary commodities. The greater
the unpredictability of price fluctuations, the larger the
risks associated with the industry — which are then reflected
in the cost of capital, and the more frequent the shifts in
rates of production. Even when large fluctuations are expected,
manufacturers and processors who use primary commodity inputs
experience increased costs by having to employ more working
capital and hold larger inventories.
Hence, ICAs which effectively reduce price instability
can provide significant economic benefits for the United
States: dampening of inflationary pressures, smoothing of
income flows to U.S. commodity producers, more stable
investment patterns over time, stabilizing and reducing
operating costs for domestic producers and processors (and
thus prices for their consumers). Moreover, such agreements
-4spread the burden of responsibility for international commodity
problems among producing and consuming countries, and promote
cooperative efforts toward their solution.
It is often argued that the market provides the optimal
degree of price stability for commodity trade.
this is not always the case.
Unfortunately,
The direct benefits of reducing
commodity price fluctuations accrue to all buyers and sellers,
whether or not they individually contribute to the cost
of the stabilization arrangement; hence the incentive to
individual market participants to contribute to the cost
of stabilization is negligible, and the market alone will
not call forth the appropriate institutions.
the indirect benefits of price stabilization —
reduction of overall inflation rates —
In addition,
notably the
extend well beyond
the universe of participants in the commodity markets themselves.
Thus, price stability can be considered a public good, and
an appropriate target for governmental action.
Our task with respect to market stabilization is to
devise economically rational, workable ICAs which stabilize
prices while still allocating resources efficiently.
This
is no mean task, and the limited history of efforts to construct
effective ICAs is strewn with failure.
The theory is reasonably
clear, but the practicality is exceedingly difficult.
When we are successful in designing agreements which
provide net economic benefits to the United States, we will
join them.
Otherwise, we will not.
In fact, only a handful of
-5agreements now seem feasible: ICAs already exist for tin,
coffee, cocoa and most recently sugar, and advanced discussions
are underway on wheat, natural rubber and copper. For other
product^', such as tungsten and jute, we are extremely
dubious despite proposals for ICAs emanating from some
producing countries.
In working on ICAs we believe that certain principles
are essential to serve the multi-faceted interests of the
United States as a major importer/consumer or exporter/
producer of virtually every primary commodity:
— they must be designed to stabilize prices around
underlying market trends, not to raise prices;
— they must balance the interests of producers and
consumers, in terms of responsibilities and benefits;
— they must provide wide latitude for the operation
of market forces.
More detailed criteria depend upon whether the individual
ICA is an international buffer stock arrangement or an export
guota/national stocking scheme. I will discuss each in
turn, suggesting the principles which should apply and drawing
from concrete examples wherever possible.
International Buffer Stocks
We believe price stabilization agreements should operate
wherever possible through buffer stocks. Bought when prices
-6are low and sold when they are high, within an agreed price
range, buffer stocks can be more effective than any other
approach in stabilizing prices without distorting markets
or production patterns.
We even expect them to make profits
to help cover operating costs.
Buffer stocks are far preferable to supply controls
regarding market efficiency, effectiveness, operational
simplicity and consumer benefits:
—
Buffer stocks allow price to allocate resources
to the most efficient producers, whereas
production controls force low cost and high
cost producers to cut back output equally, creating
inefficient production patterns.
Production and export
quotas, usually allocated according to some historical
average of market shares, tend to freeze the
production/marketing status quo and bar entry by
newer, possibly more efficient, producers.
—
Production and export quotas must cover a large percentage of world output, estimated to be up to 90 percent
for some commodities, to avoid leakages which would otherwise undermine the arrangement.
The wider their
membership, the more complex becomes the allocation
of quotas and the enforcement of operational provisions.
By contrast, buffer stock arrangements can contribute
to price stabilization regardless of output coverage
-7or breadth of membership i^f the stocking authority
and financing are sufficient — though it is desirable
for all major producers and consumers to participate,
to spread the costs of stock accumulation and ICA
operation widely and equitably among those who
receive the direct benefits of reducing price fluctuations.
— The implementation of supply controls is usually
based on previous years' data and other outdated
information, and requires long lead times before
having full impact on the market. Buffer stocking
purchases and sales can be made quickly in response
to market developments, can affect the market without
delays, and require little data other than prices
to guide operations.
— Supply controls can benefit producers in the short
run, by stemming price declines, but they often
work to the disadvantage of consumers by reducing
supplies, raising prices, and raising the average
cost of production. Buffer stock purchases to halt
a price decline also impose a cost on consumers,
but subsequent sales from the stock eventually
provide consumers with an offsetting benefit while permitting least cost producers to continue operating at
optimal production levels throughout the price cycle.
Buffer stocks are not suitable for every commodity.
There are three basic criteria which must be met for this,
our preferred, approach to apply to a given commodity.
-8The first is that the international price must be
established in an open market.
A buffer stock would be
ineffective for a commodity for which there is no "market"
price.
For example, open market sales of bauxite are rare
due to the highly integrated nature of the international
aluminum industry, and of tungsten because prices are set
almost exclusively through individual, non-standardized
contracts.
Secondly, the commodity should be either non-perishable
or easily rotated in storage facilities, so that stock, maintenance
is feasible and carrying costs do not become exhorbitant.
Storage is no problem for a number of commodities, but for
others such as bananas and meat it would either be infeasible
or the cost would be prohibitive.
Thirdly, the commodity should be relatively homogeneous
in the sense that most trading takes place in a limited
number of well-defined grades whose prices move in tandem.
There are at least fifteen grades of natural rubber, but
most trade takes place in three grades for which price movements
are highly correlated so that a benchmark is readily available.
Lack of homogeneity would probably prohibit the establishment
of buffer stocks for tungsten, oilseeds, or spices.
Copper satisfies many of the economic conditions for
a buffer stock arrangement including open trading, storeability and homogeneity and several studies indicate that
-9substantial benefits could be achieved from stabilization
of copper markets. However, there are a number of
practical difficulties in establishing such an arrangement.
The buffer stock required would be large and expensive:
cost estimates vary from around $1.5 billion to $6 billion
depending upon the width of the price range, the price at
which copper is purchased, and the extent of any reliance on
"back-up" supply controls. Moreover, any imposition of
supply controls would cause legal difficulties for a number
of producing countries; in the case of the United States,
our laws may well prohibit their use. Nevertheless,we are
continuing to examine the copper markets in an effort to
see whether any kind of stabilization agreement is feasible.
International discussions are now focussed on
the establishment of a producer-consumer forum for copper,
which is the most important traded commodity without an
international locus for producer-consumer discussions.
We expect such an international body to be established this
year to: a) continue an examination of possible price
stabilization arrangements, b) monitor trends in the copper
market and conduct consultations and information exchange
on market developments, and c) discuss and propose interim
actions related to supply/demand, stocks and pricing. This
body would eventually report its conclusions to a higher
level producer/consumer preparatory group, which would
take a decision on whether to convene a negotiating conference
for an ICA for copper.
-10In designing and evaluating buffer stock arrangements
which will fully defend the interests of the United States,
we seek:
-,- stocks which are large enough to protect
against price surges as well as price declines;
—
price ranges which are (1) compatible with the
size of the Duffer stock, (2) easily adjustable
to market trends, and (3) sufficiently wide to
allow the market to operate effectively in
allocating resources;
—
schemes which rule out the use of production controls and limit any use of export quotas to
extreme market conditions, in order to allow the
buffer stock to operate unencumbered within the
price range set by the agreement;
—
assurance that the commodity sector in producing
countries receives the direct benefits which
accrue to those countries from stabilization, in order
to benefit from the proper economic incentives for
the commodity concerned.
The Record to Date
Many of the ICAs proposed for international
discussion, and actually put into practice, have not met these
criteria.
As a result, the experience with ICAs has not
~\rsn in t-prms of achieving price stability
always been encouraging in terms
-11The buffer stock arrangements often advocated by producing
countries incorporate "back-up" supply control features
to permit a smaller, less costly buffer stock and assure
defense of the floor price.
But when production and/or
export controls are used, the buffer stock is often unable
to accumulate sufficient stock at the lower end of the range
to defend the ceiling once there is a resurgence of prices.
If the imposition of supply controls also forces producers
to cut back output significantly, or drives out marginal
cost producers, the result may be rapid price rebounds and
destabilization of markets. This has been a frequent occurrence
over the years with the International Tin Agreement (ITA).
Experience with the ITA also vividly illustrates the
necessity of achieving adequate buffer stocks through shared
financing by producers and consumers.
As the United States
and other consuming countries joined the ITA over the years,
most of them refused to contribute to the financing of the
buffer stock.
The result has been an undersized stock,
incapable of stemming either price surges or declines.
In
essence, consuming countries failed to protect their own
interests by this approach in the past.
Since the first ITA in 1956, the tin market has
undergone four major price declines.
In each case, after
purchases of tin and near financial exhaustion of the
buffer stock, the Tin Council imposed export controls to
protect the floor price.
However, production cutbacks by
-12private producers, who were unwilling to shoulder the
burden of stocking the excess tin they could not export,
soon followed.
The result was tin shortages and rapid
price rises that an inadequate buffer stock was powerless
to moderate.
Breaches in the price ceiling in 1961, 1963-66
and in the 1970's caused the Council to repeatedly raise
the range and, with it, support levels which would later
have to be defended again through export controls. Partly
due to the most recent use of export controls in 1975, current
market prices are above the ceiling and the buffer stock
is exhausted.
If the ITA had had a larger buffer stock over
the past twenty years, it might have been successful in
absorbing excess supplies during those major price declines,
making export controls unnecessary and enhancing the capability
of the buffer stock to defend against price surges.
We have also been concerned that the ITA has been operated
in a way that tends to accommodate tax and investment policies
in producing countries discouraging production and new investment,
and resulting in an ever-higher price floor.
This situation
has also contributed to the tripling of tin prices during the
last six years.
Last year we began to take action to overcome the
three structural deficiencies in the tin market: (1) the
Tin Council's wide discretion to resort to export controls,
-13(2) its small, ineffective buffer stock and (3) tax and
other policies in producing countries which act as disincentives
to expanded production.
<
First, we moved last July to secure passage of a resolution
in the Tin Council recommending that export controls be
resorted to only when there is a surplus "beyond the capabilities
of the buffer stock to absorb."
Second, we have announced our intention to contribute
up to 5,000 long tons of tin metal to the ITA buffer stock.
A bill to authorize this contribution is now before Congress.
We hope it will be enacted shortly and we urge you to support it.
Enlargement of the buffer stock could be instrumental in
creating an effective ITA, with the capability to stem future
price surges and declines and thereby significantly reduce
its reliance on export controls. This contribution will
also demonstrate a new commitment on the part of the United
States to share in the financing of commodity agreements
which promote our economic interest, and it is symbolic
of a new U.S. effort to work cooperatively and pragmatically
with other producers and consumers toward effective solutions
to commodity problems.
Effective ICAs must have price ranges which are sufficiently wide to allow the market price to adequately perform its allocative function, while checking extreme price
movements. The width of the range must also be compatible
-14with the size of the buffer stock.
The narrower the bandwidth,
the larger the stock generally required to hold market prices
within the band.
With the U.S. and other consumer country contributions,
we estimate that the ITA would have the capability of
acquiring up to 75,000 tons of tin (in part by using tin
warrants to borrow on the commercial market).
Given
the present bandwidth of +11 percent, however, it is
questionable whether 75,000 tons would still be enough.
Our analysis suggests that a bandwidth of +15 percent or
wider may be required for compatibility with a 75,000 ton
stock.
Consequently^Utmay become necessary to widen the
•i
tin price range or to consider further increases in the
size of the buffer stock.
It is also important that ICAs provide sufficient
flexibility to adjust the price band as underlying market
forces shift, in order to continuously bracket the long
term market trend.
We will in no case sanction the establish-
ment of agreements designed to raise prices above long-term
market trends, or permit ICAs to operate in such a manner.
It is therefore important that the United States
participate actively, where appropriate, in the negotiation
of ICAs and in their day-to-day operations once they are
established.
There is little we can do to prevent market-
disruptive, producer country dominated ICAs if we do not
take part.
Our concern for economic rationality, market
-15efficiency and a balance between producer and consumer
interests — coupled with our market strength in most commodities — gives us the potential of assuring that ICAs
are properly constructed and managed. Furthermore, we will
insist that our market strength is translated into enough
voting power in any ICA we join to insure us a significant
say in its operation. It is quite possible that the ITA
would have been a much more effective instrument for price
stability had the United States participated in it fully
from the outset, rather than standing aside.
Our membership in the Tin Agreement has already begun
to pay off. We have succeeded in moderating increases in
the price range, and have been much more able to bring pressure
on exporting countries to adopt market-oriented production
policies than we could have from outside the ITA.
High production and export taxes in some of the major
producing countries have been a contributing cause of
declining tin production and investment over the past
five years. We took steps toward alleviating this problem
by securing passage of a Tin Council resolution last summer
which calls on producing countries to take "all reasonable
administrative and fiscal steps to promote further expansion
in the tin industry." Our efforts have produced some results
so far, but we are continuing to press for further action.
It is extremely important that the benefits from ICAs,
such as improved income stability, flow directly to the
sector producing the commodity itself. "Flow through
-16assurance" is necessary if price floors are to benefit consumers
by spurring continued investment in new productive capacity
and avoiding longer term supply shortages.
This is a sensitive
issue because it touches the internal sovereignty of producing
countries, but it is fundamental to the effectiveness of
a price stabilization arrangement.
No ICA can provide a
balance of producer and consumer benefits if the operations
of a marketing board or the levying of high producer taxes
prevent expansion in producing sectors which the stabilization
of prices through the ICA would otherwise call forth.
Export Quota/National Stocking Schemes
I have already indicated clearly our general opposition
to supply controls as a price stabilizing mechanism.
At
the same time, there may be a case for export quota/national
stocking schemes for commodities which are unsuitable for
an internationally held buffer stock.
This applies particularly
to agricultural commodities, where price instability comes
mainly from the supply side and which have low price and
income elasticities.
Periodic surpluses for these commodities
may become much more burdensome and costly to absorb through
pure buffer stock arrangements than for other commodities.
The export quota/national stocking arrangement can
promote greater price stability by coordinating the
accumulation and release of national stocks through internationally agreed export quotas.
Such arrangements should
not deviate from the principles which I have laid out for
-17buffer stocks except that there is greater reliance upon
the export quota mechanism.
In addition, these arrangements
should provide for flexibility through frequent reallocation
of quotas to permit efficient, lower cost producers to increase
their market shares.
Flexible reallocation provides added
reassurance to consumers through the encouragement of investment
by efficient producers who wish to increase their market
shares in future years.
There are two types of export quota/national stocking
arrangements now in place, for coffee and sugar.
They differ
in the degree of reliance upon export quotas, versus stocks,
to stabilize prices.
Although the provisions of the 1976
Coffee Agreement have never gone into effect due to the
1975 Brazilian frost, the features of that Agreement bear
a brief look.
Price zones for quota adjustment may be set by the
Coffee Council at the beginning of each coffee year in light
of recent price trends.
If no agreement is possible, price
triggers for automatic quota imposition and suspension go
into effect.
These triggers are subject to biennial
price review and can be revised as market conditions change.
Unlike previous quota arrangements, the latest Coffee Agreement provides incentives for producing countries to maintain production and increase domestic stocks which can be
released once prices begin to rise, by giving producers
credit for holdings of national stocks in allocating export
-18quotas. Further flexibility is provided by resetting
and reallocating country quotas on the basis of actual
export performance.
For the new International Sugar Agreement (ISA),
coordinated national stocks play a more important role in
price stabilization.
An initial stock buildup of 2.5 million
tons of sugar is called for over the next three years—nearly
three times the stocking requirements called for in the
previous ISA.
Once the stocks are accumulated, they must
be made available for release to defend the Agreement's
ceiling price in the event of a subsequent price runup.
In contrast to the Coffee Agreement, where quotas play
the primary stabilization role, quotas in the ISA are operated
in conjunction with the stocking provisions.
When prices
decline toward the floor, quotas are triggered and producing
countries are required to accumulate stocks with the latter
actually taking precedence over export quota fulfillment.
This provision helps to insure both market stabilization
and that stocks will actually be accumulated for later use
in defense of the ceiling price.
The Administration has stated that the ISA is a cornerstone of its domestic sugar policy.
But U.S. farm legis-
lation requires us to support the domestic price of sugar
at no less than 13.5 cents per pound, well above the current
world price of 7.5 cents.
Recently, the President
implemented
-19import duties and fees as required by Congress to assure
that this target is met. Eventually, however, we expect
the new ISA to raise the world price to a level which
would permit the Secretary of Agriculture to suspend these
duties and fees. And we anticipate that any future legislation affecting sugar prices will be designed as a
backup to the ISA, in the event it fails to defend its
floor price. Consequently, the negotiation and successful
operation of the new International Sugar Agreement could
prove to be a milestone in the coordination of U.S.
domestic and international commodity policies.
Strategic Stockpile Policy
Coordination of domestic and international commodity
policy raises an issue which has been of considerable interest
to the American Mining Congress over the past several years:
U.S. stockpile arrangements. The minerals industry has often
been highly critical of Government management of the strategic
stockpile. It has been alleged that certain actions over
the last two and a half decades were taken in a seemingly
haphazard way, often to achieve short term economic and
political objectives.
As you know, after the stockpile goals were reduced
sharply in 1973, Congress refused to authorize further disposals
— disposals which it was claimed had been proposed partly
in response to widespread shortages and high prices for
many materials, and partly to generate Government
-20revenues that would help reduce the budget deficit.
Since
then, Congress, with industry support, has insisted that
the Executive Branch re-examine stockpile guidelines and
objectives.
We think the Administration has been responsive
to these concerns, and hope that we can now begin a new
era of cooperation with industry and the Congress on this
issue•
The Carter Administration has adopted new stockpile
goals which resulted from the 1975-76 interagency
re-examination chaired by the Federal Preparedness Agency,
and has been developing an annual materials plan for achieving
them.
Since these new goals are consistent with the needs
of a wartime economy during a three-year global war, as opposed
to the previous assumption of a one-year conflict, they
will require large acquisitions and in some cases disposals.
It will take several years to fulfill these goals. Thus,
the requests for approval of acquisitions and disposals
which have been transmitted to Congress for FY 1978-80 are
only a beginning.
For example, tin disposals are now scheduled
for no more than 45,000 tons, though 167,000 tons of tin
now in the stockpile are considered surplus. Similarly,
legislative authorization is currently pending for the
purchase of up to 225,000 tons of copper, far below the
goal of 1,299,000 tons.
The Administration is also supporting the principle of
using proceeds from sales of surplus materials to purchase
deficit materials.
We are willing to hold those funds in a
-21separate account for about two years. However, we oppose holding
such proceeds indefinitely in escrow to fund future purchases.
Such a procedure would violate accepted budget practice
by tying up idle funds for several years.
Two other principles are legally binding on the Administration in managing the stockpiles: (1) they should be used
for strategic, not economic, purposes, and (2) acquisitions
and disposals should not disrupt markets. Consequently,
the General Services Administration is careful to avoid
dumping commodities in a way that would depress prices below
market trends. We recognize that disruptive selling has
taken place in the past, but this Administration has no
intention of engaging in such selling.
We believe that quick Congressional action to provide
for the sale of substantial amounts of tin (and the purchase
of substantial amounts of copper) will help stabilize the
tin market. The tin sales will serve to fill the expected
deficit between tin production and consumption of 35,000-40,000
tons over the next three years and allow for minimal re-building
of the buffer stock while maintaining tin prices within
the ITA mid-range. Once the United States fully establishes
its policy with respect to the tin stockpile, our efforts
to improve the operation of the ITA buffer stock should
be much more effective.
Therefore, we feel that Administration support for such
stockpile actions are not only consistent with our overall
-22commodity policy but, as George Munroe of Phelps Dodge in
his statement before the Subcommittee on Military Construction
and Stockpiles put it last month, "... the exchange would
permit GSA and the taxpayer the rare opportunity to observe
and benefit from the maxim, 'buy low, sell'high,'/and/ ... do
much to improve the health of the nation's copper-producing
industry as can be accomplished by any single government
action."
Conclusion
We have tried to develop a comprehensive policy to
reduce the price instability for primary commodities which
adversely affects the U.S. economy, its producers and its
consumers.
That policy is designed to promote the wide
range of interests of the United States as a producer/exporter
and consumer/importer of key raw materials.
An important
element is the active participation of the United States in
the negotiation and operation of ICAs designed to stabilize
commodity prices around their underlying market trends in a
way which balances the interests of producers and consumers
and leaves wide latitude for the operation of market forces.
Where feasible, we prefer international buffer stocks
that operate unencumbered by supply controls within wide,
flexibly adjustable price ranges which bracket market
trends.
In order to achieve buffer stocks of sufficient
-23size to be effective in protecting against both high and low
prices, producing and consuming countries should share in
the financing of such arrangements. Where an international
buffer stock is not feasible or appropriate, we can accept
producer-consumer arrangements which combine export quotas
and nationally-held stocks if they include a flexible quota
reallocation system and provide for the accumulation of
sufficiently large stocks to protect consumers in the event
of price surges. We believe ICAs that meet these criteria
will promote U.S. economic interests. We will join those
which do, and reject those that do not.
It is important that the strategic stockpile policy
not unduly disrupt markets, is not used for short-term
political or economic purposes, and is consistent with our
overall commodity policy. I believe this is now being done
and I hope that we can look forward to a new era of cooperation
between Congress, industry and the Administration in the
operation of the annual materials plan to achieve our strategic
stockpile goals.
If we conduct our strategic stockpile policy in a
consistent manner, and are successful in implementing our
overall international policy, U.S. producers and consumers
will benefit. The U.S. economy should experience more
stable growth, with reduced inflationary pressures, in the
years to come. Our economic relations with the developing
-24countries, and with other industrialized countries, will be
improved. We seek your support in carrying out the several
key facets of this policy which I have discussed today.
oOo
THE SECRETARY OF THE TREASURY
WASHINGTON
20220
Dear Mr. Mayor:
I am writing to express my deep concern over the
impasse that has developed in the labor contract negotiations in New York and what may be a trend toward expensive
labor settlements.
As you know, President Carter shares with you the
goal of restoring New York City to economic and fiscal
health, and hence the Administration is working actively
with you in support of legislation in the Congress that
will have that effect. However, without a speedy and
responsible settlement between the City and its unions
the prospect, in my view, of early and favorable
Congressional action—which is essential to the City's
future—is in real jeopardy.
While we have not completed our analysis, I am concerned over the budget effects of extending the terms of
the Transit Workers settlement to new contracts with the
City unions. It is unclear to me that New York City
could afford such a settlement and still remain within
the four-year budget plan already presented to Treasury
and the Congress.
As I have repeatedly stated, a credible budget plan
is crucial to the City's future and to the proposed
federal legislation. Among other things, this means
that increased labor costs must be financed from recurring
revenues and true savings.
Furthermore, I am also mindful, as I am sure you are,
of the enormous burden placed on New York City's budget
by the current levels of debt service. If your budgetary
outlook has truly improved, I suggest that you and the
unions consider applying additional funds to even modest
reductions in the City's debt. This would augur well for
New York's fiscal and economic future.
2
But equally important to obtaining Congressional
action, is the necessity for speed in resolving the
present impasse between the City and its unions. I
realize the difficulties of this overall situation for
you, the union leaders and members and for the people
who live and work in New York. But I urge you and the
unions to recognize that only a labor settlement reached
quickly and reflecting extreme restraint will permit
favorable Congressional action on the Administration's
proposed New York City financing legislation.
I would appreciate your continuing to keep us
advised concerning the negotiations and potential
budget effects.
Sincerely,
W. Michael Blumenthal
The Honorable
Edward I. Koch
Mayor of New York City
City Hall
New York, New York 10007
Contact:
FOR IMMEDIATE RELEASE
April 7, 1978
George G. Ross
(202) 566-2356
REVISED INTERNATIONAL BOYCOTT REPORT
AVAILABLE JUNE 1 AT IRS DISTRICT OFFICES
The Treasury Department today announced that Form 5713,
International Boycott Report, is being revised and is expected
to be available through the local district offices of the
Internal Revenue Service about June 1, 1978. The Treasury
Department also announced interim procedures under which the
time for filing Form 5713 has been extended to July 15, 1978.
Filing of Form 5713
As detailed in Answer A-7 of the International Boycott
Guidelines issued January 20, 1978 (published January 25, 1978
in 43 FR 3454), one copy of Form 5713 should be sent to the
Internal Revenue Service Center, 11601 Roosevelt Boulevard,
Philadelphia, Pennsylvania, 192 55, and another copy should be
attached to the taxpayer's income tax return that is filed
with the taxpayer's customary Internal Revenue Service Center.
Both copies normally must be filed when the income tax return
is due, including extensions.
Interim Procedures
Taxpayers whose income tax returns are due in 1978
before June 15, 1978 may satisfy their reporting obligations
by complying with the following procedures:
— Taxpayers who have no boycott participation or
cooperation to report on Form 5713 may: (1) file the
unrevised Form 5713 with their income tax return, or
(2) use the normal procedures for obtaining an
extension of time for filing the income tax return and
file the revised Form 5713 when the income tax return is
filed, or (3) file the income tax return without a
Form 5713 attached and file the revised Form 5713 no
later than July 15, 1978. If this last option is chosen,
an amended tax return need not be filed with the Form
5713.
Taxpayers who have boycott participation or
cooperation to report on Form 5713 must file the revised
Form 5713 and may not file the unrevised Form 5713.
B-821
- 2 -
These taxpayers may either: (1) use the normal
procedures for obtaining extensions of time for filing
the income tax return and file the revised Form 5713
when the tax return is filed, or (2) file the income
tax return without a Form 5713 attached and file the
revised Form 5713 no later than July 15, 1978. If the
latter option is chosen, an amended income tax return
must be filed with the revised Form 5713 unless there
are no tax benefits to be lost as a result of the
participation in or cooperation with the international
boycott.
*
*
*
*
*
partmentoftheJREASURY
TELEPHONE 566-2041
5HINGT0N,D.C. 20220
FOR IMMEDIATE RELEASE
April 10, 1978
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,304 million of 13-week Treasury bills and for $ ^»^01 million
of ?6-week Treasury bills, both series to be issued on April 13, 1978,
wer^accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing July 13, 1978
Price
High
Low
Average
Discount
Rate
98.392 a/
98.388
98.389
Investment
Rate 1/
6.361% 6.56%
6.377%
6.57%
6.373%
6.57%
26-week bills
maturing October 12T 1 978
Discount Investment
Price
Rate
Rate 1/
96.599 b/
96.589
96.591
6.727%
6.747%
6.743%
7.06%
7.08%
7.08%
a/ Excepting 1 tender of $600,000
b/ Excepting 1 tender of $10,000
Tenders at the low price for the 13-week bills were allotted 79%.
Tenders at the low price for the 26-week bills were allotted 88%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Received
Boston
$
26,595,000
New York
4,053,435,000
Philadelphia
22,695,000
Cleveland
36,320,000
Richmond
56,500,000
Atlanta
31,385,000
Chicago
403,035,000
St. Louis
51,865,000
Minneapolis
25,725,000
Kansas City
44,040,000
Dallas
30,250,000
San Francisco
360,015,000
11,155,000
Treasury
TOTALS
$5,153,015,000
Accepted
$
20,760,000
1,910,385,000
18,160,000
31,665,000
18,900,000
31,385,000
55,725,000
21,700,000
7,725,000
40,575,000
24,095,000
111,415,000
11,155,000
Received
$
27,035,000
5,000,590,000
23,640,000
65,410,000
40,070,000
20,335,000
275,730,000
46,785,000
38,240,000
30,950,000
15,840,000
368,170,000
8,860,000
$2,303,645,000 £/ $5,961,655,000
Sj Includes $ 442,235, 000 noncompetitive tenders from the public.
d/Includes $223,215,000 noncompetitive tenders from the public.
_1/Equivalent coupon-issue yield.
B-82
Accepted
$
21,435,000
2,891,170,000
17,440,000
40,310,000
22,210,000
20,335,000
95,190,000
18,785,000
21,760,000
30,950,000
13,720,000
198,370,000
8,860,000
$3,400,535,000 jd/
FOR IMMEDIATE RELEASE
CONTACT:
ROBERT W. CHILDERS
(202) 634-5248
April 7, 1978
REVENUE SHARING DATA RELEASED TODAY
The Office of Revenue Sharing today released the
data to be used to allocate funds for Entitlement Period
Ten of the General Revenue Sharing Program.
The U.S. Department of the Treasury's Office of
Revenue Sharing is sending the latest available figures
on population, per capita income, local adjusted tax
collections and intergovernmental transfers to each
eligible unit of local government.
State governments are being provided their most
recent data for population, urbanized population, per
capita income, state and local taxes, general tax
effort, state individual income tax collections and
Federal individual income tax liabilities.
All recipient governments may review the figures
and notify the Office of Revenue Sharing if they believe
the figures are inaccurate. Data correction proposals
should be received by the Office of Revenue Sharing by
May 16, 1978.
B-823
General revenue sharing funds are allocated according
to formulas set by the revenue sharing law. The formulas
use data provided primarily by the Bureau of Census, the
Bureau of Economic Analysis, the Interna] Revenue Service
and the Bureau of Indian Affairs.
Quarterly payments for Entitlement Period Ten will be
made in January, April, July and October 1979, to approximately 39,000 units of State and local government. A maximum of $6.85 billion will be distributed during the tenth
entitlement period.
Since the General Revenue Sharing Program was authorized in 1972, more than $38.6 billion has been distributed.
-30-
EMBARGOED FOR RELEASE UPON DELIVERY
EMBARGOED FOR WIRE TRANSMISSION AT 1:30 P.M.
APRIL 11, 1978
Office of the White House Press Secretary \
THE WHITE HOUSE
TEXT OF THE ADDRESS BY THE PRESIDENT TO
THE AMERICAN SOCIETY OF NEWSPAPER EDITORS
APRIL 11, 1978
During the last 15 months we in the United States have made good
progress in sustaining growth and creating jobs. Four-and-a-half
million more people are at work today than fifteen months ago.
The unemployment rate has fallen from nearly 8 percent to a little
more than 6 percent. Average household income, after adjustment
for both taxes and inflation, is 5 percent higher now than a year
ago. Business profits in the second half of 1977 were 15 percent
higher than one year before, and during that time the inflation
rate was held to a reasonable and predictable level.
But too many Americans -- particularly young people and members of
minority groups -- are still without jobs. I am determined to sustain
our economy's progress toward high employment and rising real income,
with both existing programs and with new, carefully targeted incentives
to encourage private business to hire the hard-core unemployed.
We have other economic problems which cause us continuing deep concern.
Our nation's economic health can be protected only if we can cope
with the two developments that now threaten it most seriously — the
high level of oil imports and the increasing rate of inflation.
These two problems both imperil our economic recovery and threaten
the strength of the dollar, and they must be controlled.
The steps that we will take are part of a wider international effort
by the major industrial nations to promote world recovery in 1978.
In this effort, each country has a role to play — with the U.S.
maintaining its growth while attacking inflation and limiting oil
imports, other countries achieving their growth targets,and all countries
avoiding protectionism and providing greater aid to developing countries. In
the hope that this concerted approach will make a large contribution
to world recovery, I joined the leaders of six other nations yesterday
in announcing that we will meet on July 16 and 17 in Bonn to press
ahead with our common efforts.
But the first requirement is effective action within each nation.
The primary reason for our problems with the balance of trade and the
decreasing value of the dollar is no mystery. Ten years ago we were
paying rouyhly $2 billion for imported oil. This year oil imports
will cost us more than $45 billion.
Our energy problems are no longer theoretical or potential They are
an active threat to the economic well-being of our people.
Of all the major countries in the world the United States is the
only one without a national energy policy, and because the Congre
has not acted, other nations have begun to doubt our will. Holders
of dollars throughout the world have interpreted our failure to ?c
as a sign of economic weakness, and these views have been direct!
translated into a decreasing value of our currency.
-2The falling dollar in international monetary markets makes inflation
worse here at home. It raises the price of goods we import, and
this makes it easier for domestic producers to raise their own
prices as well.
That is why we must have meaningful energy legislation without further
delay. Our security depends on it, and our economy demands it. If
Congress does not act, then oil imports will have to be limited by
administrative action under present law, which is not the most
desirable solution. One way or the other, oil imports must be
reduced.
Recently our healthy and sustained economic growth has exceeded
that of most other nations who are our major trading partners, so
we have been better able to buy their goods than they have to buy ours.
Our standard of living and our ability to grow depend on the raw
materials and goods we import from other countries. Therefore, to
prevent further serious trade imbalances, we need to export more agricultural products and other goods and services to pay for our purchases
abroad.
A Cabinet-level task force, chaired by the Secretary of Commerce,
will develop additional measures to promote exports, and will report
back to me within 60 days.
Now I will discuss the steps we must take to protect our national
economic growth and the jobs and prosperity of our people from the
threat of growing inflation.
Conserving energy, increasing efficiency and productivity, eliminating
waste, reducing oil imports and expanding our exports will help to
fight inflation; but making that fight a success will require firm
government policies and full private cooperation.
The inflation we are suffering today began many years ago and was
aggravated in 1973 and 1974 by a quadrupling of OPEC oil prices,
widespread crop shortages, Soviet grain purchases, substantial
devaluation of the dollar, and a worldwide industrial boom that led
to double digit inflation in the United States and around the world.
It now has become embedded in the very tissue of our economy. It
has resisted the most severe recession in a generation. It persists
because all of us — business and labor, farmers and consumers -are caught on a treadmill that none can stop alone. Each group tries
to raise its income to keep up with present and anticipated rising
costs; eventually we all lose the inflation battle together.
There are no easy answers. We will not solve inflation by increasing
unemployment. We will not impose wage and price controls. We will
work with measures that avoid both extremes.
Our tirst and most direct efforts are within government itself.
Where government contributes to inflation, that contribution must
be lessened; where government expenditures are too high, that spending must be reduced; where government imposes an inflationary burden
on business, labor, and consumers, those burdens must be lightened;
wherever government can set an example of restraint and efficiency,
it must do so.
-3-
The budget I have proposed for the next fiscal year is both tight
and capable of meeting the nation's most pressing needs. The
prospective deficit in that budget is as large as we can afford without compromising our hopes for balanced economic growth and a
declining inflation rate. As always, pressures are developing on
all sides to increase spending and enlarge that deficit.
Potential outlay increases in the 1979 budget which are now being
considered by Congressional committees would add between $9 billion
and $13 billion to spending levels next year. The price of some
of these politically attractive programs would escalate rapidly
in future years. I am especially concerned about tuition tax
credits, highway and urban transit programs, postal service financing,
farm legislation, and defense spending.
By every means at my disposal, I will resist those pressures and
protect the integrity of the budget.
Indeed, as opportunities arise, we must work to reduce the budget
deficit, and to ensure that beyond 1979 the deficit declines steadily
and moves us toward a balanced budget. I will work closely with
the Congress and, if necessary, will exercise my veto authority to
keep the 1979 budget deficit at or below the limits I have proposed.
The Federal government must also act directly to moderate inflation.
Two months ago I proposed that in each industry and sector of the
economy wage and price increases this year be voluntarily held
significantly below the average increase for the two preceding years -an important principle of deceleration.
I am determined to take the lead in breaking the wage and price spiral
by holding Federal pay increases down. Last year, Federal white
collar salaries rose by more than seven percent. I intend to propose
a limit of about 5.5 percent this year, thereby setting an example
for labor and industry to moderate price and wage increases. This
year I will also freeze the pay of all Executive appointees and members
of my senior staff. I believe that those who are most privileged in
our nation -- including other executives in government and in private
companies -- should set a similar example of restraint.
State and local governments employ every seventh worker in our nation
and I have sent letters to every Governor and to the Mayors of our
larger cities asking that they follow the Federal example and hold
down their pay increaes. I have also asked that if those governments
plan to reduce taxes they first consider lowering sales taxes, which
add directly to the consumer's burden.
The Federal government will take several other steps to reduce inflation:
All Executive Branch agencies will avoid or reduce the
purchase of goods or services whose prices are rising
rapidly, unless by so doing we would seriously jeopardize
our national security or create serious unemployment. I
am also asking that all new or renegotiated Federal contracts
which contain price escalation clauses should reflect the
principle of deceleration.
MORE
-4-
—
We must cut the inflationary costs which private
industry bears as a result of government regulations.
Last month I directed Executive regulatory agencies
under my control to minimize the adverse economic
consequences of their actions. I am determined to
eliminate unnecessary regulations and to ensure that
future regulations do not impose unnecessary costs
on the American economy. Our efforts to reorganize
the Federal bureaucracy and to streamline the Civil
Service will help us put the government's house in
order.
I support "sunset" legislation to ensure that we
review these regulatory programs every few years,
and eliminate or change those that have become
outdated.
I also urge Congressional budget committees to report
regularly to the Congress on the inflationary effect
of pending legislation, much as the Council of Economic
Advisors and the Council on Wage and Price Stability
now report to me.
— The combined actions of my Administration and the
Civil Aeronautics Board have already led to substantial cuts in some airline passenger fares. Despite
the opposition of private interests, the airline
regulatory reform legislation must be enacted this
year. We are also re-examining excessive Federal
regulation of the trucking industry, an effort which
may result in increased efficiency while reducing
freight transportation costs and retail prices.
In addition, I am asking the independent regulatory
agencies to try to reduce inflation when they review
rate changes, and to explore regulatory changes that
can make the regulated industries more efficient.
-- Last fall, major new legislation was passed which
will improve economic conditions for farm families,
and we have announced additional administrative action to raise farm income this year.
Unfortunately, the Senate has just passed a bill that
would raise food prices by 3 percent and the overall
cost-of-living by .4 percent, shatter confidence in
the crucial export markets for America's farm products,
and cripple American farm families through increased
costs. It is bad for farmers, bad for consumers, and
bad for our nation.
I will veto any farm legislation, beyond what I have
already recommended, that would lead to higher food
prices or budget expenditures.
— Housing construction rates have been at a high level
and costs have risen rapidly, partly because of sharp
increases in the price of raw materials such as lumber.
Since lumber accounts for one-fourth of the total
cost of a new house, we can obtain some relief by increasing production and using our existing lumber
-5-
output more efficiently. Therefore, I have instructed
the Departments of Agriculture and Interior, the Council on Environmental Quality, and my economic advisors,
to report to me within 30 days on the best ways to sustain expanded timber harvests from Federal, State and
private lands, and other means of increasing lumber
yields in ways that would be environmentally acceptable, economically efficient and consistent with sound
budget policy.
— Daily hospital costs have jumped from $15 in 1950 to
over $200 today, and physicians1 fees have risen 75
percent faster than other consumer prices. It is
very important that Congress act now on the proposed
Hospital Cost Containment Bill as the most effective
step we can take toward reasonable hospital prices.
Failure of Congress to act on the Hospital Cost Containment legislation will cost the taxpayer more than
$18 billion in needless government spending over the
next five years.
Together with the airline deregulation bill, this is
one of the two most important measures the Congress
can pass to prevent inflation.
These measures have so far been delayed by the opposition of powerful lobbying groups. I will continue to give this legislation my full support, and
I call on the leaders of Congress to do the same.
Such government actions as I have discussed today can be important
steps toward controlling inflation. But it is a myth that the government itself can stop inflation. Success or failure in this overall effort will largely be determined by the actions of the private
sector of the economy.
I expect industry and labor to keep price, wage and salary increases
significantly below the average rate for the last two years. Those
who set medical, legal and other professional fees, college tuition
rates, insurance premiums and other service charges must also join
in. This will not be easy. But the example of Federal action must
be matched. Inflation cannot be solved by placing the burden of
fighting it only on a few.
The Council on Wage and Price Stability recently began a series of
meetings with representatives of business and of labor in major industries such as steel, automobiles, aluminum, paper, railroads,
food processing, communications, lumber and the postal services.
In consultation with the private parties the Council will identify
the rate at which prices, wages and other costs have been rising
in recent years, the outlook for the year ahead and the steps that
can be taken to reduce inflation.
Let me be blunt about this point. I am asking American workers
to follow the example of Federal workers and accept a lower rate
of wage increase. In return, they have a right to expect a comparable restraint in price increases for the goods and services
they buy. Our national interest simply cannot withstand unreas•*.. ~ble increases in prices and wages. It is my responsibility to
-;- .^ i; out firmly and clearly when the welfare of our people is at
oers of my Administration have already discussed this deceleration program with a number of leaders of labor, business and industry.
They have promised their cooperation. Later I expect to meet with
-6-
business and labor leaders to discuss contributions that they can
make to help slow the rate of inflation. One of the most important
contributions they can make is to show that restraint applies to
everyone — not just the men and women on the assembly line, but
also the managers in the executive suites. Just as I will freeze
the pay of the top executives in the Federal government, the
American people will expect similar restraint from the leaders
of American business and labor.
I am determined to devote the power of my office toward the objective of reduced inflation. Our approach must be flexible enough
to account for the variations in our complex economy — but it
must be comprehensive enough to cover most of the activities of
our economy.
In the long run, we should develop special programs to deal with
sectors of the economy where government actions have the greatest
potential for reducing inflation. These include housing, medical
care, food, transportation, energ\ and the primary metals industries.
The members of my Cabinet will woik individually and with the Council on Wage and Price Stability tc develop and to announce early
action to reduce inflation within pheir own areas of responsibility.
To accomplish our deceleration goa^s in the private sector, I am asking
my Special Trade Representative, fypbert Strauss, to take on additional
duties as a Special Counselor on Inflation. He will work with me, with
Treasury Secretary Blumenthal, my phief financial spokesman, with
Charlie Schultze, the Chairman of -he Council on Wage and Price Stability and its Executive Director, Barry Bosworth. He will have specific authority to speak for me in the public interest, and will be a
member of the Steering Committee of the Economic Policy Group under
the chairmanship of Secretary Blumenthal.
Reducing the inflation rate will not be easy and it will not come
overnight. We must admit to ourselves that we will never cope successfully with challenge until we face some unpleasant facts about
our problems, about the solutions, and about ourselves.
The problems of this generation are, in a way, more difficult than
those of a generation before. We face no sharply focused crisis
or threat which might make us forget our differences and rally to
the defense of the common good.
We all want something to be done about our problems -- except when
the solutions affect us. We want to conserve energy, but not to
change our wasteful habits. We favor sacrifice, as long as others
go first. We want to abolish tux loopholes — unless it's our
loophole. We denounce special interests, except for our own.
No Act of Congress, no program Qf our government, no order of my
own can bring out the quality that we need: to change from the
preoccupation with self that can cripple our national will, to a
willingness to acknowledge and to sacrifice for the common good.
As the nation prepared for the challenge of war, Walter Lippmann
addressed these words to our nation forty years ago:
"You took the good things for granted," he said. "Now
you must earn them again. It is written: for every
right that you cherish, you have a duty which you must
fulfill. For every hope that you entertain, you have
a task you must perform. For every good that you wish
could happen . . . you will have to sacrifice your comfort and ease. There is nothing for nothing any longer."
These words of admonition apply to us now.
(tpanmentoftheTR[/[$URY
^SHINGTON, D.C. 20220
TELEPHONE 566-2041
April 11, 1978
MEMORANDUM FOR THE PRESS:
Secretary Blumenthal will hold a news conference
11 A.M., Wednesday, April 12, in the Cash Room
#
FOR RELEASE AT 4:00 P.M.
April 11, 1978
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued April 20, 1978.
This offering will result in a pay-down for the Treasury of
about $6,015 million as the maturing bills are outstanding in the
amount of $11,715 million ($3,004 million of which represents
139-day bills issued December 2, 1977, and $3,004 million of
which represents 43-day bills issued March 8, 1978). The two
series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
January 19, 1978,
and to mature July 20, 1978
(CUSIP No.
912793 S3 1), originally issued in the amount of $ 3,409 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 3,400 million to be dated
April 20, 1978, and to mature October 19, 1978
(CUSIP No.
912793 T8 9) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing April 20, 1978.
Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently hold $3,332 million of the
maturing bills. These accounts may exchange bills they hold for
the bills now being offered at the weighted average prices of
accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20226, up to 1:30 p.m., Eastern Standard time, Monday,
April 17, 1978.
Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of the
Department of the Treasury.
B-824
-2Each 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 in and
porrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied £or
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on April 20, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
April
differences
accepted
20,in
1978.
exchange
between the
Cash
andpar
the
adjustments
value
issueof
price
the
will
of
maturing
be
the
made
new
bills
for
bills.
-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
FOR IMMEDIATE RELEASE
April 11, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY DEPARTMENT ANNOUNCES START OF
ANTIDUMPING INVESTIGATIONS OF PHOTOGRAPHIC
COLOR PAPER FROM JAPAN AND WEST GERMANY
The Treasury Department said today that it will begin
antidumping investigations of photographic color paper imported from Japan and West Germany.
The Treasury's announcement followed a summary investigation conducted by the U. S. Customs Service after receipt
of a petition filed by the Minnesota Mining & Manufacturing
Company alleging that this product is being dumped in the
United States.
The petition alleges that photographic color paper is
being exported from Japan and West Germany at prices below
those in the home markets. The petition is directed against
photographic color negative paper, which is used to make
color prints from color negative film.
These cases are being referred to the U. S. International
Trade Commission (ITC). Should the ITC find (within 30 days)
that there is no reasonable indication of injury or likelihood of injury to a domestic industry, the investigations will
be terminated. Otherwise, the Treasury will continue its investigations into the question of sales at less than fair value.
(Dumping occurs when there are both sales at less than fair
value and injury to a U. S. industry.)
Notice of these actions will be published in the Federal
Register of April 12, 1978.
Imports of photoaraphic color paper from Japan and West
Germany were valued at approximately $33 million and $29.5
million, respectively, during calendar year 1977.
o
B-825
0
co
For Release
9:30 A.M. EST
April 13, 1978
STATEMENT BY DONALD C. LUBICK
ACTING ASSISTANT SECRETARY FOR TAX POLICY
DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Ocean Mining Legislation
I am pleased to appear before you today to discuss the
Treasury Department's view of financial aspects of deep
seabed mining. H.R. 3350 is before you today because of its
revenue sharing provisions. The Administration is
developing specific proposals pertaining to the taxation of
seabed mining income and the customs duties applicable to
deep seabed nodules. But in view of the complexity of the
tax issues and the other, complex issues before this
Committee, the Congress, the Administration and the industry
all agreed to consider non-tax provisions now. The
Administration believes, however, that tax and tariff
provisions should move in tandem with the ocean mining bills
before the Congress and that the issuance of permits for
commercial recovery should be deferred until tariff and tax
provisions are enacted. The tax and tariff proposals will
be submitted shortly. Accordingly, my testimony this
morning will be addressed to why we endorse the provisions
for revenue sharing and how those payments will be treated
for tax purposes under existing law.
Sharing of Revenues With the International Community
All nations are agreed that the resources of the ocean
should be managed for the benefit of the entire world
community. The Administration embraces that concept and it
believes that any domestic regulatory regime should provide
for a sharing of the revenues from ocean mining at the
B-826
-2outset. Consequently, if revenue sharing provisions are
included in current legislation, U.S. companies will
understand, and plan accordingly, that their operations will
have to include payments to the international community from
the beginning of commercial operations.
The proposed regulation stipulates that a permittee
will pay 3.75 percent of the imputed value of the minerals
recovered from the seabed into a special Treasury account.
The burden of such payments on seabed mining companies
should be extremely modest. First of all, the rate is
relatively low. Second, the rate applies to the minerals as
they are removed from the seabed, which we have estimated to
be 20 percent of the value of metals sold. We think it
inappropriate to apply international revenue sharing to the
transportation, processing, and distribution activities
which are clearly outside the seabed resource area. The
United States will continue to pursue this position at the
current LOS negotiations. Finally, the payments provided
under the proposed legislation are to be made in proportion
to the value of minerals actually removed, rather than as a
fixed license or production fee to be paid in advance.
The Secretary of the Treasury would supervise the
receipts, disbursements and management of the fund. There
already are a number of similar special accounts which the
Secretary of the Treasury supervises and standard procedures
have been set up to insure safe and efficient management.
He would invest the funds in appropriate U.S. Government
securities which pay prevailing interest rates and the
income from the investment would be added to the account.
In addition, the Secretary of the administering agency will
issue, before any permit to recover minerals is granted,
necessary regulations to carry out the intent of the law
with respect to the fund.
In the event that the U.S. does not become a party to
an international agreement within 10 years, payments will be
terminated and the funds will be used as decided by the
Executive Branch and the Congress.
Tax Treatment
of Revenue
Payments of how payments
I would like
to turn Sharing
to the questions
made to the revenue sharing account will be treated for tax
-3purposes under existing law. The primary rationale for a
revenue sharing account is that seabed nodules are the
"common heritage of all mankind". The revenue sharing
requirements in the proposed legislation are in lieu of
payments to a true owner of the seabed nodules for the right
to take that resource. Accordingly, such payments would
appropriately be deducted from the gross income of a seabed
miner, much as a royalty payment to a true owner would be.
As I stated at the outset, the Administration is not
proposing specific tax amendments at this time. Nor are we
addressing the issue of U.S. tax treatment of revenuesharing payments to an international seabed authority under
a convention. We would like to reserve for the future an
opportunity to share with you our analysis of existing law
and our proposals for change. In this context, we would
call your attention to the Administration's proposal that
Section 107 of the bill before you today be deleted and
replaced with the following:
"Section 107. Act not to affect tax or customs
treatment of Seabed Mining
Nothing in this Act shall affect the application
of the Internal Revenue Code of 1954, as amended or the
Tariff Act of 1930, as amended."
Without this specific wording, we believe that H.R. 3350
might convey tax benefits that the Ways and Means Committee
would wish to consider more fully in the context of a broad
package of tax amendments. Accordingly, we would urge you
to accept the Administration's proposal for changing Section
107 as indicated above.
In conclusion, I would urge your acceptance of the
revenue sharing provisions and the postponement of the
*
consideration of any tax provisions, explicit or implicit.
To assure this second objective, we believe that Section 107
should be amended as indicated above and that tax provisions
be enacted before any permits for commercial recovery are
issued.
I appreciate this opportunity to discuss our views with
you. I will be glad to answer your questions.
oOo
FOR RELEASE AT 4:00 P.M.
April 12, 1978
TREASURY TO AUCTION $2,171 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,171
million of 2-year notes to refund $2,171 million of notes
held by the public maturing April 30, 1978. 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
$403 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.
oOo
Attachment
B-827
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED MAY 1, 1978
April 12, 1978
Amount Offered:
To the public
$2,171 million
Description of Security: H I , '
Term and type of security
Series and CUSIP designation
•.
..«,<;.
2-year notes
Series N-1980
(CUSIP No.< 912827 HR 6)
Maturity daite ." .".*. April 30, 1980
Call date. :vr. ..........
*.*. . No .provision
Interest coupon rate
...;.. . , To be determined based on
'£*. ->-'- n
the. average of accepted bids
Investment yield....."...;. To be determined at auction
Premium or discount
.. . .
. To be determined after
auction
Interest payment dates.-...
October 31 and April 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
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
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.
Wednesday, April 19, 1978,
by 1:30 p.m., EST
Monday, May 1, 1978
Wednesday, April 26, 1978
Tuesday, April 25, 1978
Monday, May 1, 1978
partmentoftheJREASURY
SHINGTQN,D.C. 20220
ELEPHONE 566-2041
FOR IMMEDIATE RELEASE
April 14, 1978
TREASURY REQUESTS AUTHORITY CONCERNING
FUTURES TRADING BASED ON GOVERNMENT SECURITIES
The Treasury Department yesterday recommended that "the
Commodity Exchange Act be amended to grant the Secretary of
the Treasury a limited authority with respect to future contract
markets based on Government securities consistent with the protection of
vital national interests."
The Treasury proposal was made in letters from Deputy
Secretary Robert Car swell to Senator Patrick J. Leahy, Chairman
of the Senate Subcommittee on Agricultural Research and General
Legislation and Representative Ed Jones, Chairman of the House
Subcommittee on Conservation and Credit.
The letter asked that the Secretary:
* be granted the final right to approve or disapprove
the designation of contract markets in futures contract based on
securities issued or guaranteed by the United States or Federal
agencies;
* be authorized to suspend trading in futures
contracts, to disapprove any existing or proposed delivery dates
for transactions in designated contract markets and to revoke the
designation of contract markets;
* be granted discretionary authority to take these
actions to avoid potential adverse impact of such trading upon the
issuance of, or trading in, the underlying Government securities,
and
* be granted access to information from the Commodity
Futures Trading Commission which he deems necessary in the
exercise of "his authority.
The text of the letter is attached.
B
- 828
THE DEPUTY SECRETARY OF THE TREASURY
WASHINGTON. D.C. 20220
APR 1 3 1978
Dear Mr. Chairman:
I would like to take this opportunity to comment on the
legislation before you, K.R. 10285, which would extend the
life of the Commodity Futures Trading Commission (CFTC).
The Treasury is primarily interested in the potential
impact of this legislation on the market for securities
issued or guaranteed by the United States or Federal agencies.
I will confine my comments here, which are on behalf of the
Administration, to that issue. The Government securities
market is the core of the money and capital markets in the
United States. It is by far the largest, most resilient and
efficient market in the world. Price movements in Government securities can and do affect all of our financial
markets and the strength of our economy. The continued
stability and efficiency of the Government securities market
are vital to the Nation's economic health and to the ability
of the Treasury to finance the national debt.
In 1977, the Treasury through market refinancings and
new issues sold $198 billion of Government securities
principally through auctions to participants in the overthe-counter market for Government securities. The low cost
and efficiency with which this volume of securities was sold
are the result of the steady and responsible development of
this market over many years.
The Market for Government Securities
The over-the-counter market for Government securities
is principally a cash market involving sophisticated dealers
in Government securities and institutional investors, such
as banks, pension funds, savings and loan associations,
state and local governments, insurance companies and corporations. In addition to buying and selling for next day
delivery, trading activity in the over-the-counter market
includes entering into repurchase agreements, reverse repurchase agreements, when-issued trading, short selling and
entering into contracts for forward delivery, some of which
have elements lin common with trading in futures contracts on
organized exchanges.
2
The breadth and liquidity of the Government securities
market are not only important to the Treasury's capacity to
finance the national debt but are also vital to the implementation of monetary policy. The Federal Reserve Bank of
New York, operating on behalf of the Federal Open Market
Committee, conducts operations in the market to affect the
level of member bank reserves and thus the availability of
credit in the economy. A highly liquid Government securities market is essential to the ability of the Federal
Reserve to inject into or absorb from the commercial banking
system a large volume of reserves temporarily — often
overnight — o r on a more permanent basis.
Prices of Government securities serve as a benchmark in
pricing securities of other public and private issuers and
as such are important to markets for other debt securities.
The unique credit standing of the U.S. Government, the large
amount of outstanding Government securities and the high
volume of trading across the maturity spectrum make the
prices of Government securities the most reliable index of
the financial markets.
The importance of this market to the Nation and its
financial system cannot be overstated. It is a national
asset that must be carefully protected.
The Commodity Exchange Act
The 1974 amendment to the Commodity Exchange Act, which
created the CFTC, charged that agency with designating
contract markets for futures transactions in commodities;
that is, determining which futures contracts may be traded
on organized exchanges. The CFTC was also charged with the
regulation of trading activity in futures markets.
Under the 1974 amendment, the scope of the CFTC extends
not only to agricultural and other tangible commodities, but
also to securities, since the amendment broadened the
definition of "commodity" to include all financial instruments. Thus, the CFTC has jurisdiction over futures trading
based on Government securities.
3
When the 1974 amendment was being considered by Congress,
the Treasury recommended that the role of the CFTC with
respect to Government securities be limited to futures contracts sold on organized exchanges. Congress adopted this
recommendation, providing that:
Nothing in this Act shall be deemed to govern or
in any way be applicable to transactions in... government securities, unless such transactions involve the
sale thereof for future delivery conducted on a board
of trade.
Growth in Futures Trading Based on Government Securities
In 1974 there was no organized trading in futures
contracts based on Government securities although for many
years — as I have discussed above — there has been trading
activity of a similar nature to futures contract trading on
an exchange. The growth of futures trading on exchanges
since then has been explosive.
CFTC first authorized the commencement of trading in
futures contracts based on Government securities in October
1974 when the Chicago Board of Trade introduced trading on
futures contracts based on mortgage pass-through securities
guaranteed by the Government National Mortgage Association
(GNMA). Because of the hedging opportunities afforded
mortgage origination and the willingness of speculators to
assume market risks, the growth in trading activity in these
contracts soared. In 1976, trading in GNMA futures contracts
amounted to a total of $12.9 billion. In 1977, total trading
jumped to $42.4 billion.
On January 6, 1976, trading in futures contracts based
on 13-week Treasury bills commenced on the International
Monetary Market (IMM) of the Chicago Mercantile Exchange.
The growth of trading activity in this contract rose from a
total of $110 billion in 1976 to $322 billion in 1977. The
average daily trading volume during 1977 totaled almost $1.3
billion, and reached a high in December 1977 of $2.3 billion.
The December total equaled about 30% of trading activity in
the market for the underlying Treasury bills as reported by
the primary dealers. At the end of 1977, open interest
(long or short positions which have not been closed out by
offsetting transactions) amounted to $17.2 billion.
4
In August 1977, the Chicago Board of Trade initiated
trading in futures contracts based on Government bonds. It
is too early to determine the receptivity of the market to
this new instrument.
I have appended to this letter a table illustrating the
dramatic growth of trading in each of these three contracts.
New Proposals *
The CFTC is currently considering two additional
contract market designations based on Government securities.
These proposals, both of which were submitted by the IMM,
involve futures contracts based on 52-week Treasury bills
and Treasury coupon issues that at the time of delivery,
have four years remaining until maturity (4-year notes).
The 52-week bill proposal is similar to the existing
futures contracts based on 13-week bills, but the 4-year
note proposal is different from currently traded futures
contracts based on Government securities. The proposal
provides that the deliverable security will be a specific
issue which is currently outstanding and which, at the time
of delivery, will mature in four years. In other words, all
outstanding Government securities with more than four years
to maturity would eventually become eligible for futures
trading. Most of these securities will have been outstanding
for some time when futures contracts based on them become
eligible for trading. Studies conducted by the Treasury and
by the Federal Reserve indicate that trading activity in
Treasury notes and bonds declines substantially with the
length of time a security has been outstanding. Consequently,
trading in the over-the-counter market in securities covered
by the 4-year note proposal is likely to be quite small
compared to trading activity in newly offered securities. A
thinly traded security more easily facilitates the manipulation of the price of that security, and therefore
futures contracts based on that security. The Treasury has
serious reservations concerning the 4-year note proposal.
5
CFTC - Treasury Consultations
Prior to designating contract markets for futures
contracts based on each of the three Government securities
now subject to futures trading, and in connection with its
review of the two proposals now pending, CFTC staff has
informally requested the Treasury's views on the proposed
contract designation. The weight given to Treasury views
is, under the statute, entirely within the discretion of the
CFTC.
Thus, under the present arrangement the Treasury has no
statutory basis for exercising its responsibility to insure
the continued proper and efficient functioning of the
Government securities market with respect to this large and
growing market.
Oversight of the Government Securities Market
The over-the-counter market for Government securities
is overseen jointly by the Treasury and the Federal Reserve
acting as Treasury's agent. Government securities are
exempt from registration requirements under the Securities
Act of 1933. The role of the Treasury and Federal Reserve
is one of careful and continuous market surveillance rather
than structured and formal regulation. We believe that this
approach has contributed greatly to the development of the
extraordinary efficiency and resiliency of this market.
The Treasury Department and the Federal Reserve System
engage in daily oversight of the trading activities of the
primary dealers, i.e. those dealers reporting their operating
statistics each day to the Federal Reserve Bank of New York.
Some of the primary dealers, because of their other activities, are also subject to the registration requirements of^
the Securities and Exchange Commission (SEC) and CFTC or, in
the case of commercial bank dealers, to supervision by the
banking authorities. Nonetheless, the primary oversight of
their activities in the Government securities market has
been exercised by the Treasury and the Federal Reserve.
6
In addition to the collection of financial statistics
which commenced in 1958 and has beer, expanded subsequently,
the Treasury and the Federal Reserve in 1966 established a
Joint Treasury-Federal Reserve System Committee charged with
the continuing review of the performance of the Government
securities market and the investigation of situations which
might involve trading abuses.
Two recent examples of the exercise of this latter
function involved close cooperation with, and the provision
of expert technical assistance to, regulatory agencies.
Treasury and Federal Reserve experts assisted Internal
Revenue Service (IRS) inspectors investigating alleged leaks
of Treasury financial announcements prior to release, and
subsequently provided expert assistance to the SEC in investigating alleged fraudulent behavior uncovered by the IRS
investigators. Within the past few months, the Treasury
advised the SEC of the possibility of fraudulent trading
activity in GNMA securities, and the Treasury and Federal
Reserve provided expert assistance to the SEC in the initial
phases of its investigation of such activity.
Information gathering by the Treasury and the Federal
Reserve is facilitated by continuous market contact. The
Federal Reserve Bank of New York conducts daily interviews
with senior members of the primary cealer firms to discuss
developments in trading activity. In addition, the New York
Fed's trading desk communicates daily with the primary
dealers.
The Treasury Department also is in continuous contact
with the market, although on a less extensive scale. Senior
staff members discuss market developments by telephone and
through personal contacts with senior representatives of
primary dealer firms and other financial institutions. The
extensive contact between Treasury and Federal Reserve
personel and participants in the Government securities
market has aided the recognition of developments which have
required supervisory or regulatory attention.
7
The* Need _for_a TreasuryPolo in the Futures Market
In 1974 it was not clear what future contractu based on
Government secur i t. i es would be de.s Lgna t eel for trading on
exchanges or what the consequence:; of such designations
liiiqhl be*. II i <; now clear that the volume? and variety of
these futures; contracts have become significant. Yet the
Treasury Department, which lias the general responsibility
for the sale of Government securities and the integrity of
the market for these securities, presently has no authority
with respect to one portion of the market based on such
securities, namely, the futures contract market.
It is important to recognize that there is a direct
link between Government securities price movements in the
over-the-counter market and price movements of futures
contracts based on those securities. In the Treasury bill
futures market, for example, speculation and arbitrage
quickly limit any growing divergence between over-thecounter and futures prices. A security dealer who wished to
establish a speculative position in Treasury bills probably
would buy either the outstanding bills or, if they were less
expensive after accounting for financing costs, futures
contracts based on the bills. Also, arbitragers would
quickly move to minimize distortions in the price relationship between the over-the-counter and futures markets. Consequently, abuses in the futures market could lead to price
distortions in the over-the-counter market.
It is not apparent, however, that futures contracts
based on Government securities serve the price discovery
function which is generally cited by the CFTC as a major
element in their economic purpose tests for determining
appropriate contract market designations. The Government
securities market is unique in that frequent new issues by
the Treasury, combined with active secondary market trading
in a large volume of outstanding securities of various
maturities, result in a market "yield curve" at any point in
time which serves as an indication of interest rate expectations
and of the price the Treasury would be required to pay in
auctioning a new issue.
It is also important to recognize that the futures
market has the potential of interfering with the debt
management responsibilities of the Treasury. To the extent
that market participants substitute futures contracts for
their holdings of underlying securities, funds could be
diverted from new issues or refinancings of Government
securities or from the market for outstanding issues, a
result that could produce a higher borrowing cost for the
Federal Government.
8
We must also be concerned about potential futures
market abuses. The low margin required for purchasing a
futures contract based on Government securities enhances the
potential for abuses. Individuals and institutions can
speculate with a small amount of money — a $1,200 initial
margin permits an investor to purchase a $1,000,000 Treasury
bill futures contract — in return for the opportunity of
reaping a proportionately large profit or suffering a
proportionately large loss. The low margin requirement, in
conjunction with the risk-free nature of Government securities,
could result in, or indeed encourage, excessive speculation.
Any speculative abuse could have an adverse effect
psychologically on investor's perceptions of the underlying
Government securities. That could only result in higher
cost financing and potential impairment of the efficiency
and resiliency of the Government securities market.
As the number of futures contracts based on Government
securities rises, the potential for markets in those contracts to affect over-the-counter market prices of the
underlying securities will, in all likelihood, also rise.
The development of the market for futures contracts based on
Government securities is in an embryonic stage. The expansion of these new markets must be diligently monitored
and action taken as necessary to insure the continued
proper and efficient functioning of the over-the-counter
market and the ability of the Federal Government to finance
the national debt. The Treasury is not in a position today
to take whatever actions might be required to insure such
continued proper and efficient functioning.
Recommendations
The Treasury is vitally concerned with the continued
integrity and efficiency of the over-the-counter market for
Government securities. Moreover, the Treasury must be and
is concerned with the impact of our financing operations on
the broader money and capital markets. Yet, under existing
law Treasury has no authority to approve or disapprove the
designation of futures contract markets based on Government
securities, nor does it have authority to revoke contract
market designations or to suspend futures trading based on
Government securities where such trading does or may adversely
impact the primary market. Exclusive regulatory authority
now rests with the CFTC.
9
The Treasury Department recommends that the Commodity
Exchange Act be amended to grant the Secretary of the
Treasury a limited authority with respect to futures contract markets based on Government securities consistent with
the protection of vital national interests. We are proposing that the Secretary be granted the final right to
approve or disapprove the designation of contract markets in
futures contracts based on securities issued or guaranteed
by the United States or Federal agencies. The Secretary
should also be authorized to suspend trading in futures
contracts, to disapprove any existing or proposed delivery
date for transactions in designated contract markets and to
revoke the designation of contract n.arkets. The Secretary
should be granted discretionary authority to take these
actions to avoid potential adverse impact of such trading
upon the issuance of, or trading in, the underlying Government securities. To perform this function, the Secretary
must also be granted access to information from the CFTC
which he deems necessary in the exercise of his authority.
I have appended the Administration's proposed bill to
amend the Commodity Exchange Act for the purposes discussed
in this letter. The Administration is not taking a position
at this time on any aspects of S.2391 other than as expressed
in this letter.
The Administration does not recommend that the regulatory responsibilities of the CFTC be vested in the
Treasury; nor do we recommend that the Treasury assume the
sole responsibility to approve the designation of contract
markets in futures contracts based on Government securities.
We believe that our proposed amendment would assure the
continued efficiency and integrity of the Government
securities market without unduly encumbering the existing
regulatory structure.
10
The Department has been advised by the Office of
Management and Budget that the submission of the proposed
amendment is in accord with the program of the President.
Sincerely,
f&TQy-
<-GLS>
Robert Carswell
The Honorable
Ed Jones
Chairman, Subcommittee on
Conservation and Credit
Committee on Agriculture
House of Representatives
Washington, D.C. 20515
Enclosures
epartmentoftheTREASURY
£H!NGT0N,D.C. 20220
TELEPHONE 566-2041
Statement of Stephen J. Friedman
Deputy Assistant Secretary for Capital Markets Policy
Department of the Treasury
Before the Securities and Exchange Commission *
Hearings on the Impact of Securities Regulation on
Small Business Capital Formation
April 13, 1978
3:00 p.m.
The Treasury Department is pleased to have,the opportunity
to participate in the Commission's examination of the impact
of Federal securities regulation on the ability of small businesses to raise capital. It is essential that smaller businesses
have access to adequate capital flows, and the Commission's
decision to examine its role in this area is an important step.
My testimony this afternoon is addressed principally to one
development: the increasing trend toward formalization of the
disclosure rules for private placements, a trend reflected in the
provisions of Rule 146 and in the case law under^Section 4(2).
Our views may be briefly summarized:
— small businesses play a central role in our economy.
— like all American business, they have experienced
great difficulty in raising eguity capital.
— the eguity problem is exacerbated for new or growing
small businesses because they have little or no
access to the public markets.
— the trend toward imposing disclosure patterns developed
for the public markets on private placements should be
reversed, since it places added costs on the raising of
capital by small businesses that are not required for
the protection of investors or the policies underlying
Section 4(2) of the Securities Act.
B-829
- 2 The Role of Small Business
Small businesses comprise a large sector of the economy.
They represent 97 percent of the total number of the nation's
business concerns; and they account for 43 percent of our
gross national product and 58 percent of our non-agricultural
work force. 1/ Even more important, small businesses represent
a significant source of competition, innovation and growth.
Studies indicate that small firms contribute at least their
share of technological innovations and may well provide a
proportionately greater share of the more important ones. 2/
Economists have highlighted the relationship of technological innovation to economic growth: new technology
creates increased productivity, lower inflation and lower
unemployment; it promotes the competitiveness of U.S. products in both domestic and world markets. 3/
The Importance of Capital
An adequate supply of capital is important to all businesses, and particularly high technology companies. They
are capital-intensive and often require substantial development
periods during which there is little or no cash flow. For them,
the availability of eguity capital is critical. A study performed for the Department of Commerce found that during the
period 1970-1971, small technology-based firms obtained almost
50 percent of their external financing in the form of equity,
and only 13 percent in the form of long-term debt. In contrast,
1/
U.S. Small Business Administration, The Study of Small
Business (June 3, 1977) at 3.
2/ See Daniel Hamburg, R&D: Essays on the Economics of
Research and Development (New York: Random House, 1966);
Edwin Mansfield et al., Research and Innovation in the
Modern Corporation (New York: Norton, 1971). K. Pavitt
and S. Wald, The Conditions for Success in Technological
Innovation (Paris, OECD, 1971).
3/ See, G. Tassey, The Effectiveness of Venture Capital Markets
in the U.S. Economy, 25 Public Policy 483-4 (1977); Speech
of Frank Press, Science Adviser to President Carter, titled:
Science and Technology: The Road Ahead (February 13, 1978).
- 3 small manufacturing firms obtained only eight percent of their
external capital from eguity investment during that period. 4/
The concern about undercapitalization runs strongly through
out the whole small business community. In our conversations
with small businessmen and our review of government financing
programs for minority businesses, the theme of a need for more
eguity, and a fear of expanding debt-equity ratios, has been
present.
Access to Public Markets
In considering the role of disclosure policy in the
capital raising process for small companies, it is useful
to think separately about the markets for publicly-traded
and privately-placed securities. For the consequences of
taking one route rather than another are great, even leaving
wholly aside the regulatory costs of the offering itself.
For example, the public markets provide liquidity, which
not only enhances the value of the securities sold, but those
retained by the management. The impersonality of the investor
relationship may make it easier for the management to retain
control. Having public stockholders brings with it a series of
costly and time-consuming disclosure burdens and other legal
obligations. Indeed, it is those very disclosure rules and
legal obligations that have done much to make the public markets
so efficient.
In contrast, a private placement can usually be done faster;
but the illiquidity of the investment means that shares will be
less valuable and the issue more costly for the issuer. Investors traditionally have less formal disclosure, but are in a
position to undertake a personal investigation of the issuer.
Moreover, investors often ask for and receive a larger voice in
the business, through contractual provisions or otherwise, than
is true in public offerings.
In theory, an issuer will take all of these factors, plus
the costs of complying with disclosure requirements, into
account in determining where it will seek its capital. But,
at least since 1972, a large number of smaller companies do
not
appear to
haveAssociates,
had a realistic
choice.of Venture Capital
4/ Charles
River
An Analysis
Market Imperfections prepared for Experimental Technology
Incentives Program, National Bureau of Standards at 12
(February 1976) .
- 4In recent years, smaller companies have had a difficult
time in securing equity capital. While there is little data on
the amount of private equity financing by small companies, we
do know from available data that public eauity offerings by small
companies have fallen dramatically. Registered securities offerings by smaller companies — those with a net worth of less than
$5 million — have dropped from a high of 698 in a single year,
1969, to only 42 in the three years of 1974 through 1976. 5/
There has been a similar precipitous fall in the number of offerings by companies seeking public equity for the first time. In
1977, such offerings totaled only $264 million compared to
$3.3 billion for the year of 1972. 6/ For the first two months
of 1978, such offerings totaled only $3.25 million. 7/
There is much debate over the causes of reduced flows of
equity to issuers, particularly to small companies. In general,
it is our judgment that inflation has been the most significant
cause. It has eroded corporate profits, increasing greatly
the cost of equity to issuers. And it has raised the yield
on debt securities, further decreasing the attractiveness
of riskier equity securities. Other observers emphasize
changes since 1969 in the effective tax rates on capital
gains in decreasing the returns on equity.
In addition, there are a number of factors that have
special impact on the public securities markets. Recent stock
market losses incurred by investors appear to have caused more
conservative investor behavior — that is, a general reduction
in the level of risk taking and a shortening of acceptable
investment time horizons. The trend toward increased institutionalization of the securities markets and the decline of
individual participation in the markets has reduced the pool
of money available to small, growing companies.
Finally, structural changes in the securities industry
also play some role. We have received some evidence that
5/ Venture
Capital
New
Issueinterest
Barometer,
1974-1976,
suggests
that
there Journal,
is sharply
lower
in market(Capital
Publishing
Corporation).
making
activities
for smaller
companies. It may be that
6/ Investment Dealers Diqest, Corporate Financing Directory
(March 7, 1978 and March 1972)".
2/ Investment Dealers Diqest, Corporate Financing Directory
(unpublished data) .
- 5 the 300,000 or 400,000 share first offering that was typical
of the late 1960's no longer presents a profitable market-making
opportunity. Any such trend would be exaggerated by the
recent reductions in the number of brokerage firms. And
the greater concentration may also mean that there are fewer
firms making it their business to underwrite the securities
of small issuers.
For all these reasons, many small businessmen simply
do not have a meaningful choice between private and public
markets. Moreover, in addition to the difficulties in bringing small businesses to market, the threshold amounts for a
public offering appear to have escalated substantially. Recent
reports of public offerings by venture capitalist-backed companies with a net worth under $5 million showed that of
29 such issues in 1977, 21 were in excess of $2 million; for
1976, 27 of the 32 such issues were over $2 million. 8»/ It
may be that the drop in the number of Regulation A offerings,
from almost 400 in 1974 to about 125 in 1975 and 1976, also,-,
reflects the fact that the Regulation A ceilings are too ,,-'
low. 9/ For the smaller amounts, either because of relative
costs 10/ or market acceptance, the issuer must stay in the
private placement market.
We do not suggest that all small companies, particularly
unseasoned ones, should have access to the public markets.
But in the current market and regulatory environment even
small companies which are sufficiently seasoned to tap the
public equity market are unable to do so.
The need for equity financing in the early stages of a
company's life can only be satisfied by a venture capitalist.
Used in this sense, the term focuses not on the character of
the investor, but on the character of the investment:, it is
a private placement exhibiting high risk, a lack of liquidity,.
a substantial intended holding period and, if successful,,high
returns.
the difficulty
of Barometer,
raising equity
publicly,
8/ VentureBecause
CapitalofJournal,
New Issue
1976-1977
(Capital Publishing Corporation).
V Securities and Exchange Commission, 37 Statistical Bulletin
No. 1 at 31 (January 1978).
10/ The costs of registered public offerings are proportionately
larger for smaller issues. See, Securities and Exchange
Commission, Cost of Flotation of Registered Issues 1971-1972
at 9 (December 1974) .
- 6 the venture capitalist must also furnish the second, third and
perhaps fourth rounds of financing as well. It is important to
keep in mind that what I have called the "venture capitalist"
is a term that covers a wide variety of investors: friends
and relatives, middle class and wealthy individuals, professional venture capital investors and, in the later stages,
institutions.
The Role of Regulatory Costs
What role do regulatory costs play in this process? Some
studies have sought to quantify those costs, particularly in the
case of public offerings. 11/ I must confess to some level
of skepticism about the work done thus far. If one thing
is clear, it is that we have all too few facts about what
is going on in the real world in this area. For that reason,
we are encouraged by the Commission's current effort, under
agreement with the Department of Commerce's National Bureau
of Standards Experimental Technology Program, to establish
a permanent system for monitoring the impact of securities
regulation on capital raising by small, technology-based
businesses. This monitoring system should serve as a valuable
tool in analyzing the costs and benefits of many of the Commission's rules and regulations which are the subject of
these hearings.
Nevertheless, we must deal with the information that is
now available. In doing so, I believe that some preliminary
judgments can be formed without the help of empirical data. It
is clear that the costs of disclosure — under both the 1933 Act
and the 1934 Act — are rising. Nevertheless, we believe that
in the case of the public markets, the Commission's disclosure
policies have done much to generate public confidence in the
integrity of our markets. While the process of considering
the value of these policies is and should be a continuing
11/ Securities
and
Exchange Commission,
Costa of
Flotation
of
one,
12/ rigorous
disclosure
is, in effect,
ticket
of admisIssues
1971-1972, (December 1974). Charles River
sion Registered
to the public
markets.
Associates, An Analysis of Venture Capital Market Imperfections, prepared for Experimental Technology Incentives
Program, National Bureau of Standards at 402-410.
12/ The work of the Commission's Advisory Committee on Corporate
Disclosure represents the latest attempt to review our corporate disclosure policies.
-7For the reasons discussed below, we do not think the price
of admission to the private placement market should be as high.
Even though it is more difficult to quantify the impact of
regulatory costs on private placements, it is clear from the chorus
of complaints that the participants believe it is too high. And,
in our view, many of the considerations that prompt rigorous disclosure policies in the public markets are not applicable to private placements. Moreover, the special importance of giving
attention to the impact of regulatory costs on those seeking
capital in the private placement market is evident if the public
eguity market is closed to smaller issuers seeking relatively
small — but still substantial in absolute terms — amounts of
equity. Those issuers do not have the choice of going to the
public or private markets for equity, weighing the costs of each
course, including the costs of complying with disclosure requirements. Their only choice is the private placement market. As the
regulatory costs rise, the "margin" of companies that find the total
cost of raising capital too high will broaden; for them, the flow
of
external equity
funds Placement
is choked Disclosure
off.
Developments
in Private
Policies
Let us examine Rule 146. Paragraph (e) specifies the
kind of information an offeree is required to have, or have
access to, in the course of a private placement. The note
to this paragraph makes it clear that "access" can only be
conferred by a special relationship to the issuer or by
economic power. For individual investors, often the source
of capital for smaller companies, neither position nor economic
power confers the necessary access. Accordingly, an issuer
seeking the certainty that the Rule was designed to afford
has no choice but to supply substantially the same information
that would be required in a registration statement. At that
point, the rules of the public marketplace have been imported
into the private financing area. And this aspect of the
Rule may well have a highly selective impact. In the case
of stronger companies, that can attract institutional investors,
the burden of preparing an elaborate disclosure document
is not imposed. The smaller, undercapitalized company that
must depend upon individual investors has the greater disclosure
burden in private placements.
This emphasis in Rule 146 on disclosure standards is, of
course, also found in some of the cases under Section 4(2). In
- 8 cases like Woolf v. S. D. Conn & Co. 13/ and Doran v. PetroleumManagement Corporation 14/, the courts have emphasized that
issuers relying on the Common law" of Section 4(2) must make
available substantially the same information as if registration
were undertaken.
Public vs. Private Disclosure Policies
We applaud the proposal in Securities Act Release 5913 to
lower the disclosure requirements for Rule 146 sales under
$500,000 from the Form S-l standard to the Regulation A standard.
Nevertheless, in our view the Commission should go further and
consider reversing the trend toward requiring formal disclosure
in private placements. In many respects, the disclosure rules
adopted for public markets do not serve the same policy objectives
in the context of private placements.
First, disclosure rules have been developed with a view
toward serving the needs of the public markets for reliable and
timely information that will enable the markets to make the
most efficient allocation of resources in the economy. The
public securities markets, most economists agree, have an impressive capacity to digest and disseminate complex and even fragmentary information in a short period of time so that securities
prices at any time reflect all information available to the market. 15/ The present SEC-administered system of mandated corporate
disclosure is premised on the belief that market forces and selfinterest alone cannot be relied upon to assure a sufficient flow
of timely and reliable information to the market place. 16/
Thus, many disclosure questions have been resolved in favor
of greater disclosure in order to improve the efficiency of the
public
market.
This
consideration
13/ 515
F.2d 591
(5th
Cir. 1975). is not present in the private
14/ 545 F.2d 893 (5th Cir. 1977).
IV This is the efficient markets hypothesis. See generally,
Fama and Miller, Theory of Finance (New York 1972) ;
West and Tinic, The Economics of the Stock Market, 2-4 (1971);
Baumal, The Stock Market and Economic Efficiency (1965).
16/ See, Report of the Advisory Committee on Corporate Disclosure
to the Securities and Exchange Commission, Volume 1 at II
(November 3, 1977).
- 9 markets. A private placement is essentially a face-to-face transaction in which either the investor or his representative can ask
questions and probe the facts. There is no "market" to process the
information. The basic question concerns the information in which
the investor is interested and his ability to evaluate it.
In a public offering, the issuer's relationship to investors
is impersonal and indirect. The Commission must develop formal
disclosure rules to protect investors. Investors cannot ask
questions or talk to management; they can only choose not to
buy. In addition, the potential for abuse is greater in the
case of public offerings, which are distributed through organized
sales efforts and general advertising and solicitation.
For these reasons, we do not think the Commission should
require formal disclosure as a condition to obtaining the benefit
of an exemption under Section 4(2) of the Securities Act. Reliance should be placed on the anti-fraud rules to protect purchasers, and such factors as the manner of offering and the number
and character of the investors would demarcate the line between
private and public transactions.
We do not believe that an elimination of the formal disclosure requirements would result in damage to investors.
Certainly, in the case of private placements by reporting companies, investors will ask for, and receive, the available documents. Institutional investors and others that are experienced
enough to know what to ask for are in a position to make their
own investigation. Is there really any substantial group left?
If the suitability rules of Rule 146 and the analogous requirements of sophistication imposed by some cases are effective,
the remaining group also should be in a position to protect itself,
either individually or through represe tatives.
We believe that this suggestion is consistent with the structure of the Securities Act and with its evolution. I doubt that
Congress ever intended that the level of formal disclosure be the
same for private placements as it is for public offerings. 17/
The policy question raised by the private placement exemption
is this: under what circumstance is it permissible for a company
to issue securities without registration? It seems to me strange
17/ See Coles, Has Securities Law Regulation in the Private Capital Markets Become a Deterrent to Capital Growth: A Critical
Review, 58 Marquette Law Review 395 (1975).
- 10 to answer that question by saying "when the issuer has done about
the same thing as if it had registered, absent only Securities
Act liability and SEC staff review." Of course, there are those
who believe that the exemption afforded by Section 4(2) was
developed only for isolated transactions and that formal disclosure was to be the rule for sales of securities. In response,
I would point out that the disclosure system has evolved to a
point where that is no longer practical. The extent and cost of
disclosure are such that to impose the existing system on the
private capital-raising process for smaller businesses would be
unreasonable.
The course suggested leaves open at least two possible
undesirable developments. On the one hand, a desire to conform
to the anti-fraud rules may, in time, generate similar formal
disclosure practices. At the other extreme, practices could
develop that would seriously diminish the protection afforded
investors. We cannot predict with certainty the likely outcome. We believe, however, that a combination of the impact
of the anti-fraud rules and the demands of the marketplace
for information are more likely to produce useful information
practices than an attempt to establish the correct level of
disclosure by rule. Prior to Rule 146, the anti-fraud rules
do not seem to have compelled the development of an elaborate
disclosure document for private placements in all cases. It has
been the adoption of that Rule and, even more important, increasing
sensitivity to the liability of professionals, that has powered
this development. It is not yet clear how the Hochfelder 18/
case will impact the professional liability question. But if the
Commission is to be successful in reducing the burdens of disclosure where it makes sense to do so, this is an area which
requires increasing attention.
Before turning to the public securities markets, I would
like to say a brief word about Rule 144, which regulates the
resale of securities purchased by investors in private placements,
called "restricted securities". The operation of this rule, in
our view, appears to have a very important impact on the ability
of small companies to raise capital under the private offering
exemption.
Rule 144 is designed to insure that purchasers of restricted
securities do not act as conduits for the sale to the public of
unregistered securities of issuers concerning which adeauate
18/ Ernst & Ernst v. Hochfelder, 96 S.Ct. 1375 (1976).
- 11 current information is not available to the public. Thus, the
Rule prohibits resale of restricted securities unless the issuer
has been subject to the reporting reguirements of the Securities
Exchange Act for at least 90 days prior to the sale of the securities, and the purchaser has held the securities for at least
a minimum period of two years. Moreover, the securities must be
offered in such a manner and in such quantities as not to disrupt
the trading markets. They can be sold only in normal trading
transactions with no unusual brokerage commissions and the
amounts that can be offered in a specified time period are
limited.
s
To the extent that Rule 144 restricts the ability of investor
to sell their investments in small businesses, it tends to reduce
the liquidity of such investments, and thereby discourages the
flow of capital into small businesses. Moreover, investors
holding restricted securities in small companies may be encouraged
to sell their ownership interests to larger companies in order
to liquidate their investments, thereby contributing to the
undesirable trend toward increased concentration within the
economy.
We recognize that the Commission has been, and is, addressing these concerns. Through recent action, the Commission has
increased the availability of the streamlined Form S-16 so that
more holders of restricted securities may be able to sell their
holdings in secondary distributions under the less costly Form
S-16 registration statement. However, Form S-16 provides no
relief for investors in newly-reporting companies since Form S-16
is available only to issuers which have reported under the
Securities Exchange Act of 1934 for a period of three years
prior to the registration. Thus, Rule 144 may still be having
a large impact on investment in small newly-reporting companies.
For this reason we are pleased that the Commission's Directorate of Economic and Policy Research has underway a study
designed to assess the market impact of sales under Rule 144.
We hope that, if the results of this study show that sales under
the present volume and rate of sale limitations of Rule 144 are
not having a significant market impact, the Commission will
consider loosening these limitations, perhaps on an experimental
Public
basis. Offerings
Before closing, I would like to say a word about public
offerings of securities. As I explained earlier, we support
the basic notion that rigorous disclosure is an appropriate
- 12 condition of entry to the public markets. Nevertheless,
while the disclosure system has enhanced the efficiency and
fairness of the U. S. securities markets, there is evidence
that the costs of disclosure bear more heavily on small
companies.
The Commission's most recent study of the cost of flotation of registered issues covering the period 1970 through
1972 found that the costs of flotation are proportionately
larger for smaller issues. To illustrate, the study found
that for registered stock offerings under $1 million, the
average underwriter's compensation, or spread, amounted
to about 12.5 percent and other expenses to about 8.25 percent of the gross proceeds of the offering. In other words,
net proceeds to the issuer- were slightly less than 80 percent of the aggregate offering price. Contrast this with
offerings in the range of $20 to $50 million. For these,
underwriters' compensation averaged 4.4 percent and other
costs .6 percent, for total costs of 5 percent, enabling
the issuer to net about 95 percent of the aggregate offering
price. 19/ More recently, the findings of the Commission's
Advisory Committee on Corporate Disclosure also tend to
substantiate this inverse relationship between the relative
costs of flotation and the size of the issuer. 20/
Congress recognized the especially burdensome impact of
the disclosure requirements on small companies by authorizing
the Commission to exempt securities from registration where
it finds that registration is not necessary to the public
interest because of the small amount involved or the limited
character of the offering. 21/ The major small issue exemption
promulgated by the Commission under this authority is Regulation A, which permits small firms to raise up to $500,000
in any one year without registration. The Regulation reauires
the issuer to file with the regional office of the Commission a
notification and offering circular which contain less extensive
19/ Securities
and Exchange
Commission,
Cost than
of Flotation
of
narrative
and financial
statement
disclosure
that required
Registered Issues 1971-1972, at 9, (December 1974).
20/ Report of the Advisory Committee on Corporate Disclosure
to the Securities and Exchange Commission, Volume 1 at
pp. 22-28.
21/ This is the "small issue" exemption of section 3(b) of the
Securities Act of 1933.
- 13 on a Form S-l. Because Regulation A offerings are reviewed at
the regional offices rather than at the Commission's headquarters,
Regulation A offerings were intended to provide a more expeditious
review process than registered offerings.
As the Commission has noted, 2_2/ the number of Regulation A offerings has decreased dramatically in recent
years. This decline in the use of Regulation A is a matter
of concern. We believe that the exemption provides the basis
for a reasonable balancing of the needs for investor protection against the costs of public offerings to small
issuers. Thus, we believe it is important that the exemption
works effectively for smaller companies.
While many explanations for the decline of Regulation
A offerings have been advanced, it does seem that one important barrier to the use of Regulation A is the $500,000
ceiling on Regulation A offerings. The available evidence
suggests that offerings of this size cannot be economically
underwritten by investment banking firms. 23/ Thus, in order
to encourage reputable investment bankers to underwrite Regulation A offerings, the ceiling on Regulation A offerings should
be raised at least to $2.5 million, and possibly $3 million.
A common complaint often voiced with regard to Regulation A
is that the exemption is too costly and time consuming. Delay
in obtaining financing can be especially critical to new small
22/
Securities and Exchange Commission, Release No. 33-5914,
34-14529 at 40.
23/ The average costs of registered public offerings under
$2 million totaled over 16 percent of the gross proceeds
during the period 1971-1972. Securities and Exchange
Commission, Cost of Flotation of Registered Issuer 19711972 at 9 (December 1974). Few registered securities
offerings of under $2 million in amount appear to have
been made in recent years. The SBA Task Force on Venture
and Equity Capital found that few securities firms will
underwrite an issue of less than $3 million. Report of the
SBA Task Force, on Venture and Equity Capital, at 16 (January 1977). Investment bankers specializing in underwriting
small companies have stated that the costs of a Form S-l
registration make it virtually uneconomical to underwrite
an offering below $2 million. See address of William
Hambrecht, general partner of the firm of Hambrecht and
Quist, before the Securities Regulation Institute of the
University of California Conference (January 20, 1978).
- 14 companies, which may require an immediate infusion of equity to
maintain their creditworthiness. We believe it is important that
the Commission consider carefully ways in which it might provide
for more expedited review of Regulation A offerings and reduce
their costs, to the extent consistent with the protection of
investors.
While we appreciate the substantial efforts of the
Commission's staff in attempting to devise a simplified
registration statement for public offerings not exceeding
$3 million, we doubt that the proposed Form S-18 would result in significant cost savings over a Form S-l registration
statement. We believe more meaningful relief for the small
company can be achieved through lifting the ceiling on Regulation A offerings.
Once a company, and its lawyers, accountants and
underwriters, incur the fixed costs of a due diligence
investigation and preparation of the necessary audited
financial statements, minor reductions in the amount of
narrative disclosure in the registration statement do
not achieve significant incremental costs savings. Professionals involved in preparing a Form S-18 will be
subject to liability under section 11 of the Securities Act
to the same extent that they are in a Form S-l registration.
Moreover, permitting the preparation of audited
financial statements in accordance with GAAP rather than
Regulation S-X would not significantly reduce the costs of
financial statement disclosure. The differences between
financial statement disclosure under Regulation S-X and
GAAP are narrowing as accountants increasingly equate the
requirements of Regulation S-X with GAAP.
Contact:
FOR IMMEDIATE RELEASE
Carolyn M. Johnston
(202) 634-5377
APRIL 14, 1978
TREASURY SECRETARY BLUMENTHAL NAMES EDWARD JOSEPH GIBLIN
SAVINGS BONDS CHAIRMAN FOR MICHIGAN
Edward Joseph Giblin, Chairman of the Board and Chief
Executive Officer, Ex-Cell-0 Corporation, Troy, has been
appointed Volunteer State Chairman for the Savings Bonds
Program by Secretary of the Treasury W. Michael Blumenthal,
effective immediately.
He succeeds Robert E. Dewar, Chairman of the Board,
and Chief Executive Officer, K-Mart Corporation, Troy.
Mr. Giblin will head a committee of business, labor,
financial, media, and government leaders, who -- in cooperation with the Savings Bonds Division -- assist in
promoting the sale of Savings Bonds.
Mr. Giblin was graduated from Fordham University
with a BS degree, and has a Masters in Business Administration from New York University.
Mr. Giblin's business associations are as follows:
Peat, Marwick, Mitchell & Company, 1951-53; Ex-Cell-0
Corporation, 1953 to date. He became President and
Chief Executive Officer of Ex-Cell-0 In 1971; and in 1978
he assumed the duties of Chairman of the Board.
Mr. Giblin has corporate directorships on the
Detroit Bank & Trust Company; Detroit Edison Company;
Ex-Cell-0 Corporation; and Tecumseh Products Company of
Michigan. Other directorships include Beta Gamma Sigma
Directors' Table; Machinery and Allied Products Institute;
and United Foundation of Detroit.
Mr. Giblin is married to the former Josephine
Fischer, and has one son.
B-830
Contact:
Carolyn M. Johnston
(202) 634-5377
FOR IMMEDIATE RELEASE APRIL 13, 1978
TREASURY SECRETARY BLUMENTHAL NAMES JOHN D. BUCHANAN, JR.
SAVINGS BONDS CHAIRMAN FOR FLORIDA
Jphn D. Buchanan, Jr., Senior Vice President, Prudential
Insurance Company of America in Jacksonville, has been
appointed Volunteer State Chairman for the Savings Bonds
Program by Secretary of the Treasury W. Michael Blumenthal,
effective immediately.
He succeeds George H. Gage, Jr., President, General
Telephone Company of Florida, Tampa.
Mr. Buchanan will head a committee of labor, business,
financial, media, and governmental leaders, who — in cooperation with the Savings Bonds Division — assist in promoting the sale of Savings Bonds.
Mr. Buchanan joined Prudential in 1947 as a Special
Agent, and was named Assistant Director of Agencies in 1952.
In 1954 he became manager of the newly-formed Cleveland
Agency in the South Central Region, earning five President's
Citations for outstanding sales and service achievement.
Mr. Buchanan has been active in professional, business,
and civic activities for a number of years. He is a Directorat-Large of the Florida State Chamber of Commerce, and a
member of the Governor's Florida Council of 100; a member of
the Jacksonville Board of the National Conference of Christians
and Jews; and Secretary of the Board and a Century Club member
of the YMCA of Jacksonville. He was also 1976 Duval County
"TaHe Stock in America" Chairman, and Co-Chairman of the
Corporate Committee for the 1976 United Negro College Fund.
Mr, Buchanan is married to the former Jo Janet Dodds
of Omaha and they have three daughters.
i
B-831
Contact:
Carolyn M. Johnston
(202) 634-5377
FOR IMMEDIATE RELEASE APRIL 14, 1978
TREASURY SECRETARY BLUMENTHAL NAMES JOHN PATRICK MAGUIRE
SAVINGS BONDS CHAIRMAN FOR CALIFORNIA
John Patrick Maguire, President Emeritus, Continental
Telephone Corporation, Bakersfield, has been appointed
Volunteer State Chairman for the Savings Bonds Program by
Secretary of the Treasury W. Michael Blumenthal, effective
immediately.
He succeeds Ernest J. Loebbecke, Director, The TI
Corporation, Los Angeles.
Mr. Maguire will head a committee of state business,
financial, labor, media, and governmental leaders, who —
in cooperation with the Savings Bonds Division — assist in
promoting the sale of Savings Bonds.
Mr. Maguire started his career with Kern Mutual Telephone
Company of Taft, California, which is now a part of Continental
Telephone Company of California. From 1954 to 1961 he was
president of Central Western Company, which merged with
Continental in 1961. Mr. Maguire retired from Continental
Telephone Corporation on January 9, 1976, after five years
as president. He is currently president emeritus and a
member of the board of directors of that company.
Mr. Maguire's outside activities include memberships
in the Kiwanis Club of Taft, California; the Advisory Committee
to the Rural Electrification Administration Administrator;
and the California Independent Telephone Association. He is
also General Chairman of Mercy Hospital Building Fund Campaign,
and was recently appointed to the Board of Directors of the
Hospital.
Mr. Maguire is married to the former Lois A. McAlpine,
and they have two children.
B-832
FOR IMMEDIATE RELEASE
April 13, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES COUNTERVAILING
DUTY INVESTIGATION OF IMPORTS OF
PAPERMAKING MACHINES FROM FINLAND
The Treasury Department today announced an investigation to determine whether the Government of Finland is
subsidizing exports of papermaking machines and parts
thereof. The investigation results from a petition filed
on behalf of domestic interests.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional duty that equals
the size of a "bounty or grant" (subsidy) found to have
been paid on the exportation or manufacture of merchandise imported into the United States.
A preliminary determination in this case must be
made not later than August 9, 1978, and a final determination no later than February 9, 1979.
Notice of this action will appear in the Federal
Register on April 14, 1978.
Imports of papermaking machines and parts thereof
from Finland during the first 11 months of 1977 were valued at approximately $21 million.
o
B 833
0
o
tpartmentoftheJREASURY
SHINGTON,D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
April 13, 1978
Contact:
George G. Ross
202/566-2356
TREASURY ISSUES FIFTH DISC ANNUAL REPORT
The Treasury Department today released its fifth Annual
Report on the "Operation and Effect of the Domestic International Sales Corporation Legislation" (DISC). This report
covers income tax returns for DISC'S whose fiscal period
ended between July 1, 1975 and June 30, 1976, referred to
as DISC year 1976.
Highlights of the report are:
— The revenue cost to the U. S. Treasury was $1.2
billion for DISC year 1976.
— Total U. S. exports are estimated to have been
$2.9 billion higher in DISC year 1976 than they
would have been without the DISC program. The
$2.9 billion estimate is based on comparisons of
the growth rates of DISC vs. non-DISC exports in
individual product classes since the DISC program
was enacted in 1971. The $2.9 billion estimate
has not been adjusted to take account of either
flexible exchange rates, or the possible displacement of non-DISC exports by DISC exports, both of
which tend to diminish the impact of DISC.
— The total pre-tax profit margin on DISC exports of
manufactured goods was 14.0 percent of gross sales,
more than twice as large as the comparable profit
margin on sales to the domestic market.
— The ten largest beneficiaries of the DISC program
realized 22 percent of the total tax saving.
This year's DISC report provides additional evidence that
the DISC provision has been cost-ineffective in stimulating
exports. The President recommended in January 1978 that this
wasteful tax subsidy be repealed over a three-year period,
beginning in 1979.
Copies of the fifth DISC Annual Report are available for
purchase from the Superintendent of Documents, U. S. Government
Printing Office, Washington, D. C , 20401. When ordering, use
Stock No. 048-000-00311-7.
B-834
fartmentoftheJREASURY
$HINGT0N,D.C. 20220
TELEPHONE 566-2041
u
tos ii ^o
Contact: " Robert 'EF^ifiipp
202/566-5328
FOR IMMEDIATE RELEASE, APRIL 13, 19 78
FINDINGS OF THE DEPARTMENT OF THE TREASURY
WITH REGARD TO THE COVERAGE OF WIRE ROD, WIRE AND
WIRE PRODUCTS UNDER THE TRIGGER PRICE MECHANISM.
The Treasury Department today released its Findings on the
coverage of steel wire rod, wire and wire products under its
"Trigger Price Mechanism" for imported steel mill products.
The Findings, together with the record of a hearing held on
March 28 will be filed today with the U.S. District Court
for the District of Columbia, in connection with the lawsuit
filed by Davis Walker Corp. challenging the trigger price
mechanism as applied to wire rod. The Findings address the
issues considered in the hearing and respond to the Court
order that the Treasury consider the effects on domestic
producers of wire and wire products of including wire rod
under the trigger price mechanism without simultaneously
including wire and wire products.
The major findings of the Treasury Department are:
— that the characterization of wire rod as a "semifinished" product does not distinguish it from other
products covered by the trigger price mechanism.
The only relevant consideration is determining whether
it is a "steel mill product" and there appears to be
no doubt of its status as such.
— that a portion of the total domestic demand for wire
rod may not now be met by the domestic industry. But
that fact does not alleviate the need to deal with
unfairly priced imports of that product through the
trigger price mechanism.
-- that the current trigger price on wire rod is based
on the best evidence of the costs of production of the
Japnese industry producing that product for export.
Until evidence is found to justify a change in that
price, it should be continued in effect.
B-835
-2—
that trigger prices should be — and will be —
issued on those wire and wire products considered
to be "steel mill products" and imported in
significant quantities. Trigger prices will be
issued next week on wire, wire nails and barbed
wire, thereby covering 75% by value of the imports
of wire and wire products within the 32 AISI
categories of "steel mill products."
— that the temporary absence of trigger prices on
these products does not appear to have resulted
in an increase in sales of wire products at unfairly low prices.
— that the trigger price mechanism has not set a
minimum import price for wire rod. Those exporters
which can sell below trigger prices but at fair
value appear to be doing so. The fact that many
exporters have raised their prices to the trigger
prices or above is the result of a voluntary decision
not to risk the assessment of dumping duties on their
products.
— that the trigger price mechanism should not be
expanded at this time beyond steel mill products
because of the need to focus the Department's
resources on the critical problems of the basic
steel mill industry identified by the Interagency
Task Force that recommended the trigger price
mechanism.
FINDINGS OF THE DEPARTMENT OF THE TREASURY
WITH REGARD TO THE COVERAGE OF WIRE ROD, WIRE AND
WIRE PRODUCTS UNDER THE TRIGGER PRICE MECHANISM.
Pursuant to the notice published in the Federal Register
on March 10, 1978 (43 F.R. 9912), public comment was
requested and a hearing was held to consider a series of
allegations made by the independent producers of wire rod,
and contested by others, in connection with the operation
and effect of the Treasury Department's "trigger price
mechanism" (TPM). These allegations were set out in the Federal
Register Notice and may be summarized as follows:
1. It is inappropriate to include wire rod under the
trigger price mechanism because
(a) wire rod is a semi-finished product; and
(b) there is a domestic shortage of wire rod.
2. The trigger prices for wire rod are too high in
relation to the costs of producing that product by
the most efficient foreign steel industry.
3. It is inappropriate to apply the trigger price
mechanism to rod as long as it is not being applied to
wire and wire products.
A hearing was conducted on March 28, 1978, before the
General Counsel and the Deputy Assistant Secretary of the
Treasury, at which oral statements were presented by 21
witnesses. Through March 29, 1978 - the date specified in
the Notice - 28 written presentations were submitted and
-2more than 200 separate letters were received.
These
comments were read and, together with other information
available to the Treasury, formed the basis for the
findings set.forth below.
On March 24, 1978, the United States District Court
for the District of Columbia, in the case of Davis Walker
Corp. v. Blumenthal, ordered the Secretary of the Treasury
to "consider the effects on the domestic producers of steel
wire and wire products of the decision to include steel wire
rod in the 'trigger price system' without simultaneously
including steel wire and wire products and make findings
with respect thereto...."
These findings address the issues raised in the Federal
Register Notice of March 10, as well as those addressed to
the Treasury Department in the Order of the District Court.
I. Background
On December 6, 1977, the President approved a Report
prepared by an Interagency Task Force under the chairmanship
of Under Secretary of the Treasury Anthony M. Solomon,
entitled "A Comprehensive Program for the Steel Industry."
The Report reflected the Task Force's study of the problems
of the Nation's basic steel industry and recommended a
series of steps to be taken by the Government.
The Task
Force had found that the production of steel mill products
-3constitutes a "basic industry" of the United States;
employment problems in that industry were extensive; the
maintenance of a viable steel mill industry was essential
to the country's security and economic interests; overexpansion of production facilities and a reduction in
demand throughout the world had created a "steel glut";
substantial sections of the basic steel industry had obsolete
facilities; uncertainty existed with respect to a number
of applicable U.S. government programs, from transportation
to environmental protection; and the basic steel industry was
responding to the significant increases of low priced
imported steel mill products with unprecedented numbers
of complaints under the Antidumping Act.
With respect to the latter finding, the Task Force
recommended that
"the Department of the Treasury, in administering the
Antidumping Act, set up a system of trigger prices,
based on the full costs of production ... of [Japanese]
steel mill products ... which would be used as a basis
for monitoring imports of steel into the United States
and for initiating accelerated antidumping investigations
with respect to imports priced below the trigger prices."
Report at 13.
In essence, this recommendation contemplated a more effective
organization of the Treasury's resources to identify imports
of steel mill products at prices that appeared.to warrant
-4investigation under the Antidumping Act and to expedite
action under the Act.
However, it was clear from this
beginning of the "trigger price mechanism" that the program
was solely a method for identifying shipments of steel and
invoking the existing procedures of the law, by specially
organizing the resources of the Treasury Department to be
devoted to this problem.
At the outset, the Task Force
noted that its proposal
"does not detract from any of the legal rights that
foreign producers or the domestic industry presently
enjoy under the Act."
Report at 14.
Concurrently, the Task Force stressed its focus of concern
was with the basic steel mill industry of the country.
Accordingly, it suggested that
"only steel mill products as conventionally defined in
the United States be included in the system."
Report
at 15.
Following the President's approval of the Report's
recommendation, the Treasury moved to implement the "trigger
price mechanism."
At its request, the Council on Wage and
Price Stability collected information concerning Japanese
costs of producing the principal classes of "steel
mill products" as defined by the American Iron and Steel
Institute.
On January 3, 1978, the first group of base
prices of products, stated to represent about 75% by value
of the steel mill products imported during the preceding
year were announced.
43 F.R. 1464 (1978).
On February 3,
-51978 the "extras" for such products were announced.
4703 (1978).
43 F.R.
Thereafter additional trigger prices were cal-
culated and published.
Prices for pipe and tube products
were published on March 27, 1978, 43 F.R. 12783 (1978).
Treasury
has been working on the preparation of trigger prices for
those remaining classes of "steel mill products", as defined
by the AISI, which are imported in significant quantities.
Before trigger prices for wire and wire products could
be computed, independent producers of such merchandise (i.e.,
companies that purchase rather than manufacture steel wire
rod to make wire and wire products) objected, among other
things, to the existence of trigger prices for rod while
no such prices existed for wire and wire products.
Based
on those objections, the Treasury announced its hearing
and specific invitation for comments.
The lawsuit seeking
an injunction against the implementation of the trigger
price mechanism with respect to rod was then initiated,
based on essentially similar arguments.
II. The Issues
Pursuant to the Notice of March 10 and the Order of the
District Court, the following issues have been considered
and the following findings reached:
1(a)
Is it inappropriate to include wire rod under the
trigger price mechanism because wire rod is a "semi-finished"
product?
-6The contention that wire rod is a semi-finished product
is based generally upon the claims that:
- there is no practical use for wire rod other than
as*the "raw" material used in the production of
wire and wire products, and
- wire rod is referred to as "semi-finished" by a
number of groups which classify steel mill products
for various purposes (e.g. the American Iron and
Steel Institute (AISI), and the Interstate Commerce
Commission).
Characterization of wire rod as a semi-finished steel
mill product is intended to convey the fact that wire rod
emerges at a relatively early stage in the steel mill production process and generally requires further processing
in a steel mill before it is used as a component of, or as, a
complete consumer item.
Other products which are included
in the TPM and are characterized by the groups listed above
as "semi-finished" include ingots, blooms, billets, and
skelp.
For the purpose of the TPM, there is no reason to
attach particular significance to the description of wire
rod as "semi-finished."
In fact, wire rod is produced by
processing steel billets, themselves considered a "semifinished" product.
Moreover, wire rod is not distinguishable
from other steel mill products by the fact that additional
processing in a steel mill is usually necessary before it
can be "consumed."
Other products requiring substantial
-7processing include hot rolled bars (also produced from
billets) which are used as the "raw material" for coldfinished bars, and hot rolled sheets which are used as
the "raw material" for pipe and tubing. Trigger prices on
hot rolled bars and hot rolled sheets have been issued.
The important feature of wire rod for purposes of the
trigger price mechanism is that it is a "steel mill product."
It has been so characterized by the industry for a
variety of reasons for at least thirty years because it is
a product, independently traded in commerce, and made and
sold by the "steel mills" that constitute the Nation's basic
steel mill industry. The basic steel mill industry was
identified by the Interagency Task Force as requiring relief
and for which the trigger price mechanism was recommended.
The products made by that industry are, therefore, the ones
for which the Treasury has adopted "trigger prices."
The fact that a particular "steel mill product" emerges
at one stage or another in the steel mill production process
is not relevant in view of the fact that the product is
nevertheless sold in that form in the world market as a
separate item of commerce. As such, it is susceptible to
possible dumping. In fact, wire rod is the subject of two
antidumping complaints now pending before the Treasury.
That further processing of such a product is possible, either
in a steel mill before it is sold for consumption outside
the steel industry or by a separate wire drawer, has no relevance
to the purposes of the TPM. Virtually all the steel mill
-8-
products covered by the trigger price mechanism require
further fabrication before they can serve their ultimate
purpose.
For many of these products this processing occurs
in steel mills, as "steel mill products" include such finished
items as railroad wheels and barbed wire.
The question of the coverage of semi-finished products
under the trigger price mechanism affects many of the 32
categories of "steel mill products" so characterized by the
AISI.
For example, cold rolled sheets are sometimes imported
in a semi-finished form as cold rolled bands for galvanizing.
Such products lack the side trimming, end trimming, and
annealing processes that are normally applied to finished
cold rolled sheets.
Such products are not excluded from
the trigger price mechanism due to their "semi-finished"
character.
Many such imports are covered by trigger prices
through the use of negative extras, that is, deductions from
the base price to account for the reduced cost of the steel
without all of the normal processing.
Trigger Price Handbook" at p. 26-8.)
(See e.g., "Steel
However, it would
not be feasible to publish an extra for every conceivable
product that might emerge at one stage or another in the
steel making process.
Provision is made to cover such products
by permitting Customs agents to make allowance in the form
-9of a deduction from the trigger price but not present
in the particular imported product.*
The point was properly made by the wire drawers that
trigger prices have not been issued for the other products
called "semi-finished" by the AISI, such as ingots, blooms,
castings, billets, slabs, and skelp. But that, too, is not
a basis for eliminating trigger prices on rod.
First, although trigger prices have not yet been
issued on these other semi-finished products, they are
covered by the "trigger price mechanism." As steel mill
products, a Special Summary Steel Invoice (SSSI) must
be presented with every import entry of such products.
Trigger prices have not yet been issued for these products
because to date they have represented a low volume of steel
imports. No significant evidence has been presented that
steel in this form is being imported at unfairly low prices
*See Question A. 7. in the Questions and Answers
released on February 10, 1978.
A. 7. Q. Under the trigger price mechanism, what
treatment will be given to "seconds", i.e.,
overrolled, secondary or under processed
material?
A. "Seconds", when priced below applicable
trigger prices, will be reviewed as will
all other shipments. If it is established
that merchandise invoiced as "seconds" is
actually an incomplete or off-spec product,
allowance will be made. The fact that
merchandise is a "second" does NOT except
it from the trigger price mechanism. The
SSSI invoice should reflect the quality in
Item 15 "Description of Goods (Include
Specifications)" . (Emphasis added . )
-10so as to affect domestic producers adversely.
This situation
is being kept under review and trigger prices for these
products will be issued when information developed through
the review of SSSI's indicates it is appropriate to.do so.
In view of these facts, it is determined that the
characterization of wire rod as a semi-finished product does
not distinguish it from other products covered by the trigger
price mechanism. The only relevant consideration is determining whether it is a steel mill product and there appears
to be no doubt of its status as such.
l«b. Is it inappropriate to include wire rod under
the trigger price mechanism because there is a
domestic shortage of that product?
Independent producers of wire and wire products contend
that there is insufficient domestic capacity in the production
of wire rod to meet domestic demand. From that fact, they
argue that the inclusion of wire rod under the trigger price
mechanism is inconsistent with the objectives intended to
be served by the Antidumping Act.
The domestic capacity to produce wire rod was the subject
of widely divergent testimony at the hearing conducted on
March 28. Some evidence was produced to support the claim
that there exists a current shortfall of 1.2 million tons
per year. This claim was contested by domestic producers
of wire rod who produced evidence that the entire domestic
demand could be met if domestic mills were able to price
-11their products so as to recover an acceptable profit.
A
representative of the AISI was clear there is "no lack of
capacity."
One producer indicated its ability and willingness
to take orders for April delivery.
There does not appear to be any reliable estimate of
current domestic capacity to produce wire rod.
Domestic
capacity is largely a function of the allocation of productive
resources.
Decisions on such allocations turn on relative
cost and profit projections for particular product lines and
the rapidity with which integrated producers, which produce
the greatest portion of domestic wire rod, shift production
to this product.
There appear to be a number of options
available for steel mill facilities and a shift to wire is
not necessarily economically sensible nor practical.
Among
problems identified by such a shift are those of marketing
and distributing wire rods compared to wire and wire products.
Different customers buy rods, different methods of shipment
are used.
It is not the type of shift that is guickly ac-
commplished.
It is a fact that imports have supplied a significant
share of U.S. consumption in recent years.
But that fact may be the result of low priced imports
that have deterred the establishment of adequate domestic
supply facilities.
The Antidumping Act is intended not only
to protect against injury to an existing industry but also
to counteract unfairly priced imports that may prevent
-12the establishment of an industry in this country.
From
the evidence presented it appears that the primary
determinant of domestic productive capacity is the price
at which the end product can be sold. Domestic producers
s
of wire rod allege that the presence of unfairly priced
imported wire rod has seriously undermined the profitability
of producing that product, thereby discouraging any expansion
of productive capacity. Others have provided evidence
that the same unfairly priced foreign rod has caused the
actual shut-down of domestic wire rod production facilities.
The Antidumping Act is properly aimed at unfairly priced
imports that actually injure, threaten to injure or prevent
the establishment of a domestic industry. If a shortfall
in capacity now exists, it may be the result of substantial
sales of imports at "less than fair value." Low present
capacity cannot be regarded as a basis for encouraging further
imports at such price levels.
From the evidence that has been introduced it is fair
to conclude that total demand for wire rod is not now met
by domestic supply. However, the causes of that situation
are less clear. The Interagency Task Force recommended
measures to stimulate the demand for products of the U.S.
basic steel mill industry. One important stimulus was to
be the expedited application of the Antidumping Act to steel
mill products imported at less than fair value. Under these
circumstances, possible present shortfalls in U.S. supply
-13cannot be considered a proper basis for failing to apply
the TPM to imports of wire rod.
2. Is the trigger price for wire rod too high in
relation to the cost of producing that product by
the most efficient foreign steel industry?
The trigger price mechanism is based on the concept
that the "fair value" of imported products is unlikely
to be lower than their costs of production by the world's
most efficient industry. This concept reflects, in part, the
position of the Antidumping Act that sales over an extended
period of time below the cost of production are below
"fair value." The Japanese steel industry, taken as a whole,
has been regarded by a variety of sources as the most efficient
at this time, and its costs of producing steel mill products
the lowest, although a particular producer in any country
may, of course, have lower costs with respect to a particular
product.
The trigger prices published with respect to wire rod
have been calculated by the Treasury and its advisers
at the Council on Wage and Price Stability from data furnished
by the Japanese Ministry of International Trade and Industry
as obtained by that agency from the six largest steel companies
in Japan operating integrated steel mills. Integrated mills
are those producing a broad spectrum of steel products,
from the starting materials for making raw steel through
-14a variety of semi-finished to finished products.
These companies
account for most Japanese exports of "steel mill products,"
including wire rod. Indeed, no information has been received
that any smaller, more specialized Japanese companies, in
particular so-called "mini-mills," using different production
techniques and relying heavily on scrap as a raw material,
account for any appreciable exports to this country or elsewhere.
Wire producers who have contended that they have been unable
to purchase wire rod from Japanese sources at prices that
prevailed prior to the implementation of the TPM have cited
as an example of price revisions only those adopted by one
of the integrated companies, Nippon Steel Co., whose costs
are presumably most like those on which the trigger prices
were calculated.
The wire producer's principal arguments concerning the
level of the trigger price for rods were based on contentions
that:
- the world market price for rod is below the level of
the trigger prices;
- the production costs of domestic producers in the U.S.
are even lower than the trigger prices; and
- the production costs of foreign mini-mills are below
the trigger price.
The first two contentions are not relevant to the Antidumping
Act's price comparisons and, therefore, not to the TPM.
-15The last contention is unproven.
The prices of wire rod in the world market cannot serve
as an appropriate guide to identify sales at "less than fair
value" under the U.S. Antidumping Act. The depressed
worldwide demand for steel has driven down prices for all
steel mill products. The domestic steel industry has compiled
a substantial amount of evidence, included in 23 separate
anti-dumping complaints (two of them with respect to wire rod)
to demonstrate that these conditions have had the effect
of causing many steel producers to sell their products in
the world market at prices below cost.
The Antidumping Act is designed to protect U.S. industry
from such below cost sales. To use the world market price as
the trigger price would, therefore, defeat, rather than aid,
the application of the Antidumping Act.
Prices and costs of domestic producers or sellers
are also not relevant in establishing the "fair value" of
merchandise. The Antidumping Act is not designed to keep
out foreign products that may be sold at prices below those
offered by domestic producers. It is aimed only at products
sold at "less than fair value." That "fair value" is based
on the foreign market value or the costs of production of
exporters to this country. Therefore, U.S. prices or costs
cannot be used to establish standards for invoking the Act.
-16On the other hand, the allegation that the trigger
price may be above the costs of production of certain more
efficient foreign producers may be a relevant consideration.
However, it is important to recognize, first, that the
production costs of different foreign steel producers are
likely to vary over a wide range, not only depending upon
such national factors as domestic wage rates, raw material,
transportation and energy costs, but also upon individual company
efficiencies due to product mix, historic age of facilities,
differing management techniques and the like.
By choosing
the average costs of production of the integrated mills of
Japan, considered to be the world's most efficient steel mills,
the Treasury Department could be reasonably assured that for
most producers their costs of production, and thereby "fair
value," would be at or above the level established by the
trigger price.
Thus, the Treasury Department believes it was
justified in devoting its resources to scrutinizing sales
of imports below trigger prices so established to determine
whether to self-initiate antidumping investigations.
This is the background against which to view the claim
that the trigger prices for wire rod are too high.
In fact,
other than the data submitted to Treasury through MITI and
analyzed for Treasury by COWPS, very little evidence of the
actual costs of production of any foreign steel mills in Japan
or elsewhere, has been presented.
The principal claim of domestic
buyers of imported rod that the Department erred is based on
the fact its trigger prices were computed from
the production
-17costs of the six large Japanese integrated mills. It is argued
that a more appropriate measure would be the so-called mini-mills,
which are said to have certain efficiencies due primarily to
their relatively greater reliance on the use of scrap as a raw
material.
However, even if this were proven, it does not appear
to be a justification for changing, much less suspending,
the trigger prices on wire rod. First, the Japanese mini-mills
referred to are not currently producing for export. Therefore,
their sales have not been a factor affecting the U.S. industry.
Trigger prices should be fixed to relate to the import trade.
Second, the key variable in the alleged cost efficiency of minimills is the price of scrap. But the price of scrap appears
to fluctuate dramatically over short periods of time. To gear
the trigger price of wire rod to such a variable factor would
make it extremely difficult to administer the TPM in a sensible
manner. Finally, if any foreign producer feels it can sell
wire rod below trigger prices but at or above "fair value,"
it can do so — and some appear to be doing so. Deficiencies
in the computation of the trigger price from the sources that
were selected are, in any event, susceptible of correction.
Evidence was also presented.by an American wire producer
that the costs of,producing wire rod by a certain domestic
U.S. "mini-mill" were, in 1977, substantially below the trigger
base price of $240 per net ton; accordingly, it argued that
the costs must be less for the Japanese industry. Reference
was made to the 1977 Annual Report of Ameron, Inc., a producer
-18of steel billets in California, to show that the reported costs
for producing 133,000 tons of billets (from which wire rod is
made) were $18,100,000, resulting in a per ton cost of $136.09.
Further, based on some figures asserted to be derived from
the experience of U.S. Steel, the cost of converting billets
to rods was estimated to be $53.02, which with capital
charges resulted in a cost of rod of $i94.44. In subsequent
communications with the Treasury, initiated entirely by Ameron,
Mr. G.A. Hanke, Jr., the President of the company stated that
the cost information supplied at the hearing was "erroneous."
Specifically, he asserted that (1) the cost figures failed to
reflect start-up costs, which had been capitalized, but which,
if properly accounted for, would have added additional costs
of $33.33 per ton; (2) the cost figures for 1977 reflected an
unusually low scrap price of $44.00 per ton, which has increased
to $63 per net ton as of March 1978 and will increase in April
to $68; and (3) the reported costs reflect per ton cost savings
of $4' to $5 of producing billets for both reinforcing bars and
wire rod, the former being a lower quality and of lower cost.
Taking these considerations into account, Ameron believes its
cost of producing low carbon billets for rod alone was actually
about $175 per ton. On this basis, Mr. Hanke reported that
Ameron's price for wire rod of $230 per ton in June 1977 was
approximately equal to its costs at the division level, but
below total costs when corporate level charges (e.g., general
overhead, debt) are added. He had no doubt that the $240 per
-19net ton in 1977, used as the base trigger price for commercial
quality wire rod, was a low figure.
Accordingly, it is determined that the current trigger
price on wire rod is based on the best available evidence of
the costs of production for the Japanese industry producing
wire rod for export. Until evidence is found to justify a
change in that price, it should be continued in effect.
3. It is inappropriate to include wire rod under the
trigger price mechanism as long as trigger prices
have not been issued on wire and wire products.
This issue was the basis of the greatest comment at the
hearing. Those who presented views were almost unanimous in
urging the retention of trigger prices on rod if the Treasury
Department also published such prices with respect to wire
and wire products. It was the absence of trigger prices on
the latter class of products about which the most complaints
were received. The Treasury had not been unaware of the grounds
for these complaints nor insensitive to taking steps to overcome the problems that may have been created by the adoption
of trigger prices for rod without a simultaneous publication
of such prices for wire products. However, the preparation
of trigger prices for literally hundreds of products in
thousands of differing specifications has been a time consuming
and laborious task. Initial efforts were directed at adopting
base prices for the products imported in the largest quantities. Seventeen base trigger prices (including the four grades
of wire rod), covering 75% by value of all imported steel, were
-20announced first. The prices for so-called extras for these
products were prepared and published within a month, and
constitute a 68 page book. Prices for pipe and tube
products were next; prices for wire and wire products
are to follow and certain classes of such products will
be included in trigger prices to be published within the
next week [see attached chart]. While it would have been
desirable to publish all trigger prices for all products
at the same time, it was decided to publish the prices
that were calculated when those computations were completed.
This procedure was intended to provide the promptest
guidance and the promptest possible relief to the basic steel
industry.
Even before the adoption of the TPM, the Treasury had
received and was processing two complaints under the Antidumping Act with respect to wire rod from France and the
United Kingdom. In light of this fact, Treasury concluded
it should not defer the publication of trigger prices with
respect to a product as to which the U.S. industry had shown
at least a prima facie case of some injury caused by substantial s.ales below "fair value". To the extent that the
independent wire producers contend that they are now unable
to purchase this product at the prices that prevailed prior
to the adoption of the TPM, their complaint cannot properly
be directed at the Treasury Department: it is a complaint
that must be addressed to their foreign suppliers. These
companies may, however, properly decide not to continue
-21to offer their product at prices that may be below "fair
value" — even though such offers and sales may have been
made in the past.
Unable to continue purchasing'rod at previously low prices,
the independent wire drawers have contended they are caught
in a "squeeze." They say they are required to purchase
higher-cost starting material, but face competition in the
sale of wire products, the prices of which are uninhibited
by "triggers." Further, to the extent foreign makers of wire
products can purchase lower-priced rod abroad, they can
produce and sell wire products in their home markets and sell
in this country at a "fair value" that may be lower than profitable sales prices the domestic wire producers could offer.
Finally, they observed that the domestic integrated mills had
increased their wire rod prices to a greater extent than
their wire prices, thereby exacerbating the "squeeze."
To the extent that the mere absence of trigger prices on
wire products to be included in the TPM has contributed to the
"squeeze" of which the wire drawers complain, Treasury expects
that the early publication of such prices will help to alleviate the problem.*
*As is discussed in greater detail below, however, the
Treasury does not presently intend to develop trigger prices
for all products made from wire rod. At least for the moment,
it will adhere to the mandate established by the Interagency
Task force that recommended the TPM: to develop trigger
prices for "steel mill products." Those items that are made
from wire rod but have not been classified as "steel mill
products" by the industry will not now be placed under the TPM
-22With respect to those wire and wire products which are
considered "steel mill products" trigger prices will be
announced next week covering a majority of the imports of the
wire and wire products included within the 32 categories of "steel
mill products."
A complete breakdown of these items and their
import volumes is provided in the attached chart.
Once these
trigger prices are issued, the major concerns of domestic
integrated and independent steel wire producers should be met
as far as the coverage of steel mill products under the trigger
price mechanism is concerned.
To the extent that foreign competitors of domestic independent wire drawers are able to make or obtain in bonafide
arm's length transactions wire rod at prices below those at
which rod is now available for purchase in the U.S. market,
the present Antidumping Act does not provide relief.
It does
not prevent a foreign producer of merchandise such as barbed
wire from acquiring rod at low prices and fabricating that
rod into wire that is sold at correspondingly low prices in
both its home and export markets.
In that situation, the
producer is using savings in one factor of production no less
proper than savings it may achieve in labor costs or energy
expenses.
The Antidumping Act is not aimed at preventing foreign
producers from relying on savings in their production costs;
it only seeks to prevent price discrimination in the sale of
merchandise.
If the law is to "reach back" to determinations
of whether those factors of production are, in turn, "fairly"
-23priced, Congress must amend the statute. The TPM cannot be
use to do so.
To the extent that foreign producers of rod may now
turn to the production of wire and wire products, only
speculation about future possibilities was adduced. At the
hearing, evidence was presented which indicates that a shift
of production into wire and wire products would take time,
particularly in view of the different marketing and distribution networks needed to sell wire and wire products. Thus,
it is highly unlikely that foreign sellers will undertake to
shift productive resources into the production of wire and
wire products to take advantage of the temporary absence of
trigger prices on such products, particularly when they know
that trigger prices will shortly be adopted with respect to
those products.
To the extent that the independent producers of wire
products face competition from foreign and domestic rod
suppliers who also use some of their rod to make wire
products — and, thus, compete with their own customers —
that problem is also beyond the reach of the Antidumping
Act. No provision of that law prevents a supplier of a
product, such as rod, from setting high sales prices for
that product, even though it also sells articles it makes
therefrom, such as wire products, at relatively low prices
to the disadvantage of its rod customers. To the extent
such competition comes from domestic firms, the Antidumping
-24Act cannot be applied at all; to the extent it comes from
foreign companies, only to the extent that the wire product
prices are below their own "fair value" can the Act apply.
But in that setting, the foreign wire maker's sales prices
for rods are not relevant.
In sum, none of the arguments of the independent wire
drawers appears to amount to more than a claim that if they
are forced to compete in sales with low priced products,
they should be able to obtain raw materials at low prices —
even if below "fair value." The Antidumping Act provides
for no such exception and, correspondingly, neither could —
nor should — the TPM. The TPM identifies steel mill products
imported at prices that may well be below "fair value." It
does no more. Its effect may have been to reduce the
availability of less than "fair value" rod — as it, and the
law on which it is based, intended.
The fact that the trigger price mechanism is not designed
to cover all the wire and wire products which the independent
wire producers make raises a different problem. This objection
calls into question the decision of the Interagency Task Force
to focus the attention of the Department on the problems of
the basic steel mill industry. Treasury believes the problem
identified by the Task Force was the most serious, requiring
immediate and extraordinary attention and that it was, therefore,
reasonable for the TPM to cover only the 32 types of products
classified as "steel mill products" by the American Iron and Stee
Institute.
-25The classification of certain steel products as "steel mill
products" as employed by the American Iron and Steel Institute, constitutes a complete and well-recognized set of product
definitions which are understood by foreign and domestic
steel producers. The actual product categories and the
delimitation of "steel mill products" were initially established
by the Steel Division of the Business Defense Services Administration (BDSA) of the U.S. Department of Commerce in 1948.
Since 1948, that basic format has continued with some product
categories added as more information became available. In
some cases, product categories were dropped following their
discontinuance as a useful classification, such as when the
Tariff Schedules of the United States became effective in 1963
and telephone and telegraph wire was deleted as a separate item.
There does not appear to be any issue with respect to the
use of the American Iron and Steel Institute categories of
"steel mill products." What is at issue is whether it is appropriate to expand the list of steel products covered by the
trigger price mechanism beyond those recognized as "steel mill
products." Views as to how many different product categories
should be covered vary. The Independent Wire Producers
Association identified an additional six categories of products.
However, this modest figure belies the complexity of any undertaking to cover all the products included in these categories.
The Specialty Wire Association in its request that all wire
-26products be covered by trigger prices identified over 100
individual wire products for which trigger prices would have
to be issued.* To attempt to determine appropriate trigger
prices and to monitor all of the imports of these wire
products would add to the already burdensome task of Treasury
in administering the TPM in the areas which the Interagency
Task Force identified as most urgently needing relief.
If the point made by the independent wire producers were
to be accepted, a further problem is posed: Any fabricator
of products produced from steel would be in a position to
argue that trigger prices must be issued on the product he
makes before trigger prices can be applied to his "raw material/'
Thus, producers of everything from paper clips to automobiles
could insist that their product lines be covered before trigger
prices are applied to the steel mill products they buy.
Treasury could not administer such an expanded trigger
price mechanism with its present resources. Indeed, as the
representatives of the AISI suggested, the system would
then collapse of its own weight.
*If the Bureau of the Census list of wire and wire products
is used, trigger prices would have to be developed on
everything from paper clips to coat hangers. See attached
Table 6A-1. The Bureau of the Census data also supports
the conclusion that the choice of the 32 categories of
steel mill products as defined by the AISI was a reasonable
delimitation of the products produced by basic steel mills
since generally the largest portion (by value) of such
products are produced by establishments defined as basic
steel mills, while the largest portions of wire and wire
products not considered steel mill products by AISI are
produced by establishments that are not considered basic
steel mills.
-27But there are also added reasons for declining to expand
the list of covered products beyond the AISI categories now
included: It is not at all clear that foreign fabricators
of steel products are actually selling their products in
their home markets or in the United States at prices below
the costs of production for the most efficient foreign
producers of those products. It is important to recognize that
the conditions which have led to the depressed market prices
for basic steel mill products are not necessarily present in
the fabricated steel industry. It remains to be established
that any such products are actually entering, or have entered,
the United States at prices below theii costs of the production
by the most efficient foreign fabricating industry to the
injury of the domestic competitors of the fabricators. In 1977,
only four antidumping complaints (affecting only three separate
products) were initiated with respect to wire products outside
of the 32 categories of steel mill products, but none has
reached the stage at which findings have been made that the
foreign sellers were selling at less than "fair value" or
below their costs. Thus, the substantial effort of developing
trigger prices for these products might be unneeded.
Of course such goods may be found to have been dumped.
That raises a second consideration: Producers of fabricated
products as those who make wire rope or strand, may file
cases under the Antidumping Act against imports of such
products. When sufficient evidence is presented, the Secretary
-28of the Treasury is required to initiate an antidumping
proceeding. Thus, domestic steel fabricators are in a position
to achieve virtually the same results that would follow
from the trigger price mechanism.
In' sum, the question fairly put is: "If the Treasury
devotes substantial resources to intensified monitoring
of certain imports, must it extend that monitoring effort
to all related products?" The answer seems clearly to be,
"no." The AISI categories chosen reasonably deal with the
basic steel industry problem on which the Interagency Task
Force and the President focused. Special, expedited action
involves the considerable expenditure of resources.
At the moment, the coverage of the TPM provides intensive
monitoring and rapid self-initiations into possible violations
of the Antidumping Act with respect to the identified need.
To add additional hundreds of products would impose a
massive strain that has not been justified to date. Thus,
it has been determined that at this time trigger prices
for products outside the 32 AISI categories need not be
established.
4. What are the effects on the domestic producers
of steel wire and wire products of the decision to
include s.teel wire rod in the "trigger price system"
without simultaneously including wire and wire
products?
-29The independent producers of wire and wire products
have made a number of allegations as to the effect of
the trigger price mechanism, some of them directed to
the fact that wire rod is covered by a trigger price and
some of them to the fact that there are no trigger prices
on wire and wire products. The Treasury Department has
attempted to identify each of the major effects claimed
and has reached the following findings.
CLAIMED
EFFECT:
The trigger price mechanism has had the
effect of increasing the price of imported
wire rod to the level of the trigger price.
FINDING: Some foreign producers of wire rod appear to
have increased the price of the wire rod they export to
the United States to the level of the trigger prices and
others have not. No evidence has been presented to substantiate the claim that any foreign producers in a position
to sell below the trigger price but at fair value under
the Antidumping Act have been precluded from doing so by
the trigger price mechanism. In fact, the President of
one of the largest importers of steel products, Kurt
Orban, testified that those foreign companies which can
sell at fair value' below the trigger price are doing so.
(See Transcript at p. 164). This fact is further
substantiated by the reports from the Customs Service
to the effect that a substantial volume of wire rod is
entering into the United States at prices below the trigger
prices.
-30The Treasury Department's trigger price mechanism
has not established a minimum import price for wire rod.
However, since trigger prices have been set at the level
of the cost of production for the most efficient foreign
steell industry, it is understandable that most foreign
producers have raised their prices to the trigger price
level to avoid an antidumping investigation which could
result in antidumping duties equal to or greater than
the difference between their export prices and the trigger
prices. This voluntary decision on the part of foreign
producers to comply with the Antidumping Act is reasonable and entirely in line with the objectives of that
Act.
CLAIMED
EFFECT:
The trigger price mechanism has had the effect
of raising the domestic price of wire rod to
the level of the trigger price.
FINDING: The price of domestic wire rod appears to have
increased since the trigger price mechanism went into
effect on February 21, 1978. However, it does not appear
that such price increases have been caused primarily by
the trigger price mechanism. The price increases by the
major U.S. steel producers which went into effect in March
were planned before the trigger prices for wire rod were
issued. These price increases have been claimed to be rela
to increases in costs, such as those the steel industry
contends will also follow the settlement of the recent coal
miners1 strike.
-31To some extent the trigger price mechanism may
have helped the domestic steel mills to raise their
prices by deterring foreign producers from selling their
products at unfairly low prices. Again this effect
is clearly mandated by the Antidumping Act and is the
result of the voluntary decisions of foreign producers
to comply with the provisions of that Act.
CLAIMED
EFFECT:
The coverage of wire rod by the trigger price
mechanism has resulted in or contributed to
a domestic shortage of wire rod.
FINDING: No absolute shortage of wire rod appears to exist.
What may exist is a shortage of rod at prices below "trigger
prices." The extent of domestic capacity to produce wire
rod and offer it for sale to independent wire drawers
is a function of the allocation of productive resources
which, in turn, is determined by projected returns on investment. In view of the domestic industry's decisions
there may be a present — and even a continuing — need to
import a certain percentage of the domestic supply of wire
rod. But that fact does not alleviate the need to deal
with unfairly priced imports. To permit unfairly low priced
imports to be sold in the United States would only further
weaken the existing domestic capacity to produce that product
to the long term detriment of producers and consumers alike.
-32In sum, wire rod is not unavailable.
At least one
domestic producer who testified at the hearing offered wire
rod for delivery in April. Other producers indicated that
they had excess capacity available to produce wire rod.
CLAIMED
EFFECT:
The trigger price mechanism has placed
independent wire and wire products producers
in a "squeeze" by raising the price of their
raw material without raising the prices of
their finished products.
FINDING: The delay in announcing trigger prices for wire
and wire products included in the AISI categories of
"steel mill products" may have encouraged some foreign
sellers of wire and wire products to continue sales at
less than fair value and deterred integrated, domestic
producers of such products from increasing their prices.
However, as the Treasury has consistently indicated it
would adopt trigger prices for such products, and, in
fact, will announce some as early as next week, no evidence
has been adduced that sales of such products at low prices
have accelerated.
There was no evidence foreign rod
makers could or would shift to wire production and sale
in the interim since different equipment is used to
make wire and different marketing practices are used
to sell wire.
-33To the extent the sgueeze is caused by the ability
of foreign makers of wire to obtain inexpensive rod from
unrelated sources and to sell wire products in the U.S.
at low prices that are nevertheless not below the "fair
value" of the wire products, the present Antidumping Act
provides no remedy. Accordingly, the TPM cannot be
applied to overcome this problem for domestic wire makers.
To the extent the squeeze is caused by the dual
distribution practices of both foreign and domestic
makers and sellers of both rod and wire (who sell rod
at comparatively high prices and wire at low prices),
again the Antidumping Act provides no remedy.
To the extent the "squeeze" is caused by the limited
coverage of the TPM to the AISI group of "steel mill products"
and, thus, does not include all wire and wire products made
or sold in the United States, the scope of coverage has
been limited to that proposed by the Interagency Task Force
as approved by the President. The TPM is a device to
allocate Treasury's resources to monitor imports and expedite
antidumping actions in an area identified as critical: the
basic steel mill industry. The classification of products
produced by that industry has been simply followed. Expanding
the TPM to cover added products might, through the dissipation
of Treasury resources, prevent its effective application
-34in the area where the need was identified. But such a selflimitation in no way inhibits wire and wire producers from
pursuing the established, existing remedies of the Antidumping
Act to imports of wire and wire products that are priced
below "fair value."
LLJL&A
Peter D. Ehreahaft
Deputy Assistant Secretary
and Special Counsel
(Tariff Affairs)
April 13, 1978
Attachment A
Specialty
U/ita -QiioclcLtlon
1625 Eye Street, Northwest
Washington, D. C. 20006
Telephone: 202-331-1611
February 9, 1978
Listing of Steel Wires
ir Filter Wire
ircraft Cord Wire
ntenna Wire
nnor Wire
mature Binding
ale Ties & Baler Wire
all Bearing Wire
elt Lacer or Belt Hook Wire
lack Annealed Wire
Wire
Lobby Pin
ookbinder Wire
ox Binding Wire
DX Stitching or Stapling Wire
raiding Wire
rake Cable Wire
ridge Wire
room Wire
able Television Lead Wire
ar Seal Wire
arbon Valve Spring Wire
arbon Welding Wire
ard Clothing Wire
lain Link Wire
lain Wire
Lay Cutting Wire
.ip Wire
>ld Heading Wire
>mmon Pin Wire
mcrete Form Twist or Snap Tie Wire
mcrete Reinforcement Wire, Plain or Deformed
mduit Wire
mnector Wire
•ntrol Wire
•Rural Telephone Wire
•tterpin Wire
rtain Spring Wire
nt Spacer Wire
op Line Wire
ectronic Lead Wire
Farm Fence & Barb Wire
Fire Screen Wire
Fish Hook Wire
Fish Leader Wire
Flat High and Low Carbon Wire
Flexible Shaft Wire, High & Low Carl
Florist Wire
Fuse Wire
Galvanized Armor Wire
Galvanized Core Wire
Galvanized Flooded Strand
Galvanized High & Low Carbon Wire
Galvanized Redraw Wire for Staples
Galvanized Steel Cores for ACSR
Galvanized Strand Wire
Galvanized Support Wire
Glass Netting
Glazier Wire
Guitar Wire
Hairpin Wire
Hard Drawn Spring Wire
Hard Drawn Wire for Prestressed Cone
Heddle Wire
High Carbon Wool Wire
High Nickel Alloy Wire
Hose Clamp Wire
Hose Reinforcement Wire - High Press
Hose Wire - Low Pressure
Industrial Quality Wire
Jewelry Chain Wire
Lamp Lead Wire
Line Wire
Link Wire
Lock Stock Wire
Lock Washer Wire
Mandrel Wire
Manufacturers Coarse Wire
Match Wire
Mattress Wire
discing of Steel Wires
Merchant Wire
Metal Spray Wire
Metal Stitching Wire
Music Wire
Nail Wire
Needle Wire
Oil Tempered Carbon Valve Spring Wire
Oil Tempered Chrome Silicon
Commercial & Valve Wire
Oil Tempered Chrome Vanadium
Commercial & Valve Wire
Oil Tempered Modified Chrome
Vanadium Valve Wire
Oil Tempered Spring Wire (Two Classes)
Oil Well Measuring Wire
Overhead Door Spring Wire
Paper Clip Wire, Tinned, Liquor Finished
or Galvanized
Pen Spring Wire
Piano Wire
Pile Wire
Pin Ticket Wire
^Pinion & Pivot Wire
Pipe Cleaner Wire
Pre-formed Staple Wire
Prestressed Concrete Stress
Relieved Wire
Reed High Carbon & Low Carbon Wire
Regulator Spring Wire
Ring-Traveler Wire
Rivet Wire
Rolling Quality Wire
Rope Wire, Bright & Galvanized
Scrapeless Nut Wire
Screw Wire
Shade Roller Wire
Shaped High and Low Carbon Wire
Shoe Wire
Sinuous Arc Spring Wire
Sinuous Upholstrey Spring Wire
Special Alloy Wire
Spiral Bindling Wire
Spoke Wire
Stainless Brush Wire
Stainless Cold Heading Wire
Stainless Cotterpin Wire
Stainless Flat Wire
Stainless Heddle Wire
Stainless Jewelry Chain Wire
Stainless Lashing Wire
Stainless Reed Wire
Stainless Rope Wire
Stainless Rub Nail Wire
- 2 -
„ _, ,
„,
Attachment A
Stainless Shaped Wire
Stainless Spring Wire
Stainless Weaving Wire
Stainless Welding Wire
Stainless Wool Wire
Staple Wire
Steel Flat & Shaped Wire
Stitching Wire
Straight Pin Wire
Strand Wire
Stone Sawing Strand Wire
Surgical Wire
T Pin Wire
Tag Wire
Tempered Carbon Brush Wire
Tempered High Carbon Flat Wire
Tempered High Carbon Shaped Wire
Terminal Pin Wire
Thermocouple Wire
Tinned High and Low Carbon Wire
Tire Bead Wire
Untempered Carbon Brush Wire
Untempered Chrome Silicon & Chrome Vanad
Upholstery Border Wire
Upholstery Lacing Wire
Upholstery Spring Wire
Vacuum Hose Wire
Weaving Wire
Welded Fabric Wire
Wire Tire Cord - Strand and Cable
Woven Mesh Wire
•
Attachment B
•1A-36
B U S T FURNACES; STEEL W O R K S ; ROLLING A N O FINISHING MILLS
1172 CCJISUS Of •AfWCTBfft:
TA8LE 6A-1. Products and Product Classes—Quantity and Valua of Shipmtnts by AH Producers: 1972 and 1967—Cont»u*j
0ncfcdei %m*nut* tat watua el lim products resorted net antyfryeatatrefrnefm CM*** iad in this M e a t y ,frtrtteafrysatatfiatvnsnn i
• "aKonds/y" predeca. Sss aopsndu. L p a n s u o A of Ttrm "Vita of liua-awr)
UiUtsJ
TstsJ product tfyQfMrB inctudiof m ussiest.
•n
product
Vat*
OsattJtV
B T R L V T U AKD U L A T B ) PWO0CCT3«
815- —
BIST
14964
13157
K964
—
—
—
—
}
ferrous wire Cloth and Other Wowoo ferrous wire Product*.
13157 11
M964 11
13157 31
14964 31
13157 91
14944 61
13157 II
14964 81
1313: 7i
14964 71
13157 II
M964 II
13137 II
I4064 II
lade la Industries 3312 and 331S
Made In fabricated wire products, a.e.c. (Industry 3496)
other Industries
UM.9
(X)
19.4
(X)
Ti.J
Millie* a*, ft.
43.9
1.8
lardvare olota
1,000 a. tarns..
10.0
11.4
Industrial elre cloth, ateel
Millie* *q. ft.
.do.
.do.
<JU)
flu)
flu)
t
31
39.4*
(X)
-}
Stainless steel paper aachine vlra oloth (fourdrlaler
cylinder)
•
..
Made in lnduatrles 3312 and 331S
Made la Industry 3496 and other Industries
.do.
.do.
.do.
(M)
f.4
(nO
5.4
Other elre cloth and voven el re products Including dl
oloth
.do.
(HA)
37.6
Made la lnduatrles 3312 and 3313
Made in fabricated wire products, a.e.e. (industry 3496) and
other lnduatrles.
...
•9.3
93.9
14S.7
9.9
19.1
13.4
<VA)
33.4
14.3
13.7
.do.
Other Fabricated Tire Products.
(X)
I*)
41
Voven wire netting (poultry, fur far*, stucco, etc.)*.
Tire cloth sad t o w n wire products, a.a.k.
}
(X)
Insect el re screening, eteol, Including atalaless steel,
Made la Industries 3313 and 3313
Made In Industry 3496 and other Industries
13157 M
14964 98
13157 00
14964 00
13131 —
14969 —
13139 —
I4M9 —
itli
fltt)
19.4
(x)
3.9
(X)
4.0
(x)
847.5
(X)
•49.3
(X)
38O.0
(X)
393.7
374.5
(X)
437. 5
33.1
35.8
44.9
39.9
71.2
69.0
71.9
51.9
Tire chain:
13159 41
14969 41
13139 49
14969 49
13139 49
14969 49
13139 61
14969 51
13139 31
14969 51
13159 S3
14969 53
13139 S3
14969 S3
Tire
Other
Made In lnduatrles 3312 and 331S
Made la Industry 3496 and other Industries.
}
Barbed and twisted steel wire'
Made In Industries 3312 and 3313
Made In Industry 3496 and other Industries,..
Wire bale tlea"
Made la Industries 3312 and 331S
Made In industry 3496 and other Industries.
1,000 a. tons.
•do.
37.3
34.4
35.4
36.2
.do.
.do.
•1.3
17.0
47.8
31.3
.do.
141.2
37.8
195.7
34.9
.do.
.do.
118.6
23.6
31.0
6.9
(HA)
(HA)
(KA)
.do.
143.7
36.4
129.3
35.9
.do.
.do.
130.3
13.5
30.6
5.9
109.1
31.3
30.4
5.5
.do.
633.9
130.4
679.9
116.9
.do.
.do.
539.4
94.5
109.3
21.1
599.7
90.1
99.8
18.1
.do.
185.3
53.1
200.9
51.7
.do.
.do.
176.7
8.6
47.0
6.1
183.5
17.4
39.3
13.4
254.1
39.3
(HA)
(KA)
(KA)
(HA)
(iu)
Voided steel wire fabric:
13159 II
14969 61
13159 61
14969 61
13159 65
4969 65
3159 IS
4969 63
3139 71
4969 71,
3159 71
4969 71
3159 73
4969 73
3139 75
4969 73
3159 77
4969 77
Concrete reinforcing* mesh..
Mads In Industries 3312 and 3313
Made in Industry 3496 and other Industries.
Other welded steel wire fabric
Mad* in industries 3312 and 3315
Made In Industry 3496 and other industries.
Wire garment hangers
Made In Industries 3312 and 3313
Made in industry 3496 and other Industries.
Million lb.
233.7
...do
.do.
176.5
57.2
3130 00
3150 02
32.4
15.9
19.0
wire carts, including- household, grocery-type, and Industrial.
(X)
36.3
(X)
Steel wire cages
(X)
9.3
(X)
16.2
(X)
3.2
(X)
242.4
Paper clips
(X)
3159 98
4969 98
31S9 00
4969 00
49.3
339.9
Other wire products Including baskets, guards, florists'
designs, kltchenware, etc
•
Other fabricated wire products, n.».k
Steel wiredrawing, n.s.k., for establishments with 10 employees
or more. (See note.)
Steel wiredrawing, n.s.k., for establishments with less than 10
employees. (See note.)
S«« footnotes at end of table.
{
28.9
(X)
31.5
(X)
32.0
(X)
32.1
(X)
4.4
(X)
1.1
(X)
_
1172 CENSUS CV MaJUfACTUIES
i \) .
/
Attachment
•LAST F U R N A C E S ; S T E k W O f M S ; BOILING A N D FlNrSHING 9JIL1&
^ 9 .
TABLE 6A-UProducts and Product Classes—Quantity %nd Value of Shipments by All Producers: 1 9 7 2 and 196/—Continrjjd
»atx«4ai•ISM*1| andwas*of Q»arodeitiraaartadnot enh; by apactsNnsntickesrf e*J *flatealuatry.fretafcofry
ej "•Kondary'' product!. Sea appendix, cxfavuxjaa mi Tanrn "Value of Mauaesaj*)
skmfi
Tetel product shipments indudloi snarplant ttaoafan
itn
un
ran
(aeattlV
Oiaatftt
VSJM
(swUavt douen)
1315-
—
S T D L Will AMD RZLAT3S PRODUCTS, TOTAL.
93131 —
34961 —
33131 —
34961 —
33151
34961
33151
34961
11
11
11
11
33151
34961
33151
34961
33151
34961
31
21
35
35
35
33
93131
34961
33131
34961
33131
34961
33151
34961
33
33
41
41
41
41
00
00
33152 —
33152
33132
33152
33132
Mottlasulated Ferrous tire Rope, Cable, sad Strand,
}
<x)
)
370.3
•XX)
399.2
343.2
174.2
.do.
.do.
333.0
93.2
199.3
55.0
172.4
101.7
.do.
4.0
7.1
34.0
.do.
.do.
.do.
175.0
143.1
32.9
55.4
49.3
7.1
49.1
(HA)
(HA)
fire strand for pre stressed concrete*.
.do.
70.6
17.2
59.9
fire forms.
.do.
(HA)
39.1
Iron aad ateel wire rope and cable*.
Made la loduatrtea 3312 aad 3315
Made la Industry 3496 aad other industries.
Made la Industries 3313 and 3313
Made la Induetry 3496 and other lnduatrloe,
1,000 s. toae.
.do.
.do.
Woalneulated ferrous wire, rope, eable, and strand, a.s.k.
Steel wire nails, spikes, aad brade:*
Bright
.'
Cal vanl xed
.,
Ceavent-<oa ted
Other nails, spikes, ete
Steel wire staples*
'
Steel tacka (wire and box)
Steel cut nails, spikes, and brads, including track aplkes and
horseshoe nails
,
Steel nalla and aplkea, a.s.k
Steel wire:*
As reported la Current
}
364.6
ix)
Steel Malls aad Spikes.
33132 00
(X)
94.4
}
}
2,199.8
(X)
Ccaposlte strand, rope, and eable, lacludlng wire a trend a of
different aetala (except ACSR )
Steel wire strand, except wire strand for preetreeeed
concrete, including guard rail eable*.....
Made la Industries 3312 and 3315
Made la industry 3496 sad other lndustrlee
33152 23
33152 25
33132 33
33136 00
34966 —
33136 —
34966 —
(X)
Hade la industries 3312 aad 3315
,
Made la fabricated wire producta, a.e.e. (industry 3494) aad
other Indus trlee..
•
11
13
17
19
33123 —
33133 —
33125 00
33133 00
(X)
(•Win
1,000 a. toaa.
...do
.do.
.do.
3.7
34.4
(HA)
(X)
5.4
(X)
(X)
344.5
(X)
(HA)
(HA)
226.9
91.5
73.3
77.4
99.4
29.0
20.0
40.9
240.9
40.4
41.1
14.0
.do.
.do.
37.9
9.4
73.0
9.4
44.4
4.3
.do.
19.9
(X)
7.0
1.9
31.7
Industrial Reports, aerlea MA-339,
(X)
(X)
719.0
(X)
734.3
(X)
(X)
397.9
(X)
(X)
323.7
(X)
. (x)
245.4
(X)
(X)
172.1
(X)
(X)
73.3
(X>
173.3
95.1
(HA)
.do.
.do.
141.4
31.9
37.4
27.7
(HA)
(XA)
Aa reported in the census of manufactures
Made in steel Bills (industry 3312)
Made in steel wiredrawing (lnduetry 3315) and other
lnduatrles
Fencing and Fence Catea.
Made In Industries 3312 and 3313
Made in fabrlcatea wire producta, n.e.e. (lnduetry 3496) and
other industries
,
(X)
33136
34966
33136
34966
13
13
13
13
33156
34966
33136
34966
33136
34966
35
33
21
21
21
21
Fence gates, posts, snd fittings..'.
.do.
235.5
74.4
(HA)
• Ire fence, woven and welded*
.do.
368.9
100.0
134.2
Made in Industries 3312 and 3313
Made In Industry 3496 and other Industries.
.do.
.do.
327.3
41.6
49.2
11.9
120.0
16.2
33156
34966
33156
349G6
33156
34966
71
71
71
71
00
00
Ornamental lswn fence
.do,
4.0
2.3
7.7
Made In industries 3312 and 3313
Made In Industry 34966 and other Industries.
.do.
.do.
(HA)
(HA)
}
Chain link* fencing, excluding post, gstes, and flttlnga.
Msde In industries 3312 snd 3315
Made ia Industry 3496 and other industries
Fencing and fence gates, n.s.k
See footnotes at end of table.
1,000 s. tons.
(X)
(XA)
(KA)
7.2
.3
1.8
(X)
1,494.3
Attachment C
Projected Coverage of U.S. Wire Product Imports
By Trigger Price Mechanism
AISI Cat. No. '
(TSUSA No.)
609.^0.10
.40
.41.05
.20
.25
.65
.43.05
.15
.45.10
.40
(Subtotal
646.25.00
.26.20
.40
(Subtotal
1977 U.S.. IMPORTS
% or Dotal, mports or Ai
(Category (By Value)
($1000)
16
16
16
16
16
16
16
16
16
16
5349
9149
14,381
1638
52,639
31,205
1319
19,499
23,508
34,397
2
3
5
1
18
11
0
7
8
12
16
193,084
67)
20
20
20
4,029
100,825
58,981
2
62
36
20
163,835
100)
20
21
366,261
NA
•
42.02.00 21 9,342 100
16
TOTAL
Coverage of total wire and wire product imports considered steel mill products
(by value)
15%
FOR RELEASE ON DELIVERY
Expected at 1:00 p.m.
Thursday, April 13, 1978
Contact: Robert E. Nipp
(202) 566-5328
Remarks by Arnold Nachmanoff
Deputy Assistant Secretary for Developing Nations
Treasury Department
The Southern Center for International Affairs,
Meeting in Miami, Florida
The International Development Banks
And the Development Process
I spend much of my time in Washington in the winter
and spring immersed in carrying out a program that must be
justified in often excruciating detail before the Congress.
We speak in a special jargon when appearing in the Capital
that is often a puzzle to outsiders. One of the attractions of your invitation is the chance to speak to an audience
and equally concerned with the objectives, and even more
involved with what the international development banks accomplish.
These organizations of which the United States has
usually been a founder and leading member are: The World
Bank Group, which includes the International Development
Association (IDA) and "he International Finance Corporation
(IFC), the Inter-Ameri n Bank (IDB), the Asian Development
Bank and the African ^lopment Fund which is attached to
the African Develops 3ank.
B-836
- 2My theme is to explore why the developing countries
are important to the United States and how the development
banks further our interests by providing a framework within
which the developed countries can join with developing
nations to support and manage the transfer of resources
for their growth. As the flow of private capital of all
kinds from the developed economies becomes larger and more
complex in form and purpose, one of the IFIfs more important
functions is to influence national policies in directions
that enhance and improve the workings of the international
capital market.
I. The Importance of the Developing Nations
The phrase "developing countries*' is in danger of
becoming a cliche of public discourse. Whatever they are
called, they represent a reality of two billion people on
three continents, who in spite of extraordinary cultural,
political and economic diversity tend to see themselves as
a group, set apart by their history and interests, from
the industrial nations, led by the United States. To
a greater extent than ever before these nations are paying
more attention to the objectives of development so that
they may improve the living standards of their people,
especially of those large groups, mired in poverty.
We have always ic^Ti-.if ied ourselves with the aspirations of the developing -ations for a number of reasons.
- 3 First of all, the developing nations collectively are
already a force to be reckoned with in world affairs. Their
attitudes and actions could have decisive effects on world
peace. Their foreign policies modify the atmosphere and
style of international relations; their development policies
can change our physical environment and effect our economy.
We need simply to recall what happened to the prices of
oil and wheat in the past four years and their impact on
our domestic rate of inflation. One of the purposes of
our membership in and support of the international banks
is to establish a type of relationship in which our interest
in the development of these countries is accepted without
question so that we can tackle problems of mutual interest
without suspicion of our motives.
Second, many of these countries are desperately poor.
More than one billion people do not have access to potable
water; 700 million do not have enough to eat; 500 million
cannot read or write; and 250 million do not have adequate
shelter. For these reasons alone, they have a claim on our
humanitarian tradition which sent men, food and medical
supplies abroad long before public aid was established.
Third, helping these countries has proved to be in our
long range economic interest. The LDCs collectively have
had a remarkable record of growth in the first post-war
generation of development. From 1 50 to 1975, per capita
- 4 "
growth was about 31 per year, or the same as the developed
nations.
In other words, despite a population growth at
least twice as rapid as the United States, Western Europe
and Japan, product per head has risen as quickly as in the
more advanced economies.
In extreme cases like South Korea,
GNP has been growing since 1960 at a rate which doubles national
product per head every decade.
Brazil's growth is only
slightly slower.
The point is that whatever the vicissitudes of the
business cycle or of balance-of-payments crises, taking
into account faster population growth, the developing economies, have been growing faster than our own and other industrial countries.
We cannot assume that even those areas
that have made the least progress in the past will not move
ahead once again.
South Korea was regarded in 1960
by
the experts as a country that would never be able to support
itself by competing in international trade.
How odd that
opinion seems today!
Faster development leads to more rapidly growing markets.
In 1970 the developing country share of world imports was 18%
of which OPEC accounted for 3%.
Six years later, it had risen
to 231 including 71 for the OPEC, most of wl *ch are still considered developing and are, or are likely for some time to come.
be,capital importers
- 5-
This growth has had very beneficial effects on our
exports.
The non-OPEC LDCs have been taking a fairly constant
share of just under one quarter of exports or a somewhat
larger share than the European Community.
Adding the OPEC
countries, raises that share to 361 in 1977, having shot
up from 27% in 1972 just before the oil price hike.
The
variations in the next few years are not likely to change
the reality that the developing nations are and will continue to be our most important foreign market.
Sales
totaled $43 billion last year, of which roughly 70% were
manufactures.
In that category, machinery and transport
equipment accounted for more than half.
Roughly half of
our exports of wheat, rice and cotton have gone to developing countries in recent years.
that
Some estimates indicate
about one million jobs depend on these exports.
As public and private creditors and as investors, the
United States has an important stake in healthy LDC economies
as the following indicators illustrate:
37% of our income derived from direct
investments abroad,or $7 billion in
1976,came from there -roughly two-thirds of our government
loans have been made to developing
country borrowers, -- the rest being t-;.Jort
and other credits to developed coun- > .< ;.
- 6 -
repayment of about 30% or $70 billion, of
commercial bank lending to foreign countries,
outstanding at the end of 1977 depends on
their continuing creditworthiness-rough estimates indicate that 15-20% of bank
profits arise from loans to these countries.
II. The Role of the Development Banks
Some developing countries have been more successful
than others.
Within that broad category we have an emerging
middle class--economies with incomes of roughly $500-$2000
per capita.
They have constructed the basic infrastructure
of power and transport.
Their agriculture is being modern-
ized and illiteracy is beginning to vanish.
The worst health
problems have been conquered and family planning is beginning
to spread.
Industry is well established and is on its way
to become the major economic activity.
Most important, they
have learned how to compete in world trade with both industrial
and primary products.
Their rapidly rising exports of goods
and services have been a key element in the speed of their
development by giving them the means to buy essential goods
and to supplement public aid with private credits.
They are the customers of the "hard" windows of the
development banks.
the institution.
These are the ordinary operations of
Typically the banks can lend no more
- 7than their capital and reserves.
That capital consists
of a paid-in portion, now usually 10%, with the rest,
callable, acting as a guaranty of the bank's own bonds.
By this device the development banks can tap the international capital market.
Bond buyers have the double pro-
tection of the guaranties, the bulk of which come from
developed countries, as well as the diversification of
risk implied in the bank's wide-ranging portfolio of
loans.
While the maturities of the banks' loans are
15-30 years the interest rates necessarily are marketrelated.
Although these countries are poor by comparison to
the United States and other developed economies, they are
far better off than their poorer brethern in South
Asia, much of Africa or Haiti, to cite an example nearer
home.
Their economies are still mired in traditional
agriculture, infrastructure generally is feeble compared to needs,
and malnutrition and illiteracy are grave problems.
Ex-
ternally, creditworthiness is poor so that foreign capital
transfers must be in the form of grants or loans with high
concessional interest rates and very long maturities.
- 8 These countries are the typical customers of the
soft windows. They are funds, fed mainly by budgetary
transfers, largely but not exclusively from the banks'
developed country members. The interest rates are now
3/4 of 1%, except for certain loans from the soft loan
window of the IDB, and the maturities range up to fifty
years.
I would like to concentrate today on the role the
multilateral banks play in the investment policy and in
programs designed to reach the poorer groups of the middle
income developing nations. These countries have a population of more than 600 million people. Their economies rely
today mainly on direct and portfolio investment and on
credit carrying largely commercial interest rates. New
government-to-government grants or aid-type loans are
becoming rarer. The hard windows of the development banks
are, as a result, becoming the more important source of public develo
ment capital.
/They alone, therefore, can take the long view and are in a
position to take more risks to back their judgements. At
the same time, they are free by the terms of their charters
and, largely in practice, of the political considerations.
The dimensions of this market are not completely known
but we do have good enough estimates to establish the orders
of magnitude. The total flow of medium and long-term capital
is$25-30 billion a year to all countries of this group of
- 9developing nations including the oil exporters. About
$2.5 billion or 10% comes from the multilateral lenders and
roughly the same amount from government aid agencies.
Between 15-20% is direct investment. Thus, about 80%
of the credit and investment is private and 20% official.
Private credit, mainly from commercial banks (plus some bond
sales) is 60% of the total. For some countries such as Brazil
and Mexico that are heavier borrowers from the banks, the
multilateral share is less than 10%.
The existence of a private international capital market
serving the developing countries on such a scale is quite
new, in the post-war period.
middle sixties.
It dates from perhaps the
Once again, as it did in the past, private
lending became the predominant source of capital. The
borrowers are largely new, the product of the successes of
the first generation of development.
Therefore, the rules
of operation are still changing and certain amount of management
is desirable from both the lender and borrower's point of view.
The special function the development banks (and the IMF)
perform is to make the market work better by a combination
the
of/quality of their policy advice to the borrowers and by
supplying long-term credits to complement the shorter maturities
of the private lender.
The banks' presence acts as an endorse-
ment for private lenders and investors in a particular country
that the development strategy of their customers is proper and
reasonable, so that they will have the resources with which to
repay ivy the future
- 10 -
In other words by influencing the volume and direction of
investment, and related spending for education and health,
the probability of producing a more rapidly developing
economy, which diffuses its benefits widely is greater.
The banks make their greatest contribution by minimizing
"white elephant" projects which tie-up large quantities of
capital with little return in output and encouraging efficient
allocation of resources.
The advisory role is strengthened by the relatively
small number of influential policy makers, executives and experts in
many developing nations, that need to be reached and, by its
link to credits.
Local leaders and experts will see many
bank missions in the course of their working careers.
The
contact will require them to think through more carefully
their assumptions and articulate them more precisely.
In
the informal and confidential give and take between experts,
improvements can be made without loss of face and policy
directions subtly altered.
The banks are not shy about attaching economic and
technical conditions to their loans to improve their efficiency.
On the other hand, they have good motives to refrain from
academic or trival advice because the loan engages the prestige
and financial standing of the lending institutions as well
as the borrowers.
If a country is badly managed, so that
its creditworthiness is endangered, then so are the bank's
- 11 loans.
With current annual lending level of eleven billion
dollars, their collective clout is considerable.
Ill. Development Banks and Commercial Banks
Probably no private institution is more directly concerned that development banks carry out their functions
successfully than the American commercial banks.
I noted
earlier the importance of foreign commercial banks in the
total flow of capital to the better-off developing nations-between 50-60% of the total. A great deal of this expansion
has taken place since the double shock of the oil price
increase in 1973 and the world recession that followed in
1974-75.
For these two years the combined current account
deficit of the better-off developing countries, not including
oil exporters, was estimated to be $47 billion.
Private
medium and long-term credit expansion to the same group
covered $17 billion of the gap, and, undoubtedly, the expansion of short-term credits also played a significant
but probably considerably smaller role.
Even though,
current accounts deficits have fallen in 1976 and 1977,
bank lending has continued on a high level enabling its
recipients to also build up their exchange reserves.
During
this latter period, for example U.S. bank lending to non-oil
LDCs has risen $15 billion.
The remarkable flexibility of the commercial banks
operating in the international market, with the American
banks playing the leading role, has helped the developing
to external recession.
natio i borrowers to stretch out their internal adjustment/
Even ifi 1975 wheri: the full force of the recession had stru K
- 12 the growth rate of the developing countries other than
oil exporters was almost 4% compared to the long-term
post-war trend of 3%.
By 1976, it rose once more to 5%.
We see the relationship between the development banks
and the commercial banking system as complementary.
The
development banks (and the IMFj establish and maintain a
policy framework within which private lenders operate.
They also contribute appreciable capital resources on long
repayment terms
which reduces the burden of amortization
for the developing country borrower.
For both reasons, the
risk to the private intermediate lender is lessened.
But
growth and its benefits could not take place to the same
degree unless the commercial banks were prepared to transfer
through their credits some of the enormous resources at
their disposal.
Both types of lending contribute to develop-
ment, the reduction of lending risk and the preservation
and expansion of the international credit market.
IV.
The Development Banks and the United States
The remarkable thing has been how inexpensive the hard
windows have been to the American taxpayer.
The World Bank
which has three quarters of these loans, has received only
$650 million fr * this purpose from the U.S. budget since its
foundation ••:.:>• gh FY 1977.
Yet it has committed $38.6 billion
of loans.
ank regularly makes profits on these opera-
tions and ?•
Kern to reserves as well as making contri-
Klitinn*?
n A V
<t-,~
-i •#- e? «?^-f*-
•Tii-n^
o-P^il i 9 t o §
J;f
the
Br*nk
- 13 were to be liquidated tomorrow our share of the reserves
would be about equal to what we have paid in.
Continuing lending requires the regular expansion
of the Bank's capital.
The current replenishment is $8.4
billion of which our share is $1,570 million.
portion is $157 million or 10%.
The paid-in
We are currently in dis-
cussions that will eventually lead to a general capital
increase.
Supporting hard window loans is a major part of our
appropriation request.
asked for $3.5 billion.
For FY 1979, the President has
Of this amount $1.5 billion
will enable the Banks to continue to make loans at marketrelated interest rates.
Only about $100 million should
result in actual expenditure.
The remaining $1.4 billion is for callable
capital of the banks which would only be needed if they
suffered defaults or rescheduling so massive that their
existing reserves were overwhelmed.
The "developing nations" problem has been transformed
in the past generation.
The issue is no longer when and
how they will grow but how we integrate those that have
already made striking
and help the remaining
members of the group h
r ogress into the world economy
untries to take the path other
already followed.
The motives
- 14 of securing a more peaceful world, of helping those whose
state of poverty is repugnant to our ideals, and promoting
our own economic interests as exporter, lender
remain valid.
and investor
The emergence of a "middle class" among the
developing economies indicates very clearly that we are
dealing with countries whose political and economic power is
growing.
In this same period the international development banks
have come fully of age in their ability to raise capital and
influence, to the extent it can be done externally, the
developing nations.
policies and priorities of the more successful/
We
see this role as particularly crucial in the new international capital market where private credit has once again
assumed the primary function of transferring resources from
the capital rich to the capital poor economies.
A frame-
work is evolving consisting of policies and attitudes of
borrowing countries and of the commercial banks particularly
in the United States, which has proven its effectiveness in
softening the effect of world recession on the developing
nations and on their suppliers.
It is in
mutual
our/interest
that the better-off developing
countries obtain more resources for growth in the private
international market
so that their growth can be
maintained and its benefits spread throughout their populations.
This is a situation that will require continuing
- 15 and careful management. The development banks(and the
IMF)will have to be given regular increases in their
resources for some time, in line with the growth of the
world economy, if they are to play their part. That is
the basis of our policy of supporting the international
development banks.
tfHINGTON, D.C. 20220
TELEPHONE 566-2041
April 14, 1978
STATEMENT BY SECRETARY OF THE TREASURY W. MICHAEL BLUMENTHAL
Reports that the Carter Administration is considering a
reduction in the tax cut proposals are entirely erroneous.
While there were discussions at the EPG Steering Committee
Thursday about Chairman Miller's suggestions, following which
economic projections were requested, this does not indicate
a change of course for the Administration. The Administration
will continue to monitor the economy and will analyze alternative
tax proposals. But this in no way indicates a change in policy.
The Administration continues to believe its proposals
are needed at the level the President prescribed in order to
continue the growth of the economy, to encourage business
investment, to reduce taxes for middle and lower income
Americans, and to some extent, offset the continuing inroads
of inflation.
The Administration will continue to actively press for
passage of a tax law this year which combines tax cuts
totalling approximately $35 billion for both individuals and
business, and tax reforms which will recover approximately
$10 billion in revenue. This represents a balanced set of
proposals.
The net tax cut of $25 billion will benefit individual
Americans by $17 billion with an additional $2 billion by
eliminating the telephone excise tax and reducing the payroll
tax for unemployment insurance. It will also benefit small
and large business by $6 billion.
B-837
wtmentoftheTREASURY
IINGTQN, D.C. 20220
TELEPHONE 566-2041
it
FOR RELEASE ON DELIVERY
(APPROXIMATELY 10:00. A.M.)
APRIL 19, 1978
STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL TRADE
INVESTMENT AND MONETARY POLICY
COMMITTEE ON BANKING, CURRENCY AND HOUSING
HOUSE OF REPRESENTATIVES
Mr 0 Chairman:
I appreciate this opportunity t;o testify on H0R0 9066,
which would place the administrative expenses of the Treasury
in the international affairs area on an appropriated basis
and discontinue the funding of those expenses from the
Exchange Stabilization Fundo Following my testimony on this
bill, I would like to take a few minutes of the Committee's
time to discuss a related point on the effect of recent
exchange rate changes and revisions of certain accounting
standards on the financial statements of the ESFC
H0Ro 9066
When this Administration assumed office, one of the first
decisions to be .addressed by the head of each Department was
that of internal organization and management0 As part of that
process, we at the Treasury were faced with a more specific
question, which had been one of some Congressional concern:
whether to continue payment of administrative expenses connected
with Treasury's international responsibilities from the Exchange
Stabilization Fund (ESF)« Our decision is reflected in the
bill you are considering today — H 0 R 0 9066 -- which was propose
by the Treasury„
B-838
- 2 The main purposes of the bill are: (1) to discontinue
the use of the ESF as a source of payment of administrative
expenses; and (2) to authorize appropriations to meet all
administrative expenses associated with the Treasury Department1 s international affairs functions0 The bill also includes
the various technical provisions necessary to accomplish this
change with minimum disruption to the ongoing work of the
Departmento
The Exchange Stabilization Fund was created by the Gold
Reserve Act of 1934 to provide financial resources for the
Secretary of the Treasury to "stabilize the exchange value of
the dollar." Those resources are authorized to be used for
financial and monetary transactions (ESF "operations11) and for
the payment of administrative expenses associated with carrying
out the ESF's purpose0
The responsibilities of the Treasury Department in
international affairs have increased substantially since 19340
In addition to managing the Exchange Stabilization Fund, the
Secretary of the Treasury serves as U.S. Governor of the
International Monetary Fund, International Bank for Reconstruction and Development, International Development Association,
International Finance Corporation, Inter-American Development
Bank, Asian Development Bank, and African Development Fundo
The Secretary of the Treasury, as chief financial officer of
the United States, serves as Chairman of the Economic Policy
Group, the National Advisory Council on International Monetary
and Financial Policies, and the East-West Foreign Trade Board;
and participates in a variety of inter-agency committees on
international economic issues such as the Trade Policy Committee,
the Export Expansion Advisory Committee, and the Advisory
Committee on P.L. 480.
These responsibilities and the related efforts to coordinate
international economic policy with domestic economic policy require
a staff of experts and adequate administrative support. In
today's interdependent world, effective operations in the broad
area of international monetary policy require an organization
equipped to develop information on, and analyze foreign activities
in, the monetary, exchange, trade, investment and development
fields, and other matters bearing on the U.S. external payments
position; to assist in formulating U.S. policy positions on
international economic and financial issues; and to implement
those policies.
- 3 Given the expanded responsibilities of the Treasury
Department in international affairs, and the growing administrative costs resulting from those responsibilities, we examined
the question whether it was appropriate to continue the
off-budget status of these expenses through their funding from
the ESF. We looked closely at the reasons why these sums had
been plaid from ESF resources in the past.
. Historically, there have been two main reasons for funding
the administrative costs of Treasury's international function from
the ESF rather than from appropriations:
r 1) placing the administrative expenses on-budget
might jeopardize the needed confidentiality
r^
of specific ESF operations which the administrative expenses support; and
0j- 2) the administrative expenses could not be included
V
in budget projections because they could be
highly unpredictable — with extraordinary developments in the international monetary and financial
TC
system at times requiring extraordinary expenditures.
In our review, we found that administrative expenses directly
tied to ESF operations comprise only a very small part of the
total ESF administrative budget, and that large, unpredictable
administrative expenditures have been increasingly rare. The
major portion of the ESF administrative budget supports the
broader range of Treasury international activities not directly
associated with specific ESF operations.
Accordingly, we concluded that ESF administrative expenses
could be placed on-budget without jeopardizing the needed
confidentiality of ESF operations, and that the Treasury's
administrative expenses in the area of international affairs
are amenable to the same kind of annual budgetary control and
projection applied to other federal expenditures. The bill
before you today would accomplish that budgetary control, and
place ESF administrative expenses on a fully appropriated basis.
Senate action has been completed, with passage of the
bill on March 8. .1 urge this Committee to act promptly as
well, in order to assure that we can accomplish the objective
of this bill for the 1979 fiscal year.
- 4I would also mention another question involving the ESF,
which was raised soon after I came to Treasury -- access by
the GAO to information and documents related to certain international economic activities of the Treasury Department.
Mr. Staats and members of his staff met with me early last
summer to discuss this matter.
The GAO serves a very important function in reviewing
and auditing government activities in various international
areas. In conducting such authorized audits and reviews,
the GAO may seek information on such international monetary
matters as U.S. participation in the IMF, debt policies
toward developing countries and the interrelationships of
monetary and trade policies.
In an exchange of letters with Mr. Staats, which is
contained in the ESF Annual Report for Fiscal Year 1977, I
provided assurance to the Comptroller General that Treasury
will continue to cooperate fully in providing the GAO, on
request, with such information, appropriate to its authorized
audits and reports. In this regard, Treasury also will provide
all information pertaining to the ESF relating to such GAO
reports and studies, except where the information involves
confidential ESF transactions with foreign governments^and
monetary authorities or information related to the ESF's
market transactions0 Such transactions continue, of course,
to be the subject of confidential consultations with members
of Congress, and ESF agreements with foreign governments and
monetary authorities are transmitted formally to the Congress
under the Case Act.
I am pleased we have been able to work out cooperative
arrangements in this regard which are satisfactory to the
Comptroller General, and I am confident that we will have
a continuing productive working relationship between the
Treasury and the GAO.
ESF Annual Report for Fiscal Year 1977
Mr. Chairman, I have provided the Subcommittee with copies
of the ESF Annual Report for last fiscal year. This report
reflects some fairly important developments and changes in the
ESF's financial position and I felt it would be desirable to
discuss it with you briefly today, given the opportunity of
this hearing.
- 5 -
As indicated in the report, the very sharp appreciation
of the Swiss franc in the exchange market is now creating
large actual and accrued exchange losses for the ESF. The
losses arise in connection with redemption by the Treasury
of Swiss franc-denominated securities issued during the 1960's
and early 1970's, under the Bretton Woods par value monetary
system, prior to the collapse of that system in August 1971*
These Swiss franc-denominated securities -- the so-called
!
^Roosa Bonds11 — were issued to help protect the U.S. gold
stock and maintain the par value system. Although these securities were issued by the Treasury's General Account, the ESF
has borne the U.S. exchange risk on such securities since
their introduction in 1961.
The contractual exchange risk provisions on these securities covered discrete par value changes. After the widespread
move to floating exchange rates in 1973, the exchange risk provisions became indeterminate and subject to discussion between
the U.S. and the Swiss authorities. Negotiations continued
over a period of several years, during which no repayments
were made by the Treasury and no losses were recorded.
During fiscal year 1977, three things occurred. First,
in October 1976, understandings were reached on the terms of
redemption for these securities, and repayments began in
November 1976. Second, exchange rates -- and particularly the
exchange rate between the dollar and the Swiss franc -- began
to move substantially, and potential exchange losses in connection with these securities began to rise. Finally, a new
accounting standard was applied to the ESF for the first time,
calling for accrued exchange losses to be recorded currently
on the ESF balance sheet as a liability, rather than to be
recorded only when realized.
These developments have created substantial differences
between the ESF's financial statements in this year's report
and the reports of previous years.
The points I would like to stress are the following.
First, the cash exchange losses the ESF has realized to date
have not substantially affected the ESF's assets, and the ESF's
resources are adequate to meet the further prospective losses
now foreseen. These cash and accrued exchange losses will not
impair the U.S. ability to conduct necessary monetary operations.
The ESF's cash position remains strong and its available SDR
holdings are large. Although we presently record SDR allocations
as an ESF liability, it is most improbable that this liability
- 6-
would ever become payable. The SDR allocations would have
to be repaid only if the IMF or the SDR Department of the
IMF were liquidated, if the U.S. withdrew from the IMF or
the SDR Department, or if SDR allocations were cancelled.
These are all highly unlikely contingencies, and the latter
two are fully under the control of the United States.
Second, the ESF's resources are important, but they are
only a segment of the overall international monetary resources
available to the United States. The ESF's accounts do nojb
include, for example, Treasury holdings of gold; U.S. rights
to use our reserve position in the IMF and to draw on the
credit facilities of the IMF; or the reciprocal currency
arrangements maintained by the Federal Reserve System.
Third, neither the ESF accounts nor other Treasury
accounts presently reflect the gains that could at some pflint
accrue to the U.S. Government as a consequence of issuing the
Swiss franc securities. As the Subcommittee knows, the
essential purpose of issuing these securities was to forestall
foreign purchases of U.S. gold as part of an effort to maihtain
the old Bretton Woods par value system. We estimate that
issuance of the Swiss franc securities resulted in the retention
of about 36 million ounces of gold by the United States. Valued
at the current market price for gold, this gold represents a
potential gain of about $4-1/2 billion for the U.S. Government,
or nearly four times the currently estimated losses on the
Swiss franc securities.
While the ESF thus remains sound and capable of fulfilling
its functions, we are nonetheless considering whether the present
ESF financial statements convey a fully accurate and meaningful
picture of the ESF's financial condition. Accordingly, I have
asked the Comptroller General to work with the Treasury to
determine whether the accounting treatment presently applied
to the items I mentioned earlier is fully appropriate and, if not,
to recommend alternative approaches for the Secretary's consideration. I would expect to consult with the Committee again when
this work has been completed.
Thank you, Mrp Chairman. I would be happy to answer any
questions you may have.
oo 00 oo
WtmentoftheTREASURY
TELEPHONE 566-2041
SHINGTON, D.C. 20220
April 17, 1978
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 April 20, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing July 20, 1978
Price
High
Low
Average
Discount
Rate
98.453 a/6.120%
6.152%
98.445
6.140%
98.448
26-week bills
maturing October 19, 1978
Investment
Rate 1/
Discount Investment
Price
Rate
Rate 1/
6.30%
6.34%
6.32%
96.695b/ 6.537% 6.85%
96.678
6.571%
6.89%
96.682
6.563%
6.88%
a/ Excepting 1 tender of $1,745,000
b/ Excepting 1 tender of $200,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Received
Accepted
Received
Accepted
$
15,440,000
4,901,045,000
9,800,000
32,900,000
24,165,000
16,605,000
199,925,000
45,500,000
31,005,000
39,285,000
9,015,000
355,965,000
$
8,540,000
3,160,845,000
9,800,000
12,900,000
18,405,000
14,760,000
28,925,000
17,500,000
21,005,000
38,985,000
9,015,000
49,965,000
Boston
$
20,410,000
New York
4,013,495,000
Philadelphia
18,460,000
Cleveland
44,405,000
Richmond
38,280,000
Atlanta
38,120,000
Chicago
203,985,000
St. Louis
53,260,000
Minneapolis
23,270,000
Kansas City
31,935,000
Dallas
18,775,000
San Francisco
317,910,000
$
20,410,000
1,914,340,000
18,460,000
42,580,000
30,005,000
35,670,000
57,105,000
25,260,000
21,270,000
31,935,000
18,475,000
72,900,000
Treasury
11,735,000
11,735,000
9,605,000
9,605,000 -
$4,834,040,000
$2,300,145,000 c/ $5,690,255,000
$3,400,250,000d/
TOTALS
^Includes $447,490,000 noncompetitive tenders from the public.
Includes $204,945,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
839
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued April 27, 1978.
This offering will result in a pay-down for the Treasury of
about $6,016 million as the maturing bills are outstanding in the
amount of $11,716 million ($6,006 million of which represents
24-day bills issued April 3, 1978). The two series offered are
as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
January 26, 1978, and to mature July 27, 1978
(CUSIP No.
912793 S4 9), originally issued in the amount of $3,503 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
April 27, 1978, and to mature October 26, 1978
(CUSIP No.
912793 T9 7).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing April 27, 1978.
Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently hold $3,387 million of the
maturing bills. These accounts may exchange bills they hold for
the bills now being offered at the weighted average prices of
accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time, Monday,
April 24, 1978.
Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of the
Department of the Treasury.
B-840
-2Each 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 in and
Dorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on April 27, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
April 17, 1978.
cash adjustments will be made for
differences
between the
the maturing
bills
accepted m exchange
andpar
thevalue
issueof
price
of the new
bills.
-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
CO
i—1
)L-
VO
Zi Csi
VO
?aeraiWASHINGTON,
iinancmg
DanK
D.C 20220
FOR IMMEDIATE RELEASE
CO
CO
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CVi
a
> <\j
i_
o
Q_
April 18, 1978
SUMMARY OF FEDERAL FINANCING BANK ACTIVITY
March 1-March 31, 1978
Federal Financing Bank activity for the month of
March, 1978, was announced as follows by Roland H. Cook,
Secretary:
On March 1, the Export-Import Bank of the United States
sold Note #14 to the Federal Financing Bank in the amount of
$260 million, maturing December 1, 1987, and bearing interest
at a rate of 8.024% on a quarterly basis.
The United States Railway Association made the following
drawdowns guaranteed by the Department of Transportation:
Date
Note #
Amount
Maturity
Interest
Rate
13
$1,500,000
8.125%
12/26/90
4/30/79
7.513%
8
1,218,250
4/30/79
7.491%
8
307,000
12/26/90
8.125%
13
500,000
4/30/79
7.533%
8
1,670,000
The FFB purchased participation certificates from the
General Services Administration in the following amounts:
3/1
3/7
3/9
3/15
3/30
Date
Series
3/2
3/9
3/14
3/31
K-005
M-031
L-038
K-006
Amount
$2,172,307. 14
3,196,308.,53
1,568,977. 20
1,975,972. 56
Maturity
Interest
Rate
7/15/04
7/31/03
11/15/04
7/15/04
8.39%
8.367%
8.329%
8.439%
On March 3, the Bank advanced $901,741.00 at an interest
rate of 8.241% on a quarterly basis to the Missouri-Kansas-Texas
Railroad. The advance was made under a $12 million note which is
guaranteed by the Department of Transportation and matures on
November 15, 1997.
B-841
- 2The FFB purchased from the Student Loan Marketing Association the following notes guaranteed by the Department of Health,
Education and Welfare:
Interest
Date
Note #
Amount
Maturity
Rate
6/6/78
$45,000,000
6.668%
134
3/7
6/13/78
45,000,000
6.618%
3/14
135
3/21
136
6/20/78
45,000,000
6.519%
3/28
137
6/27/78
70,000,000
6.626%
The National Rail Passenger Corporation drew the following
amounts under Note #13 which matures on April 30, 1978, and is
guaranteed by the Department of Transportation:
Interest
Date
Amount
Rate
$1,184,000
3/10
6.573%
1,500,000
3/20
6.486%
1,000,000
3/28
6.574%
4,000,000
3/31
6.793%
The Tennessee Valley Authority sold notes to the FFB
in the following amounts:
Interest
Date
Note #
Amount
Maturity
Rate
3/14
6.719%
72
6/30/78
$100,000,000
3/31
6.607%
73
6/30/78
225,000,000
On March 20, the Bank advanced $9.7 million to the Western
Union Space Communications at a rate of 8.261% on an annual
basis. The advance to Western Union was made against a $687
million master note maturing on October 1, 1989, the repayment
of which is secured by the National Aeronautics and Space
Administration's obligations to Western Union under a tracking
system procurement contract.
On March 16, the FFB purchased a Certificate of Beneficial
Ownership from the Farmers Home Administration in the amount of
$505 million. The maturity is March 16, 1983 and the interest
rate is 8.14% on an annual basis.
On March 22, the Bank purchased debentures from Small Business
Investment Companies in the aggregate amount of $8,440,000
bearing an interest rate of 8.135% and maturing on March 1, 1988.
The debentures are guaranteed by the Small Business Administration.
On March 31, the Bank purchased a Certificate of Beneficial
Ownership from the Rural Electrification Administration in the
amount of $97,023,000. The maturity is March 31, 2008, and
the interest rate is 8.465%.
- 3 The Federal Financing Bank advanced the following
amounts to utility companies under notes guaranteed by the
Rural Electrification Administration:
Interest
Rate
Date Borrower
Amount
Maturity
12/31/12
12/31/12
3/6/80
12/31/12
12/31/12
8.315%
8.315%
7.671%
8.315%
8.315%
7,000,000
400,000
12/31/12
12/31/12
8.327%
8.327%
3/8 East Ascension Telephone Co.450,000
157,000
"3/8 Big River Elect. Corp.
5,800,000
3/8 Tri-State Gen. § Trans.
3/8/80
12/31/12
6/30/80
7.662%
8.30%
7.701%
12/31/12
8.292%
12/31/12
8.268%.
3/1
3/1
3/1
3/1
3/1
u
3/2
3/2
Oglethorpe Elect. Membership$
Arkansas Elec. Coop. Corp.
Golden Valley Elect. Assn.
United Power Assn.
East Kentucky Power Coop.
Cooperative Power Assn.
Allied Tele. Co. of Arkansas
3/10 Allegheny Electric Corp.
4,392,000 •
20,145,000
728,000
12,000,000
2,649,000
2,056,000
3/14 Northwest Iowa Power Coop. 28,108,000
3/15 Colorado-Ute Elect. Assn.
4,467,000
12/31/12
8.268%
3/16 Cajun Elect. Power Coop.
3/16 Cooperative Power Assn.
3/16 Allied Tele. Co. of Arkansas
56,000,000
10,000,000
343,000
3/16/80
12/31/12
12/31/12
7.642%
8.27%
8.27%
3/17 Empire Telephone Co.
66,000
12/31/12
8.269%
3/20 Big River Power Corp.
3/20 Corn Belt Power Corp.
4,292,000
1,333,000
12/31/12
12/31/12
8.268%
8.268%
3/27 Basin Elect. Power Corp.
1,723,000
3/27/80
7.662%
3/29 Big River Elect. Corp.
340,000
12/31/12
8.356%
2,610,000
3/30 Southern Illinois Power Corp.
1,165,000
3/30 Big River Elect. Corp.
3/30/80
12/31/12
7.74%
8.353%
9,212,000
3/31 Oglethorpe Elect. Membership
1,621,000
3/31 Allegheny Elect.' Coop.
12/31/12
12/31/12
8.36%
8.36%
Interest payments on the
a quarterly basis.
above REA advances are made on
On March 8, the FFB entered into a guaranty agreement
with the Department of Transportation (DOT) to purchase up to
$17.6 million of Chicago § Northwestern Transportation Company
obligations. The obligations are guaranteed by DOT under
§511 of the Railroad Revitalization and Regulatory Reform Act
of 1976, and are repayable in ten equal annual installments
beginning March 1, 1980.
- 4 The FFB made the following advances to foreign governments
under loans guaranteed by the Department of Defense:
Date of
Date of
Promissory
Interest
Borrower
Amount
Advance
Note
Maturity
Rate
3/9
Argentina 6/30/76
$ 327,844.77
6/30/83
7.879%
6/30/76
3/13
93,588.40
6/30/83
7.8551
6/30/76
3/27
877,926.26
6/30/83
7.8741
China
6/29/76
3/2
1,520,000.00
7/1/84
7.9661
6/30/77
3/24
3,400,000.00
7/1/85
7.966%
Colombia
6/10/76
3/30
939,594.61
6/30/83
7.9491
Costa Rica 9/30/77
3/6
1,000,404.00
4/10/83
7.91%
Honduras
9/30/77
9/30/77
9/30/77
3/2
3/3
3/23
11,264.00
23,250.00
231,250.00
10/7/82
10/7/82
10/7/82
7.8811
7.869%
7.803%
Indonesia
7/1/76
7/1/76
7/1/76
7/1/76
7/1/76
9/30/77
2/15/78
6/24/77
2/15/78
2/15/78
2/14/78
9/6/77
9/6/77
9/6/77
9/30/77
3/3
3/8
3/9
3/20
3/27
3/31
3/10
3/14
3/14
3/21
3/23
3/3
3/14
3/30
3/22
267,446.67
802,576.00
253,650.94
802,576.00
164,142.16
3,133,856.00
100,000,000.00
14,514.25
22,526,894.97
1,150,000.00
23,890,338.53
103,778.57
79,487,147.25
227,605.82
12,902.40
6/30/83
6/30/83
6/30/83
6/30/83
6/30/83
9/20/86
1/12/08
5/12/07
1/12/08
1/12/08
1/12/08
12/31/84
12/31/84
12/31/84
6/30/83
7.908%
7.882%
7.879%
7.844%
7.874%
8.117%
8.353%
8.316%
8.325*
8.304%
8.315%
9/30/77
9/30/77
7/28/75
9/30/77
9/30/77
3/13
3/24
3/24
3/2
3/20
1,683,500.00
3/20/84
5,050,500.00
3/20/84
1,385,129.58
6/30/83
1,969,018.50 4/10/84
38,025.76
4/10/84
7.96%
7.889%
Senegal
9/29/77
3/6
1,482,395.18
9/10/89
8.157%
Spain
9/28/77
9/28/77
3/21
3/23
7,860,732.00
3,447,394.00
6/10/87
6/10/87
7.987%
8.012%
Thailand
9/29/76
9/29/76
3/1
3/2
772,671.09
60,317.88
6/30/83
6/30/83
7.889%
7.916%
Tunisia
9/29/76
9/29/77
3/6
3/14
3,521,371.46
44,106.00
10/1/84
10/1/85
7.982%
7.952%
9/30/76
9/22/77
3/3
3/3
7,091,218.75
2,498,043.79
10/1/86
10/1/87
8.041%
8.082%
Israel
Korea
Liberia
Malaysia
Peru
Turkey
totaned^Jz.^binlSJ.8^
h
°ldinSs
on
March 31, 1978,
7.987%
7.927%
8.038%
7.835%
7.894%
7.919%
7.873%
FOR IMMEDIATE RELEASE
Contact: John P. Plum
—
202-566-2615
Wednesday, April 19f 1978
NEW FISCAL ASSISTANCE LEGISLATION GOES TO CONGRESS
The Department of the Treasury today submitted legislation to Congress embodying the Administration's Supplementary
Fiscal Assistance program, an important element in President
Carter's urban policy.
The new measure would replace the expiring Anti-recession
Fiscal Assistance Program (also called countercyclical
revenue sharing) and would use funds already included in
the fiscal 19 79 budget for the countercyclical program.
Although the general economy has improved and overall
unemployment rates are declining, certain fiscally strained
local governments need supplemental fiscal assistance
because their underlying economies continue to be weak.
The recommended legislation authorizes an appropriation
of $1.04 billion for FY 1979 and $1.0 billion for FY 1980.
Funds will be allocated annually, although actual disbursements will occur quarterly.
General purpose local governments are eligible for the
program if they are experiencing either unemployment in excess
of 4.5 percent or disptoportionately slow growth in any two
of the following three economic indicators — employment, per
capita income or population. The new eligibility criteria
will target aid to those local governments whose fiscal strain
primarily reflects long term economic weakness.
The new program provides general purpose fiscal assistance
because this type of aid gives more flexibility to recipient
governments. Generally, such governments have shrinking
revenue bases caused by a long-term out-migration of taxpayers, investment and jobs. Additional tax rate increases
o¥ service reductions would only cause further economic decline.
The new formula establishes broader measures of need for
all governments, especially smaller jurisdictions, by including
the three additional economic indicators and by separating
small from large governments. Indian tribes, Alaskan native
villages, certain territories and the Commonwealth of Puerto Rico
would be eligible for assistance
under the legislation.
oOo
B-842
SECTIONAL ANALYSIS
of a bill
"To authorize a supplementary fiscal assistance program of payments
to local governments, and for other purposes."
Section 101, Short Title. This section provides that the Act may be
cited as the "Supplementary Fiscal Assistance Act of 1978."
Section 102, Findings of Fact and Declarations of Policy. This section
sets forth a policy statement on the importance of the economic veil-being
of local governments to the national economy. Many local governments have
experienced secular decline, and are also suffering from the effects of
national economic problems. Due to these economic factors, there is a
need for a program to continue general purpose fiscal assistance to local
governments experiencing budgetary hardship due to secular economic decline.
In addition, assistance to local governments is an essential element of a
comprehensive urban policy.
Section 103, Authorization of Payments. This section authorizes the
Secretary of the Treasury (hereinafter referred to as "the Secretary") to
make payments each calendar quarter to local governments experiencing substantial
unemployment (above 4.52) or secular economic decline, as reflected in
slow growth or decline in two of the three following factors: employment, per
capita income and population. (I 103(a) and (b))
This section also authorizes an appropriation of $1,040,000,000 for
each of fiscal year 1979 and $1,000,000,000 for fiscal year 1980 for payments
to eligible local and territorial governments, Indian tribes and Alaskan
-2-
native villages, in addition to funds necessary for the administration
of the program. This level of funding for the program it consistent with
the President's budget. Payments are authorized only to local and territorial
governments, Indian tribes and Alaskan native villages, and the level of
funding represents an amount that approximates such governments' aggregate
share under title II of the Public Works Employment Act of 1976, as amended
(42 U.S.C. I 6721 jet seq; hereinafter referred to as "title II").
State governments are excluded for several reasons. As independent
political entities, State governments have a variety of revenue sources
that are not available to local governments. Further, many State governments
have current revenue surpluses and, as a whole, are less in need of supplemental
fiscal assistance than local governments experiencing substantial unemployment
or secular economic decline. Also, State governments are generally not
experiencing a secular economic decline. Direct payments to local governments
will be more effective in alleviating budgetary hardships resulting from
high levels of unemployment and secular economic decline within a local
jurisdiction.
The existing program under title II contains several variable
factors which control the level of funding nationally, and to individual
governments each quarter. These fluctuations in funding cause a considerable
decree of uncertainty on the part of recipient governments and hinder their
efforts to plan, budget and efficiently use the funds. A great deal of
the uncertainty as to funding levels and eligibility in the existing program
is eliminated in the program under this Act. The latter provides for the
-3aaount appropiated to be allocated and paid nationally during a fiscal
year. Also, the possibly that funding would cease when the national rate
of unemployment fell to six percent has been deleted from this Act.
Payments would continue to be made on a quarterly basis but allocations
to the individual governments would be made annually; quarterly allocation
and reallocation, as required by the existing program, are no longer deemed
necessary since the mitigation of cyclical fluctuations is no longer a
purpose of the legislation. Local governments would thus have adequate
notice of whether they are eligible for the program, and of the amount of
their payment for the upcoming fiscal year. Payments would be made within
the first five days of each calendar quarter in fiscal years 1979 and 1980.
The program of payments under this Act, like those under the State
and Local Fiscal Assistance Act of 1972, as amended (31 U.S.C. I 1221 et aeq.)
and title II of the Public Works Employment Act of 1976, as amended (42 D.S.C.
§ 6721 et seq.) , is not a grafot or financial assistance program. It is an
entitlement program and, as such, is not governed by the requirements
and conditions normally applicable to grant or financial assistance programs.
Section 104, Local Government Allocation. This section contains the
formula, definitions and eligibility criteria used to allocate funds to
local governments under this Act. The formula criteria are necessarily
Complex to accommodate the various measures of fiscal strain and financial
need.
Section 104(a) provides that each eligible local government's annual
allocation under the Act will equal its "local government percentage"
-4-
•ultiplied by the appropriation for the fiscal year leas the amounts allocable
to the territories under f 113 and to Indian tribes and Alaskan native villages
under | 114.
Section 104(b) provides the method for determining a "local government
percentage . That percentage represents each government's share of the
annual appropriation. A local government percentage is computed by multiplying
a government's "local distribution index" (a term defined in S 104(c)(5))
by its local revenue sharing amount for the most recently completed general
revenue sharing entitlement period, and then dividing the product of that
multiplication by the sum of such products for all eligible local governments
nationally.
This allocation formula differs from the formula under title II which
is geared exclusively to unemployment, and multiplies a government's
unemployment rate in excess of 4.52 by its local revenue sharing amount.
The local government index used for the program in this Act utilizes several
additional data factors in measuring fiscal need. The local revenue sharing
amount data factor under the current legislation is retained because of
its factors of tax effort, population and per capita income. Also, it is
incorporated so as to produce a result consistent with the distribution
pattern of the current program.
Section 104(c) set6 forth the eligibility criteria and the method of
calculating a local government index for each eligible local government.
The definition for a local government ($ 104(c)(1)) is substantially
the same as the definitions used in the State and Local Fiscal Assistance Act
of 1972, as amended (31 U.S.C. 1221 et seq.) and title II.
-5-
Eligibility (| 104(c)(2)) is limited to fiscally distressed local
governments because State governments generally have a greater revenue
raising capacity and would be better able to replace title II funds.
For the purpose of determining eligibility, local governments are divided
into two categories - those wholly or pa/tly within a standard metropolitan
statistical area (SMSA) (S 104(c)(2)(A)) and those entirely outside an SMSA
(non-SMSA) (S 104(c)(2)(B)). Because of techniques used to generate unemployment and employment data, separation into SMSA and non-SMSA groups will compensate
for and minimize measurement discrepancies between the sizes of potential
recipient governments. Fiscal stress between urban and rural governments
may not be comparable by the same measures, and the SMSA/non-SMSA distinction
is intended to equalize the relative posture of each group.
A government will be eligible if it has an unemployment rate in excess
of 4.5 Z, or if it satisfies two of the following three conditions: (1)
its local rate of growth in employment is less than such rate for all SMSAs
(or non-SMSAs); (2) its local rate of growth in per capita income is less
than such rate for all SMSAs (or non-SMSAs) or; (3) its local rate of
growth in population is less than such rate for all SMSAs (or non-SMSAs).
Therefore, a government can qualify on the basis of its unemployment rate,
or its slow growth as compared to its group (SMSA or non-SMSA) in two of
the three data factors specified above (employment, population or per
capita income). Generally, these growth rates are determined by subtracting
from the most recently available data for each data category, the data
for a preceding comparable period of time for all eligible local governments,
or for a specific government, as appropriate, and dividing that difference
by the data for such prior period.
-6-
The eligibility criteria measure the government's secular economic
condition and serve as indicators of a government's fiscal atrain, if any.
The use of a local unemployment rate (I 104(c)(3)(A)) in excess of
4.52 results in targeting to areas with higher fiscal strain, since
unemployment rates above this level generally reflect the magnitude of
secular decline, such as decline in employment, low assessable base growth,
and high tax burdens. Unemployment rate is a conceptually straightforward
measure of economic distress that is widely accepted by the public, Congress,
and various interest groups, and is used in the current program. Therefore,
the use of unemployment also provides a link with the existing distribution
pattern. A virtue of unemployment rates is their availability on a current
basis. The use of an unemployment rate above 4.5 2 also serves as a
measure of a local government's social welfare burden in terms of welfare
payments, and health and criminal justice services.
The local rate of growth in employment (S 104(c)(3)(B)) is a good
indicator of the long term trend of the local economy. When used in
conjunction with the local rate of growth in per capita income and population,
it may give a better indication of secular economic decline in rural government areas than unemployment alone. Also, it represents the employment
aspects of the unemployment, and is more indicative of government revenues,
since employment generates tax receipts.
As a determinant of taxable wealth and level of economic activity,
measurement of local rate of growth in per capita income ($ 104(c)(3)(C))
gauges each government's economic position relative to its group (SMSA or
-7-
non-SiSA). For governments in rural areas, this is a particularly good
indication of relative secular economic decline. Per capita income is also
an important measure of living standards and purchasing power, and therefore
relates directly to economic conditions and government financial condition.
This indicator can also provide a measure of underemployment, which is
particularly common in rural areas because many agricultural jobs pay low
wages in relation to manufacturing or service jobs, and there are often
too few full-time jobs relative to population.
Recent evidence indicates that there is a direct relationship between
local rate of growth in population (I 104(c)(3)(D)) and fiscal condition.
Generally, cities with declining or slowing population growth have greater
fiscal strain.
The local rate of growth in population is also considered to be a good
indicator of a community's attractiveness in terms of its ability to draw
future residents and a labor aupply and, thus, of its future economic health.
The local rate of growth in population may reflect past shifts in economic
activity as well as how to predict future changes. Individuals make
residential choices for a number of reasons. To the extent that people move
m search of better employment opportunities, the rate of growth in population
is a second-order indicator of past economic performance.
Population changes affect governmental revenues and expenditures, either
directly or indirectly, since they impact the economic base of a government.
For example, the residential property tax is the foundation of most local
government revenues. Changes in population influence the amount of property
-8tax revenues by causing changes in the market value of residential property.
As the population of a city increases, demand for available housing is likely
to rise and ao will its market value and, thus, property tax revenues. Although
the supply of housing will in time expand in response to this rise in demand,
this does not happen immediately. A fall in a city's population produces the
opposite effect: demand drops, as do market values and property tax receipts.
The supply of housing in this instance is usually even more unresponsive and
will remain constant for some time.
Once the SMSA and non-SMSA eligible governments are identified, the next
step is to determine each eligible government's "local distribution index"
(S 104(c)(5)). Several calculations are used so that each government gets the
benefit of whichever one produces the highest result. These four separate
calculations are based on the following data: (I) the local rate of unemployment in excess of 4.5 2; and the local rates of growth in (2) employment,
(3) per capita income, and (4) population. For each of these data categories,
the difference between a local government's rate and its group's (SMSA or
non-SMSA) rate is divided by the standard deviation (weighted by population
to account for differences in size between governments) of the rates of the
governments in its group.
Once this index is developed for each government, it is used to compute
that government'8 local government percentage. That percentage represents
a local government'6 share of the total funds to be made available for
payments to local governments each fiscal year of the program.
-9-
Section 104(d) provides that if the annual allocation to a local
or territorial government, Indian tribe or Alaskan native village
for a fiscal year is less than $200, such government ahall not receive any
payment for that fiscal year. Allocations below $200 per year are too small
to be meaningful to the those governments and the processing of the payments
creates a substantial administrative burden (| 104(d)(1)).
The other limitation on allocations (§ 104(d)(2)) is that a government
may not receive more funds under the Act than it received under title II
during the period beginning July 1, 1977 and ending June 30, 1978, except
for those governments which received no allocation under such Act during
that time period. Funds made available due to this allocation constraint
will be redistributed to the remaining governments (§ 104(d)(3)). Governments
that received no allocations under title II during the aforementioned
time period will not benefit from this redistribution of funds.
Section 104(e) provides authority regarding treatment, for allocation
purposes, of a local government located only in part within a larger political
entity, and authority to take into account boundary changes and governmental
reorganizations.
Section 105, Use of Payments. This section provides that payments under
the Act shall be used for basic services customarily provided to persons
under the jurisdiction of the recipient local or territorial government,
Indian tribe or Alaskan native village. The governments may use payments
for the same governmental purposes for which as they use their own revenues,
-10-
including capital expenditures for equipment and construction projects.
This provision eliminates the restriction on capital expenditures currently
applicable to payments under title II. As with funds under title II, these
payments may be used as the local contribution for a Federal matching grant
49
to be utilized in a manner not inconsistent with the Act.
Section 106, Statement of Assurances. This section provides that in
order for a local or territorial government, Indian tribe or Alaskan native
village to receive a payment, a statement of assurances shall be filed
annually with the Secretary. The signatory government shall assure the
Secretary that it will comply with the following conditions in the expenditure
of payments under the draft bill: the government will use the funds for
basic expenditures as set forth in Section 105 (S 106(a)); it will use
fiscal, accounting and audit procedures that conform to guidelines established
by the Secretary (after consultation with the Comptroller General)
(§ 106(b)(1)); it will provide access to the Secretary (and the Comptroller
General) of any books, documents, papers or records as the Secretary may
require to review compliance within the provisions of the Act (§ 106(b)
(2)); it will make such reports as are requested by the Secretary to carry
out the purposes ofthe Act (§ 106(c)); it will comply with the nondiscrimination requirements of section 107 (§ 106(d)) and the labor standards
requirements of section 108 (I 106(e)); and it will use payments
only in accordance with the substantive laws and budgetary procedures that
are applicable to the use of its own source revenues (I 106(f)). The latter
11-
assurance is currently in the State and Local Fiscal Assistance Act of 1972,
as amended, and title II and would be the principal restriction on the
use of the payments under this Act.
Section 107, Nondiscrimination. This section prohibits discrimination
on the basis of race, color, national origin or sex under any program or
activity funded by payments under either this Act or title II
(S 107(a)(1)). Any prohibition against discrimination on the basis of age
under the Age Discrimination Act of 1975 (42 U.S.C. I 6101 et seq.) or with
respect to an otherwise qualified handicapped individual as provided in
section 504 of the Rehabilitation Act of 1973 (29 U.S.C. I 794 et seq.) also
applies to any such program or activity; the handicap discrimination provisions
would not be applicable to construction projects begun before January 1, 1977
(S 107(a)(2)(B)). The ban on discrimination on the basis of religion in the
Civil Rights Act of 1964 (42 U.S.C. S 2000e(2)) and in title VIII of the Civil
Rights Act of 1968 (42 U.S.C. IS 3601-19) also applies to such program or
activity. In addition, the provisions of the State and Local Fiscal Assistance
Act of 1972, as amended and title II with respect to fund tracing (S 107(a)(2)(A)),
administrative enforcement, the authority of the Attorney General to intervene
or initiate suit, and private remedies (31 U.S.C. S 1242, 1244-45), are
incorporated in this section (I 107(b)) of the Act.
Thus, the section is substantially similar to the pertinent provision
in title II. fowever, it is intended that any act of discrimination
alleged to have occurred prior to the effective data of this Act, despite
the repeal of title II, will continue to be subject to the jurisdiction
of the Secretary.
-12-
Section 108, Labor Standards. This section provides that all laborers
and mechanics employed by contractors on construction projects funded in whole
or in part by payments under this Act or title II shall be paid wages at rates
not lets than those prevailing on similar projects in the locality ss determined
by the Secretary of Labor under the Davis-Bacon Act (40 U.S.C. If 276a-5).
This section is substantially identical to the pertinent provision in
title II. However, it is again intended that the Secretary retain jurisdiction, notwithstanding the repeal of title II.
Section 109, Withholding. This section provides that after affording
reasonable notice and an opportunity for a hearing, payments shall be
withheld by the Secretary from a government that has failed to perform
any action covered by any assurance required by section 106 of this Act
or by title II, except for the nondiscrimination provisions, until the
Secretary is satisfied that compliance with that section has been achieved.
For discrimination cases, the remedies and procedures of section 107 apply.
Section 110, Data Provision Responsibilities. This section requires the
Secretary of Labor and the Secretary of Commerce to collect and make available
to the Secretary the data needed to administer the Act. The Secretaries
of Labor and Commerce are also required to advise the Secretary as to the
availability and reliability of data relevant to the program.
Section 111, Rulemaking Authority. This section authorizes the Secretary,
after consultation with the Secretaries of Labor and Commerce, to prescribe
-13-
rules necessary to carry out his functions under this Act, not later
than 90 days after the effective date of this Act.
Section 112, Reports. This section provides that the Secretary shall
report to Congress as soon as practical after the end of each calendar year
during which payments are made, on the amounts paid to local governments,
Indian tribes and Alaskan native villages, as well as withholding actions
taken pursuant to section 107 (Nondiscrimination) and section 109
(Withholding).
Section 113, Allocations to Puerto Rico, Guam, American Samoa, and the
United States Virgin Islands ("territories"). This section allocates to these
territories, in the aggregate, an amount equal to 12 of the amount appropriated
for each fiscal year ($ 113(a)). Each of the territories shall receive
an allocation based on its population compared to the total population
of all the territories (S H3fb)(1)). Each territory may allocate such
sums to the local governments within its jurisdiction as it deems appropriate
(S 113(c)). This is similar to the pertinent provision in the title II,
except that the funds paid to the territories under this Act are not in
addition to the funds paid to the eligible local governments.
Section 114, Allocations to Indian tribes and Alaskan native villages.
This section allocates to Indian tribes and Alaskan native villages, in
the aggregate, an amount equal to 0.32 of the amount appropriated for each
fiscal year (I 114(a)). Each tribe or village shall receive an allocation
-14-
based on its population compared to the total population of all Indian
tribes and Alaskan native villages (§ 114(b)(1)). This differs from title II,
under which the tribes and villages Are generally treated in the same manner
as local governments.
Section 115, Applicability to Antirecession Fiscal Assistance. This
section repeals title II with certain exceptions and provides that
the expenditure of any funds made available in fiscal years 1977 and
1978 provided under title II, which remain unexpended, ahall be governed
by the provisions of this Act. Thus, restrictions under title II relating
to use and other matters will no longer be applicable to the expenditure
of those funds, after this Act becomes effective. Since the countercyclical
aspects of the existing program are no longer relevant under this Act,
funds remaining available for expenditure will not be subject to the
requirements that have been imposed for countercyclical purposes.
The exceptions to repeal are for the purpose of ensuring that the assurance,
nondiscrimination, labor standards and withholding provisions of title II
remain in force with respect to title II funds. It is intended by this means
to preserve the Secretary's jurisdiction over noncompliance which has, or
is alleged to have, occurred prior to the effective date of this Act.
A Bill
To authorize a supplementary fiscal assistance program of payments to
local governments, and for other purposes.
Be it enacted by the Senate and the House of Representatives of the
United States of America in Congress assembled, that this Act may be cited
as the "Supplementary Fiscal Assistance Act of 1978."
FINDINGS OF FACT AND DECLARATION OF POLICY
SEC. 102. FINDINGS.— The Congress finds and declares —
(a) that local governments represent a significant segment of the
national economy whose sound fiscal and economic condition is essential to
national economic prosperity;
(b) that secular economic decline and national economic problems
have imposed considerable hardships on many local government budgets;
(c) that general purpose assistance has been especially helpful to
those governments experiencing secular economic problems which are aggravated
by severe cyclical fluctuations; and
(d) that a general assistance program which aids local communities
requiring fiscal relief is an essential component of a comprehensive urban
policy.
AUTHORIZATION OF PAYMENTS
SEC. 103. (a) IN GENERAL. ~ The Secretary of the Treasury (hereinafter
referred to as the "Secretary") shall in accordance with the provisions
of this Act make payments to local governments, territories, Indian tribes
and Alaskan native villages to provide fiscal assistance to areas experiencing
substantial unemployment or a high degree of fiscal strain or secular
-2-
economic decline as reflected in disproportionately alow growth in employment, per capita income and population.
(b) PAYMENTS TO RECIPIENT GOVERNMENTS. — The Secretary ahall pay, not
later than five days after the beginning of each calendar quarter, to each
eligible local government, territory, Indian tribe and Alaskan native village,
which has filed a statement of assurances under section 106, an amount equal
to one fourth of the annual amount allocated to such government under section
104. The first quarterly payment shall be made within the first five days
of October, 1978. Payments under this Act may be made with necessary adjustments
on account of overpayments or underpayments.
(c) AUTHORIZATION FOR APPROPRIATIONS. — There is hereby authorized to
be appropriated for payments to eligible local governments, territories,
Indian tribes and Alaskan native villages for the fiscal year 1979 the sum
of $1,040,000,000, and for the fiscal year 1980 the sum of $1,000,000,000,
and such additional sums in each fiscal year as may be necessary for the
administration of this Act.
LOCAL GOVERNMENT ALLOCATION
SEC. 104 (a) IN GENERAL. — The Secretary shall allocate to each eligible
local government from the amount appropriated for payments for each fiscal year
pursuant to section 103, an amount for each such fiscal year equal to such
government's local government percentage multiplied by an amount equal to
the difference between the amount appropriated pursuant to section 103 and
the amounts allocable pursuant to sections 113 and 114. Such allocation shall
-3be made by the Secretary during the September preceding the appropriate
fiscal year for which such allocation is made, based on the most current
available data, pursuant to rules issued under section 111 of this
Act.
(b) LOCAL GOVERNMENT PERCENTAGE. — For purposes of this Act the
local government percentage for an eligible local government is equal to
the quotient resulting from (1) the product of the local distribution index for such eligible
local government multiplied by the local revenue sharing amount for
such eligible local government, divided by
(2) the sum of such products for all eligible local governments.
(c) DEFINITIONS. — For purposes of this Act (1) "local government" means a county, municipality, township,
or other political subdivision of a State which is a unit of general
government (determined on the same principles as are used by the Bureau
of the Census for general statistical purposes), and performs substantial
governmental functions. Such term includes the District of Columbia.
(2) "eligible local government" means a local government which
satisfies the following conditions:
(A) For a local government with boundaries in whole or in part
within a Standard Metropolitan Statistical Area (SMSA), as defined
by the Department of Commerce and reported to the Secretary (hereinafter
"SMSA governments"), an "eligible local government" is a local government
which, in the area under its jurisdiction, either —
-4-
(i) has a local unemployment rate as determined pursuant to
subparagraph (3)(A) in excess of 4.5 percentage points; or
(ii) satisfies at least two of the following:
(js) the local rate of growth in employment, as determined pursuant to subparagraph (3)(B), is less than the
rate of growth in employment in all SMSAs;
(b) the local rate of growth in per capita income, as
determined pursuant to subparagraph (3)(C), is less than
the rate of growth in per capita income for all SMSAs;
(c) the local rate of growth in population, as
determined pursuant to subparagraph (3)(D), is less than
the rate of growth in population for all SMSAs.
(B) For a local government with boundaries entirely outside an SMSA
(hereinafter "non-SMSA governments"), an "eligible local government" is a
local government which meets the unemployment or growth criteria set forth
in subparagraphs (2)(A)(i) or (ii), above, except that the term "non-SMSA"
is inserted in lieu of "SMSA."
(3) Local rate of unemployment, and local rate of growth
in employment, per capita income and population are determined
as follows:
(A) "Local unemployment rate" is the rate of unemployment
in the area under the jurisdiction of the local government during the
most recent four calendar quarters for which data are available, as
determined or assigned by the Secretary of Labor and reported
-5to the Secretary.
In the case of a local government for which
the Secretary of Labor cannot determine a local government
unemployment rate, the Secretary of Labor shall assign such local
government the local unemployment rate of the smallest unit of.
local government or appropriate geographic area for which a local
unemployment rate has been determined and within the jurisdiction
or area in which such local government is located, unless an unemployment rate has been provided for the local government to the
Secretary of Labor by the Governor of the State in which the local
government is located and such rate has been determined by the
Secretary of Labor to have been developed in a manner consistent
with procedures used by the Secretary of Labor and then assigned
to the local government.
(B) "Local rate of growth in employment" is the rate of
employment growth determined by subtracting from the employment
in the area under the jurisdiction of a local government for the
most recent four calendar quarters for which data are available,
the employment within such area for a four calendar quarter period
which preceded such recent four calendar quarters by either five
or six years (depending on which prior year data are most useful),
as determined by the Bureau of Labor Statistics for the Secretary
of Labor, and dividing this difference by the employment within
such area for the earlier four calendar quarter period. In the
event that data are not available for such earlier period for
-6-
determining an allocation under this section, the Secretary of
Labor shall determine the rate of growth in employment on the basis
of data for the most appropriate period of time less than five
years preceding the most recent year for which data are available.
In the case of a local government for which the Secretary of Labor
cannot determine employment for a local government, the Secretary
of Labor shall assign to such local government the local rate of
growth in employment of the smallest unit of local government or
appropriate geographic area for which such rate has been determined
and within the jurisdiction or area in which such local government
is located, unless a local rate of growth in employment has been
provided for the local government to the Secretary of Labor by
the Governor of the State in which the local government is located
and such rate has been determined by the Secretary of Labor to
have been determined in a manner consistent with procedures used
by the Secretary of Labor and then assigned to the local government.
The local rate of growth in employment shall be determined or
assigned by the Secretary of Labor and reported to the Secretary.
(C) "Local rate of growth in per capita income" is determined
by subtracting from the per capita income in the area under the
jurisdiction of a local government for the most recent year for
which data are available, the per capita income within such area
for a year which preceded such recent year by either five or six
years (depending on which prior year data are most useful), as
-7-
determined by the Bureau of the Census for the Secretary of
Commerce for general statistical purposes, and dividing this
difference by the per capita income within such area for the
earlier year. In the event that data are not available for such
earlier period for determining an allocation under this section,
the Secretary of Commerce shall determine the local rate of growth
in per capita income on the basis of data for the most appropriate
period of time less than five years preceding the most recent
year for which data are available. The local rate of growth in
per capita income shall be determined by the Secretary of Commerce,
and reported to the Secretary(D) "Local rate of growth in population" is determined by
subtracting from the population in the area under the jurisdiction
of the local government for the most recent year for which population
data are available,'the population in such area as of a date which preceded the date of the most recently available population data by
either five or six years (depending on which prior year data are
most useful), as determined by the Bureau of the Census for the
Secretary of Commerce for general statistical purposes, and dividing
this difference by the population within such area for the earlier
year. In the event that data are not available for such earlier
period for determining an allocation under this section, the
Secretary of Commerce shall determine the local rate of growth
in population on the basis of data for the most appropriate
8-
year less than five years preceding the most recent year for
which data are available. The local rate of growth in population
shall be determined by the Secretary of Commerce and reported
to the Secretary.
(4) "Local revenue sharing amount" for a local government
is the amount determined under section 108 of the State and Local
Fiscal Assistance Act of 1972, as amended (31 U.S.C. S 1221 et
seq.) , for such local government for the most recently completed
entitlement period, as defined under section 141(b) of such Act.
(5) "Local distribution index" means:
(A) For each SMSA government, the largest of the quotients
resulting from (i) subtracting 4.5 percentage points from the local
unemployment rate for such government and dividing the difference
by the standard deviation weighted by population of all SMSA
governments' unemployment rate, using 4.5 percentage points as
the mid-point in calculating the weighted standard deviation;
(ii) subtracting the local rate of growth in employment
for such government from the rate of growth in employment
for all SMSAs (as calculated from data collected by the Bureau
of Labor Statistics for the Secretary of Labor and reported to
the Secretary for the same time period) and dividing the difference
by the standard deviation weighted by population of all SMSA
governments' rates of growth in employment for the same time period;
-9(iii) subtracting the local rate of growth in per capita
income for such government from the rate of growth in per capita
income for all SMSAs (as calculated from data collected by the
Bureau of the Census for the Secretary of Labor and reported
to the Secretary for the same time period) and dividing the difference
by the standard deviation weighted by population of all SMSA
governments' rates of growth in per capita income;
(iv) subtracting the local rate of growth in population
for such government from the rate of growth in population for
all SMSAs (as calculated from data collected by the Bureau of
the Census for the Secretary of Labor and reported to the Secretary
for the same time period) and dividing the difference by the
standard deviation weighted by population of all SMSA governments'
rates of growth in population.
(B) For each non-SMSA government, the same as it does for a
SMSA government under subparagraph (5)(A) above, except that the term
"non-SMSA" is to be inserted in lieu of "SMSA."
(d) ALLOCATION LIMITATIONS.-(1) If the amount which would be allocated for any fiscal year
to any eligible local government, territory, Indian tribe and Alaskan
native village under this Act is less than $200, then no amount shall
be paid to such government hereunder.
(2) The maximum amount payable annually to a local government under
this Act shall be the lesser of the annual allocation determined under
-10-
this section or the amount allocated during the period beginning
July I, 1977 and ending June 30, 1978 under title II of the Public
Works Employment Act of 1976, as amended (42 U.S.C. I 6721 et seq.),
except for those governments which received no allocation under such
Act during the period beginning July 1, 1977 and ending June 30, 1978.
(3) Amounts allocated under this section in excess of the maximum
allowed under paragraph (d)(2) shall be reallocated to those remaining
eligible local governments that have not exceeded the maximum allocation
under paragraph (d)(2). Governments with no allocations under title
II of the Public Works Employment Act of 1976, as amended (42 U.S.C.
§ 6721 et seq.), for the period beginning July 1, 1977 and ending
June 30, 1978 shall not be eligible for such reallocations under this
paragraph.
(e) LOCAL GOVERNMENT LOCATED IN A LARGER ENTITY; BOUNDARY
CHANGES AND GOVERNMENTAL REORGANIZATION, ETC.
(I) ONLY PART OF UNIT LOCATED IN LARGER ENTITY. - If only
part of a local government is located in a larger governmental
entity, such part shall be treated for allocation purposes as a
separate unit of local government, and all computations except as
otherwise provided in section 104(c)(2)(A) and appropriate rules,
shall be made on the basis of the ratio which the estimated population
of such part bears to the population of the larger governmental
entity.
(2) BOUNDARY CHANGES, GOVERNMENTAL REORGANIZATION. ETC. If by reason of boundary line changes, State statutory or constitutional
-11-
changes, annexations or other governmental reorganizations, or other
circumstances, the application of any provision of this section
to a local government does not carry out the purposes of this Act,
the application of such provision shall be made, under rules
prescribed by the Secretary, in a manner which is consistent
with such purposes.
USES OF PAYMENTS
SEC. 105. Each local government, territory, Indian tribe and Alaskan
native village shall use payments made under this Act for basic services
customarily provided to persons in the area under the jurisdiction of
such government, including expenditures for capital outlay and basic
governmental operations.
STATEMENT OF ASSURANCES
SEC. 106. Each eligible local government, territory, Indian tribe or
Alaskan native village may receive payments under this Act only upon filing
with the Secretary a statement of assurances, at such time and in such
manner as the Secretary prescribes by rule. The Secretary may not
require any such government to file more than one such statement during
each fiscal year. Each such statement shall contain—
(a) an assurance that the requirements of section 105 will
be complied with;
(b) an assurance that such government will™
(1) use fiscal, accounting, and audit procedures
which conform to guidelines established therefor by
-12-
the Secretary (after consultation with the Comptroller
General of the United States), and
(2) provide to the Secretary (and to the Comptroller
General of the United States), on reasonable notice, access
to, and the right to examine, such books, documents, papers,
or records as the Secretary may reasonably require for purposes of reviewing compliance with this Act;
(c) an assurance that reasonable reports will be furnished to
the Secretary in such form and containing such information as the
Secretary may reasonably require to carry out the purposes of this
Act;
(d) an assurance that the requirements of section 107 will be
complied with;
(e) an assurance that the requirements of section 108 will be
complied with;
(f) an assurance that such government will spend amounts
received under this Act only in accordance with the laws and procedures
applicable to the expenditure of its own revenues.
NONDISCRIMINATION
SEC. 107 (a)(1) IN GENERAL.— No person in the United States shall, on the
ground of race, color, national origin, or sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination
under any program or activity of a local government, territory, Indian tribe
or Alaskan native village which receives funds made available under this
Act, or any program or activity of any State, local or territorial government
-13-
funded in whole or in part with funds received under title II of the Public
Works employment Act of 1976, as amended (42 U.S.C. f 6721 et seq.). Any
prohibition against discrimination on the basis of age under the Age Discrimination
Act of 1975 (42 U.S.C. f 6101 et seq.) or with respect to an otherwise
qualified handicapped individual as provided in section 504 of the Rehabilitation
Act of 1973 (29 U.S.C. $ 794 et seq.) shall also apply to such programs
or activities. Any prohibition against discrimination on the basis of
religion, or any exemption, from such prohibition, as provided in the Civil
Rights Act of 1964 (42 U.S.C. S 2000e(2)) or title VIII of the Act of April 11,
1968 (42 U.S.C. § 3601 et seq.), shall also apply to such programs
or activities.
(2) EXCEPTIONS.~
(A) FUNDING.— The provisions of paragraph (1) of this subsection
shall not apply where any State, local or territorial government or
Indian tribe or Alaskan aative village demonstrates, by clear and
convincing evidence, that the program or activity with respect to which
the allegation of discrimination has been made is not funded in whole
or in part with funds made available under this Act or title II of
the Public Works Employment Act of 1976, as amended (42 U.S.C.
i 6721 et seq.).
(B) CONSTRUCTION PROJECTS IN PROGRESS.— The provision of paragraph (1), relating to discrimination on the basis of handicapped
status, shall not apply with respect to construction projects commenced
prior to January 1, 1977.
(b) ENFORCEMENT AND REMEDIES.— The provision of subsection (a) of this
section shall be enforced by the Secretary in the same manner and in accordance
-14-
with the same procedures as are required by sections 122, 124, and 125 of the
State and Local Fiscal Assistance Act of 1972, as amended (31 U.S.C. f 1221
et seq.), to enforce compliance with section 122(a) of such Act. The Attorney
General shall have the same authority, functions, and duties with respect
to funds made available under this Act and under title II of the Public
Works Employment Act of 1976, as amended (42 U.S.C. S 6721 et seq.) as the
Attorney General has under sections 122(g) and (h) and 124(c) of such
first cited Act with respect to funds made available under that Act. Any
person aggrieved by a violation of subsection (a) of thi6 section shall
have the same rights and remedies as a person aggrieved by a violation of
subsection (a) of section 122 of such first cited Act, including the rights
provided under section 124(c) of such Act.
LABOR STANDARDS
SEC. 108. All laborers and mechanics employed by contractors on all construction
projects funded in whole or in part by payments under this Act or title II of
the Pubic Works Employment Act of 1976, as amended (42 U.S.C. S 6721 et seq.)
shall be paid wages at rates not less than those prevailing on similar projects
in the locality as determined by the Secretary of Labor in accordance with
the DavisBacon Act (40 U.S.C. I 276a S 276a-5). The Secretary of Labor
shall have, with respect to the labor standards specified in this section,
the authority and functions set forth in Reorganization Plan No. 14 of 1950
(15 CFR 3176) and section 2 of the Act of June 13, 1934, as amended (40 U.S.C.
i 276c).
-15-
WITHHOLDING
SEC. 109. Except as otherwise provided by section 107(b), whenever
the Secretary, after affording reasonable notice and an opportunity for a
hearing, finds that a State, local or territorial government or any Indian
tribe or Alaskan native village has failed to comply substantially with
any assurance filed pursuant to section 106 of this Act or title II of the
Public Works Employment Act of 1976, as amended (42 U.S.C. f 6721 et seq.),
the Secretary shall notify that government, tribe or village that further
payments will not be made under this Act until he is satisfied that there
is no longer any such failure to comply. Until he is satisfied, no further
payments shall be made to such government, tribe or village under this Act.
DATA PROVISION RESPONSIBILITIES
SEC. 110. The Secretary of Labor and the Secretary of Commerce shall provide
information and data necessary to the administration of this Act. Such
information and data shall be provided for each local government, and shall
be made available when necessary to the Secretary to assist him in carrying
out the provisions of this Act. The Secretaries of Labor and Commerce shall
also advise the Secretary as to the availability and reliability of relevant
information and data.
RULEMAKING
SEC. 111. The Secretary is authorized to prescribe, after consultation with
the Secretary of Labor and the Secretary of Commerce, such rules as may
be necessary for the purpose of carrying out his functions under this Act.
Such rules shall be prescribed by the Secretary not later than ninety days
after the effective date of this Act.
-16-
REPORTS
SEC. 112. The Secretary shall report to Congress as aoon as is practical
after the end of each calendar year during which payments are made under
the provisions of this Act. Such reports shall include detailed information
on the amounts paid to each local or territorial government, Indian tribe
and Alaskan native village under the provisions of this Act and any amounts
withheld by the Secretary pursuant to sections 107 and 109.
ALLOCATION TO PUERTO RICO, GUAM, AMERICAN SAMOA AND THE
UNITED STATES VIRGIN ISLANDS
SEC. 113. (a) IN GENERAL. — There shall be allocated for each of the
fiscal years 1979 and 1980 for the purpose of making payments under the
Act to the Commonwealth of Puerto Rico, Guam, American Samoa and the
Virgin Islands, an amount equal to I percent of the amount appropriated
pursuant to section 103, multiplied by the applicable territorial percentage.
(b) ALLOCATIONS. — '
(I) Territorial percentage. — For purposes of this section,
the territorial percentage is equal to the quotient resulting from the
division of the territorial population of a territory by the sum of the
territorial populations for all territories.
(2) For purposes of this section (A) "territory" means the government of the
Commonwealth of Puerto Rico, Guam, Anerican Samoa or
the Virgin Islands;
-17-
(B) "territorial population" means the most
recent population for each territory as determined by
the Bureau of the Census for the Secretary of Commerce
and reported to the Secretary;
(3) The provisions of sections 103, 104(d)(1), 105, 106, 107,
108, 109, 110, 111, and 112 ahall apply to payments to the
territories under thi6 Act.
(c) PAYMENTS TO TERRITORIAL LOCAL GOVERNMENTS. -The governments of
the territories are authorized to make payments to local governments within
their jurisdiction from sums authorized by and received pursuant to this
Act as they deem appropriate.
ALLOCATIONS TO INDIAN TRIBES AND ALASKAN NATIVE VILLAGES
SEC. 114. (a) IN GENERAL. — There shall be allocated for each of the fiscal
years 1979 and 1980 for the purpose of making payments under the Act to Indian
tribes and Alaskan native villages, an amount equal to 0.3 percent of the
amount appropriated pursuant to section 103, multiplied by the applicable
Indian tribe or Alaskan native village percentage.
(b) ALLOCATIONS. —
(I) Indian tribe or Alaskan native village percentage. —
For purposes of this section, the Indian tribe or Alaskan native village
percentage is equal to the quotient resulting from the division of the Indian
tribe or Alaskan native village population by the sum of the populations
for all Indian tribes and Alaskan native villages.
-18-
(2)
For purposes of this section -
(A) "Indian tribe or Alaskan native village" means
an Indian tribe or Alaskan native village which has a recognized
governing body and performs substantial governmental functiona.
(B) "Population" means the most recent population
for each Indian tribe or Alaskan native village as provided
by the Bureau of Indian Affairs for the purposes of the
State and Local Fiscal Assistance Act of 1972, as amended
(31 U.S.C. 1221 et seq.).
(3) The provisions of section 103, 104(d)(1), 105, 106, 107,
108, 109, 111, and 112 shall apply to payments to the Indian tribes and
Alaskan native villages under this Act.
APPLICABILITY TO ANTIRECESSION FISCAL ASSISTANCE
SEC. 115. Except for section 213 of title II of the Public Works Employment
Act of 1976, as amended (42 U.S.C. S 6721 et seq.) , and except as otherwise
provided herein, such title II is repealed and the provisions of this Act
shall govern the expenditure by State, local and territorial governments
(as defined in title II) of funds made available under title II.
FOR RELEASE ON DELIVERY
EXPECTED AT 10:30 A.M.
May 17, 1978
TESTIMONY OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
Mr. Chairman and Members of this distinguished Subcommittee:
I appreciate this opportunity to testify on behalf of
the Treasury on S. 2293, the Electronic Fund Transfers Act
of 1977.
The EFT Environment
The Congress, and this Subcommittee in particular, have
played a highly constructive role in the evolving understanding of the impact of EFT on our banking system. The
Congress made a major contribution by establishing the
National Commission on Electronic Fund Transfers, which
delivered its report last fall. The report puts in perspective many questions posed by EFT developments. These
hearings are an important link in the chain of understanding.
As the pace of change in banking quickens, many old
concepts embrace less comfortably the new facts. We must
beware of too slavish adherence to our traditional ways of
thinking about banking questions. We support the general
approach to banking questions represented by S.2293. In our
view, its commitment to increased competition in making better
banking services available to the consumer is clearly the
direction in which we should be moving.
EFT is still in an early stage of development. It is
basically a phenomenon of the 1970's. Nevertheless, it has
the potential to affect profoundly the shape and character
of our financial system: the relationships among depository
B-843
- 2institutions; the relative roles of depository and nondepository institutions; the effectiveness of traditional
regulatory standards (such as the prohibition of interest on
demand deposits); the relative strength of large and small
institutions; and the products offered by competitors.
In light of the newness of EFT and its importance,
government regulation of EFT at this time should be as modest
as possible, so that it does not unduly retard or distort
the free-market development of EFT systems. All regulatory
action has an impact on the shape of the industry regulated.
Rules such as the prohibition of interest on demand deposits
and the branching regulations have had an important effect
on the products offered by different institutions and their
relative strengths and weaknesses. Once an industry has
evolved to accommodate government rules, it is hard to change
the rules without disruption.
Of course, some competitors will be more aggressive
in extending new services than others; some will make more
effective use of the new technology. Some will lose market
share. But that is not a reason to restrict the growth of
EFT systems. The justification for these adjustments will
be found in the availability, price and quality of services
to consumers.
The consideration of the questions raised by S.2293
will, no doubt, continue. We look forward to working with
the Subcommittee on these issues, and we hope the bank regulators will monitor developments in this area on a continuous
basis.
Terminal Deployment
Under Section 4 of S. 2293, Federally chartered financial institutions would be permitted to deploy nation-wide
point-of-sale ("POS") devices and automated teller machines
("ATMs") which do not perform deposit functions. Deposittaking terminals may be deployed immediately within the
sponsoring institution's home state, and interstate within
Standard Metropolitan Statistical Areas after January 1,
1980. Before January 1, 1980, deposit-taking terminals may
be deployed interstate to the extent that the states permit
interstate deployment of terminals by state-chartered insti-
J
tutions. Federal regulators may not deny permission for
terminal deployment on the basis of the suitability of the
locations chosen, the area to be served, the number of terminals to be deployed or the bank's capitalization. EFT
services may be offered through terminals owned by others
to the same extent that terminals may be deployed.
We think that this bill has chosen a sensible course
in dealing with the deployment of EFT services. It recognizes that the offering of EFT services should not be
constricted by rules developed for branches, while seeking
to modify the immediate competitive impact of the changes
through the use of a phase-in period and restrictions on
deposit-taking. We would like, however, to offer a number
of suggestions that are designed to smooth the transition:
1. Since January 1, 1980 is coming fast upon us
and the legislative process on this bill has
only just begun, we suggest that the phase-in
period for interstate deployment of deposittaking terminals be changed to a later period —
for instance, three years from the date of
adoption.
2. The effect of permitting state-wide deployment
of EFT deposit-taking services in states with
restrictive branching rules will not be unlike
the interstate deployment of such services in
SMSA's, and we suggest that Congress consider
a similar phase-in period for the state-wide
deployment of such services.
3. Using deposit-taking as a measure of the circumstances under which nation-wide deployment
of EFT services is not permitted will put great
strain on the definition of "deposit-taking",
and it should be made clear that the bank regulators have adequate powers to deal with the
definitional and related problems that will arise.
In addition, it should be made clear that the
recitation in Section 9(b) of the factors which
may not be used as a basis for regulatory disapproval of deposit-taking terminals, is not
intended to restrict the traditional responsibility of bank regulators to prohibit unsafe
and unsound banking practices.
- 4 4.
Finally, we suggest that Congress consider
requiring periodic reports from the bank
regulators and the Treasury. For example,
reports at three year intervals for the
next nine years might be appropriate.
Let me explain our reasons for these conclusions.
Phase-In Periods
EFT systems are characterized by high costs of "entry"
and significant economies of scale. The larger the number of
transactions per terminal, the faster its use becomes profitable
This is not necessarily a matter of competitive concern, of
course, since systems may be shared, or independent operators
may offer EFT facilities to small institutions through shared
facilities. The same economies of scale would be available
to these systems. Thus, in this sense, EFT may substantially
expand the reach of smaller institutions that have access to a
large, shared terminal network.
If all institutions are to have a fair opportunity to
adapt to the changes brought by the advent of EFT, there
must be adequate time to plan and to secure participation
in shared systems. That is particularly the case with interstate deployment, since there is presently little interstate
competition in retail banking. Because of economies of scale,
only the largest institutions are likely to be able to move
quickly. Accordingly, we support the bill's use of a phasein period for interstate deposit-taking activities. In view
of the time that will inevitably be consumed by the legislative
process, we suggest a period of three years from the date of
adoption.
In those states, like unit-banking states, that restrict
the deployment of brick and mortar branches, the competitive
impact of permitting state-wide deployment of deposit-taking
terminals will be not unlike permitting interstate deployment
of such terminals within SMSA's. In order to try to assure
that the resulting changes in competitive patterns are the
result of fair competition, all institutions should be given
an adequate opportunity to adjust to the prospective changes.
Thus, we suggest that Congress adopt a similar phase-in
period for state-wide deployment of deposit-taking terminals
beyond the areas in which branching is currently permitted.
- 5 Branching
EFT terminals are one step in a continuum of new ways of
extending banking services to customers: for example, telephone transfers, telephone bill paying and electronic check
authorization. It is simply not meaningful to ask whether EFT
terminals are more like brick and mortar branches than like
electronic check authorization, which is viewed as merely an
extension of banking services. The regulation of EFT terminals
should not be determined by abstract legal niceties.
These services may be a powerful competitive tool. All
other things being equal, a bank offering EFT services may .,„
increase its market share at the expense of a bank that does
not. But this does not mean that EFT terminal deployment is
just an indirect form of branching. There is no evidence that
suggests that terminal deployment will permit a bank to acquire
significant numbers of depositors in distant areas.
Accordingly, we agree with S.2293 that EFT terminals
should not be treated as branches for purposes of the McFadden
Act. This is especially so because terminal systems will be
used by savings and loan institutions and credit unions, which
are not subject to the McFadden Act, and other credit grantors
that are subject to little or no Federal regulation.
Definition of Deposit-taking
We support the bill's use of deposit-taking as the
factor that will confine a depository institution's interstate activities to SMSA's. Deposit-taking has been a
traditional touchstone for distinguishing between banking
and,other financial activities. But with the evolution of(
the banking system, the lines established by this distinction
are blurring.
If a terminal user orders money transferred from his
savings account to his checking account, is that a deposit?
How does it differ from a similar direction by letter or
telephone? If the customer makes a deposit by leaving a
check in an envelope in the electronic terminal, and the
envelope is then picked up by a bank employee, how different
is that from leaving the envelope in a mail box attached
to the terminal?
- 6 For these reasons, it is quite important that recognition
be given to the regulators' broad authority to define the
boundaries of this important concept.
In addition, we suggest that the report of this Subcommittee, if not the bill itself, reflect the fact that
the provisions of Section 9(b) were not intended to restrict
the regulators' traditional responsibility to prohibit unsafe
and unsound banking practices. For example, in prohibiting
regulatory disapproval of the deployment of deposit-taking
terminals on the basis of a "capitalization" requirement,
Section 9 should not be read as requiring the regulators
to stand idly by as an undercapitalized bank begins a
technically ill-conceived EFT program that will bring
crushing financial burdens.
Sharing
At least 14 states have adopted laws which require
institutions deploying EFT systems to permit others to offer
EFT services through those systems. These laws were prompted
by a recognition that industries exhibiting significant
economies of scale tend to reduce competition and, in some
cases, give rise to natural monopolies. Proponents of mandatory
sharing laws are concerned that large financial institutions
would overwhelm weaker competitors that could not afford
competing systems without sharing facilities.
Section 5 of S.2293 embodies the EFT Commission's recommendations on sharing, adopting a so-called "pro-competitive"
sharing policy. Financial institutions may agree to share EFT
systems or components, but would not be required to do so.
State laws requiring sharing would be nullified. If challenged,
sharing arrangements would be reviewed by the courts on a caseby-case basis under traditional antitrust standards. Antitrust
laws would also govern the objections raised by those who claim
to have been improperly denied access to EFT systems.
We support Section 5, at least as an interim solution.
Mandatory sharing laws tend to produce a smaller number of
competitivesystems at the outset. They reduce the incentive
to a financial institution to assume risks with EFT, since no
competitive gains can be realized. Certainly, EFT ought not
be allowed to be disruptive of market structure. Norshould
it be allowed to congeal market structure.
- 7 Even if it ultimately develops that continuing competition
is unrealistic and competing systems cannot survive, and that
greater regulation of the terms of access is required, we
will be better off for not having imposed that regulation at
the outset. For the resulting system will be the product of
vigorous competition for dominance in the marketplace.
Some,have expressed concern that the antitrust laws do
not provide the correct standards for resolving sharing disputes
and that the courts are not the most efficient forum to do so
quickly. It is feared both that the threat of antitrust
action may unduly inhibit desirable sharing arrangements, and
that the pace of^antitrust proceedings is too slow for effective
relief.
We share some of these concerns. We would like to explore
further the idea of finding ways to permit the Federal bank
regulators to determine disputes under expedited procedures.
But it is far too early in the development of EFT systems to
know where the real*problems lie and what standards should
be applied in resolving disputes. If, as we hope, shared EFT
services will be marketed to smaller institutions, this problem
may never become serious. And the basic antitrust approach may
well prove fully workable, particularly if the Department of
Justice develops -appropriate business review procedures.^ We
suggest that the experience with sharing questions be closely
monitored by the bank regulators and that they report yearly to
Congress on this subject.
Automated Clearing Houses
The role of the Federal Reserve in the operation of the
payments system has become the subject of debate in recent ^
years. In the EFT area, the focal-point of this debate is the
automated clearing house, or ACH. An ACH provides data processing
services for preauthorized transactions, principally deposits.
Approximately. B5 pexcent of all ACH transactions are concerned
with deposits of U.S.>government payments.
At the present time, the Federal Reserve Banks perform the
data processing functions for all ACK's in the United States
except two. Some observers question whether a public agency
ought to be involved in the provision of these services to the
private sector. Others focus on the questions of "for whom
these services should be provided and how they should be priced.
- 8 Under Section 8 of S.2293, ACH participation would
be open to all financial institutions; only cost-justified
differences in price and other terms would be permitted;
Federal Reserve Banks would impose explicit charges according
to fully allocated costs; and public sector agencies would
be prohibited from offering any other EFT services. The
purpose of Section 8 is to create an environment conducive
to effective private sector competition in the ACH area.
We support the bill's approach on this question. But
we believe that this issue cannot be separated from broader
questions that remain unresolved. Private competitors will
be able to bid effectively only if the government as a source
of EFT deposits and Federal Reserve member banks are willing
to use private ACH operators when the price of their services
is competitive. This cannot be the case if member banks
receive ACH services from the Fed in return for reserve
balances held — that is, if the reserves are an automatic
offset to the prices imposed. In that situation, member banks
will have no incentive to pay for ACH services provided by the
private sector.
True competition would require the Federal Reserve to
receive cash payments for ACH services from member banks, thus
raising broader questions of "unbundling" of other services and
the payment of interest on reserve balances. We understand
that the Federal Reserve is in the process of addressing these
questions. We will review carefully any legislation that may
be required to deal with these issues. Meanwhile, effective
legislation in the ACH area should await their resolution.
We are also concerned about Section 8's unqualified
prohibition of any public agency's involvement in EFT services
of any other type. This threatens legislative rigidity at a
premature state in EFT development. We cannot be sure how EFT
will develop or what impacts it will have on the structure of
various financial markets. It may well be that, for whatever
circumstance, the presence of some Federal agency in some
markets as an EFT service provider in support of POS as well
as ACH transactions may be necessary and in the public benefit.
Government Access to Records and Customer Rights
The Department of Justice will testify on Government access
to records and customer rights.
FOR IMMEDIATE RELEASE
April 18, 1978
ADDRESS BY
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
ALTERNATE GOVERNOR FOR THE UNITED STATES
BEFORE THE PLENARY SESSION OF THE
INTER-AMERICAN DEVELOPMENT BANK ANNUAL MEETING
VANCOUVER, BRITISH COLUMBIA
APRIL 18, 1978
Mr. Chairman, President Ortiz Nena, governors and members,
ladies and gentlemen. This afternoon the United States Senate
will vote on the second Panama Canal Treaty. That vote will be
the culmination of efforts that began over 14 years ago to
resolve the divisive issues about control of the canal that have
long complicated relations in this hemisphere. Our hope and
expectation is that these treaties will finally settle these
issues in the hemisphere and establish a more just and equitable
relationship between the United States and Panama.
President Carter has personally led the effort to conclude a
successful negotiation, to win its acceptance by our citizens and
to gain Senate ratification. The Senate itself has set aside
many other important matters and has devoted more than two months
to a careful consideration of the treaties' merits and of their
historic implications. I would suggest that this record clearly
establishes the important priority that this Administration
assigns to its relations in the hemisphere.
The treaties are also visible evidence of the substance of
U.S. policy toward Latin America and illustrate three major
principles that guide us:
— First, respect by every nation for the political
integrity and economic and social aspirations of
every other nation.
— Second, recognition of the essential interdependence
of developed and developing economies.
— Third, impressive progress in many of the world's
developing countries — especially in Latin America
— which enables them, by ability as well as right,
to play an increasingly important role on the
international economic scene.
B-844
-2This Vancouver meeting is itself a reflection of the
inexorable currents at work. The Inter-American Development Bank
now embraces not only this most hospitable of host countries,
Canada, but many other developed countries around the world.
What was originally a regional institution has acquired a global
base, and become part of a world-wide system of highly important
financial and development institutions.
United States support of the bank, like our other Latin
American aspirations, is an element in our global approach to the
problems of the international economic order -- global growth and
prosperity, making optimum use of material and human resources in
a livable environment, ensuring the essential justice of
international system as a whole.
U.S. Policies for Development
Last year, Secretary Blumenthal outlined for you the
comprehensive nature of U.S. policies and actions benefitting the
developing world. He deeply regrets that he is unable to be here
today to renew the many warm contacts with other Governors he
made in Guatemala. He recently was the host at a luncheon in
Washington with President Ortiz Mena and representatives of many
of your countries in order to maintain his personal involvement
in U.S.-Latin American economic relation. And he has asked me to
emphasize that the United States remains absolutely committed
both to the implementation of policies beneficial to the
developing world, and to the constant search for additional ways
in which U.S. interests and the interests of developing nations
can be harmonized and better served.
This search for a convergence of interests, a sharing of
responsibility for solutions to common problems, a commitment to
partnership, was a central theme of President Carter's recent
journey to Latin America. During his visit to Venezuela, one of
the great democracies of the hemisphere, he said: "Our specific
obligations will be different, our interests and emphases will
vary — but all of us, north and south, east and west, must bear
our part of the burden. If the responsibility for global
progress is not shared, our efforts will certainly fail, only if
the responsibility is shared, can we attain the goals that our
people want and that our times demand."
We believe the IDB has long symbolized this aspiration. The
Bank is a unique cooperative effort between donors and recipients
and its policies are shaped by both.
For the United States, an important part of the joint
responsibility of which President Carter spoke is maintaining the
strength of the dollar and the monetary system. The United
btates is deeply concerned about the value of the dollar and
recognizes that currency stability is in the interest of the U.S.
and the world economy. A stable dollar can only be achieved by
dealing with the fundamental U.S. economic situation.
-3On April 11, the President announced comprehensive new
measures to combat inflation. These included a series of
measures designed to: (1) limit the size of the 1979 and future
Federal budget deficits, (2) restrict the salary increase of
Federal Government employees, freeze the salaries of executive
appointees for another year, and urge similar wage restraint on
state and local governments and private businesses, (3) seek
voluntary price restraint in various economic sectors, and (4)
reduce the inflationary effect of past and future regulatory
actions by the Government, while resisting proposed legislation
in several fields which would contribute to inflation.
In the energy field, the President once again urged the U.S.
Congress to adopt meaningful energy legislation without further
delay and indicated that, if Congress did not act, oil imports
would have to be limited by administrative action under present
law.
A third area of priority action is export expansion. We are
encouraging American firms to become more export conscious. The
Administration is supporting a sharp increase in the lending
activities of the Export-Import Bank. Also, in his address on
April 11, the President called for a Cabinet-level task force to
develop additional measures to promote exports, and to report
back to him within 60 days.
The recent disorders in the foreign exchange market have
reflected doubts about the U.S. ability to reduce its trade
deficit. Once markets see that we are proceeding in the right
direction on the fundamentals — by curbing inflations, reducing
oil imports, and promoting exports -- I would expect markets to
calm. The U.S. will, however, continue to intervene to the
extent necessary to counter disorderly conditions in the market
and to curb destabilizing speculation.
The international monetary system is also being strengthened
by measures to enhance the sole and resources of the
International Monetary Fund. The amended IMF articles have just
entered into force. They provide a new legal framework for
international financial relations, including expanded IMF
authority over exchange rate practices. The resources of the
fund have been increased by one-third, to about $48 billion,
through implementation of new quotas. The supplementary
financing facility will provide an additional $10.5 billion in
resources for use in assisting those members with severe balance
of payments problems, including, of course, developing countries.
Legislation authorizing U.S. participation is now before
Congress, and final action should be completed in the near
future.
World payments are largely a reflection of world trade. In
this key area, the Administration has demonstrated concretely its
-itdedication to the avoidance of new barriers to imports from
developing countries, and to further reduction of existing
barriers through the multilateral trade negotiations. We reject
protectionism, where problems exist, our reliance is on
strengthened domestic adjustment policies or on negotiation of
temporary relief measures in specific cases. We do insist on
fairness in trading practices, in such problem areas as export
subsidies, we must work together to avoid economic conflict.
In the main, however, the U.S. offers a solid and growing
market for goods at all stages of processing from developing
countries. More than 25 percent of our imports of manufactures
now come from non-oil developing countries, compared to just 15
percent in 1972. The generalized system of preferences allowed
$3-9 billion worth of goods to enter the U.S. duty free in 1977,
including $1.1 billion from Latin America. Keeping our markets
open has not been an easy task for the Administration in face of
the high unemployment situation and a sizeable trade deficit.
But the reasons for maintaining a liberal trading stance are
sound: minimizing inflation, creating trade-related jobs,
avoiding international conflict. These considerations will
continue to guide our policy.
Trade in commodities has been a special area of concern to
developing countries, including many in Latin America. The
United States has responded actively and constructively in this
area. We understand the concern of developing countries over
excessive price fluctuations and resultant disruptions in foreign
exchange earnings, domestic investment and employment. We agree
that it is desirable to seek international measures to stabilize
prices around market trends, and believe that it is in our own
national economic interest, as well as that of the world
community to do so wherever feasible. Thus we are participating
in international stabilization agreements covering coffee, tin,
and sugar and are taking part in discussions of possible
arrangements for rubber, wheat and copper.
The foreign investment policy of the United States has
likewise been attuned to the needs and interests of the
developing world. Basic decisions remain with private investors,
but we will continue to facilitate capital flows through the
Overseas Private Investment Corporation which will have a special
focus in its operations toward the poorer countries.
Through this far-reaching array of policies, the United
States is making a major contribution to economic progress and
the alleviation of human want in developing countries around the
world. We do so for reasons both practical and idealistic, we
take great satisfaction in observing the impressive progress of
those more advanced of the less developed countries, whose
n ™ ; U ? L 0 r S ? inl??bitants are beginning to enjoy more acceptable
conditions of daily life and who are assuming a growing
importance in the functioning of the world economy. These
-5countries are emerging as full participants in the whole fabric
of international exchange -- as well as responsible participants
in the international political framework necessary for a peaceful
planet.
At the same time, our humanitarian instincts are disturbed
at the'continuing plight of large numbers of people in these
countries, as well as those in the least developed countries, who
have vastly different endowments, attainments and prospects. The
most elemental requirements for sustaining human life itself are
often unmet in these countries. Heroic struggles will be
necessary to break the grip of stagnation and prevent poverty
from feeding on poverty. These are the situations where external
help on concessional term must be concentrated, and where our
greatest efforts must be directed.
To help in this endeavor, the United States increased its
foreign assistance by 31 percent in 1977 — 20 percent for
bilateral aid, and a massive 69 percent for multilateral aid
including for the IDB. President Carter has proposed a further
24 percent rise in 1978, including another 70 percent increase in
our contributions to the Development Banks.
The Growing Dynamism of Latin America
Last year, Latin American regional GDP expanded by more than
5 percent after growing by 4.8 percent in 1976. Back in 1975,
when the industrialized world had plunged into deep recession,
Latin American economies continued to grow at an impressive rate
of almost 3 percent.
Latin American growth would have been even higher in 1977 if
several major countries including Brazil, Mexico, and Argentina
had not been implementing necessary stabilization programs under
which all made significant progress. Longer term trends have
also been favorable. The average rate of expansion since 1965
has been slightly over 6 percent — considerably better than the
world as a whole, which grew at about 4 percent if oil producing
countries are excluded. The GDP of the region stood at over $340
billion last year, or a per capital level of about $1,100. This
was far above the level of Africa and Asia (excluding Japan).
On the external side, Latin American exports grew at a rapid
pace in 1977 — rising by about $9 billion to more than $50
billion. The current account in the regional balance of payments
improved by about $2.5 billion, aided by a large trade surplus of
$3.2 billion with the United States, as compared to a slight
deficit the year before. By the end of the year, combined
international reserves were $22 billion — nearly quadruple the
level of only six years earlier.
-6These favorable developments in the aggregate statistics do
not mean, of course, the solution of all Latin America's
problems. The region is much too diverse for that to be the
case. Much poverty remains — an estimated 42 percent of the
people'in Latin America live in poverty, irregularly distributed
between and within countries. Much still needs to be done to
improve domestic resource mobilization and income distribution.
We believe this can be done. Latin American nations in
general have reached a level of maturity — in their planning
capabilities, in the quality of their public administration, in
the sophistication and vitality of their private sectors, and in
the provision of essential services to their citizens — that
places the consolidation of development progress within their
grasp. In no other region of the developing world is* this
phenomenon so widespread as in Latin America.
The Future Role of the IDB
This assessment of Latin America's relatively advanced
position along the spectrum of development has major implications
for the future activity of the Inter-American Development Bank.
In particular, it affects the balance between hard loan and soft
loan resource requirements, compared to institutions serving
other areas of the developing world. It is, inevitably, a
central issue for discussion in the context of the next
-.•*••
replenishment of the Bank's resources.
In terms of country distribution, further progress was made
in 1977 in directing resources on the Bank's most favorable terms
to the smaller and poorer countries. In the Bank's hard window,
however, further efforts are necessary to assure an equitable
distribution of resources to countries and to projects requiring
development assistance.
Some of the other lending during the year may fairly be
questioned in terms of priorities. For example, the export
credit program is utilized principally by the countries best able
to rely on traditional private sources of such financing. We
believe that the Bank should devote its resources primarily to
those sectors and projects for which private sources of financing
on appropriate terms are not available. More resources would
thereby be made available for projects of direct benefit to the
poorer sectors of society.
Several other aspects of the Bank's 1977 activities deserve
comment:
-7—
Complementary financing, drawing directly on private
market sources for project loans, took on
significant dimensions during the year and opened
the way for further development in the future.
— The effort to ensure that appropriate technologies
are employed in projects financed by the Bank
continued to gather momentum during the year.
-- The Bank's internal capacity to evaluate the
effectiveness of its loans was strengthened in
various ways. In addition, the group of
controllers, as an independent evaluation mechanism,
initiated several subsector reviews that will shed
further light on the project lending process. We^
believe that an independent evaluation mechanism is
essential to maintain desireable standards of
performance.
U.S. Policy Toward the IDB
I have already noted the sharp increase in U.S. financial
contributions to the multilateral financial institutions in 1977.
In the IDB, our contribution climbed to a total of $797 million
in calendar year 1977, a three-fold increase during the first
year of the Carter Administration.
In the Inter-American Development Bank during the year, as
in other similar institutions, U.S. representatives have used
both their voice and their vote on behalf of trie cause of human
rights. We believe that the goals and purposes of the Bank
encompass a broad range of fundamental concerns. We also believe
that scarce development funds generally can be best utilized to
promote economic and social objectives by governments which have
manifested a commitment to protecting and promoting the rights of
their people.
As Secretary Blumenthal emphasized last year, we seek to
cooperate with all members in finding ways to best advance our
common commitment to human rights and the fulfillment of basic
human needs while at the Same time insuring the integrity and
effectiveness of all the Development Banks. But no nation can
continue to have a domestic consensus in favor of providing
assistance to other countries if its own sense of decency is
offended by the activities of the governments of the countries
receiving assistance.
Another and quite different matter that affects the ability
of the U.S. Government to maintain public support for
international development institutions is that of administrative
arrangements, especially the salaries and benefits enjoyed by the
staffs of these institutions. The banks are widely viewed in the
-8United States as public agencies, and are therefore measured
against standards appropriate for the use of taxpayers' funds.
We believe that the Bank should pursue policies that gradually
bring the compensation of its staff more in line with that of
representative public and private sectors.
T6 the credit of the institution, corrective action has been
taken in a number of other administrative areas — such as first
class travel, spouse travel and annual meeting arrangements. But
the central issue of staff compensation continues to require
action urgently. A special committee is at work on the issue in
the World Bank and the International Monetary Fund; its
conclusions will provide a useful reference for action which we
hope all the international financial institutions will promptly
follow.
Dissatisfaction on matters such as human rights and
salaries, along with the sheer increase in the magnitude of money
involved, have led to the reluctance in our Congress to fund
fully our recent appropriations requests. In addition to the
$650 million which we are seeking as new appropriations this
year, there remain carryover appropriations requests for $264
million of funds whose original due dates have passed. Of the
latter amount, $125 million is for the fund for special
operations.
We are making an intensive effort with the Congress to
obtain the funds to cover all pledges past due, as well as to
obtain the full amount of current appropriations. This effort
engages the highest levels of our Administration, and there is
reason to hope that a large measure of success will be realized.
The Future of the IDB
There must also be a replenishment of the resources of the
Bank. We have already agreed on arrangements for detailed
discussion of that replenishment. These discussions will
concentrate on the replenishment size, its composition by window,
the purposes to which the funds are applied, and where the
criteria for determining who within a borrowing country shall
benefit from them, as well as certain administrative issues.
Needless to say, the U.S. Administration will work in closest
contact with our Congress as the replenishment discussions
proceed; we have committed ourselves to do so, and no
replenishment understanding would be of practical value without
it.
Although we have no fixed views yet as to the specifics of
the replenishment, it may be useful to put forward some issues
which we believe should be considered during the coming
discussions.
9*
-9First, in light of Latin America's advanced stage of
economic development compared to other areas of the world, we
foresee a replenishment in which FSO resources will decline in
relative importance to capital resources. Latin America has
progressed to a point where the need for rising levels of
concessional financing may no longer be justified. This relative
scarcity of FSO funds will force on us hard choices in the
allocation process.
Second, we must be ever mindful of the needs of the
disadvantaged people in the area. We anticipate that an
increasing proportion of the Bank's resources will be devoted to
benefiting low income beneficiaries in both rural and urban
areas, there is a strong need to improve the definitions of who
within a society is poor and what types of loans are considered
as primarily
serving
needs.
Third, we
b elievetheir
it would b e appropr iate to make available
all replenishmen t resources in co nvertible currencies freely
usable by the Ba nk. Although the Bank has made use of FSO
national currenc y contributions, and to a limited degree of
subscribed OC na tional currencies as well, resources in this form
have given rise to numerous admin istrative complications. Rather
than add to thes e, it might be pr eferable for the contributions
to the FSO reple nishment to consi st exclus ively of convertible
currency. To ac hieve this change might re quire a different
method of determ ining contributio ns in ord er to ensure equitable
burden
sharing.
Conclusion
The original establishment of the Bank 18 years ago was an
act or vision, even idealism, by pragmatic financial leaders at
that time. Our task now, as financial leaders concerned with the
architecture of the international economy in the approaching
decade of the 1980's, is to demonstrate again a similar mix of
pragmatism and vision. We need to replenish the resources of the
Bank but equally important, we must utilize those resources with
efficiency, flexibility, and wisdom.
It is in this spirit of support and creativity that we
approach the future of this Bank.
oOOo
For Immediate Release
April 19, 1978
10:00 a.m.
STATEMENT OF
GARY C. HUFBAUER
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL TRADE AND INVESTMENT POLICY
BEFORE
THE SUBCOMMITTEE ON MERCHANT MARINE
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman, I am pleased to be here today to discuss
with you the Treasury Department's views on H.R. 9998, a bill
to provide for the regulation of rates and charges by certain
state-owned carriers in the foreign commerce of the United
States.
We share the concern reflected in this bill that certain
carriers may be competing unfairly in our ocean trades by
engaging in "predatory" pricing. By selling shipping services
below cost, those carriers may be driving out U.S. vessels and
capturing a larger share of the trade. Laws to prevent such
unfair practices in our foreign merchandise trade are already
on the books. We should deal with unfair competition in
international shipping in a similar fashion.
Overtonnaging is the dominant feature of our ocean trades
today. In its report on H.R. 9518, this Committee identified
overtonnaging as the major cause of illegal rebating in ocean
shipping. Oversupply of any good or service, including ocean
B-845
- 2 shipping, can lead to pricing below cost. Carriers will cut
prices during periods of oversupply in an effort to
maintain capacity utilization. Below cost pricing by carriers
— whether controlled or not — is a reasonable possibility
under current market conditions. Goods or services provided
by state-controlled economy countries can pose an additional
problem since their prices are not necessarily established
even in the long run by market considerations.
We wish to avoid prejudging whether controlled carriers
are actually engaging in pervasive unfair pricing practices.
Such practices may not be as widespread as is frequently
asserted. Nevertheless, we believe the government should
have the tools available to prevent unfair competition.
The Administration is prepared to support this
legislation, but would recommend certain amendments.
In general, we are concerned that the bill's grant of authority
to the FMC to determine whether rates are "just and reasonable"
is far too broad and vague. In addition, we oppose FMC
authority to set minimum rates during any period a rate suspension is in effect.
We think the level of rates subject to FMC suspension
should be more carefully delineated. While the FMC
should have authority to suspend predatory rates, we wish to
assure that rate suspensions take place only when unfair
- 3 practices are occurring, and not to defeat fair competition.
We think the benchmark of rates charged by independent noncontrolled carriers, or 85 percent of the rate charged
by the lowest-price conference operating in the same trade,
represents a fair standard. Controlled carriers should be
allowed to be as competitive as any other carrier in a trade.
The 85 percent test is reasonable because independent carriers
generally underprice conference carriers by approximately
that amount. Independent carriers are able to offer shipping
services at rates below those charged by conferences
and still earn a profit. My colleagues from the Justice
Department are prepared to work with you on the details
of the Administration's proposals.
These proposals will assure that U.S. carriers are not
being victimized by predatory controlled carrier pricing.
At the same time, they will allow controlled carriers to
continue in the trade as long as they compete fairly. We
believe that competition in shipping should be allowed, in
fact strengthened. Competition will benefit the shipping
public by encouraging the most efficient and cost-effective
service possible. It will also help hold down the cost of
ocean shipping. This is an important consideration,
especially in view of the President's emphasis on curbing
inflation.
- 4 We believe that this legislation, with the suggested
amendments, can be effective in preventing predatory pricing
by controlled carriers without discouraging desirable competition in shipping.
0O0
.FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
APRIL 19, 1978
STATEMENT OF JOHN R. KARLIK
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL ECONOMIC ANALYSIS
BEFORE THE
SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION
Mr. Chairman and Members of the Committee:
It is a pleasure for me to testify today regarding the
proposed amendment of the International Investment Survey
Act of 1976.
In order for the Department of the Treasury to carry
out the provisions of the Act mandating portfolio investment surveys, we agree that Section 9 needs amending. We
plan to hire approximately the same number of persons to
carry out the forthcoming surveys as Treasury was
authorized to employ in 1974. Given a staff of this size,
up to 35 persons, the authorization contained in the 1976
Act is inadequate. More importantly, Treasury is requesting that beginning with fiscal year 1979, administrative
expenses for the purpose of conducting international
economic affairs that are presently being financed from the
Exchange Stabilization Fund be budgeted, just as other
administrative expenses are, and that expenditures for these
B-846
-2purposes be authorized and appropriated.
My appearance
before you today is, of course, an essential initial step
in that process.
I would like to briefly explain our survey plans.
The coverage of the surveys is in part dependent upon the
amount of funds authorized. The more elaborate the
surveys, the higher the costs. We believe the Act provides
sufficient flexibility to select the survey coverage
which is the most practical, efficient, and least burdensome on the public.
Basically, three approaches to coverage are implied
by three variant definitions of "portfolio investment."
These definitions are (1) the market definition, essentially stocks and bonds; (2) the balance of payments definition, which covers other long-term debt, in addition to
stocks and bonds (essentially the coverage of the 1974
survey of foreign portfolio investment); and (3) the
definition contained in the Act, which added short-term
items such as bank loans and deposits, short-term corporate
claims and liabilities, and Treasury bills and certificates.
The monthly and quarterly data collected by the
Treasury International Capital (TIC)
surveys provide information on levels outstanding for all
financial instruments except stocks and bonds and certain
-3obscure financial items. The TIC reports give us relatively
good figures on the levels of foreign portfolio investment,
except for securities. In the case of securities, we have
monthly reports on transaction flows, but not on levels
of foreign investment.
We plan to collect in the benchmark survey only information on levels of foreigners securities market holdings -—
stocks and bonds — and to supplement these reports with
data on ownership of other financial instruments collected
in the existing monthly and quarterly TIC surveys. We
believe this approach meets the analytic requirements of
most potential users of the data , and at the same time
results in a minimum burden to the public and
in significant cost savings.
We assume the same staff will be able to conduct
simultaneously a survey of foreign portfolio investment
in the United States as of December 31, 1978, and a feasibility study of U.S. portfolio investment abroad. Since
an outward survey would confront many unknowns, we plan to
undertake a study in 1979 of the cost and feasibility of
doing an outward survey. Once that study is complete, we
can then present to you our conclusions and recommendations.
In the light of these survey plans, which have been
discussed with the staffs of this Committee and also of
the House Committee on International Relations, and also
-4considering the problem created by the prospective loss of
authority to finance these surveys from the Exchange
Stabilization Fund, when these international economic activities of the Treasury become subject to normal budgetary
procedures, the funding authorized under the International
Investment Survey Act of 1976 is inadequate. We therefore
request that to fulfill Treasury's responsibilities in
conducting surveys of foreign portfolio investment, authorizations be granted in the amount of $1.4 million for the
fiscal year ending September 30, 1979, and for fiscal
years 1980 and 1981 in the amount of such funds as may
be necessary.
oOo
partmentoftheTREASURY
SHINGTON, D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
April 19, 1978
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $2,175 million of
$5,272 million of tenders received from the public for the 2-year
notes, Series N-1980, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 7.75% 1/
Highest yield
Average yield
7.82%
7.80%
The interest rate on the notes will be 7-3/4%. At the 7-3/4% rate,
the above yields result in the following prices:
Low-yield price 100.000
High-yield price
Average-yield price
99.873
99.909
The $2,175 million of accepted tenders includes $ 444 million of
noncompetitive tenders and $1,716 million of competitive tenders
(including 77% of the amount of notes bid for at the high yield) from
private investors. It also includes $ 15
million of tenders at the
average price from Federal Reserve Banks as agents for foreign and
international monetary authorities in exchange for maturing securities.
In addition, $ 983 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing April 30, 1978, ($428 million)
and from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash ($ 555 million) .
1/ Excepting 8 tenders totaling $1,965,000
B-847
partmentoftheTREASURY
IHINGTON, O.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
April 19, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY DEPARTMENT FINDS STAINLESS
STEEL PIPE AND TUBING FROM JAPAN ARE
SOLD HERE AT LESS THAN FAIR VALUE
The Treasury Department said today that welded stainless steel pipe and tubing from Japan are being sold in the
United States at less than fair value.
Sales at less than fair value, as defined by the Antidumping Act, generally occur when imported merchandise is
sold in the United States at prices below those in the home
market. Interested persons were offered the opportunity to
present oral and written views prior to this determination.
The case is being referred to the U. S. International
Trade Commission (ITC), which must decide within 90 days
whether a U. S. industry is being, or is likely to be, injured
by these sales. If the ITC's decision is affirmative, dumping duties will be assessed on all imports of this merchandise
from Japan except those from two producers, Toa Seiki Company,
Ltd., and Yamato Industries Company, Ltd.
Toa Seiki is being excluded because no dumping margins
have been found on its export sales to the United States.
Yamato is being given a discontinuance based upon minimal
margins and written assurances that no future sales will be
at less than fair value.
Notice of this action will appear in the Federal Register
of April 24, 1978.
Imports of welded stainless steel pipe and tubing from
Japan during calendar year 1977 were valued at about $20 million.
o
B-848
0
o
ril 19, 1978
Contact: Bob Nipp
202/566-5328
Sale of Gold by the U.S. Treasury
(Sale for Dollars)
The Department of the Treasury announced that it is
requesting the General Services Administration to initiate a
series of monthly public auctions of gold beginning on May 23,
1978. Approximately 300,000 ounces of gold will be sold at
each of the first six auctions. The Treasury expects to review
the experience at these auctions to determine whether the amounts
to be offered at succeeding auctions should be altered.
These sales of gold will have the effect of reducing the
U.S. trade deficit, either by increasing exports of gold or
by reducing the imports of this commodity. The sales will
also further the U.S. desire to continue progress toward the
elimination of the international monetary role of gold.
The Treasury plans to study the technical aspects of
selling gold against payment in West German deutschemarks
with a view to determining whether sales of gold also provide
a technically feasible and advisable means of acquiring
deutschemarks for use in countering disorderly conditions in
foreign exchange markets. Invitations to bid at the initial
auction will specify payment in U.S. dollars and provide
for delivery at the U.S. Assay Office in New York or at other
U.S. gold depositories. Any change in these arrangements will
be announced prior to future auctions.
Auctions will be conducted at 11:00 AM on Tuesday, May 23,
1978, and the third Tuesday of each month thereafter in the
GSA Office at 7th and "D" Streets, S.W., Washington, D.C.
At the May 23 auction, the minimum bid accepted will be for
400 ounces. A bid deposit of $10 an ounce will be required.
The gold will be made available in bars each containing
approximately 400 ounces. Sales will be by competitive bids
with all successful bidders paying the price bid for each
ounce of gold. .The Treasury reserves the right to reject any
or all bids. Bids by or on behalf of foreign governments or
central banks will not knowingly be accepted.
Formal invitations to bid in the auctions will be issued
by the GSA within ten days. Bid forms will be mailed to firms
or persons on GSA's precious metal mailing lists. All others
wishing to receive an invitation to bid should communicate with:
General Services Administration
B-849
Washinqton,
'Telephone:
Metals
18th and
Branch,
"F"Area
D.C.
Streets,
Office
Code
20405
N.W.
of
202-566-1986
Stockpile Disposal
TABLE 13
GOLD AUCTION RESULTS
Type of Auction
treasury
975:
Jan. 6
June 30
Amount
Total Bids Auctioned
(troy ounces)
Price
average or
common
London
PM Fix
bid price
common price
954,000
4,000,000
754,000
499,500
$165.67
165.05
$173.50
166.25
2
July 14
Sept.15
Oct. 27
Dec. 8
common price
common price
bid price
bid price
common price
2,368,000
2,114,000
3,662,400
4,214,400
4,037,200
780,000
780,000
780,000
779,200
780,000
126.00
122.05
109.40
117.71
137.00
126.90
122.20
111.25
117.85
135.65
977:
Jan. 26
March 2
April 4
May 4
June 1
July 6
\uq. 3
5ept. 6
)ct. 5
tov. 5
tec. 7
common price
bid price
bid price
bid price
common price
common price
common price
bid price
bid price
bid price
common price
2,003,200
1,632,800
1,278,000
1,316,400
1,014,000
1,358,400
1,439,200
1,084,000
971,200
1,356,400
1,133,600
780,000
524,400
524,800
524,800
524,800
524,800
524,800
524,800
524,800
524,800
524,800
133.26
146.51
149.18
148.02
143.32
140.26
146.26
147.78
155.14
161.86
160.03
132.15
145.05
148.60
148.10
143.85
140.55
146.00
147.65
155.05
161.50
160.30
common price
common price
bid price
bid price
984,800
598,400
1,418,000
1,367,000
524,800
524,800
524,800
524,800
171.26
175.00
181.95
177.92
171.85
176.40
182.50
178.40
MF
HiJune
111
?
fan.
eb. 4
1
larch 1
*pril 5
For Release Upon Delivery
Expected at 10:00 AM
April 20, 1978
STATEMENT OF
GARY C. HUFBAUER
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL TRADE AND INVESTMENT POLICY
BEFORE
THE SUBCOMMITTEE ON MERCHANT MARINE
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman, I appreciate the opportunity to present
the Treasury Department's comments on H.R. 11422. Because
this bill proposes fundamental changes in current U.S.
international ocean shipping policy, it merits careful
examination.
As you know, the Administration has decided to undertake an in-depth study of U.S. maritime policy. This study
was prompted by the need for the Administration to address
the basic policy issues which this legislation raises. The
study will involve a number of Executive Branch agencies,
including the Treasury. We hope to have a report completed
in six months. We believe that an Administration position
on H.R. 11422 and similar legislation will be developed as
a result of this study. Therefore, my testimony this
morning will only cover the Treasury Department's initial
comments on the legislation.
B-850
- 2 -
We believe that this legislation, if enacted, could
sharply reduce competition in our ocean trades.
As I
indicated to you yesterday in my testimony on the controlled
carrier bill, the government should protect our industry from
unfair foreign competition.
encouraged.
But fair competition should be
H.R. 11422 could reduce fair competition by
legalizing two concepts:
closed conferences and deferred
rebates.
We do not yet have a clear picture of exactly how
closed conferences would function, but their intent seems
to be to limit significantly the entry of new and competitive
carriers in ocean shipping.
The Congress could conceivably
bar participation in the U.S. ocean trades by all nonconference carriers, depending on how a closed conference
is defined. If this were to happen, closed conferences
would have virtually absolute freedom to set rates, capacity
limitations, sailing frequencies, and other aspects of the trade.
The inefficiencies and excessive costs associated
with closed conferences would not necessarily be avoided
by the addition of shippers' councils or by extensive FMC
regulation.
Rates established by conferences and shippers'
councils would not automatically reflect the rates of a free
marketplace.
Moreover, the established rates could well
discriminate against shippers occupying a weak position in
the council by comparison with shippers holding a stronger
position.
- 3 -
Extensive FMC regulation would only tend to increase
inefficiencies and red tape in shipping.
Economists,
businessmen, and government leaders are increasingly
advocating more competition in transportation.
Proposals
to increase competition are being studied or implemented
in various transportation sectors.
The legalization of deferred rebates, also proposed
by H.R. 11422, could exert an equally destructive effect
on competition.
The Alexander Committee, whose study
formed the basis for the Shipping Act of 1916, reported
that deferred rebates were the most effective tool then
at the disposal of conferences to combat competition by
outside carriers. The Committee declared that the
practice was highly objectionable, and outlawed it in
the Shipping Act. The Committee also recognized the
the danger of a total elimination of competition, and
therefore provided that entry to conferences was to be
open.
Rather than seeking ways to restrict competition, we
believe we should move toward greater competition and
less regulation in our ocean trades. The Treasury's view
is that price maintenance and price-fixing arrangements
are generally contrary to our nation's economic interests.
We believe the national economic interest is best served
when the market system is allowed to operate with as few
- 4 constraints as possible. Attempts to reduce or restrict
competition contribute to rigidity and wasteful inefficiency in our economy.
The current conference arrangement can result in
higher prices than the market will support. One symptom
is the illegal rebating problem. The closed conference
system, with even fewer competitive restraints than the
open conference arrangement, would very likely result in
still higher shipping rates over time. It could thus add
to inflationary pressures in the economy.
Mr. Chairman, these are some of the concerns the
Treasury will raise as part of the Administration's study.
We believe that the study will represent a thorough,
balanced review of international ocean shipping problems.
You may be sure the Treasury will cooperate fully in the
search for an ocean shipping policy that meets our
Nation's economic needs and interests.
FOR RELEASE AT 4:00 P.M.
April 20, 1978
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
$ 2,966 million, or thereabouts, of 364-day Treasury bills to be dated
May 2, 1978,
and to mature May 1, 1979
(CUSIP No. 912793 V7 8 ) .
The bills, with a limited exception, will be available in book-entry form only,
and will be issued for cash and in exchange for Treasury bills maturing
May 2, 1978.
This issue will not provide new money for the Treasury as the maturing
issue is outstanding in the amount of $2,966 million, of which $1>435 million is
held by the public and $ 1,531 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 par amount will be payable without interest.
Except for definitive bills in the $100,000 denomination, which will be available
only to investors who are able to show that they are required by law or regulation
to hold securities in physical form, this series of bills will be issued entirely
in book-entry form on the records either of the Federal Reserve Banks and Branches,
or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and Branches and at the
Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern
Standard time, Wednesday, April 26, 1978.
Form PD 4632-1 should be used to
submit tenders for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000.
be in multiples of $5,000.
Tenders over $10,000 must
In the case of competitive tenders, the price
offered must be expressed on the basis of 100, with not more than three decimals,
c
-g-, 99.925.
Fractions may not be used.
(OVER)
B-851
i
-2Banking 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.
Payment for the full par amount of the bills applied for must accompany all
tenders submitted for bills to be maintained on the book-entry records of the
Department of the Treasury.
A cash adjustment will be made for the difference
between the par payment submitted and the actual issue price as determined in
the auction.
No deposit need accompany tenders from incorporated banks and trust companies
and from responsible and recognized dealers in investment securities, for bills
to be maintained on the book-entry records of Federal Reserve Banks and Branches,
or for definitive bills, where authorized.
A deposit of 2 percent of the par
amount of the bills applied for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
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.
Settlement for accepted tenders for bills to be maintained on the records
of Federal Reserve Banks and Branches must be made or completed at the Federal
Reserve Bank or Branch on' May 2, 1978,
in cash or other immediately avail-
able funds or in Treasury bills maturing May 2, 1978.
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
-3include 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 a 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 Circulars, Public Debt Series - Nos. 26-76 and
27-76, and this notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue.
Copies of the circulars and tender forms may be
obtained from any Federal Reserve Bank or Branch, or from the Bureau of the
Public Debt.
Treasury Media Contact: Robert Nipp
202/566-5328
FOR IMMEDIATE RELEASE
Customs Media Contact: Alan Bernstein
April 21, 1978
202/566-5286
TREASURY ANNOUNCES ADDITIONAL TRIGGER BASE PRICES
AND "EXTRAS" FOR IMPORTED STEEL MILL PRODUCTS
The Treasury Department today announced additional trigger
base prices and "extras" for imported steel mill products.
The base prices and "extras" announced today cover a
major portion of imports of steel wire products considered
steel mill products (flat and shaped wire and barbed wire),
cold finished bars and certain rails. Other products made
of steel alloys are also included. Trigger prices on wire
nails will be announced later because of the need to obtain
additional information on such products from the Japanese
government. All prices are per metric ton. A limited exemption is applied to shipments covered by contracts with fixed
price terms provided the contracts were concluded before the
publication date of this notice.
For questions on Trigger Pricing, contact U.S. Customs
at (202) 566-8235, 8236, 8651, or 5286. If those lines are
busy, call (202) 566-8121 and leave your phone number. Your
call will be returned.
B-852
DEPARTMENT CF THE TREASURY
OFFICE OF THE SECRETARY
NOTICE
Trigger Base Prices and "Extras"
for Imported Steel Mill Products
I am hereby announcing additional trigger base prices and "extras"
for imported steel mill products. These trigger prices pertain to
certain steel wire, barbed wire and cold finished bars, rails and alloys.
The Treasury Department will use these trigger prices to monitor imparts
of basic steel mill products in connection with the "trigger price
mechanism." A description of the trigger price mechanism may be found
in the "Background" to the final rulemaking which amended regulations to
require the filing of a Special Summary Steel Invoice (SSSI) with all
entries of imparted steel mill products (43 F.R. 6065).
These base prices and extras are based upon evidence made available
to the Treasury Department by the Japanese Ministry of International
Trade and Industry (MTTI), as well as other information available to the
Department. The methodology used in developing these trigger prices is
essentially ths same as that described in the Federal Register Notice of
January 9, 1978 (43 F.R. 1464). However, these trigger prices are based
upon the production costs of the smaller Japanese fabricating mills,
rather than the six integrated Japanese steel mills.
The trigger prices being announced today will be used by the Customs
Service to collect information at the time of entry on all shipments of
the products covered which are exported after the date of publication ^
of this notice. However, the following rules will be applied to entries
of these products covered by contracts with fixed price terms concluded
before the publication date of this notice:
1. Contracts with fixed price terms between unrelated parties:
If the importer documents at or before the time of entry that
the shipment is being imported under such a contract with an
unrelated party, the entry will not trigger an investigation
even if the sales price is below the trigger price, provided
that entry is made on or before June 30, 1978. However,
failure to initiate an investigation will not diminish the^
right of affected interested persons to file a complaint with
respect to such imports under the established procedures for
antidumping cases.
- 2 -
2.
Contracts between related parties: If the importer docunents
at the time of entry that the shipment is being imported under
a contract with a related party and the shipment is to be
resold to an unrelated purchaser in the United States under a
contract with fixed price terms concluded before the publication
date of this notice, the entry will not trigger an investigation
even if the sales price is belcw the trigger price, provided
that delivery is made en or before June 30, 1978.
While these sales will not as a rule trigger a self-initiated antidumping
investigation, informaticn concerning such sales will be kept as a part of
the informaticn in the monitoring system and will be available in the
event that an antidumping petition is filed with respect to such products
sold by that producer or the Treasury Department decides to self-initiate
an antidumping investigation of such products based upon subsequent sales.
bjW'«j0o«£jauw>B^
Secretary of the Treasury
Dated:
April 21, 1978
2-1 I
Category AISI
2
Tariff Schedule Number (s) 608.7880 0.375* per lb. + 4% + additional duties
(see Headnote 4, TSUS)
Base Price per Metric Ton $466
es to CIF
West Coast
$3 $10
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Freight
$58
69
72
79
Hand 11ng
Interest
5
4
4
13
14
17
nsurance \% of base price + extras * ocean freight
Extras
None
2-12
Spheroid I zed Annealed, Si-Mn-Cr High Carbon Steel Wire Rod AISI 9254, 5.5mm to 13mm
Category AISI
2
Tariff Schedule Number (s) 608.7880 0.375* per lb. + 4$ + additional duties
(see Headnote 4, TSUS)
Base Price per Metric Ton
es to CIF
$10
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$446
Ocean Freight
$58
69
72
79
Hand
ng
$3
5
4
4
nsurance \% of base price + extras • ocean freight
Extras
None
Interest
13
13
16
2-13
Category AISI 2
Tariff Schedule Number (s) 608.7865 0.375* per lb. + 4% + additional
duties (see Headnote 4, TSUS)
Base Price per Metric Ton $513
Charges toCIF Ocean Freight Handling Interest
$3 $11West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$58
69
72
79
nsurance \% of base price + extras + ocean freight
Extras
None
5
4
4
15
15
18
Light Ralls
60 lbs./yd
Category AISI
6
Tariff Schedule Number (s) 610^2020 .05* per lb.
Base Price per Metric Ton $292
es to CIF
West Coast
$9 $ 6
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Freight
Handling
$33
35
38
44
9
9
9
Interest
nsurance \% of base price + extras • ocean freight
Extras
Size
8
8
10
6-4
LIGHT RAIL EXTRAS
Size (lbs/yd)
% o* **se Price Extra
60
0. 0
45
2.,0
40
3,,9
30
3,,9
25
5,.9
20
5,.9
6-5
Tie Plates
Category AISI
6
Tariff Schedule Number (s) 610.2500
0.125* per lb.
Base Price per Metric Ton $299
es to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Fre Ight
Handling
$39
39
49
54
$8
1
8
8
Intere
Insurance \% of base price + extras + ocean freight
Extras
None
$ 6
8
9
1 1
Il-I
Category AISI
| |
Tariff Schedule Number (s) 608.9240 10 1/251 + additional duties (see Headnote
4, TSUS)
Base Price per Metric Ton $391
Charges to CIF Ocean Freight Handling Interest
West Coast $49 $3 $ 9
Gulf Coast
Atlantic Coast
Great Lakes
51
63
79
Insurance \% of base price + extras + ocean freight
Extras
None
5
4
4
12
12
15
11-2
Spheroldlzed Annealed, High Carbon Cr Steel Round Bar
Category AISI
AISI 52100,40mm to lOOrrni
II
Tariff Schedule Number (s) 608.5225 10 1/2* + additional duties (see Headnote
4, TSUS)
Base Price per Metric Ton $437
Charges to CIF Ocean Freight Handling Interest
West Coast
$3 $10
Gulf Coast
Atlantic Coast
Great Lakes
$49
51
63
79
5
4
4
Insurance \% of base price + extras + ocean freight
Extras
None
13
13
17
12-1
Cold Finished Carbon Steel Round Bar
Category AISI
AISI 1018, 19.05mm (3/4")
12
Tariff Schedule Number (s) 608.5015 8 1/2*
Base Price Der Metric Ton $36|
Charges toCIF
Ocean Freight
$3 $ West
8
Coast
Gulf Coast
Atlantic Coast
Great Lakes
$30
35
40
58
Handling
5
4
4
Insurance \% of base price + extras + ocean freight
Extras
Size, See Table p. 12-4
Interest
10
10
13
12-2
)ategory AISI
12
"ariff Schedule Number (s) 608.5005 8 1/2?
Base D rice oer Metric Ton
Charges to CIF
$408
Ocean freight
West Coast $30 $3 $ 9
r*
3ulf Coast
Atlantic Coast
Great Lakes
35
40
58
Handling
5
4
4
'nterest
II
12
15
nsurance \% of base crice t extras -*• ocean *reich*
Extras
Size, See Table D . 12-4
12-3
Cold Finished Round Steel Bar (Free Cutting Steel-Lead)
Category AISI
AISI I2LI4, 19.05mm(3/4")
12
i-
Tariff Schedule Number (s) 608.5005 8 1/2?
Base Price Der Metric Ton $428
Charges to CIF
$3 $ 9
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Ocean freight
$30
35
40
58
Handling
5
4
4
nsurance \i of base price + extras + ocean freight
Extras
Size, See Table p. 12-4
Interes1
12
12
15
12-4
Size Extras for Cold Finished Steel Bars ($ Extra/M.T.)
Shape
Size
Round
Hexagon
Up to 3/16" Including
63
154
3/I6M thru 5/16"
42
83
33
50
5/8"
17
33
5/8"
7/8"
Base
8
7/8"
1-7/16"
8
17
13
29
1-3/4" " 2-11/16"
17
42
2-11/16" "
25
over
5/16"
ff
7/16
7/16"
1-7/16"
3"
3-3/4"
"
" 1-3/4"
3"
" 3-3/4"
»»
/t»
33
42
14-15
Welded Stainless Steel Pipe
ASTM-A3I2, Tp 304, NB 3" x Sch. 109
Category AISI 14
Tariff Schedule Number (s) 610.3715 0.3* per lb. + 4? + additional duties
(see Headnote 4, TSUS)
Base Price oer Metric Ton
Charges to CIF
West Coast $59
Gulf Coast
Atlantic Coast
Great Lakes
$1874
Ocean Freight
86
86
86
H
d 1 i ng
$3
5
4
4
Insurance \% of base price + extras + ocean freight
Extras
None
1nterest
$37
49
49
60
14-16
Welded Stainless Steel Round Ornamental Tube
Category AISI
AISI TP 304
I 5/8 x 0.065"
14
Tariff Schedule Number (s)
610.3715
0.3* per lb. + 4% + additional duti
(see Headnote 4, TSUS)
Base Price oer Metric Ton $1689
es to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Pre iaht
Ha nd1 i ng
$59
86
86
86
$3
5
4
4
Interest
nsurance \% of base price + extras • ocean freight
Extras
A,
Size
B.
Grade
$34
44
44
55
14-17
Size Extras for Welded Stainless Steel Ornamental Round Tube
(TSUSA 610.3715)
Size (Inches)
0D
W
% of Base Price
Extra
I 5/8 0.065 Base
I 1/2 0.065 0.6
I 1/4 0.065 2.8
I 0.065 3.8
3/4 0.065 I 1.1
Grade
AISI 304 Base
AISI 410 -417
AISI 430 -500
$ Ektra/M.T,
15-44
Hot Rolled, High Carbon CR Steel Tube, Suitable for Use in Manufacture of
Ball or Roller Bearings AISI 52100, 60mm to 100mm
Category AISI
15
Tariff Schedule Number (s) 610.4600 13? + additional duties (see Headnote
4, TSUS)
Base Price per Metric Ton
$534
Charges toCIF Ocean Freight Handling Interest
$3 $12West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$63
69
85
94
5
4
4
Insurance \% of base price + extras t ocean freight
Extras
None
16
16
21
15-45
Cold Rolled, High Carbon Cr Steel Tube, Suitable for Use in Manufacture of
Ball or Roller Bearings AISI 52100, 60mm'to 100mm
Category AISI
15
Tariff Schedule Number (s) 610.4600 13? + additional duties (see Headnote
4, TSUS)
Base Price per Metric Ton $792
Charqes to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Freight
$63
69
85
94
id 1 ing
Interest
$3
5
4
4
surance I? of base price t extras + ocean freight
Extras
None
$18
23
23
29
15-46
Seamless Stainless Steel Round Ornamental Tube
Category AISI
AISI TP 304, I 1/4 x 0.049"
15
Tariff Schedule Number (s)
610.5235
13? + additional duties (see Headnote
4, TSUS)
Base Price oer Metric Ton $1798
Charges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Freight
$59
86
86
86
d 1 ing
Interest
$3
5
4
4
nsurance I? of base price + extras + ocean freiaht
Extras
A.
Size
B.
Grade
$39
50
50
62
15-47
Size Extras for Seamless Stainless Steel Round Tube (TSUSA 610.5235)
Size (Inches)
00 WT ? of Base Price Extra
I 1/4 0.049 Base
I 0.049 0.9
3/4 0.049 4.4
Grade $ Extra/MT
AISI 304 Base
AISI 410 -417
AISI 430 ' ~500
15-48
Seamless Stainless Steel Square Ornamental Tube
AISI TP 304, I 1/2x1 1/2
x 0.065"
Category AISI 15
Tariff Schedule Number (s) 610.5235 13? + additional duties (see Headnote 4
TSUS)'
Base Price oer Metric Ton
harges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$1959
Ocean Freight
$59
86
86
86
d 1 i ng
$3
5
4
4
Interest
$42
55
55
68
nsurance I? of base price + extras + ocean freicht
Extras
A. Size
B. Grade
15-49
Size Extras for Seamless Stainless Steel Souare Ornamental Tube
Size
? of Base Price Fxtra
I 1/2" x I 1/2" x 0.065"
Rase
I 1/4" x I 1/4" x 0.065"
2.6
I 1/4" x I 1/4 x 0.049"
3.2
I 1/3" x I 1/8 x 0.065
2.7
I x I x 0.065"
2.8
I x I x 0.049"
3.5
5/8 x 5/8 x 0.049"
8.0
Grade
$ Extra/M.T.
AISI 304
Base
AISI 410
-417
AISI 430
-500
16-1
Cold Heading Round Wire, Hard Drawn, AISI 1018 Killed, 0.192"
Category AISI
'6
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb. 609.4315 8 1/2?
Base Price oer Metric Ton $400
Handling
Charges to CIF Ocean Freight
West Coast $41
Gulf Coast
Atlantic Coast
Great Lakes
44
45
60
$3 $ 8
5
4
4
Insurance I? of base price • extras + ocean freight
Extras
See "Extras" Tables pg. 16-12 and pg. 16-13
Interest
10
10
13
16-2
I ~
Cold Heading Round Wire, Drawn from Annealed Rods, AISI 1018 Killed, 0.192"
i
I
.
Category AISI ' 6
T •*• sr-hedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2*
609.4315 8 1/2?
T8r ,ff Schedule Number
6 0 9 . 4 , 2 5 0.3tf p e r , b .
flase Price per Metric Ton $455
Charges to CIF Ocean Freight Hand.ing Interest
West Coast $4» $\ Jt
Gulf Coast
44
3
Atlantic Coast
46
4
Great Lakes
6°
Insurance I* of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-12 and ng. 16-13
^
16-3
Cold Heading Round Wire, Drawn from Spheroldlzed Annealed Rods, AISI 1018
Killed, 0.192"
Category AISI
'6
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2 ?
609.4125 0.3* per lb.
609.4315 8 1/2 ?
Base Price per Metric Ton
$46 4
Charges to CIF Ocean Freight Handling Interest
$3 $ 9West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$41
44
46
60
5
4
4
Insurance I? of base price + extras • ocean freight
Extras
See "Extras" Tables pg. 16-12 and pg. 16-13.
12
12
15
16-4
Cold Heading Round Wire Annealed In Process, AISI 1018 Killed, 0.192"
Category AISI
16
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb.
609.4315 8 1/2?
Base Price per Metric Ton
$468
Charges to CIF Ocean Freight Handling Interest
West Coast $41 $3 $ 9
Gulf Coast
. Atlantic Coast
Great Lakes
44
46
60
5
4
4
nsura nee I? of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-12 and pg. 16-13
12
12
15
16-5
Cold Heading Round Wire, Spheroidlze Annealed in Process, AISI 1018 Killed
0.192"
Category AISI
16
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb.
609.4315 8 1/2?
Base Price per Metric Ton
Charges t o C I F
$3 $ 9West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$477
Ocean Freight
Handling
$41
44
46
60
nsurance I? of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-12 and ng. 16-13.
5
4
4
Interest
12
I?
15
16-6
Cold Headina Pound Wire, Annealed
AISI 1018 Ki I led, 0.192"
Category AISI
in Process and Hrawn from Annealed Pods,
,6
Tariff Schedule Number (s)
13ri
609.4.05 0.3* per lb.
609.4175 0.3* ner lb.
Base Price oer Metric Ton
es to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
1 nsurance
i*
1 P
609.4305 8 \/?t
609.4315 8 1/2*
$504
Ocean Freight
Ha ndli ng
Interest
$41
44
46
60
$3
5
4
4
$10
13
13
16
+ ocean f reight
of base orice + extras
Extras
See "Extras" Tables pg. 16-12 and pg. 16-3
16-7
Cold Heading Round Wire, Spheroidlze Annealed In Process and Drawn from
Annealed Rods, AISI 1018 Killed, 0.192"
_
Category AISI
,
__
_ _J
|6
Tariff Schedule Number (s)
609.4105 0.3* oer lb.
609.4125 0.3* per lb.
609.4305 8 1/2?
609.4315 8 1/2?
Base Price oer Metric Ton J5j3
Charges to CIF Ocean Fre i ght Hand Ii ng Interest
$3 $10West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$41
44
46
60
nsurance I? of base price + extras + ocean freight
Extras
See "Extras" Tables ng. 16-12 and pg. 16-13.
5
4
4
,
13
13
16
16-8
Cold Heading Round Wire, Annealed at Finished Size, AISI 1018 Killed, 0.192"
Category AISI
16
Tariff Schedule Number (s) 609.4I05 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb.
609.4315 8 1/2?
Base Price per Metric Ton
$455
Charges to CIF Ocean Freight Handling Interest
West Coast $41 $3 $ 9
Gulf Coast
Atlantic Coast
Great Lakes
44
44
60
Insurance I? of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-12 and 16-13.
5
4
4
12
12
15
Cold Heading Round Wire Spheroidize Annealed at Finished Size, AISI
Killed, 0.192"
Category AISI
\e
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb.
609.4315 8 1/2?
Base Price Der Metric Ton $464
Charges to CIF Ocean Freight Handling Interest
$3 $ 9West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$41
44
44
60
5
4
4
nsurance I? of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-12 and pg. 16-13.
12
12
15
16-10
Cold Heading Round Wire, Annealed at Finished Size and Drawn from Annealed
Rods, AISI 1018 Killed, 0.192"
Category AISI
16
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb.
609.4315 8 1/2?
Base Price per Metric Ton
$490
Charges to CIF Ocean Freight Handling Interest
$3 $10West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$41
44
44
60
Insurance 1? of base p
Extras
See "Extras" Tables pg. 16-12 and pg. 16-13.
5
4
4
13
13
16
16-11
Cold Heading Round Wire Spheroidize Annealed at Finished Size and Drawn from
Annealed Rod, AISI 1018 Killed, 0.192"
Category AISI
16
Tariff Schedule Number (s) 609.4105 0.3* per lb. 609.4305 8 1/2?
609.4125 0.3* per lb.
609.4315 8 1/2?
Base Price per Metric Ton
$500
Ocean Freight Handling Interest
Charges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$41
44
44
60
Insurance 1? of base p
Extras
See "Extras" Tables pg. 16-12 and pa. 16-13.
$3
5
4
4
$10
13
13
16
16-12
GRADE EXTRAS FOR COLD HEADING WIRE
Grade
$ Extra/M.T
AISI 1006 KiI led
through 1022 Killed Steel
base
AISI 1010 Rimmed Steel
-12
AISI 1038 Killed Steel +16
AISI I0B2! Killed Steel +20
16-13
SIZE EXTRAS FOR C O L D H E A D I N G W I R E ($ EXTRA/M.T.)
Size (Inches)
Processing Number3
(2) and (3)
(1)
(4) thru (7)
(8) thru ( m
0
0.437 thru 0.999
II
II
0.192 thru 0.436
base
base
base
base
0.135 thru 0.191
8
8
14
14
0.105 thru 0.134
14
14
29
29
0.080 thru 0.104
25
25
62
41
0.062 thru 0.079
33
33
104
66
a)
Processing numbers and descriptions:
(I) Hard
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(II)
Drawn
Drawn from Annealed Rod9
Drawn from Spheroidized Annealed Rods
Anneal in Process
Speroidize Anneal in Process
Anneal in Process & Drawn from Annealed Rods
Spheroidize Anneal in Process & Drawn from Annealed Rods
Anneal at Finished Size
Spheroidize Anneal at Finished Size
Anneal at Finfehed Size & Drawn from Annealed Rods
Spheroidize Anneal at Finished Size e\ Drawn from Annealed Rods
0
16-14
Category AISI
'16
Tariff Schedule Number (s) 609.4010 8 1/2?
609.4105
0.3* per lb.
609.4125
0.3* per lb.
Base Price per Metric Ton $329
Charges to CIF Ocean Freight Handling Interest
West Coast $40 $3 $
6
Gulf Coast
Atlantic Coast
' Great Lakes
42
45
60
Insurance I? of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-16 and pg. 16-1 7,
5
4
4
8
8
11
16-15
Galvanized Iron Round Wire, AISI Type I Coating, 80
Category AISI
,6
Tariff Schedule Number (s) 609.4040 8 1/2?
609.4165 0.3* per lb.
Base Price per Metric Ton
J414
Charges to CIF Ocean Freight Handling Interest
$ 3 $ West
8
Coast
Gulf Coast
Atlantic Coast
Great Lakes
$40
41
45
60
nsurance I? of base price + extras + ocean freight
Extras
See "Extras" Tables pg. 16-16 and pg. I 6-17.
5
4
4
II
II
13
SIZE EXTRAS FOR BRIGHT BASIC WIRE
AND GALVANIZED IRON WIRE
$ Fxtra/M.T.
Bright Basic Wire Galv. Iron Wire
ase
base
6
12
8
16
10
22
12
31
16
39
20
47
29
60
37
72
45
89
54
106
64
127
77
147
16-17
PACKING TXTRAS FOR BRIGHT BASIC WIRE
AND GALVANIZED IRON WIRF
Packing Description
$ Extra/M.T
Pare CoiI Base
Paper Wrapping 12
To Iypropylane-backed 20
Paper Wrapping
Paper and Hessian
Wrapping
29
16-18
Round Bal ing Wire, 14.50
Category AISI
16
Tariff Schedule Number (s) 609.4120 0.3* per lb
Base Price per Metric Ton $459
Charges to CIF
$3 $ 9West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Ocean Freight
Handling
$40
41
45
60
nsurance I? of base price + extras + ocean freight
Extras:
None
5
4
4
Interest
12
12
15
16-19
Bright Annealed Cold Drawn Stainless Steel Wire, AISI 304, 0.080"
Category AISI
16
Tariff Schedule Number (s) 609.4540 10 1/2? + additional duties (see
Headnote 4, T.S.U.S)
Base Price per Metric Ton $2182
Charges to CIF Ocean Freight Handling Interest
West Coast $ 93 $3 $44
Gulf Coast
Atlantic Coast
Great Lakes
109
109
142
Insurance I? of base price + extras + ocean freight
Extras
See "Extras" Table pg. 16-20
5
4
4
57
57
71
16
SIZE EXTRAS FOR COLD DRAWN, BRIGHT ANNEALED
(or ANNEALED AND PICKLED) STAINLESS STEEL WIRE
Size (Inches)
$ Fxtra/M.T.
0..200
-142
0.131
-79
0.080
Base
0.040
117
0.032
208
0.020
633
0.016
750
0.012
1067
0.008
1504
16-21
Spring Hard Temper, Nickel Copper and Plastic Coat, Cold Drawn Stainless
Steel Wire, AISI 302, 0.040"
Category AISI
,6
Tariff Schedule Number (s) 609.4510 10 1/2? + additional duties (see Headnote 4, T.S.U.S.)
Base Price per Metric Ton
Charces to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$2745
Ocean Freight
$ 93
109
109
142
>d f i n g
Interest
$3
5
4
4
nsurance I? of base price + extras + ocean freight
Extras
Non»
$55
72
72
89
16-22
Cold Heading OuaIity,Copper and Molybdenum Coat, Told Drawn Stainless Steel
Wire, ASTM 493A, KM-7, 0.131"
Category AISI
,6
Tariff Schedule Number (s) 609.4540 10 1/2? + additional duties (see Head
note 4, T.S.U.S.)
Base Price oer Metric Ton $2353
dl ing
Charges to CIF Ocean Freight H
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$ 93
109
109
142
Interest
$3
5
4
4
nsurance \% of base or.ce + extras + ocean freight
Extras
None
$47
62
62
77
16-23
Cold Heading Quality, Copper and Molybdenum Coat, Cold Drawn Stainless Stee
]rfire, AISI 305, 0.131"
Category AISI
16
Tariff Schedule Number (s) 609.4540 10 1/2? + additional duties (see
Headnote 4, T.S.U.S.)
Base Price per Metric Ton $2416
Charges to CIF Ocean Freight Handling Interest
West Coast $ 93 $3 $48
Gu If Coast
Atlantic Coast
Great Lakes
j Qg
109
142
5
4
4
63
63
7Q
Insurance I? of base price + extras + ocean freight
Extras
None
16-24
Cold Heading Quality, Copper and Molybdenum Coat, Cold Drawn Stainless Stee
Wire, AISI 410, 0.131"
Category AISI
16
Tariff Schedule Number (s) 609.4540 10 1/2? + additional Duties (see
Headnote 4, T.S.U.S.)
Base Price oer Metric Ton
Charges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$1562
Ocean Freight
$ 93
109
109
142
andl ing
$3
5
4
4
Interest
$31
41
41
51
nsurance I? of base price + extras + ocean freight
Extras
None
16-25
Cold Heading Quality, Copper and Molybdenum Coat,Cold Drawn Stainless Steel
Wire, AISI 430, 0.131"
Category AISI
|6
Tariff Schedule Number (s) 609.4540 10 1/2? + additional duties (see
Headnote 4, T.S.U.S.)
Base Price per Metric Ton
Charges to CIF
$3 $32West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$1602
Ocean Freight
$ 93
I0O
109
142
Handling
5
4
•4
nsurance I? of base price + extras + ocean freight
Extras
None
Interest
42
42
52
21-1
Category AISI
21
Tariff Schedule Number (s) 642.0200 Free
Base Price oer Metric Ton $522
Charges to CIF Ocean Freight Handling Interest
West Coast $42 $3 $ 9
Gulf Coast
Atlantic Coast
Great Lakes
50
55
60
Insurance I? of base price + extras + ocean freight
Fxtrris:
None
5
4
4
12
12
14
FOR IMMEDIATE RELEASE
April 21, 1978
Contact: Alvin M. Hattal
(202) 566-8381
TREASURY DEPARTMENT ANNOUNCES
WITHHOLDING OF APPRAISEMENT ON
MOTORCYCLES FROM JAPAN
The Treasury Department announced today that it is
withholding appraisement on imports of motorcycles from
Japan.
Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement whenever
he has reason to believe or suspect that sales at less
than fair value are taking place. Sales at less than
fair value generally occur when the prices of the merchandise sold for export to the United States are less than
the prices of the same merchandise sold in the home
market. The withholding of appraisement will not exceed
six months.
Withholding of appraisement means that the valuation
for Customs duty purposes of goods imported after the
date of the tentative determination in an antidumping
investigation is suspended for up to six months, thus
allowing any dumping duties which may ultimately be imposed to be levied on imports entered during the final
stage of the investigation.
If Treasury finds sales at less than fair value are
occurring, the U.S. International Trade Commission must
subsequently decide whether an American industry is being,
or is likely to be, injured by these sales. Both "sales
at less than fair value" and "injury" must be found to
exist before a dumping finding is reached.
For purposes of this investigation, the term "motorcycles" refers to motorcycles having engines with total
piston displacement over 90 cc (cubic centimeters), whether
for use on or off the road.
Notice of this action will appear in the Federal Register
of April 26, 1978.
Imports of this merchandise from Japan were valued at
roughly $360 million during calendar year 1976, and at
roughly $95 million during the first quarter of 1977.
B-853
0
0
0
REMARKS BY THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
U.S.-ARAB CHAMBER OF COMMERCE, INC.
INTERNATIONAL BUSINESS CONFERENCE
WASHINGTON, D.C.
APRIL 21, 1978
I am delighted to be here today to discuss U.S.-Arab
economic relations and the importance for the world as a
whole of our continued cooperation. It was the
importance of improved cooperation in an increasingly interdependent world which took me to the Middle East last
I
i
fall to discuss a number of matters of mutual interest and to
.liiii!
establish personal relationships with the key government
officials of Egypt, Saudi Arabia and Kuwait.
I returned from my visits with President Sadat, King
Khaled and Crown Prince Fahd, and Shaykh Jabir al-Sabah and |ii;j
f
Minister al-Ateeqi very encouraged by their clear perception
of the problems facing the world economy, and their willing- j
ness to work with us in resolving them.
We place a high
priority on these relations^ We will work hard to maintain
them.
The problems we have dealt with go well beyond bilateral concerns. The actions we take in the areas of monetary
B-854
j
i
'
- 2 policy, energy and trade, investment, and aid to the developing countries can have a lasting impact on the vitality
and stability of the world economy. I would like to discuss
today the actions the United States is taking in a number
of these areas as a means of strengthening the monetary
system and improving mutual cooperation.
THE DOLLAR
At the top of everyone's list is what we have come to
to know (but not love) as the "dollar problem". The dollar
came under pressure in the foreign exchange markets last
year because of the unexpectedly large increase in our trade
and current account deficits. Disorderly conditions led
to excessively rapid rate movements which went beyond what
was justified by underlying economic conditions.
We recognized then and recognize now the concern of
some OPEC nations that recent exchange market developments
would reduce the dollar's purchasing power relative to
that of some other major currencies. Yet for all the publicity
about the dollar's decline, the real extent of exchange
rate changes has been considerably smaller and less volatile
than most people think. Although some bilateral exchange
rates have undergone very substantial changes in the last
few years, these changes have been in both directions. Since
March 1973, the Swiss franc, the German mark and the Japanese
- 3 yen have appreciated substantially against the dollar, while
the dollar has appreciated against such currencies as the
Canadian dollar, the pound sterling, and Italian lira.
On a U.S. trade-weighted basis compared to all OECD
countries, the dollar as of March 31 had actually appreciated
by about one percent since the beginning of generalized floating in 1973. Against all currencies, the dollar appreciated
by eight percent during this period. Thus, while the dollar
has depreciated against some currencies, it went up by even
more against others. Moreover, taking into account relative
price movements among major countries, the extent of real
exchange rate changes has been even more modest.
But that is past history. The U.S. recognizes that
a strong dollar is in the interest of both the U.S.
and the world economy. And we are taking steps to
address the exchange market problem in the only manner in
which it can be truly resolved: by dealing with the fundamental
economic situation.
First, we are determined to implement a national energy
program, either through Congressional or Administrative action,
to reduce our oil import requirements and thus reduce our
trade deficit.
Second, we are determined to reduce inflation. The
anti-inflation program which the President announced last
week includes a long list of specific actions to help hold
down the rate of inflation. Most important, perhaps, is
- 4 -
the President's determination to maintain a tight Federal
budget which will meet the nation's most pressing needs without compromising our hopes for balanced economic growth.
The President has said he would veto such legislative proposals as tuition tax credits to keep the budget in line.
His position has already been recognized by the House of
Representatives in defeating a highly inflationary farm bill
and the passage of airline deregulation.
Success or failure in this effort to restrain inflation
will clearly be determined in large part by the actions of
the private sector of the economy.
A number of leaders of
labor, business and industry have promised to cooperate with
this program to decelerate price increases.
We recognize that
a reduction in the inflation rate will not be easy and will
not come overnight, and that it will demand real sacrifice
by many Americans.
But we will pursue this program with vigor.
And we will suceed.
Our anti-inflation program will help maintain a
domestic climate for investment which will continue to
attract capital inflows.
It will help preserve the
real value of Arab dollar investments. It will justify the
confidence which the oil producing states have shown in the
United States.
- 5 Third, we are determined to encourage U.S. exports
and to maintain our competitive position in world markets.
The President has already proposed to double Commodity
Credit Corporation credits to support agricultural exports
and to sharply increase Export-Import Bank lending activity
in 1978. He has also asked a special cabinet-level task
force, chaired by the Secretary of Commerce, to develop
additional measures to promote U.S. exports.
As progress*is being made along these fundamental
lines, the U.S. will be ever ready to intervene to the
extent necessary to counter market disorders and curb
speculation. We~ have the resources for this purpose. The
resources of the Treasury are being used in conjunction with
the Federal Reserve's $22 billion swap network through
establishment of a swap between the Exchange Stabilization
Fund and the German Bundesbank. The Federal Reserve's swap
facility with the Bundesbank has also been doubled, to $4
billion. We have agreed to sell up to $740 million worth of
SDR's to Germany for marks. Furthermore, the U.S. has a res
position in the IMF of $5 billion which can be drawn upon,
if and as necessary, to obtain additional foreign currencies
for intervention.
- 6 I wish to make clear at this point that a shift from
the dollar for oil pricing and investment holdings would
not be a solution to the recent exchange rate changes. The
dollar is the predominant currency of world investment, trade,
and financing. While there are other outlets for OPEC investment, the dollar serves as the principal currency capable
of accommodating OPEC's investment needs. To be sure, no
unit of account can provide full protection against exchange
risk. If, for example, the SDR had been used over the past
2-1/2 years, OPEC's oil revenues would have been lower than
they have been with dollar pricing. Thus, despite significant
exchange market fluctuations in the last five years, it comes
as no surprise that one quarter of all OPEC surpluses have
been invested in the U.S. and another 13 percent in U.S. banks
abroad; and that the dollar component of official foreign
currency reserves has remained constant at about 80 percent.
A healthy dollar is vital to the world. And we will make
significant efforts to preserve its integrity. As recognition
of our determination spreads, markets will calm down. Our
economy is outperforming all others in growth. The United
States is an attractive place to invest. We intend to see
that it remains so- And we are counting on other nations,
including the OPEC countries, to help maintain the stability
- 7 and vitality of the global economy.
ENERGY
It would be wholly inappropriate for me to neglect
discussing energy before this distinguished group. For
the United States, the increased price of oil and our continuing strong demand for energy imports were important factors
in our $31 billion trade deficit in 1977. Oil imports last
year totaled $45 billion, more than nine times the value
of our oil imports just five years earlier. Delays in Congressional adoption of a comprehensive energy policy and
the prospect of continued large U.S. trade deficits have
clearly damaged confidence in the U.S. dollar.
I must tell you that the American people are measurably
cutting back on their energy consumption. Fuel efficiency
standards, new insulation techniques and other conservation
measures are beginning to take hold.
Nevertheless, we are still in dire need of U.S. action
on a domestic energy program which will pare further wasteful
oil consumption, expand domestic energy production, and
encourage Americans to use all forms of energy more efficiently.
To accomplish this goal, President Carter proposed a
National Energy Plan almost exactly one year ago. Unfortunately, Congress still has not given its final approval
to this plan.
- 8 -
Time is running out.
The President has indicated that
this is an urgent matter. Moreover, as stated in his April
11 speech, he is willing to take Administrative action under
the law, if necessary to accomplish the goals of the proposed
Crude Oil Equalization Tax. We must have an energy bill. It
is necessary for the sake of our economy and the integrity
of our money, and for the sake of others, including the
OPEC surplus holders who are concerned about the capital
value of their investments. Thus, we are working hard with
the Congress to assure that the COET and the rest of our
legislation is passed on a timely basis.
While we are working on an energy program at home, we
are also cooperating with other industrial countries to
conserve energy and stabilize energy markets, notably through
the International Energy Agency. Within the IEA, we have
negotiated an Emergency Oil-Sharing Program to reduce the
effect of any supply interruptions.
We have also cooperated with key oil-producing countries
to bring down world inflation and promote recovery from the
world recession which had been triggered by increases in oil
prices. The oil producing countries have wisely recognized
that further increases would be disruptive — for both them
and the oil importing nations, and especially damaging to
the developing countries. The responsible decision to freeze
- 9 oil prices represents an important contribution to a healthier
world economy. We hope they will maintain this freeze throughout 1978 at least.
U.S." ARAB COOPERATION
I would like to turn now to a few specific areas in
which cooperation between the United States and the Arab
nations is essential.
First, we must work in a constructive manner to achieve
an accommodation on the important issue of the Arab boycott
of Israel.
Our laws specifically acknowledge the legitimacy of a
direct boycott of one country by another, although we regret
the existence of such a boycott directed against another
friendly country.
Our anti-boycott laws draw a distinction, however,
between a direct boycott, and indirect boycotts which call
upon Americans to refuse to engage in certain types of
transactions with Israel or with other entities which engage
in such transactions, as a condition for trading in the Arab
world. Such practices clearly run counter to our longstanding commitment to fair and open competition in the market
place, and we cannot accept them. Indeed, Americans who
comply with the indirect boycott are subject to the loss of
foreign tax credit, deferral, and DISC tax benefits as well
as criminal penalties.
- 10 We believe that the laws which have been passed reflect
substantial compromises on the part of the United States. We
are hopeful that our Arab friends will also find it possible
to adjust their boycott practices. We have seen evidence
of their willingness to do so.
Second, U.S.-Arab trade relations are becoming increasingly important to each of us, and we should do our best
to assure that trade will continue to grow, unimpeded by
artificial or unnecessary restraints.
U.S. exports to your countries now represent almost 10
percent of our total exports. These exports reached $10 billion
in 1977, an increase of more than 40 percent from 1976 and
triple the 1974 level of $3.3 billion.
Although the growth of imports by the Arab countries
has been slowed by absorptive, and in some cases financial,
constraints, there remains a great potential for continued
expansion of U.S.-Arab trade and commercial relations, especially for the kind of goods and services in which U.S. companies excel: for example, transportation, communications and
industrial machinery and processes.
The Export-Import Bank of the United States had $740
million in direct loans to Arab countries and $600 million
in insurance and guarantees, as of January 31. We expect
- 11 Eximbank to play an increasingly important role in support
of U.S. exports to Arab countries. For many of these countries,
access to long-term private capital finance is limited. For
many others, access to long-term World Bank loans is either
limited or insufficient for their needs. An Eximbank guarantee
to private lenders or an Eximbank long-term loan effectively
fills the gap in the financial resources available to Arab
countries. We should both benefit from the expanded use of
these programs.
Third, we are proposing changes in our tax laws to
reduce the tax liability of Americans overseas and to
make them more equitable.
It has become increasingly apparent that the changes
made in Section 911 of the U.S. Tax Code, which permits
the exclusion of a portion of foreign earned income from
taxable income, by the Tax Reform Act of 1976, are unsatisfactory and in some cases unfair. The net effect
of the changes would be to increase greatly the U.S. tax
which some Americans in the Middle East would have to pay,
thus causing many to consider leaving the area or to
decline jobs which they otherwise might accept.
An overall reduction in American involvement in the
economic development efforts of the Middle East would be
- 12 severely injurious to U.S. policy objectives.
Such involve-
ment contributes positively and substantially to U.S. exports
to the area, as well as to the economic development of an
area of major importance.
Therefore, the Administration has proposed special
deductions for Americans living abroad for certain housing
and education costs and for the cost of travel to the United
States on home leave. We believe this approach to Section 911
is more equitable, and we hope for prompt Congressional action
on this important issue.
Finally, we should continue to expand our economic
assistance to the poorer Arab nations and bilateral
programs of economic cooperation.
The immense oil earnings of the oil-producing Arab
states have enabled them to contribute substantial amounts
toward the development of other countries in the area, especially their Arab neighbors. We understand that bilateral
aid commitments by Saudi Arabia, Kuwait, the UAE and Qatar
last year were about $8 billion. Actual disbursements over
the last three years probably totaled about $10.5 billion.
The U.S. has also had extensive aid programs in effect
in the area for many years. The U.S. has committed more than
$2.3 billion in economic assistance to Egypt alone since mid1974. Congress recently appropriated an additional $750 million
- 13 for FY 1978 and we expect food aid programs to add another
$150 million to this amount.
This is the largest single U.S.
economic assistance program ever.
The U.S. is also committed to the long-term development of the Jordanian economy.
Our economic assistance to
Jordan is planned to increase from approximately $80 million
in FY 1977 and $100 million in FY 1978 to a proposed $150
million in FY 1979.
In addition to these major assistance programs, the
United States is also actively working with Saudi Arabia
to aid its economic development, using U.S. technical
expertise and Saudi capital deposited in a dollar trust
with the Treasury Department.
The U.S.-Saudi Arabian
Joint Commission on Economic Cooperation currently is
implementing projects valued at over $600 million, involving
more than 100 U.S. experts nowJworking in Saudi Arabia.
The Joint Commission provides a valuable forum
in which the two governments can discuss a wide range
of financial and economic matters of mutual interest.
I
personally am very enthusiastic about the work of the U.S.Saudi Arabian Joint Commission and the significant contributions its economic assistance programs are making to
the strengthening of our bilateral economic and commercial
- 14 relationship.
This represents a new and vigorous effort
in international economic cooperation.
CONCLUSION
President Carter has pointed to the high level of our
oil imports and the increasing rate of inflation as the two
developments which most seriously threaten our nation's
economic health. They both imperil our economic recovery and
threaten the strength of the dollar. They must be controlled.
As I have discussed in my comments today, the United
States is taking major initiatives in each of these areas.
We depend upon other nations to play their appropriate
roles, as well, in helping to promote world recovery. For
the major Arab countries, and especially for the oil-producing nations, this means maintaining needed restraint on
the price of their oil exports, continuing to offer
substantial economic assistance to the developing nations,
and meaningful, effect ive cooperation in seeking to resolve our mutual economic problems. I am confident that,
by pursuing the cooperative economic efforts we now have
underway, and by avoiding actions which could disrupt those
efforts, the answers to these problems can be found.
Further development of our economic relations with
the Arab countries will continue to be an important U.S.
- 15 policy objective.
We hope that this will also encourage
real progress toward a just and lasting peace in the Middle
East, bringing with it the true promise of a better life for
all of our people.
partmentoftheJREASURY
SHINGTON, D.C. 20220
TELEPHONE 566-2041
FOR RELEASE UPON DELIVERY
April 24, 147*4
10:00 a.m.
STATEMENT OF EMIL M. SUNLEY
DEPUTY ASSISTANT SECRETARY FOR TAX ANALYSIS
BEFORE THE SUBCOMMITTEE ON TAXATION AND DEBT
MANAGEMENT OF THE COMMITTEE ON FINANCE
Mr. Chairman and Members of this Distinguished
Committee:
I appreciate this opportunity to appear before you and
discuss the subject of indexation of the tax system. The
recent surge of interest in indexation, or inflation
adjustment of the tax system, obviously stems from the high
rate of inflation we have experienced for the last several
years. If inflation were proceeding at a rate of only one or
one and a half percent as it did in the early 1960's, there
would be much less concern with as complex an alteration of
the tax law as indexation. On the other hand, if the rate of
inflation were to accelerate and reach a level of 20 or 25
percent as in some other countries, I believe almost everyone
would favor indexation. Thus, one factor in deciding whether
we want to index the tax system is the projection of likely
future inflation rates. If we expect a moderate rate of
inflation, say 6 to 7 percent, we must then decide whether
the complexities involved in going to an indexed system are
worth the gains, or whether there are other forms of ad hoc
adjustments which could achieve the same ends of automatic
indexation, but which would involve much less tax complexity.
There are two separate issues in indexing the tax
system: the definition of income and the proper tax
treatment of income, once defined.
I will begin by
discussing the second issue, the tax treatment of nominal
dollar amounts, because in this area proposals and
recommendations have been most fully developed.
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-2Fixed Dollar Amounts
As inflation occurs, the real value of fixed dollar
amounts declines; and thus, since income taxes are computed
from tax brackets and exemptions which are denominated in
fixed dollars, tax liabilities and effective tax rates rise.
To illustrate this result, consider a family consisting of a
husband, wife, and two children, with an income of $15,000.
Their income tax based on 1977 rates would be $1,385 or about
9.2 percent of income. Now, let's assume that inflation runs
at a rate of 7 percent this year, a bit higher than our
current estimate but the average that we have experienced for
the last several years, and assume further that this family's
income increases by this same percentage. That would mean
that their dollar income in 1978 would be $16,050, but, of
course, their real income, that is, their actual spending
power, would not have increased at all above last year's
level of $15,000. Yet their income tax would rise to $1,613
and more importantly, their effective tax rate, which had
been 9.2 percent in 1977, would rise to 10.0 percent in 1978.
If this high rate of inflation were to continue for 10 years,
this family, even though it had experienced no increases in
real income, would see its effective tax rate climb to 17.8
percent, almost double what it had been in 1977 — if, and
this is a big if, Congress did not make any income tax
changes during the intervening period.
In this instance, what is true for an individual family
is true for taxpayers as a whole. If we experience 10
percent inflation, individual income tax receipts rise not by
10 percent, but by something closer to 15 percent. In the
technical jargon of economics, the elasticity of the income
tax with respect to inflation is about 1.5; that is, tax
receipts rise one and a half times as fast as the rate of
inflation.
Since World War II, the rate of inflation has ebbed and
flowed but the trend of prices has always been upward. Does
this mean that the effective tax rate on individual income
ias been constantly rising over time? Not at all, because
Congress has in fact taken frequent action to reduce
individual taxes so that the individual income tax as a
percentage of personal income has actually fluctuated in a
:ather narrow band. Since 1951, it has ranged from a low of
>.2 percent (in 1965), to a high of 11.6 percent (in 1969
*hen the 10 percent surcharge was in effect).
It is not just inflation which pushes taxpayers up into
ugher tax brackets. Because the real productivity of the
American economy has been rising, in the absence of
-3)ffsetting legislation, our tax bills would also have risen,
liven our progressive rate structure. This would have been
Thus, the fact
:rue even if there had been no inflation.
:hat income taxes as a percent of personal income have not
isen, means that Congress, with its periodic tax cuts, has
ieen offsetting not ony the impact of inflation on tax rates,
iut also the impact of the growth of real per capita income.
n fact, if Congress had not cut taxes periodically but
nstead had indexed the individual income tax for inflation
•n the basis of the Consumer Price Index in 1960, taxes would
n fact have been higher in 1975 than they were under the
ctual 1975 law.
Thus, I think the question we should ask is not: should
e adjust the tax system for inflation? But rather, how
hould we adjust the tax system for inflation: by an
utomatic process called indexation or by periodic
egislative read j ustments?
utomatic Indexation
I would like to discuss three issues concerning
utomatic indexation: the impact of inflation on the
overnment's share in the economy, the necessity of
ongressional overview, and the impact of indexation on
:onomic stability.
Many people favor automatic indexation because they
5lieve that the government will automatically increase its
lare of the total economy as inflation generates additional
axes. Thus, they believe the government "benefits" from
lflation. This view is mistaken. The historical record,
mtioned above, shows that the response of the Federal
)vernment to an upward trend in effective tax rates has not
;en to launch new expenditure programs, but rather to reduce
ixes. The present proposed tax cuts illustrate this. Taxes
e raised to pay for government programs; government
ograms are not expanded just to spend increased tax
venues. Automatic indexation by itself would lead to
ither a smaller nor a larger government sector.
Next, the argument is sometimes made that automatic
dexing is desirable because Congress should not have to "be
thered with" an inflation adjustment every year. It is
ue that the automatic nature of indexation systems removes
e need for frequent oversight by Congress, but this
gument works both ways. The argument could be made equally
11, that encouraging the Congress to take a more frequent
°k at what is happening to the tax system may in itself be
-4lesirable. Also, even with indexation, Congress would have
.0 adjust taxes downward periodically to offset the impact of
ising real per capita incomes.
The final argument, and one which I find very important,
•oncerns the impact of automatic indexing on overall fiscal
>olicy. Inflation represents an excess of purchasing power
elative to the amount of goods and services available, and
herefore tax increases are called for. Automatic indexation
f the tax system, whatever its appeal on equity grounds,
oves in the opposite direction. That is, under indexation,
nflation would give rise not to tax increases but rather to
ax cuts or at least, in real terms, no change in effective
ax rates. Rather than give up its control over this aspect
f fiscal policy, I feel the country would be better off if
ongress continued with its existing ad hoc approach to tax
ncreases and decreases.
There have been occasions when we would have been better
ff with an automatic tax reduction — 1974 or 1975 might
ave been such occasions, given the increasing rate of
nemployraent. But in general, if all we know about the
conomy is that it has been experiencing inflation, economist
ould generally prefer to have taxes going up rather than
oing down. If the appropriate fiscal policy calls for a tax
eduction, Congress can provide that reduction.
ncome Measurement
Let me now turn to the second and much more difficult
ssue concerning indexation, that is, the definition of
icome and specifically the measurement of real income from
apital. Ideally, the base of the tax system should be real
icome because that is the best measure of ability to pay.
Lth reasonable price stability, nominal income provides a
itisfactory approximation of real income, but under
lflationary conditions, this is no longer the case.
irticularly severe problems arise in four areas:
jpreciation of fixed assets, inventory accounting, capital
iins, and financed instruments.
'preciation
Generally, fixed assets are depreciated on the basis of
eir historical cost. It is easy to see that this is
appropriate in a period of inflation because the dollar
lue of depreciation allowances will be worth less, as time
e
s on, than the "real" value of the assets being used up.
-5Unfortunately, while the problem is clear, the solution is
not: there has been much controversy in recent years, both
here and abroad, concerning the appropriate accounting for
depreciation of fixed assets in a period of inflation. One
possible approach would be to adjust depreciation for each
asset based on replacement cost, which would involve
calculating a separate price index for every kind of asset.
Even aside from the great difficulties in adjusting for
quality changes and technological innovations over time, it
is clear that the sheer numbers and recordkeeping involved
here would lead to a very cumbersome system. Moreover, such
practice would allow real changes in relative values to
escape taxation. Another possibility would be to index on
the basis of some measure of the general price level. Such a
measure would refer not just to the prices of capital assets,
but would be a reflection of the value of the dollar in
broader terms.
Although current law does not contain an explicit
depreciation adjustment to account for the effect of
inflation, accelerated depreciation methods provide some
offset for inflation. In fact, until the high inflation
rates experienced in the last few years, the use of
accelerated depreciation on an historical cost basis has
generally meant higher depreciation deductions (and hence
lower income taxes) than if the law permitted straight-line
depreciation on a replacement cost basis. The Commerce
Department has estimated the net effect of these adjustments
(accelerated depreciation and replacement cost accounting) on
Capital Consumption Allowances, which is the National Income
and Product Account concept analogous to depreciation and
amortization. For corporations, the net effect was positive
(i.e. lower taxes) for the years 1962-1973, while for the
years since 1974, it has been negative. That is, for the
last few years of high inflation, replacement cost
depreciation on a straight-line basis would have meant lower
taxes, whereas for earlier years historic cost depreciation
on an accelerated basis meant lower taxes. (For sole
proprietorship
and partnerships, the net effect has been
Inventory Accounting
lower taxes ever since 1946.)
In the area of inventories, the current LIFO (Last In,
First Out) system of accounting is in fact a form of
inflation adjustment similar to replacement cost
depreciation. However, some have argued that it would be
more appropriate to require FIFO (First In, First Out)
inventory accounting but to permit an adjustment to reflect
-6the change in the general price level from the time the item
was put in inventory until the time it was removed from
inventory and sold. Such a system would be much more complex
than the LIFO method.
Capital Gains
One of the clearest areas in which inflation has an
impact is capital gains. If an asset's market value
increases due solely to inflation, the holder of that asset
has really experienced no increase in wealth, yet he is
required to pay a capital gains tax on the difference between
the original purchase price and the sales price. In fact,
this impact of inflation has been one of the key arguments
in defending the present favorable treatment which capital
gains receive in our tax system. The present 50 percent
exclusion feature does indeed provide an offset for
inflationary gains. However, in any given case it is usually
either too much or too little; only rarely would inflationary
gains amount to exactly 50 percent of the total gain. The
proper taxation of capital gains under inflation depends on
the way financial instruments are handled, as we shall see
below.
Financial Instruments
If an individual earns an interest rate of five percent
on a $1,000 savings account, at the end of the year he would
have $1,050. Suppose, however, the rate of inflation has
been 7 percent over the course of the year. This means that
at the end of the year the individual has not gained from his
investment, but is actually worse off, for he has less
purchasing power than he did at the beginning of the year.
His $1,050 is actually worth only $981 in terms of
beginning-year prices, and even though he is experiencing
this $19 decline in real purchasing power, he must still
include $50 in his taxable income, and when he withdraws his
deposit, he will not be allowed a tax deduction for his loss
of purchasing power.
On the other hand, consider a debtor who is able to pay
off his debt in deflated dollars: he actually benefits from
inflation. Moreover, for tax purposes he may deduct all of
}is interest payments—even those which merely reflect
inflation. Thus, inflation produces both gainers and losers
in terms of real income, and this asymmetry poses real
Problems for any practical system of indexation. Suppose for
example, I purchased an asset for $1,000 and financed it
-7entirely by debt. Would I be helped or hurt by inflation?
The answer is that if the holding period of the asset and the
debt are the same, I have completely protected myself from
the effects of inflation; any inflationary loss on the asset
is exactly offset by a gain on the debt.
Market Adjustments
We generally speak of the changes in value resulting
from inflation as if they were always unanticipated, but this
is not really the case. No one, for example, thinks that the
price level 12 months from now will be precisely where it is
today—while we may not agree on an exact number, everyone
anticipates some rise in prices, and lenders, as well as
borrowers, take this into account in deciding the terms of a
loan.
If the real rate of interest, that is, the rate for
stable prices, is three percent, lenders will not continue
lending money at three percent when the rate of inflation is
five percent—they will demand a higher rate of interest.
How much higher, depends on the lender's tax rate, for he
will try to maintain his after-tax rate of return. Suppose a
lender's marginal tax rate is 50 percent; that means that
under stable prices, his after-tax rate of return was 1-1/2
percent. If inflation now rises to five percent, he will
seek to raise the before-tax rate not just to eight percent
(i.e. three percent + five percent), but to 13 percent,
because after he pays taxes on 13 percent he will have 6-1/2
percent left, which in real terms (substracting five percent
for inflation) is the same as the 1-1/2 percent he was
earning before inflation.
Thus, in this case the market rate of interest would
adjust so that no inflation adjustment would be necessary for
the lender. What about the borrower? If he is in the same
tax bracket, no adjustment is necessary for him, either. In
the absence of inflation, he had to pay three percent, but
this was a deductible expense on his tax return, so his
after-tax, real cost was 1-1/2 percent. Now he has to pay 13
percent interest, but this, too, is deductible, so
after-taxes he pays only 6-1/2 percent, and he is repaying
the loan in depreciated dollars, so his real cost is again,
1-1/2 percent.
To the extent that market rates of interest adjust for
anticipated inflation, then, it would appear that no tax
ad]ustment for debt instruments is necessary. There are
three qualifications to this, however. First, creditors and
-8debtors may not be in the same tax bracket, so any rise in
the rate of interest will have certain redistributive effects
between them. Second, many people feel that the market does
not fully adjust, that there are always lags and other
discrepancies among nominal rates of interest, real rates of
interest, and the rate of inflation. Finally, for many
creditors there are institutional barriers which prevent them
from adjusting their rate of return in response to inflation.
Specifically, we have laws setting limits on the rate of
interest which may be paid on savings in banks and other
financial institutions. In some recent years, these limits
have been less than the rate of inflation, which means that
savings account holders have been unable to adjust the rate
of interest they earn, and therefore have suffered an actual
loss in the value of their assets while at the same time they
have been forced to pay income tax on their nominal interest
receipts.
In brief, there is currently no agreement among
economists, accountants, or businessmen on just how an
adjustment for financial instruments should be made. This
uncertainty reflects both differences of opinion concerning
how well the market adjusts rates of return to take account
of inflation, and concern with the equity and practicality of
handling inflation premiums. Some economists have argued
that the interest deduction should be reduced by the amount
of interest that is caused by inflation, i.e. the "inflation
premium." This of course would require an estimate of how
much of the current nominal rate of interest is "real" and
how much is just an inflation premium. Others have suggested
that the full interest deduction should be permitted and the
full amount of interest income taxed, but at the time debt is
paid off, a gain or loss should be recognized to the extent
that the debt is paid off with deflated dollars.
Financial Accounting
Similarly, no consensus has yet emerged concerning the
appropriate way of adjusting depreciation for inflation. The
Securities and Exchange Commission has required on certain
large companies to provide supplemental accounting
information concerning the cost of replacing productive
capacity. The approximate amount of depreciation, depletion,
and amortization which would have been recorded under such a
scheme provides a measure of replacement cost depreciation.
Another proposal for adjusting accounting data for
inflation was made, somewhat tentatively, by the Financial
Accounting Standards Board. The aspect of that proposal
-9which drew the most attention was the inclusion in net income
of changes in the purchasing power of net holdings of
monetary assets. This turned out to be quite controversial,
and the FASB subsequently withdrew its proposals for further
study.
A study of the impact of indexed accounting for two
groups of corporations was undertaken by Sidney Davidson of
the University of Chicago and Roman Weil of the Georgia
Institute of Technology. They recalculated the financial
statements of the 30 firms included in the Dow Jones
Industrial Average and the 24 utilities included in the Dow
Jones Utility Average. All of the utilities would have had
higher income and hence presumably higher taxes under the
FASB proposed accounting rules, mainly because of the large
amount of debt they owed. In the case of the industrial
firms, 21 would have had lower taxes and nine would have had
higher taxes. Thus indexation is not an unmixed blessing
from the point of view of corporate taxpayers.
It seems to us that until there exists a greater
consensus within both the accounting profession and the
business community concerning the best manner of adjusting
financial and operating statements for inflation, it would be
inappropriate for the Treasury Department to attempt to
impose any particular "correct" method. Until the accounting
profession has worked out the technical details of how to
index income, and until the business community is prepared to
use an indexed financial statement in reporting to their
stockholders and creditors, Congress should not permit the
business community to report to the Internal Revenue Service
on an indexed basis.
Conclusion
What we can conclude from this review of indexation? As
I stated at the outset, at rates of inflation above a certain
level almost everyone would feel that indexation is
desirable. I feel that our present and prospective inflation
rates are not at that level. To introduce indexation into
the tax system would mean substantially increasing the
complexity of the present system, greatly increasing the
recordkeeping requirements of individuals and firms, and
naking fairly arbitrary decisions in many areas of income
measurement in which no consensus has emerged to date from
economists, accountants, or businessmen. Until we know more,
it would be a mistake to proceed too rapidly.
-10Comments on S. 2738
I have been asked to comment on bill S. 2738 which
provides for indexation of certain provisions of the tax
laws. This bill essentially calls for indexing the fixed
dollar amounts defined in the tax code by adjusting them
upwards at two-thirds of the percentage change in the
Consumer Price Index. As I indicated in the first part of my
testimony, this is a fairly straightforward form of
adjustment and while it does mean the recalculating of a
number of factors, it requires no action on the part of
Congress or the executive each year in response to inflation.
It does mean, however, that the amount of fiscal stimulus (in
the form of tax cuts) provided each year will be determined
by the rate of inflation in the previous year: the more
inflation last year, the more stimulus this year. Moreover,
it would make it more difficult for taxpayers to make
accurate estimates of their tax liability and therefore make
appropriate adjustments in their withholding rates.
The bill goes will beyond this simple form of
indexation, however, and provides for a basis increase for
capital gains. This basis increase would apply only to
capital assets; no provision is made for adjusting financial
instruments. Thus, the proposal encounters the difficulty
which I mentioned of discriminating between leveraged and
unleveraged investors, and between those investors capable of
converting income into a capital asset and those unable to.
While a heavily-leveraged taxpayer would receive a
significant windfall from such a provision, many persons
relying on fixed incomes would be relatively disadvantaged.
The savings account depositor is a prime example. Because
his savings account interest rate is limited by law, he is
not in a position to obtain a real interest rate sufficient
to compensate for his inflationary losses. Moreover, a fixed
security like a savings account cannot increase in market
value the way an equity can. Thus, while the equity holder
might experience a rise in market value for his equity, only
a portion of which would be taxed away, the holder of a bank
deposit would see no rise in the value of his account. He
would still be required to pay taxes annually on the full
amount of his nominal interest income while the owner of a
capital asset could adjust his gain for inflation as well as
postponing the tax on that adjusted gain until the asset is
sold. Further, under S. 2738, only half of that real capital
gain would be taxed at all! There is a patent inequity in a
tax system that would insulate holders of real estate and
stock from the impact of inflation while ignoring the plight
of low income taxpayers who tend to hold savings accounts.
-11Current law with respect to capital gains has
demonstrated that taxpayers will strive to change an ordinary
income transaction into, a form qualifying for preferential
tax treatment.' An inflation adjustment for capital gains
would place an even greater premium on such manipulative
practices and open new avenues for tax gamesmanship. A clear
example of this is the collapsible corporation, a device used
for the conversion of ordinary business profits into capital
gains. If an inflation adjustment is permitted with respect
to stock, such collapsible corporations would retain
substantial tax advantages unless a significant holding
period were required before the inflation adjustment would go
into effect.
If we attempt to restrict the categories of assets
eligible for inflation adjustments, we would exacerbate
problems involving corporate tax shelters. In the event
corporate stock is eligible for an inflation adjustment which
is denied most other assets, there will be pressure to
incorporate scores of non-preferred investments. For
example, taxpayers might be motivated to incorporate savings
accounts, jewelry, and antiques if the basis of those
investments could not be adjusted independently. Another
area of complexity in the tax law would have to be developed
in order to prevent such abuses.
Finally, providing an inflation adjustment for capital
gains as proposed in S. 2738 would add to the complexity of
computing taxable gains. Currently, the amount of gain in a
transaction is generally determined without regard to the
length of time an asset has been held, once the holding
period is such as to qualify as "long-term." With an
inflation adjustment mechanism such as S. 2738, however, the
date of any change in bais becomes all important. Even in
the simplest of transactions, a taxpayer will have to account
for the date an asset was purchased as well as the amount
paid for that asset, and this determination could create
significant administrative problems in those instances where
basis is carried over from one taxpayer to another or from
one asset to another by transfer where no gain is recognized.
Further, an investor adding to or withdrawing from his
investment over time would have to calculate a separate
inflation correction for each such action.
In brief, without the introduction of a comprehensive
scheme of indexation throughout the tax law, a basis
adjustment for capital gains might violate the neutrality
standard and add new economic distortions to the tax laws.
During periods of high inflation, the savings of individuals
-12and businesses would tend to flow increasingly into those
investments eligible for an inflation adjustment and away
from "non-adjustable" investments. Once an inflation
adjustable asset had been selected as an investment, there
would also be a tendency for the investor to maintain that
investment longer than would be desirable in the absence of
the inflation adjustment.
There are many difficult conceptual as well as practical
problems involved in correcting the measurement of income for
the effects of inflation. Until we have made much more
progress in this area, it would be a mistake to proceed in
piecemeal fashion to provide an adjustment for only one form
of income, namely, capital gains, while denying any
adjustment for other, equally deserving, types of income
which do not enjoy the preferential treatment already
accorded capital gains.
0O0
partmentoftheTREASURY
TELEPHONE 566-2041
HINGTON, D.C. 20220
April 24, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 2,301 million of 13-week Treasury bills and for $3,406 million
of 26-week Treasury bills, both series to be issued on April 27, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Price
High
Low
Average
a/ Excepting
b/ Excepting 1
26-week bills
maturing October 26, 1978
13-week bills
maturing July 27, 1978
Discount
Rate
Investment
Rate 1/
6.282% 6.47%
98.412 a/
6.298%
6.49%
98.408
6.294%
6.48%
98.409
98.409
6.294%
6.48%
1 tender of $475,000
tender of $15,000
Price
:
Discount
Rate
Investment
Rate 1/
96.582b/ 6.761% 7.10%
7.12%
96.572
6.781%
96.574
6.777%
96.574
6.777%
7.11%
Tenders at the low price for the 13-week bills were allotted 90%.
Tenders at the low price for the 26-week bills were allotted 13%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Received
Boston
$
25,285,000
New York
4 ,214,315,000
25,760,000
Philadelphia
Cleveland
32,255,000
Richmond
22,085,000
Atlanta
57,925,000
Chicago
375,620,000
St. Louis
45,310,000
29,760,000
Minneapolis
30,015,000'
Kansas City
Dallas
18,080,000
San Francisco 224,785,000
Treasury
11,535,000
TOTALS $5,112,730,000
Accepted
:, Received
$
19,585,000
2,018,645,000
25,535,000
29,835,000
18,085,000
32,580,000
36,115,000
18,310,000
20,760,000
24,400,000
18,080,000
27,965,000
17,815,000
: $
: 4,757,445,000
8,070,000
:
15,630,000
:
58,225,000
::
46,260,000
:
226,980,000
::
39,415,000
:.
23,915,000
::
.
22,660,000
.
8,665,000
612,550,000
:
$
7,815,000
3,017,075,000
7,515,000
10,630,000
22,175,000
26,160,000
40,860,000
10,615,000
13,435,000
20,750,000
8,665,000
213,180,000
11,535,000
6,820,000
6,820,000
$2,301,430,000^/
$5,844,450,000
£/Includes $382,905,000 noncompetitive tenders from the public.
J Includes $179,355,000 noncompetitive tenders from the public.
1/Equivalent coupon-issue yield.
B-856
Accepted
$3,405,695,000d/
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:00 E.S.T.
APRIL 25, 1978
STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
SUBCOMMITTEE ON DOMESTIC MONETARY POLICY
Mr. Chairman and Members of the Committee:
I am pleased to respond to your request for the
views of the Treasury Department on H.R. 7800, the Solar
Energy Bank Act. My remarks will address the financial
structure of the proposal from the standpoint of the
Treasury's overall policies regarding Federal credit
assistance programs. Other Administration witnesses will
address the energy policy implications.
The bill would create a new Federal instrumentality,
the Solar Energy Development Bank, whose function would be
to make long-term low interest loans to encourage the use
of solar energy and insure adequate investment in new or
improved solar technology. The proposed Bank would be
authorized to make loans directly or through banks and other
lending institutions, which would receive fees for their
services. The loans would be made to organizations, corporations, partnerships, and individuals to purchase energy
equipment and for other, solar energy-related purposes.
Loans would be made at annual interest rates not to exceed
3 percent for periods not to exceed 30 years. At least
sixty percent of the amounts authorized for loans would
have to be used in residential dwellings. Loans for
commercial buildings could not exceed $100,000 and loans
for residential buildings could not exceed $7,500.
Routine credit examinations of applicants would be required.
B-857
2
All loans would be made from a Solar Energy Fund, which
would be administered by the Secretary of the Treasury.
Monies in the fund not needed for current operations could
be invested in direct or guaranteed obligations of the United
States Government or any Federal agency. Five billion
dollars would be authorized to be appropriated to the fund
initially. In this connection, the President indicated in
his anti-inflation speech on April 11 that we must work
to reduce the budget deficit.
The proposed 3 percent loans could result in unintended
and uncontrolled subsidies that would vary with changing
credit market conditions, rather than with the needs of the
borrowers. The subsidies would be greatest when market
interest rates were at their highest, and would decline as
market rates fell. The consequent volatility in the demand
for loans would put the greatest pressure on financial and
credit markets precisely when they were most strained and
would impede the Government's overall financial policies.
As an illustration, consider a $1,000, thirty year loan
made at 3 percent when the cost of long-term funds to the
government is at the current level of about 8k percent.
The present value of the subsidy would be $439; thus,
a fixed interest loan at 3 percent would be equivalent to
a $561 "break-even" loan at the Treasury's cost of funds —
%h percent — and a cash grant of $439. If the cost of
funds to the government were to increase to 10 percent,
the present value of the subsidy would be $519, over half
the value of the loan.
The bill would not require a finding that credit is
not otherwise available at reasonable terms and conditions
from private market sources. As a general principle, and
to provide a built-in control over program growth, Federal
credit programs should be designed to facilitate the flow of
credit to those borrowers who are unable to obtain credit in
the private market. The needs of more creditworthy borrowers
should be met in the market without Federal credit aid. Such
aid should be contingent on a requirement for evidence that
borrowers cannot obtain credit from conventional lenders.
thus helping to assure that the limited Federal funds available
are directed to the areas of greatest need.
3
The bill contains no requiremert that the amount of
each loan be less than the value of the equipment being
financed. Nor would the bill require that the term of the
loan be less than the economic life of the equipment being
financed. Thus, the bill does not provide adequate protection of the financial interests of the Federal Government,
and the bill could encourage excessive demands for loans and
less efficient projects.
In addition, the bill lacks restrictions concerning
default procedures and other features common to Federal loan
programs which would minimize the exposure of the Government
to unnecessary risk and insure that Federal credit resources
were being most effectively utilized.
Finally, we are concerned with the provisions of the
bill which, on the one hand, would provide the Bank with
interest-free money from the Treasury but, on the other
hand, would permit the Bank to invest any excess funds in
interest-bearing obligations of the Government.
This concludes my formal remarks. I would be pleased
to respond to any questions you may have.
0 o 0
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE
April 26, 197 8
TREASURY MAY QUARTERLY FINANCING
The Treasury will auction two securities in a total
amount of $4,000 million, consisting of $2,500 million of
10-year notes and $1,500 million of 22-1/4-year bonds.
The bonds will be an addition to bonds which are currently
outstanding. The proceeds will be used toward the payoff
of $5,884 million of publicly held securities maturing
May 15, 1978. The balance of the maturing issues, $1,884
million, will be redeemed from the Treasury operating cash
balance.
The $5,884 million of maturing securities are those
held by the public, including $746 million held, as of today,
by Federal Reserve Banks as agents for foreign and international
monetary authorities. In addition to the public holdings,
Government accounts and Federal Reserve Banks, for their own
accounts, hold $2,499 million of the maturing securities that
may be refunded by issuing additional amounts of new securities.
Additional amounts of the new securities may also be issued,
for new cash only, to Federal Reserve Banks as agents for
foreign and international monetary authorities.
Details about each of the new securities are given in the
attached "highlights" of the offering and in the official
offering circulars.
oOo
Attachment
H5*
HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
MAY 1978 FINANCING
TO BE ISSUED MAY 15, 1978
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call date
Interest coupon rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Accrued interest payable by
investor
Preferred allotment
Deposit requirement ,
Deposit guarantee by designated
institutions
Key Dates:
Deadline for receipt of tenders
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.
...
y
$2,500 million
10-year notes
Series A-1988
(CUSIP No. 912827 HS 4)
May 15, 1988
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
November 15 and May 15
$1,000
Yield Auction
April 26, 1978
$1,500 million
22-1/4-year bonds
8-3/8% Bonds of 1995-2000
(CUSIP No. 912810 BV 9)
August 15, 2000
August 15, 1995
8-3/8%
To be determined at auction
To be determined after auction
August 15 and February 15
$1,000
Price Auction
None
Noncompetitive bid for
$1,000,000 or less
5% of face amount
Acceptable
$20.59047 per $1,000
Noncompetitive bid for
$1,000,000 or less
5% of face amount
Acceptable
Tuesday, May 2, 1978,
by 1:30 p.m., EDST
Monday, May 15, 1978
Wednesday, May 3, 1978,
by 1:30 p.m., EDST
Wednesday, May 10, 1978
Wednesday, May 10, 1978
Tuesday, May 9, 1978
Monday, May 15, 1978
Tuesday, May 9, 1978
Monday, May 15, 1978
Monday, May 15, 1978
FOR RELEASE AT 4:00 P.M.
April 25, 1978
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,800 million, to be issued May 4, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $ 5,806 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
February 2, 1978, and to mature August 3, 1978
(CUSIP No.
912793 S5 6), originally issued in the amount of $3,505 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,500 million to be dated
May 4, 1978,
and to mature November 2, 1978
(CUSIP No.
912793 U2 0) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing May 4, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,370
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The biJls will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
0. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, May 1, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the* Treasury.
B-859
-2Each 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 in and
oorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection ol their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on May 4, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
May 4, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.
-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
oOo
FOR IMMEDIATE RELEASE
April 25, 1978
Contact:
George G. Ross
202/566-2356
TREASURY RELEASES RESULTS OF
A. S. HANSEN STUDY OF PENSION PLANS
The Treasury Department today released the results of a
study designed to assist in evaluating the impact of the
Administration's proposal to change the present pension-social
security integration rules in the Internal Revenue Code.
Plans which relate private pension benefits or contri-^
butions to social security benefits or contributions are said
to be "integrated." Under present law, it is possible for
workers whose earnings are lower than the social security
wage base to receive little or nothing from an integrated
private plan.
The study was conducted by A. S. Hansen, one of the largest actuarial firms in the country at the request of the
Treasury. The Hansen firm undertook the study voluntarily
in the public interest and at no cost to the government.
A proposal included in the President's 1978 tax program
would provide at least some benefits to those who now are
not receiving any benefits, and would improve the benefits of
other participants who are also affected by present integration rules. In large part, employees who would benefit most
from the proposed change are low paid or moderately paid.
The Administration's proposal generally is that plans
can provide pensions based on pay in excess of the social
security wage base no greater than 1.8 times the pensions
based on pay below the social security wage base.
Alternatively, the Administration's proposal will allow
plans integrated by the social security offset method to use
as a maximum offset the same portion of social security benefits as the portion of pay provided by the plan formula. For
example, a plan could provide a pension of 50 percent of final
average pay reduced by 50 percent of Social Security; or, 60
percent of final average pay reduced by 60 percent of Social
Security.
B-860
- 2 -
The Hansen study finds that under the Administration's
proposal, a large majority of the plans which are described
as social security offset plans would meet the new rules without any plan adjustments, or additional costs. Under an
offset plan an employer can now reduce the amount of the
private pension benefit by as much as 83 1/3 percent of the
social security benefit the employee receives. Only minor
cost adjustments would be needed for some of the remaining
offset plans which would not meet the proposed standard.
These include offset plans which now provide benefits in the
range of 40 percent to 45 percent of earnings offset by 50
percent of social security benefits. These plans, therefore,
fall just short of the Administration's proposed standard for
offset plans.
In another type of integrated plan - the step-rate excess
plan - the Hansen study finds that under the Administration's
proposal, a large majority of such plans also would meet the
proposed rules without any plan adjustments or additional
cost.
Here, too, only a nominal low cost adjustment would be
needed in many of the remaining step-rate plans which would
not meet the proposed rule. Under an excess plan, an employee
can receive a pension up to 37 1/2 percent of compensation
above a plan's integration level. Employees below that level
need not receive any pension. In a step-rate excess plan,
they do get some benefits.
About one-fourth of the step-rate plans, and about onefifth of the offset plans would need more than a nominal
adjustment to meet the proposed standard. Treasury interprets
these results to indicate that the Administration's proposal
would provide improved pension benefits for a significant
number of workers without imposing widespread or disruptive
revisions among existing defined benefit pension plans.
A study is now being made of the cost impact on plans
requiring change.
The study comprises a survey and analysis that covers
a large sample of pension plans on which the Hansen firm performs recurring annual valuations. About 1,200 plans are
included in the study covering about 1,200,000 active participants.
Hansen reports that practically all types of plans are
included in the sample, and that the sample is representative
of all plans serviced by the firm. However, there are no
data as yet available to measure the degree to which the sample
is representative of all plans in the country.
- 3 -
Since Hansen services a relatively small number of
defined contribution plans and those usually in a consulting
capacity, only defined benefit plans were included in the
study and the data provided are for defined benefits plans
only.
A defined benefit plan may be described as one for
which the monthly pension is determined by a formula usually
involving the employee's pay and service. In a defined contribution plan, the benefit depends on the amount in the
employee's account at retirement.
The 1,200 plans included in the study are sorted into
categories of: (1) non-integrated plans, (2) pure excess
plans, (3) step-rate excess plans, and (4) Social Security
offset plans.
Two-thirds of the 1,200 plans in the Hansen study are
integrated - these number 814. One-third are not - these
number 38 6.
The 814 integrated pension plans include 80 percent
which are Social Security offset plans and 19 percent which
are step-rate excess plans. Only 1 percent are pure excess
plans. The Treasury also is obtaining results of an impact
study of small plans which are typically money purchase or
profit-sharing, and among which there is a large representation of pure excess plans.
For further information, contact:
Gabriel Rudney (Treasury) 202/566-5911
Thomas McSweeney (Treasury)
Richard Keating (A. S. Hansen, Inc.)
202/566-864 7
312/234-3400
The Hansen study, "Analysis of Private Pensions Plans,"
is attached.
o
0
o
PRIVATE PENSION PLANS
Number of Employees in Plan
Under 10
Total Plans in Survey
Number of Plans
Number of Employees
Average Number of Employees
2. Non-Integrated Plans
Number of Plans
Number of Employees
Average Number of Employees
10 - 25
26 - 50
51 - 100
101 - 1000
Over 1000
Total
I.
124
712
6
186
3,204
17
142
5,051
36
197
14,668
74
433
144,775
334
118
1,025,954
8,695
1,200
1,194,364
995
18 (15%)
108 (15%)
6
32 (17%)
608 (19%)
19
51 (36%)
1,836 (36%)
36
74 (38%)
5,846 (40%)
79
169 (39%)
54,925 (38%)
325
42 (36%)
453,492 (44%)
10,797
386 (32%)
516,815 (43%) % of 1
1,339
3. Integrated Plans
Number of Plans
Number of Employees
Average Number of Employees
106 (85%)
604 (85%)
6
154 (83%)
2,596 (81%)
17
91 (64%)
3,215 (64%)
35
123 (62%)
8,822 (60%)
72
264 (61%)
89,850 (62%)
340
76 (64%)
572,462 (56%)
7,532
814 (68%)
677,549 ( 5 7 % ) % of 1
820
A. Plans Integrating Under Proposed Rules (1.8)
Number of Plans
Number of Employees
Average Number of Employees
69 (65%)
429 (71%)
6
112(73%)
1,890(73%)
17
73 (80%)
2,685 (84%)
37
97
7,020
72
200 (76%)
66,144(74%)
63 (83%)
423,318 (74%)
6,719
614 (75%)
501,496 ( 7 5 % ) % of 3
950
B. Plans Not Integrating Under Proposed Rules
Number of Plans
Number of Employees
Average Number of Employees
37 (35%)
175 (29%)
5
42 (27%)
706 (27%)
17
18 (20%)
530(16%)
26 (21%)
1,802(20%)
64 (24%)
23,706 (26%)
370
13 (17%)
149,144(26%)
11,473
200 (25%)
176,053 ( 2 5 % ) % of 3
880
29
69
331
Types of Integrated Plans
4. Pure Excess Plans
Number of Plans
Number of Employees
Average Number of Employees
1
7
7
4
72
18
1
29
29
3
408
136
9
516
37
A. Plans Integrating Under Proposed Rules
None
B. Plans Not Integrating Under Proposed Rules
5. Step Rate Plans
Number of Plans
Number of Employees
Average Number of Employees
Using 1.8 Ratio Test
A . fj a n s Integrating Under Proposed Rules
Number of Plans
Number of Employees
Average Number of Employees
B. Plans Not Integrating Under Proposed Rules
Number of Plans
Number of Employees
Average Number of Employees
Using 2.0 Ratio Test
A . Plans Integrating Under Proposed Rules
Number of Plans
Number of Employees
Average Number of Employees
B. Plans Not Integrating Under Proposed Rules
Number of Plans
Number of Employees
Average Number of Employees
9
11
63
6
26
481
19
14
546
39
32
2,112
66
62
22,942
370
13
37,455
2,881
158
63,599
403
3 (27%)
15 (24%)
5
13 (50%)
247 (51%)
19
9 (64%)
351 (64%)
39
16 (50%)
1,120(53%)
70
44(71%)
14,608 (64%)
332
9 (69%)
22,023 (59%)
2,447
94 (59%)
38,364 ( 6 0 % ) % of 5
408
8 (73%)
48 (76%)
6
13 (50%)
234 (49%)
18
5 (36%)
195 (36%)
39^
16 (50%)
992 (47%)
62
18 (29%)
8,334 (36%)
463
4 (31%)
15,432 (41%)
3,858
64 (41%)
25,235 (40%) % of 5
394
10 (91%)
60 (95%)
6
16 (62%)
304 (63%)
19
7 (50%)
280 (51%)
40
20 (63%)
1,380(65%)
69
55 (89%)
20,460 (89%)
372
11 (85%)
31,163(83%)
2,833
119(75%)
53,647 ( 8 4 % ) % of 5
451
1 ( 9%)
3 ( 5%)
3
10 (38%)
177 (37%)
18
7 (50%)
266 (49%)
38
12 (37%)
732 (35%)
61
7(11%)
2,482 (11%)
355
2 (15%)
6,292 (17%)
3,146
39 (25%)
9,952 ( 1 6 % ) % of 5
255
Hansen
6.
Flat Dollar Offset Plans
Number of Plans
Number of Employees
Average Number of Employees
ANALYSIS OF PRIVATE PENSION PLANS
Number of Employees in Plan
Under 10
10 - 25
26-50
51 - 100
101 - 1000
29
172
6
26
402
15
12
432
36
10
706
71
8
1,808
226
Over 1000
1
5,945
5,945
no
None
B . Plans Not Integrating Under Proposed Rules
Social Security Offset Plans
Number of Plans
N u m b e r of Employees
Average Number of Employees
86
9,465
All
A. Plans Integrating Under Proposed Rules
7.
Total
65
362
6
98
1,641
17
64
2,208
35
81
6,004
74
191
64,692
339
62
529,062
8,533
561
603,969
1,077
A. Plans Integrating Under Proposed Rules
N u m b e r of Plans
N u m b e r of Employees
Average Number of Employees
37 (57%)
222 (61%)
6
73 (74%)
1,241 (76%)
17
52 (81%)
1,872 (85%)
36
71 (88%)
5,254 (88%)
74
148 (77%)
49,728 (77%)
336
53 (85%)
395,350 (75%)
7,459
434 (77%)
453,667 ( 7 5 % ) % of 7
1,045
B. Plans Not Integrating Under Proposed Rules
N u m b e r of Plans
N u m b e r of Employees
Average Number of Employees
28 (43%)
140 (39%)
5
25 (26%)
400 (24%)
16
12 (19%)
336 (15%)
28
10 (12%)
750 (12%)
75
43 (23%)
14,964(23%)
348
9 (15%)
133,712 (25%)
14,857
127 (23%)
150,302 (25%) % o f 7
1,183
The plans in the survey are those serviced by actuarial units in Atlanta, Dallas, N e w York City, and Lake Bluff, Illinois. These offices were chosen so as to provide geographic
distribution. The plan formulas were analyzed to see if they fell into the integrated or non-integrated category. The integrated formulas were further examined to see if the
plans — all of which satisfy present integration rules — would continue to satisfy the proposed rules.
The plan characteristics and data shown are as of December 31, 1976 for the most part. Census dates for some of the plans are spread through the years 1976 and 1977.
13144-115-146
4/10/78
-2Hansen
ppartmentoftheTREASURY
TELEPHONE 566-2041
5H5HINGTON, D.C. 20220
April 26, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 2,967 million of 52-week Treasury bills to be dated
May 2, 1978,
and to mature May 1, 1979,
were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
High
Low
Average -
Discount Rate
92.883 7.039%
92.828
7.093%
92.849
7.072%
Investment Rate
(Equivalent Coupon-Issue Yield)
7.54%
7.60%
7.58%
Tenders at the low price were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Received
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Accepted
$ 12,280,000
$ 12,280,000
3,868,575,000
2,539,475,000
8,365,000
8,365,000
49,230,000
40,550,000
50,455,000
34,455,000
10,690,000
KL32SL 00052-WEEK BILL RATES
DATE
HIGHEST SINCE
TOTAL
April 26, 1978
LAST MONTH
Q.J77 %
The $2,967 million <
noncompetitive tenders fr
Federal Reserve Banks fo
international monetary a
LOWEST SINCE
TODAY
An additional $ 55
Reserve Banks as agents of foreign and international monetary authorities
for new cash.
* * * * * * * *
T
e Treasur
a
A •1 o
y lso wants to announce that the weekly bill offering of
April 25 reported that Federal Reserve Banks, for themselves and as agents
ot foreign and international monetary authorities hold $2,370 million
Mrs 5 a t U r 5 n 8 b i l l s > which are eligible in exchange for the bills to be auctioned
uonaay, May 1._. JU**- ssrrect amount held by those accounts is $3,236 million.
B:861
lepartmentoftheTREASURY
TELEPHONE 566-2041
HINGTON, D.C. 20220
April 26, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 2,967 million of 52-week Treasury bills to be dated
May 2, 1978,
and to mature May 1, 1979,
were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
High
Low
Average -
Discount Rate
92.883 7.039%
92.828
7.093%
92.849
7.072%
Investment Rate
(Equivalent Coupon-Issue Yield)
7.
7.
7.
Tenders at the low price were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
$ 12,280,000
3,868,575,000
8,365,000
49,230,000
50,455,000
10,690,000
242,510,000
32,045,000
21,890,000
17,990,000
3,130,000
317,925,000
2,675,000
$ 12,280,000
2,539,475,000
8,365,000
40,550,000
34,455,000
10,520,000
123,510,000
16,045,000
21,890,000
10,990,000
3,130,000
142,925,000
2,675,000
TOTAL
$4,637,760,000
$2,966,810,000
The $2,967 million of accepted tenders includes $ 77 million of
noncompetitive tenders from the public and $ 1,208 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 $ 55 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.
* * * * * * * *
The Treasury also wants to announce that the weekly bill offering of
April 25 reported that Federal Reserve Banks, for themselves and as agents
of foreign and international monetary authorities hold $2,370 million
of maturing bills, which are eligible in exchange for the bills to be auctioned
Monday, May 1. The correct amount held by those accounts is $3,236 million
B-86*
FOR IMMEDIATE RELEASE
April 25, 1978
REMARKS BY
THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
ASIAN DEVELOPMENT SACK'S ELEVENTH ANNUAL MEETING
VIENNA, AUSTRIA
Mr. Chairman, President Yoshida, Distinguished Delegates,
Ladies and Gentlemen:
It is a great pleasure for me to be in Vienna today to
address the governors of the Asian Development Bank on the
occasion of this Eleventh Annual Meeting. I would particularly like to thank our hosts for this meeting, Vice Chancellor
Androsch and the Austrian Government for their warm hospitality.
The charm and beauty of Vienna are an inspiration to all of us.
The United States strongly supports the Asian Development Bank.
We view it as an important contributor to development in Asia,
and as a focal point for cooperation in the region. We are
delighted with the opportunity provided by this meeting to
continue our efforts in support of the Bank.
I join my fellow governors in welcoming the Republic of
Maldives as the Bank's forty-third member. I would also like
to extend special recognition to Mr. C. S. Krishna Moorthi,
who recently retired from the Vice Presidency of the ADB. His
unceasing efforts in behalf of the Asian Development Bank,
which date from the Bank's beginnings, are well known to all
those assembled here today. I would like to wish Mr. Krishna
Moorthi every success in his future endeavors. His contributions
to making the Asian Development Bank an effective force for
economic development will not soon be forgotten. At the same
time, I would like to congratulate and extend our warmest greetings to Mr. Bambawale and Mr. Katz, the two new Vice Presidents
of the Bank.
The World Economic Outlook
The success of our joint efforts in the Asian Development
Bank and ^cind are deeply affected by developments in the' world
economy: rates of economic growth and inflation, levels of
unemployment, international monetary stability. Each of these
issues is of critical importance to the prospects of th§ member
countries of the Bank, particularly its developing member
B-862
countries.
- 2 -
I would like to address briefly our view on each of these
issues, and report to you on the efforts of the United States
to contribute to their improvement.
There are numerous encouraging signs for the global
economy in 1978. We expect somewhat faster real growth this
year than last, both within the OECD area and among developing
countries. Within the OECD, we believe that real growth outside
the United States will be about one percent faster than in 1977.
Japan, in particular, is making a noteworthy and laudable effort
to expand its economy more rapidly. In addition, substantial
progress has been made in reducing rates of inflation. Disparities in inflation rates among countries are being reduced.
There has been considerable success in improving the distribution of current account imbalances, though some large surpluses
and deficits still remain.
At the same time, unemployment rates and inflation remain
too high throughout the world. Some payments imbalances are
still too large. Stability needs to be maintained in the
exchange markets. But our outlook is one of cautious optimism,
and a belief that the global economic picture is improving in
both the industrialized and developing worlds.
U. S. Policy
The United States has embarked on a comprehensive effort
to promote such an outcome, as part of our effort to assist the
developing nations as well as to meet our broader responsibilities
for the effective functioning of the world economy. The first
requirement is a strong United States economy, which is the
foundation of all our commitments in the international arena.
Currently, the United States is growing faster than most
other industrial countries. We achieved a growth rate of 5.7
percent in the last quarter of 1977, while the industrial production of our major trading partners fell, and grew at a rate
of 4.9 percent for the year as a whole. We expect a growth rate
of 4.5 to 5 percent in 1978, and a further reduction in unemployment from the late 1977 level of 6.5 percent to 5.7 percent toward
the end of 1978. At the same time, we are experiencing greater
success than most countries in holding inflation under control.
The United States fully recognizes that the stability of
the international monetary system rests heavily on a stable dollarIt is our clear, and clearly stated, view that a strong and stable
dollar is in the interest of the United States, as well as the
interest of the world economy and the developing countries including those in Asia.
- 3-
Such stability can be achieved only by dealing with the
fundamental economic situation. We are doing so. On April 11,
President Carter made clear the priority we attach to the fight
against inflation. He announced that, if Congress did not
quickly pass meaningful energy legislation, he would move to
limit oil imports by administrative action. He announced that
we will be taking a series of actions designed to enable U. S.
business to compete more effectively in world markets.
We are thus working on strengthening each of the underlying
economic conditions in the United States needed to support the
dollar — a reduction of our oil imports, a reduction in our
rate of inflation, and a greater export effort. In the meanwhile, we have taken a number of bridging actions, including
exchange market intervention, for the purpose of countering
disorderly conditions in those markets. I am confident that by
dealing with the fundamentals, and by our bridging actions, we
will restore stability to the exchange markets and thereby provide a sound financial basis for ongoing prosperity in the world
economy.
We are also pursuing our commitment to an efficiently
functioning system of world payments by giving strong support
to the Witteveen Facility in the IMF. Legislation authorizing
U. S. participation in the Facility has been enacted by the U. S.
House of Representatives, and we are hopeful that final legislative action will be completed in the near future. Once in place,
the Witteveen Facility will help assure that adequate official
financing is available to deficit countries — developed and
developing alike — during the years ahead.
In the trade area, we are determined to continue to resist
the imposition of new barriers to imports — particularly from
developing countries. In every case that has come before him,
President Carter has rejected proposals for comprehensive import
controls. Indeed, we are seeking further reductions of existing
barriers through the multilateral trade negotiations (MTN).
We will continue to offer to developing countries the largest, most open market in the world. This is of critical importance
to those developing Asian economies which have so successfully
followed strategies of exported growth. We fully intend to preserve an open world economy in which their outward-looking development strategies -- and similar strategies by other countries -can prosper and succeed.
Commodity policy is another area in which the United States
has sought to be highly responsive to the problems of the developing countries. We understand their concern over excessive price
fluctuations and resultant disruptions in foreign exchange
earnings, domestic investment and employment. We support the
Principle of stabilizing prices around market trends, and believe
- 4 -
that it is in our own national economic interest to do so
wherever feasible. Thus we have participated in, or expressed
a willingness to examine participation in, international
commodity arrangements covering sugar, coffee, cocoa, tin,
rubber and copper. Some of these commodities are of particular
importance to developing countries in Asia, and we look forward
to continuing to work with them in this area in pursuit of our
common economic goals.
Our bilateral development assistance has risen substantially. For the developing countries of Asia, it has risen
sharply from $266 million in FY 1977 to a requested $470 million
for FY 1979. Asia's share has risen from 31 percent of the
total in 1977 to 37 percent in 1979. In addition, we are providing approximately $1 billion in food aid for Asian developing countries.
U. S. Policy Toward the International Development Banks
Our support for the International Development Banks also
clearly manifests United States concern for the aspirations
and strivings of the developing countries. United States supoort for the Banks, which has become a centerpiece of our
foreign assistance effort, extends back over one-third of a century.
From the original Breton Woods plan for an international bank
for reconstruction and development to the recent creation of
the Asian and African Development Funds, the United States has
steadfastly promoted the principle of multilateralism in
foreign assistance. We are proud of our record of sustained
support, and we pledge our continued support for this principle.
In 1977, the Carter Administration obtained Congressional
support for over $2.3 billion for the development banks —
supplemental appropriations of $396 million for FY 1977 and
$1,925 million for FY 1978. This represents a dramatic increase — more than a tripling — of the $745 million appropriated in 1976. For this fiscal year, the Administration
submitted to Congress a request for the largest yearly appropriation in history for the international development banks —
$3.5 billion. We believe that these actions clearly indicate
the major efforts of our nation to carry out its responsibilities
to the poor people of the world.
Indeed, these actions are based on our judgment that the
banks, with their corps of highly professional development
experts, have become extremely effective instruments for development — translating assistance from donor countries into sound
development programs for recipient countries. To assure efficient utilization of their loans, the banks promote sound economic
policies which serve to generate substantial private resource
flows as well. Largely unencumbered by narrow political factors,
the development banks have been able to devote their energies
- 5 -
and resources to the central task at hand — effective development. At the same time, the banks multilateralize the foreign
assistance effort and thus ensure fair burdensharing among
donor countries in the pursuit of world development.
Within the tenets of multilateralism, the United States —
like all other member countries — has a responsibility to
seek to ensure that the development banks remain responsive to
new directions in development policy. To this end, we have
encouraged the development banks to pay close attention to the
technology employed in their loan projects so that the resulting resource utilization reflects underlying factor availabilities. We have encouraged the banks to target project benefits
so as to better aid the most disadvantaged of a country's
population. We have urged that the sector distribution of
lending be modified to focus the banks' resources more on
meeting basic human needs.
Basic infrastructure projects traditionally financed by
the banks should of course continue to be supported, as they
have recognized expertise in these fields which should continue
to be employed. We are, however, seeking a reshaping of sectoral priorities to better address the needs of the poor without
neglecting the key infrastructure areas. I am pleased to note
the extent to which the Asian Development Bank has already
moved to focus its lending program on these "growth with equity"
concerns, as stressed yesterday by President Yoshida.
Finally, we seek to incorporate concern for human rights
into the activities of the development banks. We believe that
the goals and purposes of the banks must encompass a broad
range of fundamental concerns, including human rights as well
as freedom from economic privation land want. We seek to cooperate with all members in finding ways to best advance the
common commitment to human rights and meeting human needs,
while at the same time ensuring the integrity and effectiveness
of the multilateral process. This is a substantial list of
concerns. B\jt we see it as a legitimate expression of, our responsibilities within a multilateral framework. Multilateralism
does not imply abdication of responsibility to voice concern,
or to express preferences. Constructive proposals and suggestions from member nations are necessary ingredients of effective
international action. We intend to continue to exercise that
responsibility.
The Asian Development Bank
The Asian Development Bank draws together into one effort
perhaps the most varied group of developing nations in any
region. Its developing members include some of the most dynamic
and fastest growing countries in the world. Korea, The Republic
of China, Singapore, Hong Kong and Malaysia all experienced
growth in real GNP greater than 7#5 percent in 1977. They have
- 6 -
become effective competitors for a wide range of products
in international trade. These countries have all exhibited
impressive flexibility in adapting to the new parameters of
the international economy. They are clearly among the most
advanced developing countries in the world.
At the same time, the bank's membership includes countries heavily dependent upon agricultural and raw material
exports. These countries found their progress slowed in 1977
by sluggish growth in world trade and output. The Philippines
Thailand, Pakistan and Bangladesh all experienced reduced
rates of growth. Indeed, economic growth failed to match
population growth in Pakistan and Bangladesh. Along with
Nepal, Burma, Sri Lanka and Afghanistan, these countries face
some of the most pressing and difficult development problems
in the world.
Finally, the bank includes among its membership a number
of small island economies, from Tonga and the Cook Island? to
Western Samoa and the Gilbert Islands — countries which face
their own unique set of development problems.
This diversity in the bank's developing country membership represents both a challenge and an opportunity. No one
development strategy, no single project preparation technique,
no one set of lending terms nor single sector focus will be
adequate to meet the varied needs of such a diverse group of
countries. The bank must maintain a high degree of flexibility
and adaptability if it is to respond effectively to the diversified problems of development it confronts.
The United States has strongly supported the Asian
Development Bank from its beginning. Growing out of a pledge
made by President Johnson in his April 1965 speech at Johns
Hopkins University, the United States actively participated in
the creation of the Bank — and I had the personal privilege
of participating, as a member of the U. S. delegation, at the
charter signing ceremonies in Manila in December 1965. As one
of the initial charter signatories, the United States joined
with Japan in subscribing the largest shares to the original
capital mobilization of the Bank — a position which we intend
to maintain. In addition, the United States has been the second
largest contributor, next to Japan, to the Bank's concessional
loan window, the Asian Development Fund. We and other developed
member countries have in fact just completed negotiations for
the second replenishment of the Asian Development Fund. I am
pleased to announce that the United States will be joining the
other donor countries in a substantial replenishment of the
Fund's resources, which will enable the Bank to greatly expand
the
its concessional
next four years.
lending to its poorest member countries over
- 7 The United States pledges $445 million to the replenishment, subject to authorization and appropriation by the U. S.
Congress, thereby maintaining our agreed ADF share of 22.25
percent of the basic replenishment target of $2.0 billion.
This substantial increase,, from our pledge of $180 million to
the first replenishment of the -fund, reaffirms our support for
the Fund's activities and our desire to see some of the additional concessional resources directed toward the marginally
eligible countries of Indonesia, Thailand and the Philippines
for projects meeting basic human needs. The pledge has been
approved personally by President Carter, and has been made
after extensive consultations with our Congress which have
reaffirmed the widespread support.throughout our government
for the activities of the ADB.
I would like to add the deep satisfaction which we take
from the widespread support of other donor countries for ADF
III. We believe that these expressions of confidence in the
Fund, and in its management by the Bank, are fully justified —
and bode well for the future of our joint efforts for Asian
Development.
This replenishment of the Asian Fund draws attention to
the Bank's recent efforts to recast and reshape its priorities,
by placing greater emphasis on meeting basic human needs and
on reaching the poorest people in the developing member countries. We approve of the greater emphasis given to agriculture
and agro-industry. We applaud the critical analysis that is
presently underway, on the basis of the findings of the banksponsored second Asian agricultural survey, to modify existing
practices of project design and project implementation. We
believe that the Bank can increase its effectiveness in coping
with the hardcore poverty problems found in developing member
countries by incorporating a greater emphasis on off-farm
employment, on appropriate technology and on targeting
benefits to the marginal farmer and landless laborer — recommendations highlighted in the survey.
In other sectors as well, the Bank is demonstrating creative adaptability. We especially applaud the initiatives
taken in the energy field. The Bank's recent power projects —
which emphasize improved efficiency for existing power systems
and the use of indigenous resources such as hydro, thermal and
coal — are examples of admirable responsiveness to changing
conditions and the needs of developing member countries. These
projects, and the example they set, have great importance both
for the recipients and for the world energy balance.
I would also like to commend the Bank for its sound financial and administrative policies. We supported the recent
increase in the Bank's commitment charge to 0.75 percent. The
Bank's prudent budget policies are well known, and deserve support from all member countries.
- 8 -
The United States supports the Bank's expressed interest
in devoting greater attention to sub-regional development
cooperation, in the South Pacific and through the Association
of Southeast Asian Nations (ASEAN). We support this development
and hope that, in addition to the feasibility studies for ASEAN
industrial projects already planned by the ADB, the Bank can
continue to work closely with ASEAN in future project financing.
This can be done both from the Bank's owri resources and through
co-financing from other sources.
We would also encourage the Bank to do more to involve the
private sector in its activities. The Bank should make lending
to private, small-scale industry an increasingly important focus
of its industrial development program. Such industries are
generally labor-intensive, and thus create more jobs per dollar
invested than do larger enterprises; they also strengthen private
entrepreneurial skills and allow greater scope for the utilization
of light capital technology. Finally, we encourage the Bank to
expand its efforts in private sector co-financing. We think the
Bank's maturity and reputation make it more feasible to do so
now than at any time in the past. As yet, the Bank has preferred
to co-finance with national public sector entities or inter-v
national institutions. Public sector co-financing should continue
to be encouraged, and we would especially like to see more OPEC
co-financing with the ADB. But private sector co-financing is
also a fertile and promising area. For the Bank to maximize its
contribution as a catalyst for development finance, this type
of cooperation should be actively explored.
Conclusion
In conclusion, I want to re-emphasize the firm commitment
of the United States to the Asian Development Bank and Fund.
We are proud that the United States played an important role
in creating the Bank, and has helped it become an effective
instrument of development. Over the next decade, the Bank will
play an increasinglv important role in the economic development
of the Asia-Pacific region—a region of great importance to the
world economy, and of great importance to the United States.
The Bank's management and staff, as well as the member
countries, deserve considerable praise for the Bank's record
to date. The United States is gratified to be a part of this
endeavor. I am sure it will warrant our continued and growing
support in the years ahead.
FOR IMMEDIATE RELEASE
April 27, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY DEPARTMENT FINDS VISCOSE
RAYON STAPLE FIBER FROM BELGIUM IS
SOLD HERE AT LESS THAN FAIR VALUE
The Treasury Department said today that viscose rayon
staple fiber from Belgium is being sold in the United States
at less than fair value.
Sales at less than fair value, as defined by the Antidumping Act, generally occur when imported merchandise is
sold in the United States at prices below those in the home
market. Interested persons were offered the opportunity to
present oral and written views before this determination.
The case is being referred to the U. S. International
Trade Commission (ITC), which must decide within 90 days
whether any U. S. industry is being, or is likely to be,
injured by these sales. If the ITC's decision is affirmative,
dumping duties will be assessed on all imports of this merchandise from Belgium.
Notice of this action will appear in the Federal Register
of May 1, 1978.
Imports of viscose rayon staple fiber from Belgium were
valued at approximately $1.4 million in 1977.
o
B-863
0
o
FOR IMMEDIATE RELEASE
May 1, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES COUNTERVAILING
DUTY INVESTIGATION OF IMPORTS OF
NON-RUBBER FOOTWEAR FROM INDIA
The Treasury Department today announced an
investigation to determine whether the Government of
India is subsidizing exports of non-rubber footwear.
The investigation results from a petition filed on
behalf of domestic interests.
The Countervailing Duty Law requires that the
Secretary of the Treasury collect an additional duty
that equals the size of the "bounty or grant" (subsidy)
paid on the exportation or manufacture of merchandise
imported into the United States.
A preliminary determination in this case must be
made not later than September 10, 197 8, and a final
determination no later than March 10, 1979.
Notice of this action will appear in the Federal
Register on May 2, 1978.
Imports of non-rubber footwear from India amounted
to approximately $9.2 million during calendar year 1977.
o
B-864
0
o
partmentoftheTREASURY
TELEPHONE 566-2041
SHINGTON, D.C. 20220
May 1, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 2,300 million of 13-week Treasury bills and for $3,507 million
of 26-week Treasury bills, both series to be issued on May 4, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing August 3, 1978
High
Low
Average
a/ Excepting
1
Price
Discount
Rate
98.377a/
98.365
98.367
6.421%
6.468%
6.460%
26-week bills
maturing November 2, 1978
Investment
Rate 1/
Price
6.62%
6.67%
6.66%
Discount
Rate
96.512
96.490
96.494
6.899%
6.943%
6.935%
Investment
Rate 1/
7.25%
7.30%
7.29%
tender of $500,000
Tenders at the low price for the 13-week bills were allotted 65%.
Tenders at the low price for the 26-week bills were allotted 31%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location
Received
Boston
$
25,640,000
New York
3 ,916,405,000
Philadelphia
39,430,000
Cleveland
41,375,000
Richmond
34,765,000
Atlanta
33,955,000
Chicago
371,355,000
St. Louis
49,200,000
Minneapolis
20,475,000
Kansas City
39,040,000
Dallas
17,740,000
San Francisco 172,060,000
Treasury
9,785,000
TOTALS $4,771,225,000
Accepted
:: Received
Accepted
$
25,640,000
1,899,185,000
38,800,000
41,375,000
30,065,000
31,765,000
60,605,000
22,200,000
19,425,000
35,135,000
17,740,000
68,315,000
:•$
14,340,000
:: 5,256,340,000
19,020,000
::
68,515,000
:
19,525,000
::
28,585,000
:
419,675,000
:
:
41,115,000
:
22,535,000,
::
32,935,000
::
9,395,000
::
237,635,000
:;
$
9,340,000
3,242,650,000
19,020,000
25,065,000
19,525,000
23,485,000
31,775,000
13,115,000
18,465,000
32,935,000
9,395,000
52,735,000
9,290,000
9,290,000
$2,300,035,000b/: $6,178,905,000
$3,506,795,000
9,785,000 ::
/Includes $ 374,335,000 noncompetitive tenders from the public.
i/Includes $188,980,000 noncompetitive tenders from the public.
/Equivalent coupon-issue yield
•865
TREASURY WAIVES COUNTERVAILING DUTIES
AGAINST HANDBAGS IMPORTED FROM COLOMBIA
The Treasury Department today determined that the
Government of Colombia subsidizes exports of handbags to
the United States but waived imposition of countervailing
duties. Treasury's decision to waive was based on steps
taken by the handbag exporters to phase out the export subsidy.
Under the Countervailing Duty Law, the Secretary of the
Treasury is required to impose an additional duty equal to
a "bounty or grant" paid on the imported merchandise in question. In the handbag investigation, Treasury found that
Colombian handbag exporters benefit from bounties in the form
of tax certificates, known as "CATS," that are paid on the
value of the exported handbag.
Under the waiver provision of the Countervailing Duty
Law, the Treasury Secretary can waive assessment of countervailing duties until no later than January 4, 1979, if the
following criteria have been satisfied:
(1) Adequate steps have been taken to reduce of eliminate
the adverse effect of the bounty or grant;
(2) There is a reasonable prospect that trade agreements
will be reached with other foreign countries that will reduce
or eliminate barriers or distortions to international trade; and
(3) To countervail in this situation would seriously jeopardize the trade negotiations.
Treasury decided to waive countervailing duties after the
Colombian manufacturers/exporters agreed to give up that portion of the subsidy found to be countervailable. A 50-percent
reduction of the bounty is to take place immediately, followed
by its total elimination by January 1, 1979. In addition, the
Colombian manufacturers have promised not to market their handbag exports aggressively to the United States.
Some $6 million in handbags were imported from Colombia
to the United States during 1977.
Notice of this action will be published in the Federal
Register of May 2, 1978.
B-866
o
0
o
FOR RELEASE AT 4:00 P.M.
Ma
Y 2/
1978
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued May 11, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,717 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
February 9, 1978,
and to mature August 10, 1978
(CUSIP No.
912793 S6 4), originally issued in the amount of $3,504 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
May 11, 1978,
and to mature November 9, 1978
(CUSIP No.
912793 U3 8) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing May 11, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,972
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
0. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, May 8, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-867
-2Each 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 in and
Dorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on May 11, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
May 11, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.
-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
oOo
FOR IMMEDIATE RELEASE
May 2, 1978
RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $2,502 million of
$5,017 million of tenders received from the public for the 10-year
notes, Series A-1988, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 8.26% 1/
Highest yield
Average yield
8.30%
8.29%
The interest rate on the notes will be 8-1/4%. At the 8-1/4% rate,
the above yields result in the following prices:
Low-yield price 99.933
High-yield price
Average-yield price
99.665
99.732
The $2,502 million of accepted tenders includes $ 585 million of
noncompetitive tenders and $1,918 million of competitive tenders
(including 33% of the amount of notes bid for at the high yield) from
private investors.
In addition, $1,600 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing May 15, 1978.
1/ Excepting 7 tenders totaling $446,000
B-868
FOR RELEASE ON DELIVERY
May 3, 1978 - 9:20 PDST
STATEMENT BY THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
AT THE
35TH ANNUAL CONVENTION OF THE
WINE AND SPIRITS WHOLESALERS OF AMERICA
LAS VEGAS, NEVADA
When I received the invitation to address you I wondered
whether I really should accept. I must confess that it is not
wholly consistent with my self-image to fly to Las Vegas, with
all its glamour, in order to make a speech. But on reflection,
I decided that it was important that I accept. I was concerned
that there was confusion as to what was transpiring in Washington.
It was time, therefore, that communications stopped taking place
by rumor. It was time that you stopped learning about ideas
by leaks — leaks which are often imcomplete and inaccurate.
I, therefore, decided to accept your invitation and to speak
directly to a topic I believe is of interest to all of us:
"Liquor Regulations: Current Issues and Future Options."
There are many matters being considered in Washington
which will affect all of us. Regulatory reform, ingredient
labelling, health warnings and wine labelling: all are issues
about which you are concerned; all are issues which affect the
American public at large. My goal here today is not to announce
decisions on any of these issues. None have yet been made.
Each alone is probably sufficiently intricate to warrant more
discussion than the time alloted to me here. Rather, my hope
B-869
- 2 -
is to provide you with some insight about our perspective and t
highlight some of the issues which must be addressed in the
months ahead.
Probably the most significant long-range issue confronting
us today is regulatory reform: should changes be made in
the manner in which the liquor industry is regulated? Should
changes be made in the substance of those regulations, both
those imposed by statute and those the result of agency rules?
I cannot answer these questions today with any precision.
I can, however, say that they plainly require serious study
and resolution. This has been clear to me from the day I
assumed my responsibilities last summer. It was revealed by
the multitude of liquor related issues described in the briefing book given me on the day I arrived. It was accented by a
mere reading of the Federal Alcohol Administration Act and
some of the relevant regulations.
The volume of regulation and control — covering trade
practice rules, production methods, advertising, labelling,
tax collection and so on — impressed me then. It continues
to impress me as various issues reach my desk on a
regular basis.
Another thing struck me immediately in addition to the
complexity of the regulatory requirements — the apparent
competition among regulatory agencies. FDA, FTC, ATF, whatever
their initials, they all appeared to have a regulatory claim
over you. And their assertions of authority, it was clear,
were not always coordinated.
- 3This then is what I perceived when I surveyed the
situation: an agency — ATF — working hard to administer
a detailed and complex regulatory scheme; the appearance of
jurisdictional jealousies; and a regulatory scheme based on
a statute passed 43 years ago as we emerged from Prohibition.
The need for careful study of the liquor regulatory scheme
was clear. And that is what we are doing.
Now, I have already said that our study has not yet
produced any answers. What I would like to share with you
is some of the underlying conceptions which will contribute
to those answers. I do not think you will find these conceptions particularly novel; they are also plainly easier
to recite in a speech than to implement in practice. I hope,
however, that they will assist you in understanding our goals.
The first underlying premise is that simplicity is a
critical goal of any scheme. When I was a trial lawyer, I
used to observe some of my colleagues develop highly ingenious
theories of proof, which involved the use of detailed and
complex evidence. Such theories worked well in the office:
they generally failed in the courtroom. Their complexity
made them unintelligible to the jury, and thus unpersuasive
to them.
So, too, with regulatory schemes. What is imaginative
and logical in the office may fail in real life. As the
language of regulation becomes more detailed and complex,
- 4 inconsistancy and confusion are likely to follow.
The result
will soon be that a system that ceases to be understandable to
the regulated, or helpful to the consumer. Simplicity is
thus an essential — though admittedly highly illusive — goal.
Our second premise is that destructive competition among
enforcement and regulatory agencies is bad. I say this so
often that some of my colleagues in Washington, I think, are
tired of hearing me use this refrain. But as a prosecutor I
have observed the impact of this kind of competition first hand
it is not beneficial to anyone; it causes investigations to be
more difficult; and causes a loss in necessary public confidenc
So, too, with the regulatory world — destructive competition
helps no one, neither the regulated nor the consumer.
If destructive competition is bad, how are we to avoid
it? As a general matter, we try to do so simply by coordinating
our efforts where we have overlapping responsibilities. It is
important also, however, that the lines of responsibility be
drawn as clearly as possible. For us this means looking at
the responsibilities of various agencies — ATF, FTC, FDA and
the Justice Department — and seeing if the lines of authority
really are clear. Now as you know, this raises a significant
issue. There is one school of thought which believes that
liquor is not a special commodity; that FDA, the FTC and the
Justice Department should exercise fully their responsibilitie
over this industry; that there is no need for a single agency
dedicated solely to liquor. Others feel equally as strongly
that the opposite is true.
mm
5
-
This is obviously a core issue. From any perspective
one of the strongest arguments in favor of continuing the
single agency concept is the dedicated manner in which the
men and women of ATF have carried out their responsibilities
and the expertise concerning the liquor industry which they
have, as a group, developed. We certainly should not recommend
a change in the single agency concept unless we were convinced
it would mean real improvement. In any event, it will be important no matter what specifically is proposed, or not proposed,
that ultimately responsibility, and thus accountability, for
all aspects of regulatory enforcement is as clearly defined
as possible.
The third underlying premise is the need to develop a
better definition of criminality as it applies to conduct in
the liquor industry. We are increasing our reliance on the
criminal sanction in appropriate cases, particularly where
there is no voluntary disclosure. And, as you know, the
Federal Alcohol Administration Act makes a wide variety of
conduct criminal, but only slightly criminal. That is, those
who violate many of its provisions may be called criminals,
but the potential jail sentences are virtually non-existant.
This, I believe, leaves all in an uncomfortable position.
The notion that particular conduct is criminal is a serious
one: we should not lightly ascribe this characterization to
particular acts. It should be reserved for conduct that
society truely intends to condemn. We should recognize also
- 6 that the criminal sanction is not the only alternative for
a government seeking to regulate conduct. Civil penalties,
license suspensions, and injunctive relief: all can be
effective enforcement tools.
Thus, one key thing that must be considered is to review
the conduct now proscribed by the FAA; to define that which is
really criminal and to provide real criminal penalties for
that conduct and define that which is not and for it provide
other sanctions.
Finally, any analysis of this question must have one
additional underlying premise: a recognition of the unique
history of liquor as a product. It is the only product banned
by one constitutional amendment, and allowed by another. It
is a product which produces for various levels of government
an extraordinary amount of revenue; yet it is a product which
also has always been understood to have important health implications for those who overuse it. While it is not clear
whether all these qualities have specific logical significance,
it is clear that it is part of the reality of understanding
your industry, and its concerns, as well as the concerns of
the public.
The issues of regulatory reform are not simple. Their
resolution will involve examining regulations we have issued,
as well as the underlying statutes. That will take time.
There is no certainty that it will be decided to make major
proposals.
- 7At the same time, however, issues exist which must be
decided under the existing framework. What, for example,
should we do about the various labelling issues? I would
like to spend a few minutes describing what we view as some
of the considerations involved in an analysis of these issues.
Labelling is undoubtedly one of those regulatory issues
which always seems to be with us. We are struggling with
some aspects of it right now. How should one address such
issues? Plainly there are a variety of factors present. They
often point in opposite directions. All, however, must be
considered and balanced.
First, the value of the proposal must be analyzed — will
it assist the consumer, will it avoid deception, will it deter
some questionable processing. Regulation can provide a
positive benefit to society. It can, however, be an unnecessary
burden when it becomes an end itself. Both of these truisms
must be remembered.
Second, the cost of any proposal must be considered. We
recognize that by adding to industry's costs, we inevitably
are adding to the prices we all must pay. While the cry of
increased cost cannot be allowed to become a claim that defeats
all proposals, it is one that plainly cannot be ignored. And
it must be considered at two levels — in determining whether
to impose a requirement and, also, how any requirement should
- 8 be implemented.
We sometimes forget that if we put in the
effort and remain flexible, regulations can be designed in
a way to minimize their cost while still accomplishing basic
goals.
Third, and finally, we must consider the appropriateness
of imposing particular requirements. This issue has legal
aspects; it also has highly philosophical implications. There
are many different views as to the appropriateness of governme
intervention in private conduct. It is, I believe, important
to assure that our citizens have adequate information to make
reasonable choices in the consumer market. At the same time
there plainly is some point at which a requirement becomes
too detailed, too intrusive. We undoubtedly will not always
agree when that point has been reached. It is important that
decision makers, however, always remember that such a limit
exists as they wrestle with particular issues.
These then are some of the issues confronting us. Issues
of regulatory reform are never simple. Those involving the
determination of appropriate requirements always involve
honest conflicts. One thing, I hope is clear. We understand
that wisdom does not reside in Washington alone. Policy — if
it is to be both wise and workable — must be the product of
many minds and many ideas. On all the issues I have discussed
today — and those others that may arise — we want your views?
- 9 we want the views of other interested individuals and groups,
both business and consumer. We cannot always agree with
everyone. Hopefully, however, by learning all we can and
trying to act rationally, we can minimize our mistakes and
improve the quality of what we try to do.
0O0
rOR RELEASE UPON DELIVERY
Expected at 10 AM
Wednesday, May 3, 1978
STATEMENT OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON UNEMPLOYMENT COMPENSATION,
REVENUE SHARING & ECONOMIC PROBLEMS
OF THE
SENATE COMMITTEE ON FINANCE
ir. Chairman and members of this distinguished Committee:
I welcome this opportunity to present the Administration's
Dill for a Supplementary Fiscal Assistance program, S.2975. This
Drogram is an essential element of the President's recently
announced policy for distressed areas and is aimed at alleviating
fiscal distress of local governments throughout the Nation.
The program is the product of careful study by the
Administration over the course of the past year. It is intended
;o succeed the Anti-Recession Fiscal Assistance program (often
Jailed countercyclical revenue sharing or ARFA), which expires on
September 30.
The Administration recommends that Supplementary Fiscal
issistance (SFA) be authorized for two years, with approximately
»1 billion of outlays in both fiscal 1979 and fiscal 1980. The
'•1.04 billion already included in the President's fiscal 1979
'Udget for countercyclical revenue sharing, would be applied to
•his program.
The Supplementary Fiscal Assistance program preserves the
asic concept of targeting the distribution of funds which
nderlies countercyclical revenue sharing. Targeting means, of
ourse, that a relatively higher proportion of total funds would
e provided to those governments which suffer the greatest
istress. In addition, the eligibility test for SFA allocations
ould be based on broader measures of economic need than were
mployed in the ARFA targeting formula. We believe these
easures will permit fairer treatment for a number of urban and
ural governments for which unemployment is not an adequate
easure of distress.
-870
-2The program would also be funded at higher levels than would
countercyclical revenue sharing were it continued under its
present formula which provides that no funds can be distributed
following a quarter in which the national unemployment rate is at
6 percent or below. Unemployment is already near 6 percent and
we estimate that the national economic recovery will have
proceeded to the point during the first half of fiscal 1979,
where the rate will fall to 6 percent. As a result,
substantially less than $1.04 billion would be available under
the countercyclical revenue sharing program during fiscal 1979,
were it simply extended in its present form. In addition, local
governments would be uncertain of the amount of funds they would
receive were the countercyclical program so extended.
ORIGIN OF THE PROGRAM
The Supplementary Fiscal Assistance program reflects months
of intensive study by the Administration, primarily at the
Treasury, of the fiscal condition of State and local governments
and the fiscal impact of certain Federal programs on those
governments. The Treasury analyzed the effects of President
Carter's 1977 Economic Stimulus Program, including Anti-Recession
Fiscal Assistance, on local fiscal conditions. That study was
nade available to the Congress in January.
Fiscal Distress, Need for Supplementary
Assistance and Targeting
The Treasury study devised a fiscal strain index which
determined which of the 48 largest municipal governments in the
Jnited States — those governments for which the Bureau of the
Census maintains the most complete statistical information —
should be considered high, moderate or low strained cities. A
lumber of these governments were found to be in a serious state
5f fiscal distress. Their local tax rates were at legal or
economic limits, and thus tax revenues could not be meaningfully
•ncreased in the immediate future. Moreover, despite efforts to
Jut their budgets, these governments experienced inflationary
pressures which were driving local expenditures higher.
Subsequent research has demonstrated that the same combination of
stagnant revenues and inflation-driven expenditures is also
>ressuring many rural governments.
The study showed that the more seriously strained local
overnments received a proportionately greater share of
ountercyclical payments and concluded that such governments
ould not easily offset the loss of such payments. For example,
he ten most severely strained of our largest municipalities were
btaining ARFA funds representing between approximately 2 percent
^d 7.5 percent of their so-called "own-source" revenues. Loss
i these funds would mean that these localities would have to
md alternative revenue sources or cut back essential services.
-3Theoretically, if ARFA funds were discontinued, governments could
raise taxes or cut expenses to replace them. Unfortunately,
neither of these alternatives is readily available to distressed
local governments. Accordingly, the Administration decided to
recommend continued fiscal assistance to distressed local
governments which have not enjoyed the benefits of the Nation's
improved general economic condition.
The proportionately greater distribution of ARFA funds to
the most severly strained large urban governments, indicated that
countercyclical revenue sharing was well targeted for relief of
fiscal strain in urban areas. Further examination of available
data led us to conclude, however, that the allocation formula
used in the countercyclical program did not fully measure
economic distress in all areas. Hence we modified the formula
for the Supplementary Fiscal Assistance program to include three
additional measures of economic distress — relative growth of
employment, of per capita income and of population. Let me
discuss briefly these measures of distress.
The Selection of Eligibility Criteria
as Measures of Distress
Countercyclical revenue sharing distributed funds based on
local unemployment rates exceeding 4.5 percent. The Treasury
study indicated this was a good measure of urban secular economic
distress, reflecting declines in employment, lower assessable
base growth, and higher tax burdens. Moreover, it was determined
that the unemployment rate served as a proxy of a local
government's social welfare burden. Unemployment rates are also
readily available on a current bases. For these reasons, the
Supplementary Fiscal Assistance program retains the use of local
unemployment rates and measures them against a 4.5 percent base
to provide a link with the existing distribution pattern under
ARFA.
The local rate of growth in employment has been included in
the SFA formula because it is a good indicator of the long term
-rend of the local economy. As local economies expand,
employment opportunities increase. Employment growth may give a
setter indication of economic conditions in certain urban and
*ural areas than unemployment rates since these areas generally
suffer more from underemployment than unemployment. Also,
employment growth appears to be a better indicator of the
Potential growth of local government revenues.
We have also included the local rate of growth in per capita
JIcoroe in the SFA formula because it is a good measure of the
jrowth in taxable wealth and the level of economic activity.
The local rate of growth in population is also considered a
!ood indicator of a community's future economic health by
l
easuring its ability to attract new taxpayers.
-4The Congressional Budget Office used similar criteria —
growth in population, per capita income and earnings which is a
proxy for employment -- to measure local economic distress in its
report, Troubled Local Economies. Similar indicators were also
used in the Brookings Institution's "Hardship Index" which is now
part of HUD's Community Development Block Grant formula. The
Urban Institute's "Economic and Fiscal Indicators Project"
addressed the question of how shifts in a city's economic base
effect the revenue-expenditure balance by analyzing components of
such base as measured through its population, employment and
income.
We checked the results of our new targeting formula and
found that the formula targets assistance to those governments
which are the most fiscally distressed.
THE PROGRAM
Let me now describe how the Supplementary Fiscal Assistance
program would work. The program would authorize the distribution
of $1.04 billion in fiscal year 1979 and $1.00 billion in fiscal
year 1980. Eligible local governments would receive 98.7 percent
Df the total funds. The share of each local government would be
determined by a formula designed to reflect the level of its
distress relative to the other eligible local governments. The
remainder of the funds would be distributed to the Commonwealth
Df Puerto Rico, Guam, American Samoa, the Virgin Islands, which
in aggregate would receive one percent of total SFA
distributions, and the Indian Tribes and Alaskan native villages.
State governments would not be eligible to receive SFA
funds under the Administration's proposal because our studies
indicate that, as a group, State governments are not fiscally
strained at present. Most State governments are currently in
;ood fiscal condition with many states planning tax decreases
luring the next fiscal year. Moreover, the major State revenue
sources, sales and income taxes, are more responsive to
-mprovements in the national economy than the predominant local
avenue source, property taxes. Accordingly, as the economy has
.mproved, State revenues have increased at a faster rate than
.ocal revenues.
For the purpose of test determinations under SFA, local
governments are divided into two categories — those wholly or
>artly within a Standard Metropolitan Statistical Area (SMSA) and
•hose entirely outside a SMSA. Because of techniques used to
ather and categorize general employment and unemployment data,
eparation into SMSA and non-SMSA groups minimizes measurement
iscrepancies among members of each group and permits governments
'ithin each group to be treated more fairly.
-5Only eligible local governments would receive SFA funds.
The eligibility test is a statistical test based on the most
recent data available to the Departments of Commerce and Labor
prior to the beginning of each Federal fiscal year. For a local
government to be eligible, it must have an unemployment rate in
excess of 4.5 percent or exhibit slower than average growth in
two of the three following categories: employment, per capita
income and population. The local unemployment rate is to be
determined on a four calendar quarter basis while local growth
rates for employment, per capita income and population are to be
determined by comparing data for the present year with a base er
period five or six year. However, shorter periods for the latt_
three measurements may be used if the required data is available
Dnly for such shorter periods. The local growth rates for
employment are likely to be determined initially with a four year
Dase period. The Bureau of Labor Statistics has announced that
Improved unemployment and employment data will be available in
June. We would, of course, use this data for SFA purposes and,
accordingly, any current estimates should be viewed as
)reliminary.
Once a local government is determined to be eligible, its
allocation is determined by a formula which is designed to
n
eflect the relative fiscal distress of the local government.
The formula is detailed in Exhibit 1 to my testimony. As you can
see, it is complex and merits your careful review. I would like
;o describe briefly the general way in which it works.
The factor in the formula which reflects the relative fiscal
strain of a particular government is determined by that economic
.ndicator -- rate of unemployment, growth in employment, growth
.n per capita income or growth in population — which shows the
5reatest relative severity of distress. This factor is then
adjusted to reflect the population and per capita income of, and
*ax effort being made by, each eligible government based on
'igures developed under the General Revenue Sharing program.
The distribution formula constructed in this manner would
etermine each government's share of total funds. To avoid
xcessive administrative burdens, no distributions will be made
o governments which would receive less than $200 annually.
No local government could receive more money under the
upplementary Fiscal Assistance program than the amount it
eceived under countercyclical revenue sharing during the twelve
onths through April, 1978. This cap was established to avoid
^creasing the dependence of local governments on supplementary
ederal fiscal assistance. There is no limit on the amount of
unds allocated to local governments which did not receive ARFA
unds during the most recent twelve months. Limiting these funds
ould preclude the advantages of more equitable distributions
articularly to those areas whose level of fiscal distress was
°t accurately reflected under the countercyclical targeting
ormula.
-6Both the eligibility of, and allocation of funds to, each
local government is to be determined during the September
preceeding each Federal fiscal year. This will eliminate the
uncertainty governments now face under the countercyclical
program which makes these determinations quarterly and leaves
governments uncertain of the amounts they will receive during the
full year. SFA payments, however, will be made quarterly to
permit more efficient cash management.
Recipient governments may use SFA funds as part of their
general revenue. We have eliminated certain restrictions on the
use and timing of expenditures to permit more efficient use of
funds at the discretion of recipients. S.2975 also contains
nondiscrimination, auditing, labor, and reporting requirements
and provides withholding and rulemaking powers similar to those
in the Anti-Recession Fiscal Assistance legislation. The general
enforcement rights under ARFA have also been retained.
Estimated Allocation of
Supplementary Fiscal Assistance
As I stated earlier, we checked our modified distribution
formula to make certain that it targeted distributions to
distressed local governments at least as well as the
countercyclical formula. We have also compared the Supplementary
7
iscal Assistance formula with other alternative formulas. Our
preliminary estimates show that during fiscal 1979 approximately
twenty-six thousand (26,000) governments would receive funds
under SFA. During the most recent four quarters of ARFA,
twenty-four thousand (24,000) local governments were eligible
recipients. This increase in the number of eligible recipients
is the intended result of adding new eligibility criteria to our
formula to include local governments, both in urban and rural
areas, whose long term economic problems were not adequately
neasured under countercyclical revenue sharing. Of the 26,000
eligible recipients under SFA, about 5,000 did not receive money
Jnder the countercyclical program during the most recent twelve
nonths.
Despite the addition of new recipients, the allocation of
>FA funds will be targeted to the most distressed governments. A
•umber of governments which receive ARFA funds have become
lealthier and have falling unemployment rates. In effect,
because they now will receive less or even nothing, funds are
Teed up for new entrants into the program. In addition, the new
•ntrants generally have small budgets. Although the amount of
'unds received will be important to them, the funds will be a
wall part of total distributions.
The most distressed recipients of countercyclical revenue
•oaring will still receive proportionately greater funds under
p
A. We estimate that approximately 23 percent of SFA 1979
-7disbursements would be received by the ten cities which ranked
highest — meaning most distressed -- on the fiscal strain index
contained in our January report. Only 11 percent of the
disbursements would be received by the other 38 large municipal
governments included in our study. In short, the
Administration's program would be well targeted because those who
are neediest would receive the largest amounts. Exhibit 2 to my
testimony illustrates this conclusion.
CONCLUSION
As you know, this fiscal assistance program constitutes a
very important part of the President's program for distressed
areas. The financial health of local governments depends
primarily on their economies. The Carter Administration has
recommended several proposals to assist distressed areas and will
be working with the Congress to implement a program that will
foster the development of these economies across the Nation. We
believe local governments in distressed areas will need
Supplementary Fiscal Assistance until a broader economic
redevelopment program is fully established. It is our hope that
this effort will reduce the need for Supplementary Fiscal
Assistance in the future.
Obviously, this process will take time. In the meanwhile,
the Administration's Supplementary Fiscal Assistance program is a
necessary and critical part of our efforts to strengthen and
assist local areas which have not shared fully in the Nation's
general economic recovery.
We have purposefully designed this program to bridge the two
years remaining until the expiration of General Revenue Sharing
in 1980, when the results of a zero based review of general Federal
assistance will have been completed by the Administration. On the
)asis of that review and an evaluation of the effects of other
aspects of the President's fiscal and economic programs, we expect
-o present recommendations to the Congress in 1980 on the future of
^oth SFA and GRS.
I appreciate this opportunity to present the Administration's
Supplementary Fiscal Assistance program. I look forward to
forking with you and the other members of Congress to implement the
urogram.
oOOo
wwMoftheTREASURY
TELEPHONE 566-2041
HlfrHlNGTON, D.C. 20220
FOR IMMEDIATE RELEASE
May 3, 1978
RESULTS OF AUCTION OF 22-1/4-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF MAY FINANCING
The Department of the Treasury has accepted $1,500 million of the
$3,100 million of tenders received from the public for the 22-1/4-year
8-3/8% Bonds of 1995-2000, auctioned today. The range of accepted
competitive bids was as follows:
.
„. _ ,
A
Approximate Yield
To First Callable
To
Price
Date
Maturity
High
Low
Average -
99.23 1/
98.91
99.02
8.46%
8.49%
8.48%
8.45%
8.48%
8.47%
The $ 1,500 million of accepted tenders includes $170 million of
noncompetitive tenders and $1,330 million of competitive tenders
(including 38% of the amount of bonds bid for at the low price) from
private investors.
In addition, $895 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing May 15, 1978.
1/ Excepting 2 tenders totaling $19,000
SUMMARY RESULTS OF MAY FINANCING
Through the sale of the two issues offered in the May financing, the
Treasury paid off approximately $1.9 billion of the $8.4 billion of
securities maturing May 15, 1978. The following table summarizes the
results:
New Offerings
8-1/4%
Notes
5-15-88
8-3/8%
Bonds
8-15-19952 00 o
Nonrnarketable
Special
Issues
Maturing
Securities
Total
Held
Net
Pav-off
Pa
^ ott
^blic $2.5 $1.5 - $4.0 $5.9 $1.9
Government Accounts
and Federal Reserve
Banks
Foreign Accounts for
Cash
1.6
.9
_
-
TOTAL $4.1 $2.4 - $6.5 $8.4 $1.9
Details may not add to total due to rounding.
B-871
2.5
2.5
_-_
-
FOR RELEASE UPON DELIVERY
Expected at 9:30 AM
Thursday, May 4, 1978
STATEMENT OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON INTERGOVERNMENTAL RELATIONS
AND HUMAN RESOURCES
OF THE
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS
Mr. Chairman and members of this distinguished Committee:
I welcome this opportunity to present the Administrations
bill for a Supplementary Fiscal Assistance program, H.R.12293•
This program is an essential element of the President's recently
announced policy for distressed areas and is aimed at alleviating
fiscal distress of local governments throughout the Nation.
The program is the product of careful study by the
Administration over the course of the past year. It is intended
to succeed the Anti-Recession Fiscal Assistance program (often
called countercyclical revenue sharing or ARFA), which expires on
September 30.
The Administration recommends that Supplementary Fiscal
Assistance (SFA) be authorized for two years, with approximately
$1 billion of outlays in both fiscal 1979 and fiscal 1980. The
$1.04 billion already included in the President's fiscal 1979
budget for countercyclical revenue sharing, would be applied to
this program.
The Supplementary Fiscal Assistance program preserves the
basic concept of targeting the distribution of funds which
underlies countercyclical revenue sharing. Targeting means, of
course, that a relatively higher proportion of total funds would
be provided to those governments which suffer the greatest
distress. In addition, the eligibility test for SFA allocations
would be based on broader measures of economic need than were
employed in the ARFA targeting formula. We believe these
measures will permit fairer treatment for a number of urban and
rural governments for which unemployment is not an adequate
measure of distress.
B-872
-2The program would also be funded at higher levels than would
countercyclical revenue sharing were it continued under its
present formula which provides that no funds can be distributed
following a quarter in which the national unemployment rate is at
6 percent or below. Unemployment is already near 6 percent and
we estimate that the national economic recovery will have
proceeded to the point during the first half of fiscal 1979,
where the rate will fall to 6 percent. As a result,
substantially less than $1.04 billion would be available under
the countercyclical revenue sharing program during fiscal 1979,
were it simply extended in its present form. In addition, local
governments would be uncertain of the amount of funds they would
receive were the countercyclical program so extended.
ORIGIN OF THE PROGRAM
The Supplementary Fiscal Assistance program reflects months
of intensive study by the Administration, primarily at the
Treasury, of the fiscal condition of State and local governments
and the fiscal impact of certain Federal programs on those
governments. The Treasury analyzed the effects of President
Carter's 1977 Economic Stimulus Program, including Anti-Recession
Fiscal Assistance, on local fiscal conditions. That study was
made available to the Congress in January.
Fiscal Distress, Need for Supplementary
Assistance and Targeting
The Treasury study devised a fiscal strain index which
determined which of the 48 largest municipal governments in the
United States -- those governments for which the Bureau of the
Census maintains the most complete statistical information —
should be considered high, moderate or low strained cities. A
number of these governments were found to be in a serious state
of fiscal distress. Their local tax rates were at legal or
economic limits, and thus tax revenues could not be meaningfully
increased in the immediate future. Moreover, despite efforts to
cut their budgets, these governments experienced inflationary
pressures which were driving local expenditures higher.
Subsequent research has demonstrated that the same combination of
stagnant revenues and inflation-driven expenditures is also
pressuring many rural governments.
The study showed that the more seriously strained local
governments received a proportionately greater share of
countercyclical payments and concluded that such governments
could not easily offset the loss of such payments. For example,
the ten most severely strained of our largest municipalities were
obtaining ARFA funds representing between approximately 2 percent
and 7.5 percent of their so-called "own-source" revenues. Loss
of these funds would mean that these localities would have to
find alternative revenue sources or cut back essential services.
-3Theoretically, if ARFA funds were discontinued, governments could
raise taxes or cut expenses to replace them. Unfortunately,
neither of these alternatives is readily available to distressed
local governments. Accordingly, the Administration decided to
recommend continued fiscal assistance to distressed local
governments which have not enjoyed the benefits of the Nation's
improved general economic condition.
The proportionately greater distribution of ARFA funds to
the most severly strained large urban governments, indicated that
countercyclical revenue sharing was well targeted for relief of
fiscal strain in urban areas. Further examination of available
data led us to conclude, however, that the allocation formula
used in the countercyclical program did not fully measure
economic distress in all areas. Hence we modified the formula
for the Supplementary'Fiscal Assistance program to include three
additional measures of economic distress — relative growth of
employment, of per capita income and of population. Let me
discuss briefly these measures of distress.
The Selection of Eligibility Criteria
as Measures of Distress
Countercyclical revenue sharing distributed funds based on
local unemployment rates exceeding 4.5 percent. The Treasury
study indicated this was a good measure of urban secular economic
distress, reflecting declines in employment, lower assessable
base growth, and higher tax burdens. Moreover, it was determined
that the unemployment rate served as a proxy of a local
government's social welfare burden. Unemployment rates are also
readily available on a current bases. For these reasons, the
Supplementary Fiscal Assistance program retains the use of local
unemployment rates and measures them against a 4.5 percent base
to provide a link with the existing distribution pattern under
ARFA.
The local rate of growth in employment has been included in
the SFA formula because it is a good indicator of the long term
trend of the local economy. As local economies expand,
employment opportunities increase. Employment growth may give a
better indication of economic conditions in certain urban and
rural areas than unemployment rates since these areas generally
suffer more from underemployment than unemployment. Also,
employment growth appears to be a better indicator of the
potential growth of local government revenues.
We have also included the local rate of growth in per capita
income in the SFA formula because it is a good measure of the
growth in taxable wealth and the level of economic activity.
The local rate of growth in population is also considered a
good indicator of a community's future economic health by
measuring its ability to attract new taxpayers.
-4The Congressional Budget Office used similar criteria —
growth in population, per capita income and earnings which is a
proxy for employment -- to measure local economic distress in its
report, Troubled Local Economies. Similar indicators were also
used in the Brookings Institution's "Hardship Index" which is now
part of HUD's Community Development Block Grant formula. The
Urban Institute's "Economic and Fiscal Indicators Project"
addressed the question of how shifts in a city's economic base
effect the revenue-expenditure balance by analyzing components of
such base as measured through its population, employment and
income.
We checked the results of our new targeting formula and
found that the formula targets assistance to those governments
which are the most fiscally distressed.
THE PROGRAM
Let me now describe how the Supplementary Fiscal Assistance
program would work. The program would authorize the distribution
of $1.04 billion in fiscal year 1979 and $1.00 billion in fiscal
year 1980. Eligible local governments would receive 98.7 percent
of the total funds. The share of each local government would be
determined by a formula designed to reflect the level of its
distress relative to the other eligible local governments. The
remainder of the funds would be distributed to the Commonwealth
of Puerto Rico, Guam, American Samoa, the Virgin Islands, which
in aggregate would receive one percent of total SFA
distributions, and the Indian Tribes and Alaskan native villages.
State governments would not be eligible to receive SFA
funds under the Administration's proposal because our studies
indicate that, as a group, State governments are not fiscally
strained at present. Most State governments are currently in
good fiscal condition with many states planning tax decreases
during the next fiscal year. Moreover, the major State revenue
sources, sales and income taxes, are more responsive to
improvements in the national economy than the predominant local
revenue source, property taxes. Accordingly, as the economy has
improved, State revenues have increased at a faster rate than
local revenues.
For the purpose of test determinations under SFA, local
governments are divided into two categories — those wholly or
partly within a Standard Metropolitan Statistical Area (SMSA) and
those entirely outside a SMSA. Because of techniques used to
gather and categorize general employment and unemployment data,
separation into SMSA and non-SMSA groups minimizes measurement
discrepancies among members of each group and permits governments
within each group to be treated more fairly.
-5Only eligible local governments would receive SFA funds.
The eligibility test is a statistical test based on the most
recent data available to the Departments of Commerce and Labor
prior to the beginning of each Federal fiscal year. For a local
government to be eligible, it must have an unemployment rate in
excess of 4.5 percent or exhibit slower than average growth in
two of the three following categories: employment, per capita
income and population. The local unemployment rate is to be
determined on a four calendar quarter basis while local growth
rates for employment, per capita income and population are to be
determined by comparing data for the present year with a base
period five or six year. However, shorter periods for the latter
three measurements may be used if the required data is available
only for such shorter, periods. The local growth rates for
employment are likely to be determined initially with a four year
base period. The Bureau of Labor Statistics has announced that
improved unemployment and employment data will be available in
June. We would, of course, use this data for SFA purposes and,
accordingly, any current estimates should be viewed as
preliminary.
Once a local government is determined to be eligible, its
allocation is determined by a formula which is designed to
reflect the relative fiscal distress of the local government.
The formula is detailed in Exhibit 1 to my testimony. As you can
see, it is complex and merits your careful review. I would like
to describe briefly the general way in which it works.
The factor in the formula which reflects the relative fiscal
strain of a particular government is determined by that economic
indicator -- rate of unemployment, growth in employment, growth
m per capita income or growth in population -- which shows the
greatest relative severity of distress. This factor is then
adjusted to reflect the population and per capita income of, and
tax effort being made by, each eligible government based on
Hgures developed under the General Revenue Sharing program.
The distribution formula constructed in this manner would
aetermine each government's share of total funds. To avoid
excessive administrative burdens, no distributions will be made
to governments which would receive less than $200 annually.
No local government could receive more money under the
supplementary Fiscal Assistance program than the amount it
rnn fJ V e :, U n d e r countercyclical revenue sharing during the twelve
months through April, 1978. This cap was established to avoid
Fpd
i 1 ^ 6 t h e d e P e n d e n c e of local governments on supplementary
furri
ii C a l a s s i s t a n c e There is no limit on the amount of
ailocated to
furri
local governments which did not receive ARFA
lng the m o s t
would
recent twelve months. Limiting these funds
P e c l u d e the>
oari* ^
advantages of more equitable distributions
r l y t0 t h o s e are
not a
a s whose level of fiscal distress was
CUrately r e f l e c t e d
formul
under t h e countercyclical targeting
-6Both the eligibility of, and allocation of funds to, each
local government is to be determined during the September
preceeding each Federal fiscal year. This will eliminate the
uncertainty governments now face under the countercyclical
program which makes these determinations quarterly and leaves
governments uncertain of the amounts they will receive during the
full year. SFA payments, however, will be made quarterly to
permit more efficient cash management.
Recipient governments may use SFA funds as part of their
general revenue. We have eliminated certain restrictions on the
use and timing of expenditures to permit more efficient use of
funds at the discretion of recipients. H.R.12293 also contains
nondiscrimination, auditing, labor, and reporting requirements
and provides withholding and rulemaking powers similar to those
in the Anti-Recession' Fiscal Assistance legislation. The general
enforcement rights under ARFA have also been retained.
Estimated Allocation of
Supplementary Fiscal Assistance
As I stated earlier, we checked our modified distribution
formula to make certain that it targeted distributions to
distressed local governments at least as well as the
countercyclical formula. We have also compared the Supplementary
Fiscal Assistance formula with other alternative formulas. Our
preliminary estimates show that during fiscal 1979 approximately
twenty-six thousand (26,000) governments would receive funds
under SFA. During the most recent four quarters of ARFA,
twenty-four thousand (24,000) local governments were eligible
recipients. This increase in the number of eligible recipients
is the intended result of adding new eligibility criteria to our
formula to include local governments, both in urban and rural
areas, whose long term economic problems were not adequately
measured under countercyclical revenue sharing. Of the 26,000
eligible recipients under SFA, about 5,000 did not receive money
under the countercyclical program during the most recent twelve
months .
Despite the addition of new recipients, the allocation of
SFA funds will be targeted to the most distressed governments. A
number of governments which receive ARFA funds have become
healthier and have falling unemployment rates. In effect,
because they now will receive less or even nothing, funds are
freed up for new entrants into the program. In addition, the new
entrants generally have small budgets. Although the amount of
funds received will be important to them, the funds will be a
small part of total distributions.
The most distressed recipients of countercyclical revenue
sharing will still receive proportionately greater funds under
SFA. We estimate that approximately 23 percent of SFA 1979
-7disbursements would be received by the ten cities which ranked
highest — meaning most distressed -- on the fiscal strain index
contained in our January report. Only 11 percent of the
disbursements would be received by the other 38 large municipal
governments included in our study. In short, the
Administration's program would be well targeted because those who
are neediest would receive the largest amounts. Exhibit 2 to my
testimony illustrates this conclusion.
CONCLUSION
As you know, this fiscal assistance program constitutes a
very important part of the President's program for distressed
areas. The financial health of local governments depends
primarily on their economies. The Carter Administration has
recommended several proposals to assist distressed areas and will
be working with the Congress to implement a program that will
foster the development of these economies across the Nation. We
believe local governments in distressed areas will need
Supplementary Fiscal Assistance until a broader economic
redevelopment program is fully established. It is our hope that
this effort will reduce the need for Supplementary Fiscal
Assistance in the future.
Obviously, this process will take time. In the meanwhile,
the Administration's Supplementary Fiscal Assistance program is a
necessary and critical part of our efforts to strengthen and
assist local areas which have not shared fully in the Nation's
general economic recovery.
We have purposefully designed this program to bridge the two
years remaining until the expiration of General Revenue Sharing
in 1980, when the results of a zero based review of general Federal
assistance will have been completed by the Administration. On the
basis of that review and an evaluation of the effects of other
aspects of the President's fiscal and economic programs, we expect
to present recommendations to the Congress in 1980 on the future of
both SFA and GRS.
I appreciate this opportunity to present the Administration's
Supplementary Fiscal Assistance program. I look forward to working
with you and the other members of Congress to implement the
program.
oOOo
EXHIBIT 1
SUPPLEMENTARY FISCAL ASSISTANCE ELIGIBILITY
AND DISTRIBUTION
Eligibility:
An SMSA government is eligible if:
(A) its unemployment rate for a 12 month period
averages over 4.5%
or
(B) its rates of growth in at least 2 of the following
3 indicators are lower than the average rates
of grcwth for SMSA areas:
(1) employment
(2) per capita income
(3) population
A non-SMSA government is eligible if it meets the same
criteria above, when "non-SMSA" is substituted for "SMSA."
Distribution:
For all eligible SMSA and non-SMSA jurisdictions, distribution
is determined by the product of its latest completed
entitlement period general revenue sharing allocation and
its local distribution index, divided by the sum of all such
products. The resulting fraction multiplied times the
national allocation determines the local annual allocation,
to be paid quarterly:
local GRS amount x local distribution index
National
Allocation
Sum of all numerators
2
SUPPLEMENTARY FISCAL ASSISTANCE INDEXES
The local distribution index for SMSA jurisdictions is the
largest of the following four quotients:
local unemployment rate - 4.5%
(1)
SMSA unemployment rate weighted
standard deviation
SMSA group pci growth - local pci growth
(2)
SMSA pci growth rate weighted
standard deviation
SMSA group pop growth - local pop growth
(3)
SMSA pop growth rate weighted
standard deviation
SMSA group emp growth - local enp growth
(4)
SMSA enp growth rate weighted
standard deviation
The local distribution index for non-SMSA jurisdictions
is determined as above, substituting "non-SMSA" for
"SMSA."
iixnit>it z.
Estimated Targeting of Supplemental Fiscal Assistance in Fiscal 1979
(to the 48 Largest Cities)
SFA Allocation
($ in millions)
High Strain Cities (10)
$236.8
2
Moderate Strain Cities (28)
3
Low Strain Cities (10)
% of SFA
Allocation to 48
Largest Cities as
as a group
of total
SFA Allocation
%
Per Capita
SFA
Allocation
67%
23%
$14.06
98.1
28
9
6.14
18.6
5
2
3.09
Ratio of High Strain to Low Strain Per Capita Allocations: 4.55 to 1
Ratio of High Strain to Moderate Strain Per Capita Allocations: 2.29 to 1
The ten high strain cities are: Boston, Buffalo, Chicago, Cleveland, Detroit, New Orleans
New York, Newark, Philadelphia, St. Louis
3'The ten low strain cities are: Columbus, Denver, Houston, Memphis, Norfolk, Oklahoma City,
Phoen
•hoenix, Portland, San Diego, San Jose
Source:
Office of the Secretary of the Treasury, Office of State and Local Finance
FOR IMMEDIATE RELEASE
May 3, 1978
Contact:
Charles Arnold
566-2041
IRS PUBLISHES AMENDMENTS TO REGULATIONS
DEALING WITH STATE AND LOCAL OBLIGATIONS
Washington, D.C. -- The Treasury Department today
announced amendments to previously proposed regulations dealing
with the tax treatment of interest on state and local government
obligations. The Internal Revenue Service today filed the amendments for publication in the Federal Register.
Section 103 of the Internal Revenue Code generally
exempts interest on these obligations from tax.
However,
section 103(c) provides that interest on state and local
obligations will not be tax exempt where a major portion
of the proceeds of the issue Is reasonably expected to be
used to purchase securities or obligations that will
produce a yield materially higher than the yield on the
state or local bond issue.
Under the regulations as previously proposed, some
issuers attempted to avoid the restrictions on investment
yield by contributing taxes or other revenues to a sinking
fund that is then invested at a rate allowing the issuer
to retire the entire issue at the end of a fixed period
while making a profit on the investment of the fund.
B-873
- 2Because of this abuse, the proposed regulations are
amended to provide that contributions made to a sinking
fund for an issue are treated as proceeds of the issue to
the extent the issuer reasonably expects to use the fund
to pay principal or interest on the issue. These amounts
will thus be subject to the limitation on yield rules.
This amendment and related conforming amendments will
not apply to issues sold before May 16, 1978, provided
that one of three specified actions was taken before
May 3, 1978. These actions are:
(A) The sale of the bonds was either authorized
or approved by the governing body of the governmental unit issuing the bonds or by the voters
of such governmental unit,
(B) Notice of sale of the bonds was given as
required by law, or
(C) A bona fide written offering statement (or
preliminary offering statement) was circulated to
potential purchasers.
Other significant amendments are also being made to
the proposed regulations.
However, these amendments will
apply only to bonds issued after September 1, 1978.
oOo
FOR IMMEDIATE RELEASE
May 3, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY DEPARTMENT EXTENDS PERIOD OF
INVESTIGATION OF STEEL WIRE ROPE FROM KOREA
The Treasury Department said today that it will extend
its antidumping investigation of steel wire rope from the
Republic of Korea for an additional period not to exceed 30
days. The decision was made because more time was needed
to analyze the data provided.
Under the Antidumping Act, "sales at less than fair
value" generally occur when the price of merchandise sold
for exportation to the United States is less than the price
of such or similar merchandise sold in the home market or
to third countries. If Treasury determines "sales at less
than fair value" occur, the case is referred to the U. S.
International Trade Commission for an injury determination.
An affirmative ITC decision would require dumping duties.
Notice of this action will appear in the Federal Register
of May 4, 1978.
Imports of steel wire rope from the Republic of Korea
were valued at approximately $13 million during calendar year
1976.
o
B-874
0
o
FOR IMMEDIATE RELEASE
May 3, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES START OF FOUR ANTIDUMPING
INVESTIGATIONS ON VISCOSE RAYON STAPLE FIBER
The Treasury Department said today that it will begin
antidumping investigations of imports of viscose rayon staple
fiber from Finland, France, Italy and Sweden.
Treasury's announcement followed summary investigations
conducted by the U. S. Customs Service after receipt of four
petitions filed by Avtex Fibers, Inc., alleging that firms
in these four countries are dumping viscose rayon staple fiber
in the United States.
Information contained in the petitions indicates that
viscose rayon staple fiber is being sold in the United States
at "less than fair value." In all four cases, "fair value"
was based upon the constructed value of the merchandise because the petitioner presented information indicating that
this product may be selling in the home markets for less than
its cost of production.
If Treasury finds there have been sales at less than fair
value, the U. S. International Trade Commission will subsequently decide whether there is injury, or the likelihood of
injury, to a domestic industry. Both "sales at less than fair
value" and "injury" must be found to exist before a dumping
finding is reached.
For purposes of this investigation the term "viscose rayon
staple fiber" means viscose rayon staple fiber, except solution
dyed.
Notice of the start of these investigations will appear in
the Federal Register of May 5, 1978.
Imports of this merchandise from these four countries during 1977 were valued at approximately $3.9 million, as follows:
Finland - $0.9 million, France - $1.7 million, Italy - $0.5
million, Sweden - $2.1 million.
o
B-875
0
o
Contact:
Carolyn Johnston
(202) 634-5377
FOR IMMEDIATE RELEASE MAY 5, 1978
TREASURY SECRETARY BLUMENTHAL NAMES GERALD C. SMITH
SAVINGS BONDS CHAIRMAN FOR WEST VIRGINIA
Gerald C. Smith, president of the West Virginia Water
Company, has been appointed Volunteer State Chairman for
the Savings Bonds program in West Virginia. The appointment,
by Secretary W. Michael Blumenthal, is effective immediately.
Mr. Smith succeeds James R. Thomas, II, President,
Carbon Industries, Inc. of Charleston.
Mr. Smith, who also lives in Charleston, will head a
committee of business, financial, labor, media, and governmental leaders, who. --in cooperation with the Savings Bonds
Division -- promote the sale of Savings Bonds.
Mr. Smith started his career with the Monongahela Valley
Water Corporation in Elizabeth, Pa. He served as manager of
the Armstrong Water Company in Kittanning, Pa., and the
Marion Water Company in Marion, Oh. In September 1965 he
-- more --
B-876
- 2 -
was promoted to manager of the Kentucky-American Water
Company in Lexington, Ky., and in 1967 he was elected vice
president of the company.
He is past president of the
National Association of Water Companies, having served as
president in 1970, and currently is a member of its board
of directors.
Only July 15, 1974, Mr. Smith was appointed
to his present position.
Mr. Smith is active in business and civic affairs and
serves on the board of directors for the Kanawha Valley
Bank, the Charleston Regional Chamber of Commerce and
Development, the United Way, and the West Virginia Chamber
of Commerce.
Mr. Smith is married and has two daughters.
FOR IMMEDIATE RELEASE
May 3, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY EXTENDS PERIOD OF INVESTIGATION
OF CARBON STEEL WIRE ROD FROM FRANCE
The Treasury Department said today that it will extend its antidumping investigation of carbon steel wire
rod from France for an additional period not to exceed
90 days. The decision was made because more time was
needed to obtain and analyze data.
Under the Antidumping Act, "sales at less than fair
value" generally occur when imported merchandise is sold
in the United States at prices below those in the home
market or in third countries. If Treasury finds that
"sales at less than fair value" occur, the case is referred to the U. S. International Trade Commission for
an injury determination. An affirmative ITC decision
would require dumping duties.
Notice of this action will appear in the Federal
Register of Mav 9, 1978.
Imports of carbon steel wire rod from France were
valued at approximately $38 million during calendar year
1976 and at roughly $28 million1during the first seven
months of 1977.
o
B-877
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o
FOR RELEASE THURSDAY AM'S
May 4, 1978
Contact:
George G. Ross
202/566-2356
TREASURY PUBLISHES REPORT OF EFFECTIVE
TAX RATES PAID BY CORPORATIONS IN 1972
The Treasury Department today released a report of
estimated effective income tax rates paid by U. S. Corporations in 1972. The report, first of its kind, is
intended to clarify widespread misunderstanding about
the ambiguities of effective tax rate construction and
their interpretation.
The report, titled "Effective Income Tax Rates Paid
by United States Corporations in 1972," relies on data
derived from individual corporations income tax returns.
According to the report, among all nonfinancial
corporations, effective tax rates increase with size of
assets. Additionally, among 19 industry categories identified in the report, manufacturing paid the highest
effective tax rate (4 2 percent), while coal mining and
banking paid the lowest (19.4 and 18.6, respectively).
The report contains tables of effective tax rates
for corporations by size and industry; for worldwide,
domestic, and foreign income.
Copies of the report are available for sale by the
Superintendent of Documents, U. S. Printing Office,
Washington, D. C. 20402. The cost is $2.30 per copy.
o
B-878
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o
FOR RELEASE ON DELIVERY
MAY 4, 1978, 9:30 a.m. PDST
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
FOR ENFORCEMENT AND OPERATIONS
BEFORE THE
HOUSE JUDICIARY COMMITTEE
SUBCOMMITTEE ON CRIME
Mr. Chairman and Members of the Committee:
I very much appreciate the opportunity to discuss
with you today various proposed regulations designed to
reduce the criminal misuse of firearms. With me is
Rex Davis, Director of the Bureau of Alcohol, Tobacco and
Firearms (ATF).
I believe that these hearings are very timely.
We are in the midst of a comment period on these regulations; this period will close on May 22nd. It is therefore
an important time for us all to take steps to make certain
that those interested in these matters have an accurate
understanding of what is being proposed. I am not certain
however, that is currently the case. Much of the debate
we hear, and the comments we receive, claim that these
regulations would create a national registration system
or complain that they represent an attempt to prevent the
sportsman or law abiding citizen from acquiring or keeping
a firearm. These regulations would do neither. They create
no registration system. They add no new restrictions on
the ability of private citizens to purchase firearms.
They usurp no Congressional prerogatives. They involve
only what Congress has authorized and what the
public has a right to expect — that we seek ways to enforce
our current laws more effectively. They are aimed at
C-379
- 2 identifying the criminal who uses a weapon, and those
individuals who are his sources of supply. Hearings such
as these will assist in removing some of the confusion which
has been created by some private interest groups concerning
the scope of these regulations.
At the outset I would like to set out some of
the underlying premises and general goals involved
in proposing these regulations. Our basic goal, of
course, is to strive to improve the manner in which
we enforce existing firearms laws. In doing so one of
our principal premises is recognition of the fact that the
explicitly stated purpose of the Gun Control Act of 1968
was "to provide support to Federal, State and local
law enforcement officials in their fight against crime
and violence ....". One of the principal ways we can
do this, of course, is to trace weapons found at crime
scenes or otherwise used in crimes.
Another of our operating premises is that violent
crime continues to be a serious problem and that firearms continue to be used in many of these crimes. In
1976 over 12,000 murders, 190,000 robberies and 120,000
aggravated assaults were committed with firearms. Approximately
12,000 people were killed in that year alone with firearms. From 1967 to 1976, over a thousand police officers
were shot down in the line of duty. Last year 94 police
officers were shot and killed in the line of duty .
As the agency charged with responsibility for enforcing
our firearms laws, the Treasury Department believes that
it should take those steps it can to seek to provide
our police officials — and particularly those at the
state and local level — with increased capabilities to
meet this growing problem.
Our third operating premise is a belief that we have to
try to develop an approach which involves something other
than simply adding an endless number of agents to the
Federal payroll. ATF's Concentrated Urban Enforcement
Program, Project CUE, for example, involved the assignment of over 200 additional personnel to only three
cities at a cost of over eight million dollars. It is
unrealistic to suggest, however, that we will be able to
add similar numbers of agents to all our cities. What is
needed, therefore, is a program which impacts not just
selected cities, but which provides benefit to all
parts of our country. What is also needed is a program which
minimizes the need for additional resources by providing a
basis for more effective targetting, of those resources we
have.
- 3 And finally another of our premises is to concentrate
our efforts on the lawbreaker, not the law abiding citizen.
Information must be available so we can track down the
criminal, without affecting those who obey our laws.
It is with these thoughts in mind that proposed new
regulations were drafted. They are designed to:
* Increase significantly the ability
of ATF to trace firearms used in crime;
* Provide ATF with essential information
to identify unusual flows of firearms to
particular areas or dealers so that resources
can be meaningfully targetted;
* Allow a more organized effort against the
problem of stolen firearms which are used
in so many crimes.
* Assist State and local governments who are
seeking to deal with the problem of street
crimes.
By taking these steps we hope to enhance the ability
first to apprehend those who use firearms in crime and,
second, to identify — and where possible, stop — sources
of firearms which are entering the illegal market. The
ultimate beneficiaries of these proposals will include
state and local police officials, law abiding gun owner,
and the public at large.
The proposed regulations can provide us with
these improved capabilities without putting new restrictions
on the ability of citizens to acquire firearms, without
adding to the burdens of firearms ownership and without
creating any national file or registry of citizen purchasers
or owners of firearms. These regulations would help take
weapons from the criminal; they would not make it easier to
take weapons from our law abiding citizens.
Now I would like to summarize for you specifically
what these regulations, if implemented, would require.
While the package of regulations published on March 21
has a number of provisions, the three principal aspects
would require the following:
1. That licensees — not private citizens —
promptly report to ATF all thefts and losses
of firearms by manufacturers, wholesalers,
and dealers;
- 4 2.
That quarterly reports be made to ATF of
all commercial transactions between licensees,
that is from manufacturers or importers to
wholesalers, from wholesalers to retailers,
from retailers to other retailers; and
3. That each firearm manufactured or imported
into the United States contain a unique
serial number.
These proposed regulations do not place any requirements
on individual citizens. Rather, they only affect licensees
who are engaged in the business of manufacturing, importing,
or selling firearms. In addition, and given the statements
of some, we cannot be too clear on this point: these regulations do not require the name or address of citizen
purchasers or owners of firearms to be reported to ATF; they
do not require firearms purchasers or owners to register
their firearms; and they do not create a "national registration system." We have not suggested such requirements in
these proposals and we have no intention of issuing regulations which would involve such requirements. Any decision
to impose such requirements should require legislative action
by the Congress. This is simply not a first step to "gun
registration". Nothing in these regulations would make
it easier for Congress to adopt such a program.
While some have questioned the authority of the
Department to issue these regulations, it could not be more cle
that the Secretary was given full authority by the Congress
to impose these requirements. Section 923 paragraph (g) of
Title 18, Chapter 44 specifically provides:
(g) Each licensed importer, licensed manufacturer,
licensed dealer, and licensed collector shall maintain
such records of importation, production, shipment,
receipt, sale, or other disposition, of firearms
and ammunition at such place, for such period, and in
such form as the Secretary may by regulations
prescribe. Such importers, manufacturers, dealers,
and collectors shall make such records available
for inspection at all reasonable times, and shall
submit to the Secretary such reports and information
with respect to such records and the contents thereof
as he shall by regulations prescribe. (emphasis supplied)
Authorization for the unique serial number is found in
Section 923 paragraph (i) of the Act. In addition, Section
926 gives the Secretary of the Treasury general authority
- 5 to issue regulations. These regulations therefore represent
no more than an attempt by the Treasury Department to faithfully enforce a law passed 10 years ago by Congress. We
believe it is long past time such an effort was made.
I would now like to explain in more detail how the
information secured by these proposals could be used. The
first way would be to enhance our ability to trace firearms
used in crimes. To understand the benefits which would
accrue, it is necessary to understand how the current
tracing system works, and what its drawbacks are.
While in a crisis case — such as an assassination or
mass murder — ATF can trace a firearm very quickly, it is
misleading to assume that the isolated exceptional case is
at all typical. The average case takes weeks, not minutes.
Under the current system, after receiving the request for
a trace, ATF must call the manufacturer or importer and
various wholesalers before ultimately contacting the retailer.
Studies have indicated that there are an average of three
commercial transactions before the gun is sold to the retailer.
Of course, in each instance, ATF must await the answer from
one licensee before contacting the next one. Once the retailer
is finally identified ATF or the law enforcement agency
who requested the trace then contacts that retailer to
find out the name and address of the individual who
purchased the firearm. Under current rules, retailers
are required to keep names and addresses of purchasers of
firearms. These regulations would not change this.
This trace by telephone system, despite the efforts
of ATF, simply does not meet the needs of our law enforcement agencies, Federal, state or local. Last year ATF
attempted only 62,498 traces, 55% of which were for state
or local officials. The Bureau actually lacks the
capacity to expand this number of traces and is
forced into the extraordinary position of not encouraging
law enforcement officials to seek its assistance in tracing
guns used in crime. When one considers the large numbers
of robberies, assaults, murders, narcotics cases, rapes
in which firearms are used, this inability to trace a
firearm is unacceptable. This creates a gap in the
nation's efforts to fight crime.
Attempting a trace is not, however, completing it, and
the current system makes success difficult to achieve. In
-6fact, in 1977 of the 62,498 traces attempted, 45% were
incomplete. In 10,000 of these failures, the inability
to complete the trace was caused by the unavailability
or incompleteness of the records that the licensees were
required to keep at their premises. Records are often
reported lost or destroyed and it is impossible to
complete the trace.
Even when we can complete a trace, the current
system often produces unfortunate delays in doing so. There
are three categories of traces: urgent, expedite, and
routine. Where urgent the goal is to complete the trace
in 24 hours, where expedite in 4 working days, and where
routine, in 7 working days. Approximately 76% of all
traces are routine, 19% expedite, and 7% urgent. Even
these rather long time limits are often not met: as of
April 5 there was a backlog of 23 urgent requests, 177
expedite requests and 390 routine requests.
Our best
estimate is that the average urgent trace took 2 days;
the average expedite took 8 days; the average routine
case took 11 days. When there are difficulties with
retail or wholesale records these averages can double
or triple. This delay becomes even more distressing when
it is only common sense that the speed with which police
receive evidence may determine whether they can solve
the crime. Thus a fast and successful trace can be the
difference in determining whether or not local police are
able to apprehend a murderer, a rapist, or a robber.
Ideally, we should trace any gun used in a crime or
found at a crime scene. Where a suspect has been apprehended
such a trace could identify possible criminal associates,
provide leads as to how the gun got into the criminal market,
supply additional evidence to assure successful prosecutions,
and solve earlier thefts of firearms. Where the gun, but not
the suspect, is in custody, tracing can provide at least an
assist in identifying the criminal. But, as you can see,
our capability to do this is plainly insufficient.
These regulations promise to correct this situation.
If the proposed system were in effect, ATF could skip
the intermediate steps and not bother the manufacturer,
wholesaler and so on. They would have this information
already and within hours or even minutes, be able to
identify the final retail seller. The problem of incomplete
or unavailable records would be diminished. The service
would be fully available to state and local, as well as
Federal law enforcement officials. An important part of
-7the assistance Congress wanted us to provide when it
enacted the 1968 Gun Control Act would thus finally be
available.
In addition to enhancing its tracing ability, these
regulations, as I mentioned at the outset, would also provide
information necessary for ATF to more effectively develop
strategies of enforcement and target its resources. As you
are probably aware, there are approximately 170,000 individuals
who are licensed by ATF to engage in the business of manufacturing,
importing, distributing or selling firearms. Under Federal
firearms law, ATF has the responsibility to regulate the
interstate commerce of firearms, ensure that licensees are
complying with the law, and identify those diverting weapons
illegally. However, as you know under current regulations
there is no requirement that copies of the record of transaction
with other licensees be sent to ATF. The Bureau therefore
lacks the ability to target their inspection or investigative
resources so as to focus their attention on dealers where
there is reason to believe may be engaged in illegal commerce
or the selling of firearms on a regular basis to criminals.
Instead, for example, inspections inevitably must be on a
more random basis that is desirable.
These regulations will change this situation. They
will provide ATF with essential information to identify
unusual flows of firearms. ATF could then assign its
inspectors and agents to investigate those areas or dealers
who are receiving firearms in quantities that may not be
explainable by the demands of normal legal business.
With such information to guide its efforts, the average
law abiding dealer would be bothered less by the government.
Those possibly abusing their license and selling into the
criminal market would however, receive more attention, as
they should.
There is another benefit to this proposal, one not
usually associated with reporting requirements. Ultimately
it will reduce tne recordkeeping burden now placed on licensees.
Currently it is necessary to require that records of
firearms transactions be maintained indefinitely. This
is essential if firearms traces are to always be possible.
Under these proposals, however, this would no longer be
necessary. ATF would have the information it
needs. Record retention requirements could than be
reduced, easing the burden on our licensees.
Also, once the system is fully operational, licensees
would probably have to respond to fewer requests from ATF
to assist in traces.
-8Other aspects of these proposals would also assist our
enforcement efforts. A unique serial number would include
in one number all that is necessary to submit for a firearms
trace; would avoid confusion for the street officer seeking
to determine what information or numbers he must submit;
would end the duplication in numbers used by different
manufacturers; and would simplify the computerization of
this information. This change is long overdue.
The theft reports would enable ATF and local police
to address more effectively the problem of stolen
firearms. As you may know, it has been estimated that
stolen weapons are used in 20 percent of all crimes committed
with firearms. Though there is some voluntary reporting,
under current regulations there is no requirement that a
licensee report a theft or loss of a firearm. Without
knowledge of a theft, however there is no way local or
Federal law enforcement can investigate the incident.
Thus, law enforcement in some cases also is unaware of
the problem until the firearm is used in a crime. Knowing
whan a gun was stolen would help identify the criminal who
uses it in a crime. In addition, with more complete
information on firearms thefts, vulnerabilities in the
distribution process would be identified, so that methods
to remove them could be developed.
The regulations proposed on March 21 also include other
provisions. One would require members of the military to
obtain authorization prior to importing weapons for their
personal use. Civilians must do so now. The other proposals
seek to simplify and revise certain procedures relating to the
importation and transportation of various weapons. In addition,
they would require licensees to supply information when needed
by ATF over the telephone. Most do so on a voluntary basis now.
The comment period for these regulations is scheduled
to close on May 22. We are, of course, interested in the
arguments and information these comments will provide. We
know, for example, the advantages of requiring a unique serial
number; we need to obtain a better notion as to the costs to
industry, as well as any suggestions for alternatives.
So too, with the other proposals. We welcome all comments
so that the most meaningful decisions on this matter can be
made.
We have, of course, already received many comments.
Support has come from the National Conference of Mayors
-9and the League of Cities; the International Association
of Chiefs of Police (IACP), which has 11,000 members?
the Police Executive Research Forum comprised of the'
police chiefs of 50 cities; the Police Foundation which
did an extensive two year study of the problem of firearms
abuse and various police chiefs. We also have letters
from individual police chiefs in support. The NRA
and the Firearms Lobby have opposed the regulations
even though they are aimed at tracing firearms used in
crimes and do not effect, in any way, law abiding
gun owners and purchasers.
We expect many additional comments. They will
take time to sort and analyze. A final decision will
be based upon this analysis. Because of this process
there is no possibility that implementation could be
earlier than sometime in 1979. Whenever they are
implemented, we will have to come to Congress for the
necessary funds. If implemented in their current form, it
is our estimate that the costs will be approximately
$4.1 million. The Administrations fiscal year 1979
budget submitted to the Congress contains no funds with
which to implement the regulations.
In sum, we have proposed these regulations as part
of an effort to use our current firearms laws more
effectively in the fight against crime. They take no
really dramatic steps; they create no national registration system; they usurp none of Congress1 authority.
Rather, they are simply an attempt to what all — both
pro and anti gun control people — have urged us to do
to enforce existing laws more effectively and to direct our
attention at the criminal misuser of firearms.
After Rex Davis summarizes his statement we will
both be happy to answer any questions.
TITLE 18—CRIMES AND CRIMINAL PROCEDURE
§ 923. Licensing
' (i) Licensed importers and licensed manufacturers shall identify by means of a serial
number engraved or cast on the receiver or
frame of the weapon, in such manner as the
Secretary shall by regulations prescribe, each
firearm imported or manufactured by such importer or manufacturer.
§ 926. Rules and regulations
The Secretary may prescribe such rules and
regulations as he deems reasonably necessary
to carry out the provisions of this chapter, including—
(1) regulations providing that a person licensed under this chapter, w h e n dealing with
another person so licensed, shall provide such
other licensed person a certified copy of this
license; and
(2) regulations providing for the issuance.
at a reasonable cost, to a person licensed
under this chapter, of certified copies of his
license for use as provided under regulations
issued under paragraph (1) of this subsection.
T h e Secretary shall give reasonable public
notice, and afford to interested parties opportu-.
njt£Jor~hearing. prior to prescribing'such rules
and regulations/
(Added Pub. L. 90-351, title IV. § 902. June 19.
1968, 82 Stat. 234, and amended Pub. L. 90-618,
title I. § 102, Oct. 22, 1968, 82 Stat. 1226.)
rtmentoftheJREASURY
HNGTON,D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
May 4, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY OFFICIALS DEFEND
NEW GUN TRACING RULES
Senior officials of the Treasury Department today
defended proposed gun tracing rules as a way to "take weapons from the criminals...not make it easier to take weapons
from our law-abiding citizens."
Treasury Assistant Secretary for Enforcement and Operations
Richard Davis testified before the House Judiciary Subcommittee
on Crime chaired by Congressman John Conyers. Davis said, "In
1976 over 12,000 murders, 190,000 robberies and 120,000 aggravated assaults were committed with firearms. Approximately
12,000 people were killed in that year alone with firearms.
From 1967 to 1976 over a thousand police officiers were shot
down in the line of duty."
Davis said the new rules are designed to provide police
officials, expecially at the state and local level, with increased capabilities to trace guns used in crime and to stop
the flow of guns to illegal hands.
The new regulations provide for the following:
1. That licensees — not private citizens — promptly
report to the Bureau of Alcohol, Tobacco and
Firearms all thefts and losses of firearms by
manufacturers, wholesalers, and dealers;
2. That quarterly reports be made to ATF of all
commercial transactions between licensees; that
is, from manufacturers or importers to wholesalers,
from wholesalers to retailers, from retailers to
other retailers; and
3. That each firearm manufactured or imported into
the United States contain a unique serial number.
Commenting on the widespread public confusion over the
proposals, Davis testified, "Much of the debate we hear, and
the comments we receive, claim that these regulations would
creat a national registration system or complain that they represent an attempt to prevent the sportsman or law-abiding citizen
B-880
(More)
- 2 -
from acquiring or keeping a firearm. These regulations would
do neither. They create no registration system. They add no
new restrictions on the ability of private citizens to purchase
firearms. They usurp no Congressional prerogatives. They involve only what Congress has authorized and what the public has
a right to expect — that we seek ways to enforce our current
laws more effectively. They are aimed at identifying the criminal who uses a weapon and those who are his sources of supply."
Testifying that the power to issue these regulations
"could not be more clear," Davis cited specific statutory language authorizing rules for the submission of "such reports and
information with respect to such records and the contents
thereof," as the Secretary of the Treasury determines necessary.
Davis noted that manufacturers already are required to put
serial numbers on guns and to keep records of commercial transactions.
Davis said that; under current procedures, the Bureau of
Alcohol, Tobacco and Firearms, which traces guns used in crime
at the request of Federal, state and local law enforcement
officials, has the resources for only 5,000 traces a month.
However, he said that almost half of the 62,498 traces attempted
in 1977 were failures. More than a third of the time, the
inability to complete the trace was caused by poor recordkeeping
by importers, manufacturers, wholesalers or dealers who are
required to keep records of commercial transactions on guns on
their premises.
Davis said that, under current procedures, the successful
gun trace often takes twice as long as necessary. ATF is
required to call the manufacturer and wait for him to search
his records and identify the wholesaler before the wholesaler
can be contacted. ATF must then wait for a search by the
wholesaler. The average successful gun trace involves three
commercial transactions before the gun is purchased by a private
citizen.
"This delay becomes even more distressing when it is
only common sense that the speed with which police receive evidence may determine whether they solve the crime. Thus, a
fast and successful trace can be the difference in determining
whether or not local police are able to apprehend a murderer,
a rapist, or a robber." Davis said that, under the proposed
(More)
rules, ATF could have a gun
traced to a retailer "within hours
or even minutes."
- 3-
Under existing inspection programs, ATF agents make
random inspections of the more than 170,000 gun dealers.
Under the new rules, Davis explained, ATF could concentrate
on suspected sources of illegal guns. Thus, "The average
law-abiding dealer would be bothered less by the government.
Those possibly abusing their licenses and selling into the
criminal market would, however, receive more attention— as
they should."
Davis also said that the new regulations would reduce
the recordkeeping burden now placed on gun licensees and
the time and manpower cost of responding to gun tracing would
be reduced.
Davis said that the requirement for a unique serial number on all guns manufactured or imported into the U. S. is
"long overdue." Under the existing haphazard system, he said,
guns often have more than one serial number, or the same number
appears on more than one gun.
"The theft reports would enable ATF and local police to
address more effectively the problem of stolen firearms,"
Davis testified. He said that "stolen weapons are used in
20 percent of all crimes committed with firearms." Under
current rules, some gun licensees voluntarily report thefts
and losses. "Without knowledge of a theft, however, there is
no way local or Federal law enforcement can investigate the
incident. Thus, law enforcement in some cases also is unaware
of the problem until the firearm is used in a crime. Knowing
when a gun was stolen would help identify the criminal who
uses it in a crime."
Davis said that the new proposals have received widespread support from local police chiefs and law enforcement
organizations such as the International Association of Chiefs
of Police, the Police Executive Research Forum, and the Police
Foundation, as well asothe National
0
o Conference of Mayors.
The complete text of Davis's testimony is attached
RELEASE ON DELIVERY
REMARKS BY
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
AT THE
SECRETARY OF LABOR'S CONFERENCE FOR LABOR EDITORS
HYATT REGENCY HOTEL
WASHINGTON, D.C.
MAY 4, 1978 — 3:30 P.M.
I am delighted to be with you this afternoon. I
would like to take this opportunity to discuss a matter
of great significance to members of the labor movement
throughout our country.
On January 20, the President sent to the Congress a
comprehensive package of tax reduction and reform. The
proposals call for $34 billion in reductions, $9 billion
of which is to be paid for by a broad spectrum of reforms
designed to eliminate various preferences and to simplify
our tax laws. $17 billion of the net reductions are in the
form of income tax relief for individuals, and 94% of that
$17 billion goes to taxpayers with incomes under $30,000.
The balance of income tax relief goes to business as an
incentive for increased capital investment to produce
more jobs.
This package was designed with America's working men
and women firmly in mind. On February 20, the Executive
B-88L
- 2 Council of the AFL/CIO announced its unanimous support for
the vast majority of the President's proposals. This support
was gratifying and reaffirmed our belief that the President's
program merits the active support of labor union members. Let
me tell you why it does.
The reform proposals close up loopholes few American
workers can enjoy. The tax reductions, paid for in part by
the closing of the loopholes, are concentrated in the income
brackets where most union members find themselves. The
reforms are also badly needed to start the process of
improving a tax system which the President has correctly
described as a disgrace. And the reductions are needed to
be sure that our economy continues to move ahead in 1979
and beyond. If it does not, union members will be among
those who will feel the shortfall first.
It is now more than three months since the President
sent his tax message to the Congress, but as of today,
the proposals have made very little progress. Two weeks
ago the Ways and Means Committee — after agreeing to some
minor reforms — alternated between rejecting reform
proposals and adding more loopholes. Last week it
temporarily suspended operations to consult with the
Administration about the course of future action. To date
the message from the Congress is clear: drop significant
reform proposals and change the focus of the reductions to
increase benefits for those in higher brackets.
- 3One Representative has proposed an amendment to
the bill to reduce the tax treatment of capital gains back
to the 1969 level of 25%. This change, which appears to
have considerable support, would substantially decrease
the progressivity of the individual income tax system.
Two-thirds of the benefits of such a change would go to
individuals with annual incomes of $200,000 or more.
Such taxpayers would receive an average annual reduction
of $14,128 as compared with present law; whereas those
with $15,000 to $20,000 of income would receive an average
cut of 26$.
The President has been equally clear that he rejects
this type of change. He has stated repeatedly that the
Administration proposals are fair and right, and we intend
to fight for them. He rejects the notion that broad-based
tax cuts for average taxpayers should be sacrificed in
favor of tax preferences for high-income individuals and
large corporations. He resists the fashionable argument
that there is something wrong with having a progressive
tax cut — one that focuses relief on low- and middle-income
workers.
- 4 -
The President deserves to hear your support and the
support of your readers for his stand. The polls show that
an overwhelming majority of Americans, when asked, are in
favor of tax reform. But they have not been writing letters
to, or visiting with, their Congressmen. Those interests
which enjoy tax preferences and tax shelters and can afford
organized campaigns on the Congress have been conducting
such campaigns. This is all many Congressmen are hearing,
and most Congressmen respond to what they hear. Why
shouldn't they? That means they tend to vote benefits
for the small minority of wealthy taxpayers — a curious
result in a democracy and an unhappy one for most taxpayers.
Taxes are a complex subject and except on April 15,
they are generally considered dull or too technically
complex to write about for the ordinary man. Weeks and
months go by without general press coverage of
- 5tax provisions.
The taxpayers, who are paying the freight,
pay little heed to the special provisions that make our
tax system unfair and complex. Radio and TV find other
stories that appear to be of more immediate interest.
Except for Sunday panel interviews now and then, a spate
of three-martini jokes and the lonely voice of the
President, there has been little national media coverage
of the details of our tax package.
I do not know what each of you is telling union members in
America today. But I do know they have a considerable
stake in what is happening to the President's tax proposals.
And if the early retreat of the Congress under stiff pressure
from anti-reform lobbyists is an indication of what the
summer will bring, union members will not like the results.
They need to be told — and told now — of their real
interest in the success of the President's package or
they may not put up a fight.
History is not replete with instances where the
Treasury Department's activities are of direct and
immediate interest to the labor press. But they are now.
Despite the Executive Council's announced support of the
President's tax proposals, labor's voice has rattled no
legislative window panes. In my view, that is regrettable.
- 6 Let me remind you of what the President's program
would do:
• It would crack down on tax shelter abuses
that drain funds from job-creating, productive
investments into uneconomic ventures designed
to produce tax write-offs for affluent individuals.
We cannot continue to ask low- and
middle-income workers to provide more tax
support for this country than is furnished
by some of our wealthiest citizens.
• It would eliminate the $2 billion DISC and
foreign tax deferral preferences that are
enjoyed primarily by America's largest
multinational corporations.
These proposals
have been priority reform recommendations of
organized labor, and this Administration
believes it is time the recommendations
become law.
• It would eliminate some of the least
significant itemized deductions and translate
the savings into lower tax rates.
Six million
taxpayers will switch to standard deductions;
three million will switch to 1040A.
Those
people will actually be able to prepare their
own returns.
- 7 • It would produce tax reductions that
should add one million additional jobs
to the economy by the end of 1979.
• It would eliminate certain deductions —
including deductions for hunting lodges,
pleasure boats and Astrodome boxes -- that
allow a privileged few to charge off
luxuries that the rest of us cannot afford.
The situation we have today inevitably leads
some to feel the system is not fair. It
erodes our self-assessment system, and it
should not be permitted to continue.
I will not attempt to go through the details of
the President's proposals here today. They are available
from the Treasury both in the technical splendor the tax
lawyers try to pass off as English and in something approaching
layman's language. There are hundreds of pages of hearings
and explanations that one can consult as well. I hope that
you will pursue this material and make it available to your
readers. At stake is a dollars and cents issue, one that is
worth billions of dollars to labor union members. There is
also a chance to correct some fundamental inequities. Yet-
- 8these issues have not yet risen even to the level of a
public debate. Without a public debate, I am afraid that
most taxpayers —
and most union members —
ultimate losers.
Thank you.
0O0
will be the
wtmentoftheTREASURY
||NGTON,D.C. 20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
May 5, 1978
Press Contact:
Non-Press Contact
John P. Plum
202/566-2615
202/566-8235
566-8651
566-5286
THIRD QUARTER STEEL TRIGGER PRICE REVISIONS PUBLISHED
The Department of the Treasury today announced third
quarter revisions of trigger base prices and extras for those
of the 32 categories of imported steel mill products (as
defined by American Iron & Steel Institute) being monitored
under the trigger price mechanism. The revisions are effective
for steel exported to the United States on or after July 1, 1978
The revisions reflect the increases in raw material and
labor costs including the annual wage settlement, and appreciation in the exchange value of the yen for those Japanese steel
producers whose cost data was used in computing the trigger
prices:
Integrated producers --A 5.5 percent increase will
be applied to the products of integrated producers^
such as cold and hot rolled sheets and plates.
Electric furnace producers —Increases of 13.9, 14.5
and 14 percent will be applied to angles, flat bars
and reinforcing bars, respectively.
Fabricating mills —A 5.5 percent increase will be
applied to the products of Japanese fabricating mills
(e.g. wire and wire products, cold finished bars,
and light rails) until complete data is available
from the Japanese government to compute revisions
for these products.
Treasury also announced its intention to gather more
information to complete the steel mill product coverage of
trigger prices and to correct claimed anomalies in the calculation of certain trigger prices.
Persons other than from the press seeking additional
information should call the above non-press telephone numbers
at the U.S. Customs Service. If those lines are busy, call
202/566-8121 and leave your phone number so that your call may
be returned.
B-882
#
DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
NOTICE
Imported Steel Mill Products Trigger Price Mechanism:
Quarterly Revision of Trigger Prices
The Treasury Department is hereby announcing increases
in trigger prices for imported steel mill products reflecting
increased costs of production for the Japanese steel industry
and appreciation in the value of the yen, effective for all
shipments exported on or after July 1, 1978.
A. Integrated Producers
With respect to the categories of steel mill products
produced primarily by the integrated steel producers, the price
revision is based on changes since the end of 1977 in the costs
of basic raw materials and labor and in the rate of exchange.
Coal and iron ore costs increased in the aggregate by 3.5 percent in dollar terms. In April 1978, the integrated companies
agreed to a new industry-wide labor contract which provides
for an estimated overall 4.2 percent increase in hourly labor
costs for the current fiscal year ending March 31, 1979.
Finally, as reflected in the average daily exchange rate from
March 1 through April 30, the Japanese yen has appreciated to
a level of 226 yen to the dollar.
These changes in costs and the exchange rate have increased by approximately 5.5 percent the average costs of
production and, correspondingly, both the base prices and
"extras" for products in Categories 2, 1/ 3, 2/ 4, 5, 10, 3/
14, 1/ 15, 1/ 22, 23, 25, 26, 27, and 37 will be increased by
5.5%. The magnitude of this increase is due to the coincidence
of the timing of the bulk of the annual wage increases in Japan
and the appreciation of the yen. The calculation leading to
the indicated increase for these products was made as follows:
1/ With the exception of those specific products listed in
Table 3.
2/ Only wide flange beams and bearing piling (Trigger Price
Handbook pp 3-1 to 3-4). Other products in this category are
covered in Table 3.
3/ Only hot rolled carbon bars: special quality (Trigger
Price Handbook pp 10-1 and 10-2). Other products in this
category are covered in Table 3.
- 2 Table 1
Estimated Japanese Costs of Production
($ per metric ton of finished product)
Revision for Third
January 9, 1978
Basic Raw Materials
Other Raw Materials
Labor
Other Expenses
Depreciation
Interest plus profit
Less scrap credit
Quarter
120.62
67.10
83.61
22.70
19.65
39.59
(6.97)
346.30
116.91
65.12
75.60
21.38
18.51
37.28
(6.57)
328.23
Increased Estimated Cost of Production:
5.5%
B. Electric Furnace Producers
- Trigger prices for products produced by electric furnace
producers were published on Monday, March 27, 1978 (43 FR
12783).
Trigger price revisions for these steel mill products
reflect only an adjustment for scrap prices and the exchange
rate since these companies have not yet concluded their
collective bargaining for the current fiscal year. A complete
description of the methodology used in computing the original
trigger prices for these products is set forth below. The
original input costs are provided in Table 2. The revised
input costs are provided in Table 3.
The trigger prices for the carbon steel products listed
below are based upon the costs of production of Japan's
main electric arc furnace steel mills, submitted to the
Treasury Department by the Japanese Ministry of International
Trade and Industry. Three sets (A, B, and C) of cost data
for these electric arc mills were submitted. The cost of
particular products within a cost group were obtained by
applying relative cost coefficients provided by the Japanese
to the appropriate group average cost.
COST GROUP PRODUCTS
Equal
A Angles
A
A
A
Unequal Angles
Channels
I Beams (S4 through S8)
- 3 B
Hot Rolled Strip produced on bar
mills
B
Merchant Quality Hot Bars
B
Merchant Quality Hot Rolled Round
Bars
B
Merchant Quality Squares and Round
Cornered Squares
B
Bar Size Channels
C Plain Concrete Reinforcing Bars
C
Deformed Concrete Reinforcing Bars
Because of a different input mix, output mix and
production technology, the base production costs estimated
for the electric furnace steel mills differ from the base
costs reported for the six major Japanese producers.
The principal assumptions originally utilized by
Treasury in estimating the Japanese electric arc furnace
costs are (the only assumptions affected by the quarterly
revisions are the exchange rate and the scrap netback):
a. Exchange rate. Where relevant, Japanese
cost data have been converted to U.S. dollars
on the basis of 240 yen per dollar (revised
to 226 yen per dollar for the third quarter).
b. Capacity utilization. All costs pertain to
a standard operating rate of 85 percent.
c. Labor productivity. Group A products (equal
angles) require 3.3 man hours per metric ton
of raw steel, Group B products (flat bars)
3.6 man hours per metric ton of raw steel,
and Group C products (reinforcing bars) 2.9
man hours per metric ton of raw steel.
d. Yield. The electric arc furnace products
are generally fabricated from continuously
cast semifinished shapes. Therefore, the
yield of Group A (angles) and Group C products
(reinforcing bars) per ton of raw steel is
taken to be 0.95 and the yield of Group B
products (flat bars) of 0.92.
- 4 -
e.
Capital costs. Total depreciation charges,
net interest expenses and a margin for
profit on average amount to slightly over
13 percent of total assets related to steel
production.
f. Scrap netback. As previously, yield factors
reported by the Japanese electric furnace
mills were not used in the calculation of
trigger prices in the belief that some of
the products considered "finished" would
be regarded by U.S. standards as low quality.
However, this low quality product receives
a cost credit based on the current market
price of scrap, which increased for the third
quarter.
The total costs of production for products in Groups
A, B, and C, based on the above assumptions, are estimated
to be:
TABLE 2
ORIGINAL ESTIMATED JAPANESE ELECTRIC FURNACE
MILL BASE PRODUCTION COSTS
($ per metric ton of finished product)
Group A
Group B
Group C
Raw Materials
147.19
Labor
24,52
Other Expenses
10.06
Depreciation
5.47
Interest Plus Profit 21.46
Less Scrap Credit
(1.94)
159.59
27.94
12.28
6.96
25.85
(2.14)
148.33
19.55
12.68
5.60
20.81
(2.00)
230.48
204.97
Total original 206.76
average cost
- 5 TABLE 3
REVISED
ESTIMATED JAPANESE ELECTRIC FURNACE MILL BASE
PRODUCTION COSTS
($ per metric ton of finished product)
Group A
Group B
Basic Raw Materials
(primarily scrap)
Other Raw Materials
Labor
Other Expenses
Depreciation
Interest Plus Profit
Less Scrap Credit
Revised average cost
Original average cost
Increased Estimated
Cost of Production
C. Other Products
Group C
140,.42
32,.29
26..05
10,.68
5,.81
22,.79
(2,.49)
235,.55
206,.76
150.92
38.16
29.64
13.04
7.39
27.45
(2.80)
263.80
139.16
34.88
20.76
13.47
5.94
22.10
(2.56)
233.75
230.48
204.97
13.9%
14.5%
14.0%
Data from which to compute quarterly revisions on a
number of items has not yet been received from the Japanese
government.
When this data is available, quarterly
revisions will be computed and published. Until such time,
the 5.5% increase applicable to the products made by the
integrated producers will be applied to such products as
well.
Trigger Price Handbook Page
Item
Alloy wire rod
Light rails
Tie plates
Hot rolled bar
Cold finished bar
Welded stainless steel pipe
Hot rolled tube
Cold rolled tube
Stainless steel ornamental tube
Wire
Barbed wire
2-11 to
11-1 and
12-1 to
14-14 to
15-46 to
16-1 to
21-1
2-13
6-3
6-5
11-2
12-4
14-17
15-44
15-45
15-49
16-25
-6D.
Other Revisions
Aside from these general revisions to the trigger
prices now in effect, the Treasury Department hopes in
the course of the current calendar quarter to undertake
analyses of individual trigger prices in the light of
comments received with respect to their relationships
with other trigger prices. Further, apparent gaps in
product coverage as well as the prior inclusion of
trigger prices for products not imported in significant
quantities will be reviewed. The results of these studies
should be available not later than the next quarterly
revisions in trigger prices to be published from 60 to
90 days prior to their effective date.
Secretary of the Treasury
Dated:
Ma
^ 5'
1978
Contact:
FOR RELEASE A.M. MONDAY, MAY 8, 1978
John P. Plum
566-2615
NAC REPORTS ON INTERNATIONAL MONETARY-ECONOMIC DEVELOPMENTS
The Department of the Treasury has released the annual
report of the National Advisory Council on International
Monetary and Financial Policies (NAC) for 1977.
The 368 page report provides detailed information on
significant international monetary, economic and financial
developments and the relationship of those developments to
policies and programs of the United States.
Included is coverage of global economic trends; the
evolution of relationships among the developed and developing
countries; U.S. support of the international development
lending institutions such as the World Bank, Inter-American
Development Bank, the Asian Development Bank and the African
Development Fund, and major events in international monetary
affairs, foreign trade policy and finance, foreign investment,
and policies and problems involving foreign indebtedness to
the United States.
Appendices to the report provide extensive statistical
material on U.S. balance of payments, foreign assistance and
other U.S. Government international programs, and the activities of the principal international lending and financial
institutions of which the United States is a member.
The NAC is chaired by the Secretary of the Treasury.
Other members of the NAC at the end of the year were the
Secretaries of State and Commerce, the Chairman of the Board
of Governors of the Federal Reserve System, and the President
and Chairman of the Board of Directors of the Export-Import
3ank of the United States. Details on the organization,
functions and operations of the Council are contained in
Appendix A to the report.
Compiled and edited by Robert S. Watson, the Secretary
of the Council, the report is available from the NAC Office
in the Treasury Department and from the Superintendent of
Documents, Government Printing Office, Washington, D.C. 20402.
(Stock No. 052-071-00560-9) - Price: $5.25.
#
B-883
FOR RELEASE ON DELIVERY
EXPECTED AT 10:30 P.M.
May 8, 1978
TESTIMONY OF
ASSISTANT
BEFORE THE
OF THE
THE HONORABLE ROGER C. ALTMAN
SECRETARY OF THE TREASURY
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am pleased to be here today to advise you of the
Treasury's financing needs through the fiscal year 1979.
The present temporary debt limit of $752 billion
will expire on July 31, 1978, and the debt limit will
then revert to the permanent ceiling of $4 00 billion.
Legislative action by July 31 will be necessary, therefore,
to permit the Treasury to borrow to refund securities
maturing after July 31 and to raise new cash to finance
the estimated deficits in the budgets for the fiscal
years 1978 and 1979.
In addition, to permit the Treasury to continue
borrowing in the long-term market, it will be necessary
to increase the $27 billion limit on the amount of bonds
which we may issue without regard to the 4-1/4 percent
interest rate ceiling on Treasury bond issues.
Finally, we are repeating our earlier request for
authority to permit the Secretary of the Treasury, with
the approval of the President, to change the interest
rate on U.S. Savings Bonds if that should become necessary
to assure a fair rate of return to savings bond investors.
B-884
- 2 Debt Limit
Turning first to the debt limit, our current estimates
of the amounts of debt subject to limit at the end of each
month through the fiscal years 1978 and 1979 are shown in
the table attached to my statement. These estimates are
based on the latest budget revisions, which were released
by the Office of Management and Budget on March 13, 1978.
The table indicates that the debt subject to limit will
increase to $771 billion on September 30, 1978, and to
$860 billion on September 30, 1979, assuming a $12 billion
cash balance on those dates. The usual $3 billion margin
for contingencies would raise these amounts to $774 billion
on September 30, 1978, and $863 billion on September 30, 1979.
Thus, the present debt limit of $752 billion would need to
be increased by $19 billion to meet our financing requirements
through the remainder of fiscal 1978 and by an additional
$89 billion
to meet the requirements in fiscal 1979.
Bond
Authority
I would like to turn now to our fiscal 1979 need for
an increase in the Treasury's authority to issue long-term
securities in the market without regard to the 4-1/4 percent
ceiling. This limit has been increased a number of times,
and in the debt limit act of October 4, 1977, it was increased
from $17 billion to the current level of $27 billion. To meet
our requirements next year, the limit should be increased to
$37 billion.
The Treasury to date has used $21 billion of the $27
billion authority, including the $1-1/2 billion bond issue
which was auctioned on May 3 and will be settled on May 15.
This leaves the amount of unused bond authority at $6 billion.
While the timing and amounts of future bond issues will depend
on prevailing market conditions, a $10 billion increase in the
bond authority would permit the Treasury to continue its
recent pattern of bond issues throughout fiscal year 1979.
Thus, the Treasury would be able to make further progress
toward achieving a better balance in the maturity structure
of the debt.
- 3 Savinqs Bonds
In recent years, Treasury has recommended frequently
that Congress repeal the ceiling on the rate of interest that
the Treasury may pay on U.S. Savings Bonds. The current
6 percent statutory ceiling was enacted by Congress in 1970.
Prior to 1970 the ceiling had been increased many times, as
market rates of interest rose, and it became clear that an
increase in the savings bond interest rate was necessary to
provide investors in savings bonds with a fair rate of return.
Mr. Chairman, we do not feel that an increase in the
interest rate on savings bonds is necessary today. Yet,
we are concerned that the present requirement for legislation
to cover each increase in the rate does not provide sufficient
flexibility to adjust the rate in response to changing market
conditions. The delays encountered in the legislative process
could result in inequities to savings bond purchasers and
holders as market interest rates rise on competing forms of
savings.
Furthermore, Treasury relies on the savings bond
program as an important and relatively stable source of
long-term funds. On that basis, we are concerned that
participants in the payroll savings plans and other savings
bond purchasers might drop out of the program if the interest
rate were not maintained at a level reasonably competitive
with comparable forms of savings.
Anv increase in the savings bond interest rate by the
Treasury would continue to be subject to the provision in
existing law which requires approval of the President.
Also, the Treasury would, of course, give very careful consideration to the effect of any increase in the savings bond
interest rate on the flow of savings to banks and thrift
institutions.
Our request to remove the statutory interest rate ceiling
on savings bonds was approved by your Committee in the debt
limit bill you reported on March 3, 1978, and we understand
that that bill was not passed by the House because of its
debt limit provisions rather than the savings bond provision.
Accordingly, we are renewing our request to remove the savings
bond interest ceiling.
I will be happy to try to answer any questions.
0o0
1977
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 197 8
Based on: Budget Receipts of $400 Billion,
Budget Oultays of $454 Billion,
Unified Budget Deficit of $53 Billion,
Off-Budget Outlays of $12 Billion
($ Billions)
Operating
Public Debt
With $3 Billion
Cash
Subject to
Margin for
Balance
Limit
Contingencies
-Ac:tual-
September 30
$19.1
$700.0
October 31
7.7
698.5
November 30
5.5
709.1
December 31
12.3
720.1
January 31
12.5
722.7
February 28
7.4
730.9
March 31
6.4
739.1
April 19
10.8
745.7
April 30
9.3
737.7
1978
-Est imatedMay 31
12
751
$754
June 30
12
744
747
July 31
12
752
755
August 31
12
766
769
September 30
12
771
774
Office of the Fiscal Assistant Secretary
Office of the Secretary of the Treasury
May 3, 19 7 8
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1979
Based on: Budget Receipts of $440 Billion,
Budget Outlays of $499 Billion,
Unified Budget Deficit of $60 Billion,
Off-Budget Outlays of $12 Billion
($ Billions)
Operating Public Debt With $3 Billion
Cash
Subject to
Margin for
Balance
Limit
Contingencies
-Estimated-
1978
$12
$771
$774
October 31
12
782
785
November 30
12
793
796
December 31
12
798
801
January 31
12
801
804
February 28
12
817
820
March 31
12
829
832
April 18
12
833
836
April 30
12
821
824
May 31
12
838
841
June 30
12
832
835
July 31
12
840
843
August 31
12
856
859
September 30
12
860
863
September 30
1979
3ffi.ce of the Fiscal Assistant Secretary
Office of the Secretary of the Treasury
Ma
Y
3
'
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
MAY 8, 1978
STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE SENATE FINANCE COMMITTEE
U.S. EXPORTS AND THE TAXATION OF AMERICANS WORKING ABROAD
I am pleased to be here today to discuss the United
States taxation of the earned income of Americans working
abroad. In particular, I would like to comment on the
impact that our system of taxing Americans working abroad
may have on U.S. exports.
The Administration values the role of overseas
Americans. It wants to assure that they are taxed fairly.
At the same time, it wants to put this troubling issue
to rest so that overseas Americans can continue their
work free from the uncertainties of a changing tax law.
This Administration also recognizes that our tax policy
regarding overseas Americans has important consequences
for our trade interests.
The Administration does not believe that the present
provisions of Section 911, as set forth in the Tax Reform
Act of 1976, adequately reflect the important considerations
B-885
- 2 -
which must be weighed in formulating our policy towards overseas Americans. On February 23, in testimony before the House
Ways and Means Committee, the Administration recommeded a
system for taxing Americans working abroad which permits those
taxpayers to deduct:
(a) the amount by which reasonable housing costs abroad
exceed average U.S. housing costs;
(b) the cost of educating dependents through grade 12,
subject to a ceiling of $4,000 per year, plus the
cost of two round trips per year between the school
and the foreign residence; and
(c) the cost of home-leave travel for each family member
every other year.
In addition, the Administration proposal would liberalize
certain other provisions of the tax law affecting nonresident
citizens such as the moving expense deduction and construction
camp provisions. The basic approach and rationale of the
Administration's proposal are similar to those of the Ribicoff
bill, S9251, which this Committee has voted on favorably.
I would like to explain how these proposals respond to the
competing interests which arise in formulating a tax policy for
the foreign earned income of overseas Americans.
The debate concerning the taxation of Americans working
overseas, and the various bills introduced in Congress on this
subject, including the Administration's proposal, reflect a
- 3 fundamental policy decision: the U.S. chooses to tax its
citizens whether they reside in the United States or overseas.
The United States is the only major country that taxes wage
and salary income of its nonresident citizens simply because
they are citizens.
On administrative grounds, taxation of Americans on
the basis of residence rather than citizenship might be
easier to apply. It may also be true that nonresident citizens
derive fewer benefits from government spending than do taxpayers living in the United States. But these arguments '
overlook two basic precepts of our tax policy. First, U.S.
citizenship carries with it very considerable lifetime benefits,
and with these benefits come lifetime responsibilities. Second,
the basic determinant of tax due in our system is the ability
to pay, and not the extent of benefits received during any
given year. If we accept the citizenship basis of taxation
— and I have heard few people criticize that fundamental
principle — we are left with two principal arguments directed
against the present manner in which we now tax nonresident
citizens. I am sure you have heard these arguments before,
and I am sure you will hear them again today. It is
important that these arguments be made and heard, but it is
equally important that they be placed in proper perspective.
The first argument essentially is that the tax system
is insufficiently sensitive to the special conditions faced
by Americans overseas. The argument is that a citizen's
- 4 foreign earnings are frequently inflated to compensate
him for unusually high costs of moving and living abroad.
In some countries, housing which is barely adequate by U.S.
standards costs several times what more comfortable housing
would cost in the United States. In non-English speaking
areas, Americans may have to spend considerable amounts to
obtain education for their children comparable to that available
without cost at public schools in the United States. In addition,
costs associated with moving abroad or returning to the United
States on home-leave can be substantial.
If a citizen must earn more to maintain a U.S. standard
of living overseas and the United States taxes the additional
earnings, then that citizen will pay more U.S. taxes than a
citizen maintaining a comparable standard of living at home.
In this sense, our tax laws may place our citizens overseas
in a worse position than they would have been had they remained in the United States.
The Administration recognizes the validity of this eguity
argument, as have virtually all the sponsors of legislation
relating to the taxation of Americans working abroad. But
without additional facts, this argument is no more compelling
than a similar case which can be made for recognizing the wide
variation in living costs within the United States itself, for
which no special tax treatment is provided. Living costs in
the United States also vary considerably, and those who are
compensated for the added cost of living in expensive areas
- 5 of the United States must pay a higher percentage of their
income in taxes even though they do not necessarily enjoy
greater purchasing power than those with lower incomes in
relatively inexpensive areas of the United States. For
example, living costs in Alaska and Hawaii are substantially
higher than they are in Mississippi and Alabama.
Although overseas living costs often exceed the costs
of living in even the most expensive parts of the United
States, equity considerations alone would not necessarily
dictate that overseas Americans be treated differently from
residents of the United States. But when these issues of
equity are combined with the competitive realities facing
many overseas Americans, special consideration seems advisable.
Indeed, these competitive realities facing overseas Americans
can have important consequences for our trade balance.
Unlike Americans working within the United States,
Americans working overseas are often subject to higher tax
burdens than persons of other nationalities in the same
income bracket. Because the United States is virtually unique
in taxing the earned income of its overseas citizens, Americans
working in a country imposing low tax rates must pay higher
taxes than citizens of other nations living in that country.
In countries imposing taxes comparable to or higher than
those in the United States, Americans are not placed at
a disadvantage by virtue of U.S. taxes since the local tax
system acts to equalize the taxes paid by local residents,
- 6American or otherwise. As you know, Americans are permitted
to credit such foreign income taxes paid against their
federal income tax liability, and, thus, are not subjected
to double taxation. These points may be simply illustrated:
An American and a French citizen living in New York City pay
approximately the same income taxes assuming they have
comparable incomes and situations; this same relative position
holds true if they move to Stockholm, Sweden, because of the
fact that Swedish income taxes are higher than United States
income taxes. But these same individuals living in Jeddah, »n
Saudia Arabia bear very different tax burdens. Although them
American in Jeddah continues to pay U.S. income taxes, the
Frenchman living in Jeddah does not pay any income taxes, ri
either to France or to Saudia Arabia. This basic disparity
supports treating the earned income of overseas Americans
differently from the earned incomes of United States residents.
The consequences of this disparity for our trade balance
are difficult to quantify. To the extent that overseas
Americans must bear a heavier tax burden than other nationals,
they either will expect higher compensation or must accept
less take-home pay than others with comparable incomes. In
either case, the result is to foster the replacement of
Americans in overseas employment by nationals of other
countries. When overseas Americans are replaced by foreign
nationals, the U.S. economy loses an employment opportunity
and the remittances to the U.S. which normally accompany such
- 7 employment. However, from a trade perspective there can be
even more important adverse effects. From my own experience
in living and doing business abroad, I know that an American
engineer is much more likely to specify American products,
which he has used and with which he is familiar, than a French
engineer who is familiar with French products. The overseas
employment of an American engineer thus creates jobs in the
United States. Given the falling share of the U.S. in world
manufactures trade, and our present trade deficit, we need
the exports that are created by the employment of overseas
Americans.
The Administration proposal does not totally eliminate
the disparity in the tax treatment of overseas Americans
and persons of other nationalities. The disparity is rooted
in our citizenship approach to taxation. But our proposal
ameliorates that disparity. By recognizing excess overseas
costs in the tax law, Americans residing in countries
where they would experience the most extreme tax disparity
in comparison with nationals of other countries would
obtain the largest tax benefits while those experiencing
relatively small disparities would receive lesser benefits.
In particular, our proposal will confer a significant portion
of its tax benefits on Americans working in the Middle East,
where there is a considerable promise of generating U.S. exports.
Reasonable people may differ on how to resolve the
competing considerations which arise in formulating tax policy
- 8 in this area. We believe the Administration's proposal
represents a fair and practical solution to this important
problem.
Mr. Chairman, I will be happy to answer questions.
REMARKS BY
W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE
ANNUAL CONFERENCE
OF THE
FINANCIAL ANALYSTS FEDERATION
BAL HARBOUR, FLORIDA, MAY 8, 1978
Today's subject for discussion, capital formation, raises
some of the most vexing and important economic problems facing
the country.
Like college football, economic policy has too many
candidates for the "number one" position: inflation,
unemployment, growth, poverty — a parade of problems, each vying
for priority attention. In this spirited rivalry, capital
formation often gets shoved to one side. In the popular mind, it
is too often labelled a "business issue" and for that reason
assumed to be of only parochial concern.
This is unfortunate, for the subject, despite all its
technicalities, boils down to questions of overriding public
importance:
Are we saving enough?
Is our financial system adequately tapping those savings
and presenting then in optimal form to those wishing to make
productive use of them?
Is the resultant real investment sufficient to our future
needs, both in volume and in composition?
Unless we are doing each of these things — saving enough,
passing those savings optimally through the financial system, and
then investing them wisely — we are going to find ourselves in
serious, long term trouble.
I wish I could say with confidence that we are doing each
of these things and doing them well. But my conclusion is
exactly the opposite. In my judgment, this economy shows
dangerous signs of underinvestment and misinvestment. As with
every important issue in economics, the evidence is much more
fragmentary and murky than we'd like. But the record here cannot
be explained away. What it says is that we are not laying an
adequate foundation for our future prosperity.
Let me begin with the evidence on savings. For some time
n
ow, American households have been saving no more than 6 percent
of their disposable income. We are, in that basic respect, the
quintessential "consumer society." This—we are told by all
B-886
-2prophets—is where every other successful nation is heading, or
wishes to head. I wonder. Our 6 percent looks very strange in
international comparisons. The Canadians save 10 percent of
personal disposable income, the British 14 percent, the Germans
15 percent, the French 17 percent, the Japanese 25 percent.
These are not comforting figures.
Of course, they do not tell the whole story. The low
savings rate of American consumers has traditionally been
balanced by the relatively high savings rate of American
business. By international standards, our business sector
finances an exceptionally large share of its capital formation
through internal cash flow.
The problem is that, while our personal savings rate has
remained low, the financial self reliance of our business firms
has apparently suffered a secular decline. In the mid-1960's,
the flow of internal funds just about matched the fixed and
variable capital expenditures of our business firms. By 1977,
however, internal funds stretched to cover only about 80 percent
of capital spending.
Whether we look at personal savings or business savings,
whether we compare ourselves internationally or to our own past
experence, we arrive at the same conclusion: We are not setting
aside enough of today's income for tomorrow's growth. We are
skimping on our future.
The growing dependence of our busines firms on external
financing leads me to the second area of inquiry: the fitness of
our financial system. As business looks increasingly to the
financial markets to fund its investment, those markets assume
central importance to our prospects for capital formation. We
have of course exceptionally well developed capital markets, the
most sophisticated and efficient in the world. These markets
clearly do an excellent job of tapping savings. But do the
markets make those savings available in optimal form to
businesses wishing to make real investments?
Again, the evidence is disquieting. More and more, what
the capital markets offer is loans. By contrast, what is needed,
more and more, is equity financing.
The capital structure of American enterprise increasingly
reflects this questionable tilt in the financial system. The
ratio of debt to equity for manufacturing companies has risen
from about 25 percent in the early 1960's to 40 percent at the
end of last year.
This piling up of fixed claims makes our businesses much
more vulnerable to the swings of the business cycle, in the
extreme case by heightening the risk of bankruptcy. An
increasing reliance on debt reduces the willingness and ability
of companies to venture into untested markets and new
technologies.
-3-
The problem is greatest for new companies, and for small
and medium sized ones trying to market new ideas and new
technology. For these enterprises, the relative shortage of
equity financing translates into an absolute shortage of any kind
of capital. They never get started, or they die young, or they
sell out swiftly to larger, established concerns.
What these financial trends mean no one can say with
certainty. But I find it hard to argue with common sense: the
fall-off in equity capital, it seems to me, can hardly help but
encourage a trend toward dominance by larger companies, a
corporate sector abnormally skittish about economic fluctuations,
and a dearth of new, small companies dedicated to testing,
generating and spreading technological innovations.
I turn now to real investment in plant, equipment, and
productive processes. This is the crux of the matter.
nfThe record here is particularly grim.
Consider the period 1960-to-1974, before the last
recession. In the United States, non-residential fixed
investment averaged 13-1/2 percent of national output. The
average was 18 percent for the larger OECD countries. It was 20
percent for West Germany, 25 percent for Japan. As one might
expect, these differentials in investment contributed to sharp
differentials in average real growth rates over the period: For
the U.S., 3.8 percent; for Germany, 4.6 percent; for Japan 9.7
percent.
Last year, of course, the situation reversed itself.
We grew considerably faster in real terms than most OECD
countries. Our rate of growth in real investment, about 8
percent, also outpaced that in many of those countries. But I
see little to suggest that this relative success of ours, in
climbing out of 1974-75 recession, portends a long term recovery
of our growth prospects. For that to occur, a genuine sea change
is needed in the trend of private investment.
kedly " I V / L C UllO.11 1 Q O U J f C C l l . . J- L. A »3 V C t JT «i» Sm t~r »J \- w. * * v, J. V* -t J. J
roore than recenttrends. Looking at the 1970's as a whole, the
^ increase
-mv^^aoc in real investment has been less than 2 percent.
annual
We are very far behind schedule. Unless we begin catching up,
and quickly, we will pay a serious price in the 1980's.
Our recent investment experience stands in sharp contrast
wn uhe 1 9 6 ° l s During those 10 years, productive capital per
porker was growing at about 3 percent. In the last five years,
has been virtually stagnant. As a consequence, the growth in
-4productivity - output per worker - has fallen off by about 25
percent since the 1960's. If this trend persists, we will fail
to build plants and to supply tools fast enough to keep our labor
force adequately employed. At the same time, we will ensure that
every wage increase is inflationary and that each major increment
of output runs into inflationary bottlenecks. In a word, we will
ensure a future of stagflation.
Quite apart from the volume of investment, we have serious
problems concerning its composition. There is not time today to
explore in any depth whether we are making the right investments,
in the right kind of enterprises and in the right sectors. But I
do want to mention briefly two of these structural issues.
One is that we are now devoting a very sizeable chunk of•
our private investment to meeting government regulatory
standards. This investment will, in many cases, produce needed
social benefits: cleaner air, purer water, a healthier populace.
But, like every other desirable product, these things come at a
cost, and in some of these areas we may well be reaching a
breaking point. Investment in environmental capital now accounts
for about 9 percent of investment outlays in the manufacturings
sector. If you exclude those mandated expenditures, investment
as a share of value added has actually declined in the
manufacturing sector since 1966.
s
Lu
My other major concern about the composition of our
investment relates to advanced technology. The stakes here are
exceptionally high. In international trade, we depend very
heavily on our exports of R&D intensive manufactured products.
Indeed, in manufactured products that are not R&D-intensive, our
trade balance is negative. Unfortunately, our investment
patterns are doing far too little to preserve our comparative
edge in high technology products. As a share of GNP, R&D
spending declined in the United States by more than 25 percent
between the mid 1960's and the mid 1970's. Scientists and
engineers, as a share of the population, have also declined,
while that ratio has increased in the Soviet Union, West Germany,
and Japan. The number of U.S. patents granted to foreign
residents has doubled. Our acquisition of foreign patents has
declined.
These are mere straws in the wind; but it seems quite clear
to me that the wind is blowing strongly in the wrong direction.
Our technological supremacy is not mandated by heaven. It can
disappear. Unless we pay close attention to it, and invest in
it, it will disappear.
All this leads me to the big questions: Why has capital
formation, in nearly all its aspects, reached such a sorry state
in this country? And what can we do about it?
One hears all sorts of sociological explanations:
Americans have lost their spirit or nerve; our entrepreneurs have
become less entrepreneurial; the genius for invention has fled
-5away, across the Pacific; some sort of cultural exhaustion has
crept in, fog-like, from across the Atlantic.
Such theories are entertaining, but I don't believe them.
In my judgement, investment is lagging for the simple
reason that it has become less profitable. The rational
investor, before he leaps, looks to expected real returns and to
the probability of getting them. This vista of return and risk
has been deteriorating.
After-tax rates of return on capital — reflecting the
replacement cost of captial — have declined from around 8
percent in the mid-1960's to between 3 and 3-1/2 percent in
recent years. That's a very substantial fall-off. As a percent
of corporate product, profits have declined from more than 11
percent in the mid-1960's to around 8 percent in recent years.
We are under investing because it no longer pays enough to invest
enough.
At the same time that real returns have fallen, the
riskiness of investment has substantially increased. The sources
of uncertainty have been many and powerful. The 1970's brought
back the business cycle with a vengeance, and then twisted the
cycle so as to give us both unemployment and inflation
simultaneously. Government added to the shock by controlling
wages and prices. These controls eventually disintegrated, but
memories of them have lingered on. All through this period, the
government applied layer after layer of complicated new
regulations, some cost effective, some clearly not. Perhaps more
important, the very process of regulation introduced bureaucratic
delays and costly confusions into nearly every productive
enterprise in the nation. For many businesses, particularly
small and new ones, the gap between a productive idea and a
foreseeable profit widened into a forest of red tape.
So the sources of our plight are many, but they come down
to a simple diagnosis. Profits are too low, and they are too
uncertain.
How do we turn this situation around?
The most important thing is to assure that the fact of, and
the causes for, our plight receive the highest level of attention
within the federal government.
I have made today a number of international comparisons of
a statistical nature. But the most important comparison cannot
°e quantified. It concerns the atmosphere of relations between
government and those responsible for private capital formation.
in the case of most of our major trading rivals, these relations
are close, supportive, and understanding. In the United States,
this has not been the custom. The public and private sectors
have viewed each other with a certain, prickly mistrust. This
-6has had consequences across the board. The most important
consequence is that government has a very imperfect knowledge of
what it can do—and what it must refrain from doing—in order to
promote capital formation.
President Carter is acutely aware of this problem and has
elevated the issue of private capital formation to a high level
of Administration concern. The White House is conducting an
important Presidential review of technological innovation in the
American economy. The President has also established a
Cabinet-level task force on national export policies, to report
within the next few months. The need to increase investment has
dominated many meetings of the Cabinet Economic Policy Group,
which sets our overall fiscal policies.
-1B
Given my own deep concerns, I have now established a
permanent Treasury task force, at the highest levels, to examine
the financial aspects of capital formation and what can be done
about the shortage of equity finance. This group will reach
beyond the Treasury and integrate, for the first time, the
expertise and policy views of the several executive and
3U
independent agencies that regulate, and operate in, the nation's
capital markets. What the federal government does in and to the
financial markets very substantially determines their vigor and
efficiency. This task force will give us, finally, a means to
analyze and coordinate those federal actions in a coherent
fashion.
Much of this work is in an early stage. There is a great
deal about the problems of capital formation that we simply do
not know. But already, some things are clear enough.
The first is that government must work to reduce the
uncertainties and risks which its own mistakes have injected into
the investment process.
Above all, this means controlling inflation. Inflation is
now, indisputably, the chief threat to our continued prosperity.
Bringing it to heel is item one on the Administration's economic
agenda, overriding all other concerns.
Public attention now centers on a possible re-acceleration
of wage and price increases. Preventing a re-acceleration is
obviously essential. However, it is also not enough. I am
firmly convinced that private investment in this country will
remain sub-optimal until we bring down the rate of inflation.
Inflation raises construction costs ahead of prices, squeezes
profits, generates high interest rates, and - most importantly creates pervasive uncertainties. In such a climate, this economy
cannot and will not build adequately for the future.
To reduce the cost and riskiness of investment, we must
also rethink our approach to government regulation. Before we
add further layers off regulation, for whatever purpose, we owe
-7it to our furture prosperity to undertake a meticulous audit of
the economic trade-offs. Last month, the President put in place,
through Executive Order, a stringent inter-agency procedure to
assure that just such an analysis takes place, in the case of
every new Executive Branch regulation. I personally hope we can
move toward a genuine "zero base" regulatory budget — a system
of accounting and control to assure that the costs of existing
regulations are weighed against the social gains expected from
them. In the meantime, we need a significant streamlining of
regulatory procedures — to bring a measure of certainty,
clarity, and common sense to the daily interaction of government
and industry.
Mi
By acting on inflation and over-regulation, we can reduce
the abnormal, economy-wide risks that are retarding investment.
The chief drag on investment, however, is low
profitability, an inadequate real rate of return on capital. For
this problem one of the important remedies has to be tax policy.
In constructing the tax package for this year, we consulted
exhaustively with all sectors of the business and financial
communities and conducted a very thorough examination of the
structure of capital income taxation. We reached several major
conclusions, shared by nearly everyone we consulted.
The key conclusion was that, to increase investment, it is
vital to increase the profitability of American industry. This
means cutting business taxes — to boost the real rate of return,
to provide an increased cash flow, and to improve the ratio of
equity to debt on corporate balance sheets.
The second conclusion concerned the way taxes should be cut
on capital income. We were advised, by virtually every segment
of the business and financial communities, that the simplest,
most balanced, most effective—and most popular—way to reduce
taxes was through broad and general reductions in corporate tax
rates.
inally, LUL sma-L± Dusmess, we provide
simplified procedures for depreciation.
-8-
Obviously, there are other ways to cut taxes on capital
income. In taxation, nothing is simple. We gave careful study
to such issues as the special tax rate on capital gains, the
double taxation of dividends, the distinction between earned and
unearned income, and the problem of inflation adjustments in the
tax system. The complex structure of taxes on capital income
offers virtually endless opportunity for innovation and
tinkering.
But the advice we received, uniformly, was to stay away
from any such tinkering this year, to keep our package simple,
and thereby minimize delay and uncertainty. To alter the
intricate structure of capital income taxation is not a job for a
short legislative session. Each of the structural issues is
technically difficult and politically controversial on its own,
and the issues are so closely related to each other that it is
not only irresponsible but virtually impossible to alter one
piece of the structure without dealing with many other pieces at
the same time.
For the longer term, a thorough review of this structure is
clearly in order. I personally would like to see the double
taxation of dividends receive very close attention in any such
study. But this, of necessity, requires reconsideration of the
capital gains issue and also a review of the present distinction
between earned and unearned income in the individual tax system.
Obviously, there is no time in this Congress to undertake
such an effort. A detour into these structural issues can only
endanger the broad consensus needed to enact the President's
program of deep, general corporate and individual rate cuts. If
that should happen, the prospects for urgently needed, long term
investment would be seriously prejudiced. That is why the
Administration is strongly resisting any and all efforts to open
up the structual issues of capital income taxation.
This has been a very rapid tour of a very complicated and
controversial subject. At almost every stage, I'm afraid, my
conclusions have been rather somber.
The facts are inescapable: we are not saving enough; our
financial system is providing insufficient equity capital; we are
not investing near enough in productive plant, equipment and
technological innovation; profits are too low, and they are too
uncertain.
We must turn this situation around. I am convinced we can
do so. The President not only appreciates the problem; he has
oriented his entire fiscal policy toward solving it, and he is
mobilizing the full resources of the government to subject every
aspect of the issue to expert scrutiny. We in the Treasury are
fully dedicated to this effort.
-9What is now essential is that the Congress and the country
also understand the dimensions of these problems. Your program
today is an important step in that direction. I congratulate you
on your prescience and thank you for the opportunity to
participate.
FOR RELEASE UPON DELIVERY
SATURDAY, MAY 6, 1978
REMARKS BY HELEN B. JUNZ
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR COMMODITIES AND NATURAL RESOURCES
BEFORE THE
COMMITTEE ON FOREIGN AFFAIRS
CHICAGO COUNCIL ON FOREIGN RELATIONS
WOODSTOCK, ILLINOIS
United States Trade Relations
With Developing Countriels
Only a few years ago, we used to discuss trade'relations with developing countries in terms of "trade, not
aid," or of how cyclical disturbances that affect demand for
primary goods tend to disrupt development'plans.'On the
whole, our discussions were'couched in terms of the developing countries' dependence on us. Recently,' however, the
focus has shifted and we now hear increasingly about LDC
import penetration, with some even talking about "overcompetitive" LDCs.
These kinds of concerns have been given further impetus
by the massive U.S. trade deficit and by high unemployment
in a number of industries/ This has led to considerable
pressure for solutions that would shield affected industries
from import competition. In this process, however, it is
B-887
- 2 often forgotten that the LDCs are not only major suppliers
to our markets, but are also among our best customers.
Furthermore, the solutions to our external payments and
unemployment problems do not lie in closing our borders
to foreign competition.
The U.S. Trade Deficit
yV
'
Our trade deficit in 1977 rose to $31 billion and we
expect a deficit of similar size in 1978. We cannot and
should not look upon such deficits with equanimity. But, we
should neither accept them as prima facie evidence of economic weakness on our part nor seek their causes in LDC
competitiveness.
First, we must not forget that the one trade surplus we
have registered since the. oil price increases of 1973-74 —
that of 1975 — reflected the trough of the deepest recession
we have experienced since World War II. Since then, we have
not only have recaptured our previous peak level of output,
but have actually surpassed it by 9.3 percent. In addition,
we created four million new jobs in 1977 alone and have
reduced the unemployment rate to its lowest level since
1974. In our economy, which is increasingly inter-linked
with others, such growth is necessarily associated with
- 3sizeable increases in imports.
Second, in contrast with
the healthy growth of our domestic market, foreign economies
have made much less progress in absorbing spare capacity.
Consequently, our export markets have been growing slowly.
The third, and most important, factor in the shift in
our trading position is our high foreign energy bill. U.S.
oil imports cost $45 billion in 1977 — up from less than
$5 billion as recently as 1972. Increased import volume
alone would have raised the bill only to $9 billion; higher
prices account for the remaining $36 billion. While our
sales to OPEC countries have increased, our trade deficit
with them has amounted to about $20 billion. As long as
oil exporting nations cannot spend all they earn on imports
of goods and services, we, as other major oil importing
nations, should expect to run continuing deficits with them.
However, $20 billion clearly is excessive.
Some part of our deficit with OPEC, however, has not
been demand-related. The volume of our oil imports, in
contrast to developments in virtually all other oil-importing
countries, has risen because of reduced domestic energy
output as well as higher domestic consumption. Over the
last five years, domestic production has declined by 1.5
million barrels per day, while consumption has increased by
2.5 million barrels per day. Roughly 40 percent of the
increase in the volume of U.S. imports since 1972 can thus
- 4 be attributed to reduced production and 60 percent to
increased oil consumption. As a consequence, for every
one percent increase in GNP, our oil imports have grown
by two percent. The erosion of energy output in the lower
48 States, of course, was underway before the oil price
increases. It it is now being partly offset by rising
Alaskan oil production. Consequently, our dependence on
foreign oil — now around one-half of total requirements —
is no longer increasing. But there is no question that it
remains much too high.
Fourth, we may have seen some deterioration in our
competitive strength, mainly because we have not made as
much progress on reducing inflation as is needed. Recent
changes in exchange rates, however, have improved our
relative price position vis-a-vis foreign suppliers.
In sum, the major factors in the large increase in our
trade deficit are:
(1) relatively strong economic growth at home;
(2) relatively slow growth of our export markets;
(3) large energy imports; and
(4) insufficient progress on reducing inflation.
Clearly, we must continue our policies of sustained
growth which requires accepting the import increases
associated with it. We must guard against a resurgence of
inflationary pressures and must take advantage of the compe
titive potential created by the recent depreciation of the
- 5 dollar.
Finally, and most important, it is imperative
that we address our energy problem in a fundamental manner.
Trade Creation Versus Trade Restriction
While appropriate macro-economic policies here and
abroad and an active energy policy will do much to reduce
our trade deficit, there remains the need for adjustment,
or accommodation, to structural changes in the world economy.
During the last generation, the world trading system remained
open, and in fact was liberalized in the face of considerable
adjustment needs. The most notable adjustment took place in
the late 'Forties and early 'Fifties as we moved from a
post-war supply shortage to a more normal demand and supply
balance. Because of the post-war supply constraints, adjustment to the increase in productive capacity that accompanied
post-war reconstruction, particularly in Germany, was achieved
relatively easily. The need to adjust to the emergence of
Japan as a modern industrial nation in the 1960s posed
different problems. These, however, were smoothed by
rapid expansion of world demand.
During the 'Seventies and 'Eighties, we will need to
adjust to the increase in productive capacity that is occuring
in a growing number of developing countries. Currently,
we face the task of accommodating these changes in a climate
of subdued growth, complicated by the external and internal
- 6 problems associated with the adjustment to the higher
relative price of energy.
Under these circumstances, the rapid industrialization
of a number of developing countries, particularly as it is
concentrated on a relatively small number of industrial
sectors, such as textiles, shoes, electronics, steel and
more recently shipbuilding, is causing friction in a number
of markets. Thus, it is not surprising that certain
industries or segments of industry have become increasingly
concerned about import competition. And, it may be only
natural that many of these concerns are focused on imports
from developing countries, which benefit from the double
advantage of low wages and preferential tariff treatment.
Although these concerns are justified to some extent,
they have given rise to the unjustified conclusion that the
only way to deal with these problems is to close our border
to protect our industries and labor from import competition.
It is true that in developing countries, wages are significantly lower than in the United States. But these wage
differentials in themselves do not indicate anything about
competitive positions. Higher U.S. wages reflect our higher
productivity and our industrial structure, which are the mainspring of our greater wealth and higher living standards.
Our output embodies not only a very large amount of physical
- 7 capital investment, but also an enormous amount of investment
in human capital. As a result, our competitive performance
and our comparative advantage are greatest in the areas of
high technology goods and product innovation, and least in
areas requiring the input of unskilled labor. This is evident
across the whole spectrum of economic activity, be it
agriculture, industry or services.
In the older, more basic industries, higher wage levels
may handicap our competitive position, but our high level
of productivity — as distinct from change in productivity —
continues to assure a certain market share even in those
sectors. Nevertheless, there is no question that with growing
industrialization in LDCs, the industrialized countries
cannot expect to maintain the same dominant position in
world markets to which they have become accustomed. We, as
other developed countries, must expect to meet increasing
competition from developing countries in our own and in
world markets.
However, I believe proponents of the protectionist argument view these developments in a one-dimensional way. As
developing countries become more highly industrialized, they
also become increasingly profitable markets for our products
and absorb a wider range of goods and services. On the
same basis, we reject the assertion that our foreign aid and
investment abroad are detrimental to our own economic interests.
Aid and investment flows to the developing countries — like
Marshall Plan aid to Europe — assist in raising per capita
- 8 incomes and foreign exchange earnings in recipient countries.
As a consequence, these countries are better able to satisfy
growing pressure for increased standards of living at home
and in the process buy more goods and services from abroad.
As purchasing power rises, so will social and economic
aspirations, and gaps between wage payments among developed and
developing countries will begin to narrow. We are already
seeing some evidence of this process. For example, although
levels of wage compensation, on average, continue to be well
below those of the industrialized countries, hourly compensation in manufacturing industries in a number of rapidly developing countries, such as Brazil and Korea, have tended to double
over a two to three year span, while increases in developed
countries tend to average around six to nine percent per annum.
The consequences of industrialization and concomitant
rises in per capita income are reflected in the substantial
growth of the import markets of developing countries.
Recently, of course, the limelight has been on the increased
purchases of oil exporting countries. But the markets of
non-OPEC developing countries also have expanded rapidly.
U.S. exports to all LDCs rose from $12-3/4 billion in
1970 - 72 to $41-3/4 billion in 1977, lending considerable
support to economic activity during the recession. Although
exports to OPEC rose from about $2-1/2 billion in 1970 - 72 to
$14 billion in 1977, those to non-OPEC LDCs rose to an even
greater extent -- from $10-1/4 billion to $27-3/4 billion.
In fact, we often tend to overlook that as a market the
- 9 non-OPEC LDCs are more important to us than the entire
European Community. Non-OPEC LDCs account for about onequarter of our total export market, as well as for onequarter of our exports of manufactured goods. The EC
accounts for more than one-fifth of total U.S. exports and
for a shade under one-fifth of exports of manufactured goods.
When OPEC is included, LDCs account for more than one-third
of our total exports and almost two-fifths of exports of
manufactures.
Interestingly enough, our exports of manufactures to
non-OPEC LDCs have grown faster than our manufactured imports
from them. Exports rose from $7 billion in 1970 - 72 to
$18-1/2 billion in 1976, while our imports grew from
$4 billion to $13 billion, raising our surplus to $5-1/2
billion. This illustrates the point that with growing
industrialization, both imports and exports of manufactured
goods expand as intra-industry trade intensifies.
Although all LDCs have shared in the rise in our imports,
the major portion, about $11 billion of the total $13 billion
of manufactured imports from LDCs is concentrated among eight
suppliers. These are: Brazil, Mexico, Taiwan, Hong Kong,
Singapore, Philippines, South Korea and Malaysia. Our
structure of trade with these countries has changed over
time with the importance of manufactured goods increasing.
Whereas in 1971 - 72, manufactured goods accounted for
- 10 55 percent of our imports from these countries, by 1976
that share had risen to 65 percent.
Total imports into the United States from these
countries rose from about $6 billion in 1970 - 72 to
$21 billion in 1977, an average annual growth rate of
close to 25 percent. This approximates the annual growth
rate of their exports to all industrial countries. Consequently, these countries account for the major portion of
the expansion of LDC import penetration into industrial
country markets. In addition, they are turning out to be
formidable competitors in third world markets, particularly
in OPEC countries. Brazil, for example, has captured a
significant share of the automobile market in OPEC.
Looking at our export performance in the markets of
OPEC, it appears that we have been losing some competitive
edge. Between 1970 - 72 and 1977, we experienced a loss of
market shares in almost all major commodity categories, except
in electrical machinery. In a number of these markets,
particularly Venezuela and Saudi Arabia, we have long been
the dominant supplier. It is not surprising that we should
experience some diminution of our market shares as other
countries discover them to be lucrative markets and compete
more fervently to offset their oil deficits by sales of
goods and services. Thus, we, as well as the British and
-lithe French, have lost market shares in OPEC especially to
Germany, Japan and Italy, who have tended to increase
their shares from a relatively low base.
But, part of our loss in OPEC market shares has been
in countries which experience particularly dynamic growth —
the so-called "high absorbers" — and are not part of our
traditional markets. We apparently have been unable or
unwilling to capture a significant share of this rising
demand. For example, we are currently spending about
$6 billion, largely on oil, in Nigeria and have become
Nigeria's most important customer. Nevertheless, out of
total industrial country exports of $7-3/4 billion to
Nigeria, we supply less than $1 billion.
However, when we look at our competitive performance in
the markets of non-oil developing countries, it appears that
we have done relatively well. In real terms, we have either
maintained or increased our average 1970 - 72 market share.
When we break down our market shares by commodities, we
also appear to have done well, except in automobiles. One
particularly interesting trend is that we have increased our
exports of consumer goods significantly since the dollar
devaluation of the early 1970s. While consumer goods still
represent only about 16 percent of our total exports, it
is evident that the downward trend of the 1960s of our
market share has been reversed.
- 12 The most dynamic markets among the non-oil LDCs have
been those of the eight rapidly growing countries noted
earlier. Industrial countries' exports to these eight LDCs
rose from $13-1/2 billion in 1970 - 72 to $40 billion in
1977. U.S. market shares improved slightly as our exports
rose from $5-1/4 billion in 1970 - 72 to $15-1/2 billion in
1977. Our performance in 1977, however, fell well below
the average annual rate of growth of over 20 percent for
the period and also below that of other industrial countries.
To some extent, this reflected the stabilization programs
adopted by Brazil and Mexico, two of our most important
customers, but also some loss in market share in some of
the other countries.
Adjustment Needs and Policy Responses
The emergence of some LDCs as increasingly important
and complex trading nations may have some implications for
the way in which we think about the division of labor among
countries. We normally view the comparative advantage of
less developed countries as residing in their natural
resource endowment and in the fact that labor is relatively
cheap. But, this view may no longer be fully adequate.
The fast growth of capital formation in most of these
countries means that competition is manifesting itself not
only in terms of the relative cost of labor, raw materials
and transportation, but perhaps to an even greater extent
- 13 in terms of competition of modern capital equipment against
an aging capital structure in the more mature economies.
The fact that private investment is continuing to lag in
most of the industrial economies, while a number of the
newer industrializing countries provide promising investment opportunities, strengthens this argument as does the
determination of a number of OPEC countries to increase
their industrial potential.
Continuing pressures of competition from developing
countries, thus will be a fact of life for the foreseeable
future. But, defensive actions against such competition
would only be counterproductive. Developing countries,
already among our most important customers, are likely
to become even more so. Even the most optimistic forecasts
of growth for the OECD area do not foresee growth rates
much above those achieved during the last couple of years;
and the explosive growth of OPEC markets has begun to
stabilize. Consequently, the non-OPEC LDCs are likely
to furnish the most dynamic markets for exports of industrial countries for some time to come. U.S. import
restraints vis-a-vis LDCs could, therefore, result in a
considerable loss of high wage export jobs and income.
First, because income losses abroad would cut into foreign
purchasing power and second, because such restrictive
- 14 actions could easily spread across borders.
But, all the
benefits from keeping an open trading system can be
realized only if we maintain our competitive position in
these expanding markets.
Positive adjustment to the growing industrial potential of LDCs requires not only that we avoid an increase of
rigidities in our economic system, but that we act to reduce
them. Where there is a legitimate need for assistance to
domestic producers in case of substantial injury from
import competition due to unfair foreign trade practices or
disruptive changes in trade flows, measures should aim to
facilitate adjustment rather than shield the economy from
competition. And such measures should be decided on a
case-by-case basis. More generally, we need to assure
flexible responses of the economy to competition at home
and abroad. This can best be achieved through policies of
sustained non-inflationary growth on the macro side and
policies aimed at reducing risks and uncertainties associated with government regulations on the micro side.
Positive adjustment must, however, be a two-way street.
The success of a number of developing countries in world
markets reflects the fact that they have invested in export
oriented industries and have channelled their savings
largely into productive investment rather than consumption.
However, past experience shows that at a certain point in
- 15 the development process, adjustment measures need to be
taken so as to avoid the emergence of chronic surpluses,
which reduce the welfare of the domestic population and
put strains on the international trading system. Thus,
some of the surplus LDCs have recognized the desirability
of reducing their surpluses. In general, they have tended
t£ reduce tariffs and liberalize imports rather than
remove export subsidies or appreciate their exchange rates.
It may be natural for them to believe their surpluses only
to be temporary and therefore to be cautious in liberalizing
their trade relations. But for some, the time may have come
when it is appropriate to begin to accept more fully the
general rules and obligations applying to trading nations
under the GATT and the IMF.
The developing countries seek to establish a new set of
trading rules in the current Multilateral Trade Negotiations
(MTNs) that would recognize permanently preferential treatment for their products in industrialized countries' markets
and would permit protection of their own markets for the
benefit of their "infant industries." Institutionalizing
"special and differential treatment" for developing countries
in a generalized way would be harmful to the international
trading system. There are circumstances and cases which
- 16 temporary.
As the development process proceeds and countries
emerge as important trading nations, they must increasingly
undertake the full obligations of the trading system. This
means not only gradual reduction in preferential status, but
also an increasing degree of reciprocity for tariff
reductions and other concessions extended by the industrialized countries. This would include a graduation
from the benefits extended by generalized systems of
preferences and reductions in subsidies to exports and
in tariff barriers.
Not only would a gradual acceptance of the rules of
the international trading system actually benefit those
developing countries that are increasingly in a position
to accept them, but it would also assure that those developing
countries which continue to need the benefit of unilateral
trade concessions can, in fact, continue to receive them.
For example, the eight countries discussed earlier receive
about three-quarters of the benefits extended under our
generalized system of preferences. The political support
for continued extension of such preferences is not strong,
to say the least, under current circumstances. If the
lion share of such benefits continues to accrue to countries
that no longer appear to need them, and for commodities that
- 17 tend to compete with the weak sectors in our economy,
such preferences may well erode and, as a consequence, be
withdrawn from those who need them and those who no longer
appear to need them alike.
Our trade relations with developing countries indeed
should be based on differential treatment, that is, we
must differentiate among LDCs, so as to be able to continue
to accord "preferential and differential" treatment to some.
For those who have become successful trading nations, active
participation in international trade must increasingly
come to mean active and" more equal participation in the rules
and obligations that keep the system liberal.
Only in this
way can protectionist pressures in industrialized countries
be resisted and special benefits continue to be extended
to those who need them most.
o 0 o
Table 1.
Exporter:
Share o:f Exports to
OPEC
1977
1976
1970-72
Share of Industrial Countries' Exports to LDCs
(Percent Based on 1975, Dollars)
Share of Exports to Non-OPEC LDCS
Total Non-OPEC LDCs
1970-72
F97"6 VTTT
Africa
Latin America
1970-72
"T37T5— wrr
1970-72—Tm
Asia
1970-72
vrrr
—T97o"
1977
24.8
23.2
22.0
30.5
32.6
30.9
45.3
49.7
48.8
10.3
10.7
10.2
27.4
29.3
28.0
Canada
2.3
1.5
1.5
2.8
2.3
2.4
4.0
3.6
3.5
1.0
1.2
1.1
2.4
2.0
2.2
Japan
14.5
18.1
18.1
20.5
22.1
22.7
7.9
10.2
11.0
10.5
6.3
6.7
39.2
42.1
42.1
France
12.4
10.0
9.7
9.5
10.2
10.6
6.4
6.4
6.9
27.5
32.7
32.4
3.7
4.2
4.1
West Germany
13.1
15.8
16.7
10.1
10.0
9.7
12.1
10.6
10.1
11.1
12.5
12.7
7.5
6.9
7.2
7.9
8.6
9.1
4.4
3.9
4.2
4.3
3.7
3.6
7.5
6.7
7.5
2.0
1.6
1.8
12.3
10.1
10.2
10.1
7.9
7.9
7.4
5.4
5.4
13.5
10.6
9.7
9.7
7.0
6.8
Belgium
2.4
2.5
2.9
2.3
2.1
2.3
1.9
1.4
1.4
5.0
4.2
4.3
1.6
1.6
2.1
Netherlands
3.7
3.3
3.1
3.0
2.6
2.6
2.7
2.0
2.2
4.8
5.1
4.9
1.9
1.5
1.5
Sweden
1.5
1.9
1.6
1.9
1.6
1.6
2.3
2.1
1.7
3.0
2.6
3.1
1.0
1.0
1.0
Switzerland
2.6
2.2
2.4
2.2
1.9
2.0
2.6
2.2
2.2
1.5
1.6
2.0
2.0
1.6
1.8
Ireland
.1
.2
.3
.1
.1
.2
.1
.1
.2
.1
.2
.2
.0
.1
.1
Austria
.7
1.1
.9
.5
.6
.5
.4
.4
.4
.6
.8
.9
.4
.4
.3
Denmark
.8
.7
.7
1.1
.8
.8
1.3
1.1
1.2
1.6
.9
1.0
.6
.3
.4
Finland
.5
.4
.5
.4
.3
.3
.6
.4
.3
.3
.5
.5
.2
.1
.1
Norway
.4
.4
.4
.7
.9
1.1
.7
.7
1.1
1.8
3.4
2.9
.3
.3
.5
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0 100.0
100.0
100.0
100.0
United States
Italy
United Kingdom
Total
Table 2. Shares of Industrial Countries* Exports to OPEC, by Commodity*
(Percentages based on current dollars)
Agricultural
Manufactures
Raw Materials
Total
Motor Vehicles
Consumer Goods
Heavy Machinery
Electrical Machinery
1970-72
1976
1970-72
1976
1970-72
1976
1970-72 1976
1970-72
1976
1970-72 1976
1970-72 1976
45.7
43.6
40.5
28.9
23.4
22.7
13.5
7.2
32.5
29.5
20.8
24.3
24.2
21.3
Germany
3.5
6.0
9.0
13.1
15.1
17.8
6.9
7.3
17.6
22.8
17.4
19.8
19.9
23.2
Japan
3.5
3.2
6.4
12.5
18.0
20.4
44.8
55.7
8.4
10.0
14.0
13.3
13.7
22.9
12.2
13.3
9.1
5.8
12.2
10.3
10.1
8.0
11.4
10.7
13.4
11.0
11.6
10.4
United Kingdom
8.9
8.9
10.0
7.6
13.7
10.5
8.5
10.2
14.0
10.4
16.5
13.5
14.9
7.7
Italy
3.9
4.2
5.8
6.3
8.5
8.7
14.4
10.2
9.3
8.4
7.9
7.0
5.1
5.3
Canada
5.9
2.9
8.9
11.5
2.1
1.7
.1
.2
.6
.9
2.0
1.4
7.2
4.3
Belgium/Luxemburg
2.4
2.1
3.3
4.3
2.6
2.7
1.0
.9
2.0
1.9
1.6
3.5
.5
.6
10.2
11.4
3.0
3.7
2.4
2.5
.5
.2
1.9
2.7
1.5
1.2
.9
1.0
.5
.4
3.8
5.9
1.5
2.2
.0
.0
1.2
1.4
4.3
4.5
1.8
3.1
Denmark
3.2
4.0
.4
.3
.6
.5
.1
.1
1.2
1.2
.6
.5
.1
.2
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Exporter:
United States
France
Netherlands
Sweden
* Note: Commodities are defined as follows: Agricultural, SITC 0,1, 22 and 4; Raw Materials, SITC 2 (excluding 22 and 266) and 68;
Manufactures, SITC 5-9 (excluding 68); Consumer Goods, SITC 84 (clothing), 85 (footwear) and 7241, 7242, 8911 (consumer electronics);
Heavy Machinery, SITC 71 (excluding 7114 and 7115); Electrical Machinery, SITC 72 (excluding 7241 and 7242); Motor Vehicles,
SITC 732 and 7115.
Table 3. Shares of Industrial Countries' Exports to Non-OPEC LDCs, by Commodity*
(Percent based on current dollars)
Agricultural
Raw Materials
Manufactures
Total
Consumer Goods
Heavy Machinery
Electrical Machinery
Motor Vehicles
1970-72
1970-72
1976
26.4
23.6
1970-72 1976
1970-72
1976
1970-72 1976
1970-72 1976
1970-72 1976
48.8
58.6
51.4
55.3
26.7
28.3
25.5
33.7
31.3
33.9
Germany
2.8
3.0
4.0
4.1
11.3
11.2
4.0
4.7
16.5
17.3
10.3
9.8
14.9
16.3
Japan
7.6
3.5
13.8
16.8
29.0
30.7
47.4
42.3
17.8
18.0
24.5
24.0
20.2
26.8
France
10.8
12.9
4.5
4.6
8.8
9.9
12.4
9.4
7.2
8.4
9.0
10.3
11.3
11.3
United Kingdom
6.8
5.2
5.3
3.0
11.0
8.1
5.7
4.5
13.1
9.9
11.4
7.4
17.0
11.7
Italy
2,2
1.1
1.6
1.2
4,7
4.1
3.4
3.2
6.9
5.8
4.4
3.7
5.1
4.9
10.3
6.2
13.4
10.7
1.8
1.5
.6
.3
1.2
1.1
2.2
1.6
2.1
1.1
Belgium/Luxemburg
2.2
2.5
2.1
1.5
2.3
2.0
.7
.6
1.6
1.6
2.0
1.2
.7
.9
Netherlands
5.9
5.1
1.5
1.0
1.9
1.8
.3
1.1
1.5
1.4
.8
.5
.5
.6
.2
.5
2.0
1.6
1.9
1.9
.0
.0
1.8
1.8
4.3
3.7
1.6
2.5
Denmark
2.3
1.4
.2
.7
.5
.1
.1
1.1
.8
.4
.4
.3
.3
Total
100.0
100.0
100.0
100.0
100.0 100.0
100.0
100.0
100.0
100.0
100.0
)0.0
100.0
1976
Exporter:
United States
Canada
Sweden
30.6
37.4
*Note: Commodities are defined as follows: Agricultural, SITC 0, 1, 22 and 4; Raw Materials, SITC 2 (excluding 22 and 266) and 68;
Manufactures, SITC 5-9 (excluding 68); Consumer Goods, SITC 84 (clothing), 85 (footwear) and 7241, 7242, 8911 (consumer electronics);
Heavy Machinery, SITC 71 (excluding 7114 and 7115); Electrical Machinery, SITC 72 (excluding 7241 and 7242); Motor Vehicles,
SITC 732 and 7115.
Table 4.
Imports by Industrial Countries 3 U.S. from Eight Selected LDCs and From the World
($ million and percent)
Imports by Industrial Countries
Exporter:
1977 Value
($million)
Imports by United States
•
•71- •76 Ave. Annual
Giowth
1977 Annual Growth
1977 Value •71-•76 Ave. Annual
Growth
($million)
1977 Annual Growth
Taiwan
7,059
30.0%
19.5%
4,052
28.5%
22.9%
Hong Kong
6,683
21.9%
12.4%
3,157
18.6%
19.8%
Singapore
2,649
36.1%
24.0%
916
33.7%
25.8%
Philippines
2,937
14.7%
23.8%
1,230
14.1%
23.7%
Brazil
8,018
19.7%
25.8%
2,392
17.6%
26.7%
Mexico
5,857
19.9%
28.2%
4,759
20.2%
30.2%
South Korea
7,403
44.3%
19.8%
3,175
37.2%
20.0%
Malaysia
4,608
26.6%
23.0%
1,393
27.3%
40.1%
733,674
21.0%
13.4%
156,708
21.0%
20.9%
45,214
25.3%
21.4%
21,074
23.4%
25.1%
World
8 Selected LDCs
Table 5.
Exports by Industrial Countries 6 U.S. to Eigfot Selected LDCs and to the World
($ million and percent)
Exports by united States
1977 Value
(fmillion)
•71-*76 Ave. Annual
Growth
1977 Annual Growth
Taiwan
5,105
22.5%
11.91
1,798
24.1%
10.0%
Hong Kong
5,361
17.1%
23.0%
1,292
20.5%
15.9%
Singapore
4,157
21.8%
17.9%
1,172
25.2%
21.5%
Philippines
2,618
18.3%
5.3%
876
17.9%
7.0%
Brazil
6,535
22.1%
-7.6%
2,482
22.5%
-11.6%
Mexico
6,620
21.6%
-4.6%
4,807
23.0%
-3.71
South Korea
7,535
25.6%
33.6%
2,371
24.1%
17.71
Malaysia
2,218
24.5%
17.9%
561
42.6%
4.7t
689,333
20.1%
13.4%
120,172
20.3%
4.51
8 Selected LDCs 40,149
21.7%
10.1%
15,359
23.3%
3.2%
Importer:
World
1977 Value
($million)
•71-'76 Ave. Annual
Growth
1977 Annual Growth
epartmentoftheTREASURY
fiHIHGTOH, D.C. 20220
TELEPHONE 566-2041
Tuesday, M a y 9, 1978
CONTACT:
G e o r g e G. Ross
(202) 5 6 6 - 2 3 5 6
Treasury D e p a r t m e n t A n n o u n c e s A d v a n c e P u b l i c a t i o n
of I n t e r n a t i o n a l B o y c o t t R e p o r t Form
FOR IMMEDIATE
RELEASE
The Treasury Depar
tment today released a d v a n c e c o p i e s
of revised Form 5 7 1 3 , I n t e r n a t i o n a l B o y c o t t R e p o r t , to tax
services whose p u b l i c a t i o n s reach tax p r a c t i t i o n e r s .
The
form is expected to be a v a i l a b l e to all t a x p a y e r s t h r o u g h
local district o f f i c e s of the I n t e r n a l R e v e n u e S e r v i c e about
June 1, 1 9 7 8 . The T r e asury D e p a r t m e n t also a n n o u n c e d that
the time for filing Fo rm 5713 has been e x t e n d e d to J u l y 1 5 ,
1978 for taxpayers w h o se income tax r e t u r n s are d u e on J u n e
15, 1978.
Filing of Form 5713
As detailed in A n s w e r A - 7 of the I n t e r n a t i o n a l B o y c o t t
Guidelines issued J a u a r y 2 0 , 1978 (published J a n u a r y 2 5 ,
1978 in 43 FR 3 4 5 4 ) , one copy of Form 5713 should be sent
to the Internal R e v e n u e S e r v i c e C e n t e r , 11601 R o o s e v e l t
Boulevard, P h i l a d e l p h i a , P e n n s y l v a n i a , 1 9 2 5 5 , and another
copy should be attached to the t a x p a y e r ' s income tax return
that is filed with the t a x p a y e r ' s c u s t o m a r y I n t e r n a l R e v e n u e
Service C e n t e r . Both c o p i e s n o r m a l l y m u s t be filed w h e n the
income tax return is d u e , i n c l u d i n g e x t e n s i o n s .
Interim Procedures
By News Release B-821, dated April 7, 1978, the Treasury
Department announced interim p r o c e d u r e s for filing Form 5713
applicable to t a x p a y e r s w h o s e tax r e t u r n s are due in 1978
before June 1 5 , 1 9 7 8 . T h o s e interim filing p r o c e d u r e s also
197ft t 0 t a x p a y e r s w h ° s e tax r e t u r n s are due on J u n e 1 5 ,
B-888
mrtment of theJREASURY
TELEPHONE 566-2041
iSHlNGTON, D.C. 20220
May 8, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,302 million of 13-week Treasury bills and for $ 3,401 million
of 26-week Treasury bills, both series to be issued on May 11, 1978,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing August 10, 1978
26-week bills
maturing November 9, 1978
Price
Discount
Rate
Investment
Rate 1/
Price
98.370
98.365
98.366
6.448%
6.468%
6.464%
6.65%
6.67%
6.66%
96.486 6.951%
96.465
6.992%
96.468
6.986%
Discount
Rate
Investment
Rate 1/
7.30%
7.35%
7.34%
Tenders at the low price for the 13-week bills were allotted 7
Tenders at the low price for the 26-w-ek bills were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
31,680,000
4,106,415,000
16,340,000
43,115,000
33,760,000
28,385,000
307,665,000
53,375,000
21,985,000
25,165,000
15,470,000
289,680,000
Treasury
8,285,000
$
Accepted
:: Received
21,680,000
2,036,380,000
15,090,000
34,585,000
26,485,000
25,185,000
30,210,000
26,175,000
9,680,000
23,780,000
12,470,000
31,830,000
>' $
33,555,000
J: 5,194,805,000
>'
48,085,000
141,015,000
:
35,390,000
'23,400,000
::
294,895,000
::
45,990,000
J
20,275,000
::
23,450,000
:
15,460,000
:
321,255,000
:
8,275,000
TOTALS $4,981,320,000 $2,301,825,000 a/
:
7,760,000
$6,205,335,000
/IiM
S 3 6 3 > 9 1 0 > 0 0 0 noncompetitive tenders from the public.
nc udes $209,425,000 noncompetitive tenders from the public.
equivalent coupon-issue yield.
•889
Accepted
$
13,555,000
3,139,005,000
12,035,000
55,595,000
15,390,000
21,150,000
53,180,000
17,990,000
4,275,000
23,450,000
11,960,000
25,905,000
7,760,000
$3,401,250,000b/
FOR IMMEDIATE RELEASE
May 8, 1978
Contact:
Alvin M. Hattal
202/566-8381
TREASURY LIBERALIZES RULES
FOR CUBANS TRAVELING HERE
The Treasury Department said today that it is
liberalizing the rules involving transactions by Cubans
traveling to, from, and within the United States. The
action applies to those entering the United States on
visas issued by the Department of State•
The transactions affected include payment of travel
and living expenses in the United States, as well as other
transactions directly related *to that travel, such as
arranging domestic charter flights and hotel reservations.
The authorization does not apply to any transactions
involving transfers of any money ot other property to Cuba.
The Treasury also said it will issue specific licenses
in appropriate cases for non-travel transactions related to
cultural exchange events (such as public exhibitions and
performances).
Specific licenses will be available for transactions
with Cuban nationals participating in events in the United
States and transactions by U. S. nationals participating
in events in Cuba.
Specific licenses issued under this policy will not
authorize any transfers of money or other property to Cuba,
apart from ordinary travel expenditures.
Notice of this action will appear in the May 9 Federal
Register.
o
B-890
0
o
FOR RELEASE ON DELIVERY
May 10, 1978 — 10:00 a.m. EDST
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
FOR ENFORCEMENT AND OPERATIONS
BEFORE THE
SUBCOMMITTEE ON ADMINISTRATIVE LAW AND GOVERNMENTAL RELATIONS
HOUSE JUDICIARY COMMITTEE
Mr. Chairman and Members of the Subcommittee:
It is a pleasure to appear before you this morning
to discuss Treasury's position on HR 9219, the bill to
amend the Federal Tort Claims Act, and the proposed amendments
to that bill. Treasury supports the approach followed
in HR 9219 as originally introduced and in the amendments
proposed by the Department of Justice.
The proposals which this Committee are now considering
involve an attempt to balance varying, and sometimes
competing, concerns. We desire a system of justice which
compensates citizens whose rights have been violated,
which holds Government officials accountable for their
actions and which provides a deterence against illegal
actions by those we entrust with the responsibility of
enforcing our laws. It must be a system which has both
the fact, and the appearance, of fairness.
Any system designed to deal with citizen allegations
of violations of their constitutional rights must also
recognize, however, certain other realities. The responsibility of enforcing the law — whether in the hands
of prosecutors, police, investigators, or tax collectors —
always brings the Government official into confrontation
with individual citizens. And it generally brings about
this confrontation in the context of the citizen being
suspect of, accused of, or involved in some wrongdoing.
B-891
-2In this situation overreaching by the Government
official is possible. At the same time, however, this
is the kind of situation which breeds false accusations
and complaints by citizens who simply do not like being
in this position. If we want our law enforcers to do
their jobs effectively, the system must also be fair
to them. It must not allow them to become victims of
a desire for revenge on the part of those they have properly
investigated, arrested or prosecuted.
We believe that the approach taken in this bill
and the proposed amendment is an appropriate balance
of these considerations.
One principal effect of HR 9219 would be to enlarge
the liability of the United States under the Federal
Tort Claims Act to include actions which violate an individual's constitutional rights. Giving persons whose
constitutional rights have been invaded a right of action
against the Government, where they now have only a right
against the Government employee, reflects the continuing
attempt to find appropriate ways to protect individuals
whose rights have been violated by the Government. This
change recognizes that in reality the officer is usually
acting for the Government in these situations. It also
recognizes that the opportunity for citizens to actually
receive compensation will be increased if the Government
is a defendant.
Another principal effect of these proposals is to
protect Government employees from personal liability
for damages they may cause while performing their official
duties. This is done by establishing a procedure by
which actions filed against Federal employees personally
for damages caused by something done under the color
of their office are transferred into Tort Claims actions
against the Government. This provision will enable officers
to perform their responsibilities, which often involve
difficult situations, without concern that they will
have to personally defend claims — even when they turn
out to be baseless — which may be made. It also recognizes
the fact that the Government is a more solvent potential
defendant than the law enforcement officer who, in the
case where serious damage is found, is unlikely to be
able to afford the resulting judgment.
-3The Government official - wrongdoer is not, however
left free by these proposals. In the first instance
he would be liable to disciplinary action and, where
appropriate, criminal prosecution. The Department of
Justice has also recommended an amendment to HR 9219
to allow persons whose constitutional rights have been
violated to initiate, and to participate in, inquiries
into the conduct of employees whose actions were the
basis for the claims. The amendment would allow this
where the claim resulted in a monetary settlement or
a judgment paid by the United States. Under the amendment
the complaining citizen can also appeal decisions on the
disciplinary actions taken against Government employees
to the Civil Service Commission and ultimately to court.
This amendment reflects the fact that there is a
need to continue to make certain that individual wrongdoers are held accountable if similar conduct is to be
deterred in the future. The Treasury Department thus
supports this proposal. In doing so, however, we are
not unmindful of certain risks inherent in this approach.
Settlement of a dispute does not in the world of litigation
always mean that a wrong has taken place. This is particularly true since the Justice Department has agreed that
the Government will not have the "good faith" defense
now available to the employee. Settlement could however,
trigger a series of potential actions against the employee
which could require him to defend himself in both administrative and judicial tribunals. Nevertheless, we believe
that the approach taken in this bill, and the proposed
amendment, is a sound one, we support it and we are prepared
to work with the Justice Department and the Congress
to resolve any remaining issues.
In addition to this amendment concerning disciplinary
actions against employees, the Department of Justice
has proposed additional amendments. Some would amend
sections 3 and 4 of HR 9219. If adopted, these would
meet objections that have been made to the provisions
of the bill in the form it was originally introduced.
In addition to some technical changes in the language,
these proposed amendments would provide in constitutional
tort cases, that a claimant may recover attorney's fees
and costs, that the United States may not assert as a
defense the "good faith" belief of the employee in the
lawfulness of his conduct, and that class action may
be used. Treasury supports each of the proposed amendments.
-4Additional amendments have been proposed by the
Department of Justice that would change sections 6 and
8 of HR 9219 to limit the effect of the exceptions to
liability provided for in 28 USC §2680 to common law
tort cases, and prohibit the urging of these exceptions
as a defense in constitutional tort cases. Treasury
particularly urges the adoption of these amendments.
In sum, the Treasury Department strongly believes
in the need for a system which holds Government officials
accountable for their acts, and is fair to both them
and to our citizens. We will continue to implement this
philosophy within the Department and to work with this
Committee to assure that we are doing the best we can.
I will be glad to answer any questions you may have.
oOo
garment of theJREASURY
SHINGTQM.C. 20220
TELEPHONE 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 12:00 NOON, EST
TUESDAY,MAY 9, 1978
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
BRAZILIAN-AMERICAN CHAMBER OF COMMERCE
NEW YORK, NEW YORK
ECONOMIC RELATIONS BETWEEN THE UNITED STATES
AND BRAZIL: A FOCUS ON TRADE
The economic relationship between Brazil and the United
States has undergone substantial change in recent years. Today
Brazil is clearly one of the most important participants in the
international economic system. We fully recognize and welcome
that position, as the basis for strengthened cooperation between
LO
our countries in a wide range of policy areas and a^s a basis for
helping to achieve a more effectively functioning world economy.
In the past, economic discussions between the Unii:e3
States and Brazil have tended to focus on bilateral relations
between our two countries. Today, I am pleased to report that
there are no major bilateral economic problems between us.
This is doubly fortunate because our economic relationship
B-892
o
- 2 should now, in any event, focus increasingly on the global
roles of the United States and Brazil — and on our potential
contributions to the future strength of the world economy,
for our own benefit as well as that of other nations.
In recognition of the sharp distinctions which exist
within the universe of less developed countries (LDCs), we
will henceforth refer to Brazil and other advanced developing countries as ADCs — as opposed to the poorer developing
countries (PDCs). These ADCs in particular have as vital
an interest as our own in the future of the international
economy: in the continued operation of an open international
trading system; in maintaining stable international monetary
arrangements; in ensuring adequate rates of growth of
global production; and in assisting the poorest countries
in eradicating extreme poverty.
The key issue for Brazil and other ADCs, as well as
for the world's industrialized economies, is how to work
together to translate their enhanced economic positions into
more effective participation in the affairs of the world
economy. The United States has actively supported the
increased participation of the ADCs in international
institutions, as well as through our bilateral relations.
For example, the IMF's currency basket for purposes of
denominating Special Drawing Rights was recently expanded
to include the currencies of two key ADCs — Saudi Arabia
- 3 and Iran.
We must also remember, however, that leadership
implies responsibility,
and we regard as extremely
important the principle of graduation along a continuous
spectrum from least to most advanced levels of economic
achievement.
In the trade field, graduation involves
the transition from having preferential access to the
markets of others through opening up one's own markets
to eventually providing preferences to less fortunate
nations.
In development assistance, it involves a gradual
shift from receiving foreign resources and technical expertise
to providing such resources to others.
For Brazil in particular, but also for other ADCs,
this new economic situation raises fundamental, and profound,
questions:
—
What should be their relationship with the
United States, with the other industrial
countries, and with the developing world?
—
Do they lie closer to the countries which
still receive large amounts of outside
assistance or to those which extend such
assistance?
Should they be somewhere in
the middle, neither giving nor receiving?
Should they continue to receive in some
areas, and give to PDCs in others?
- 4 —
How should the monetary, trading and invest-
ment rules apply to these countries: as they
do to the industrial powers, or as they apply
to the poorer countries? Or are new rules
needed for Brazil and others in a more
intermediate position?
How are these nations' own vital interests
affected by the impact on others of their
answers to these questions — in terms, for
example, of the willingness of the United
States and other industrial countries to
maintain policies which help foster their
further economic growth?
We in the United States have no clear answers to
these questions. Indeed, it would be highly presumptuous
for us to suggest answers even if we thought we had them.
We feel, however, that it is essential to raise the
questions — because the answers to them which emerge over
the next few years will go far to determine the economic
future of Brazil and other ADCs, the United States,
and perhaps the world economy as a whole.
Indeed, Brazil has already taken some important steps
in accepting the responsibilities that go along with its
new economic strength. It participates as a donor in
- 5 the African Development Fund and has become a donor to the
Inter-American Development Bank. It has agreed not to
borrow convertible currency from the soft window of the
Inter-American Bank. It extends bilateral assistance to
several less fortunate countries in Latin America.
U.S.-BRAZIL TRADE RELATIONS
It is the area of international trade however, which
perhaps offers the best opportunity for improving mutual
cooperation between Brazil and the United States. The United
States fully recognizes the high priority which Brazil places
on access to our markets and to those of other industrialized
countries — access for its exports of manufactured goods
and primary products, as well as access to private capital.
The other ADCs have similar interests. U.S. policy is to provide such access to our markets to the maximum extent possible.
We are also fully aware of concern, in Brazil and
elsewhere, that — to the contrary — the United States is
on the verge of going protectionist. I believe that concern
to be unjustified.
Soon after President Carter took office last year,
he had to make decisions on a number of recommendations
from the International Trade Commission for comprehensive
controls on imports of several major products. At least
- 6 two of these, shoes and sugar, were of major importance to
Brazil. Brazilian exports of shoes to the United States
totaled $120 million in 1977, and of sugar about $90
million. Domestically, the President risked Congressional
override if he rejected the Commission's proposals.
But the President did reject them. He viewed the
imposition of such controls as harmful to our own economy,
because they would intensify inflationary pressures and
insulate us from the beneficial effects of international
competition. But he also rejected import quotas because
of their injurious impact on other countries, notably
developing countries. The impact on Brazil was a specific
consideration in both those decisions.
Congress subsequently legislated an increase in the
U.S. sugar tariff, but even that action will be superseded
as soon as the new International Sugar Agreement is able to
raise world prices to its floor level. This Agreement, which
was negotiated last fall in large part due to the efforts of
the United States and Erazil, will help sugar exporters such
as Brazil by raising prices from their current low levels.
Early this year, the President also rejected an
International Trade Commission recommendation for import
- 7 relief to domestic producers of high-carbon ferrochromium.
Brazil has been among the top five exporters of this product to the United States over the past five years, with
exports of $8 million for 1976.
In addition, there have been a multitude of proposals
to remove specific products — many of interest to Brazil —
from eligibility under the system of generalized tariff preferences (GSP) which we extend to exports from developing
countries. In some cases, Brazilian products have been removed from GSP eligibility because of the requirement in U.S.
trade law that exports of specific products from individual
countries must be disqualified from preferences once that
country becomes internationally competitive in those
articles. Beyond these, however, very few products have
been withdrawn.
One result of this policy is that Brazil's exports
to the United States under GSP increased significantly
in 1977. In 1976, the first year the GSP program was
in effect, Brazil exported about $215 million under it to
the United States. In 1977, this figure grew by more than
60 percent to almost $344 million. A large percentage of the
increase was accounted for by manufactured goods,
especially automotive and electrical parts and equipment.
More than ten percent of Brazil's exports to the United
- 8 -
States in 1977 entered free of duty under GSP.
For the future the United States has taken the lead in
infusing new life into the Multilateral Trade Negotiations
in Geneva. We are seeking further liberalization of world
trade, by steep cuts in tariffs and meaningful reductions
of non-tariff barriers. We are encouraged by the active
engagement of other major trading countries, including Brazil
in the last few months. We hope and expect that the negotiations will bring major success this year.
The record is thus clear. Partly in order to provide
growing markets for world trade, we have taken steps to
assure continued rapid growth of our own economy and urged
the other stronger countries around the world — notably
Japan and Germany — to do the same. We have consistently
rejectd comprehensive new import restrictions. We have
sought renewed trade liberalization. Our concern to maintain
market access for Brazil and other developing countries has
been central to these efforts. Our success can be measured
by the fact that Brazil significantly reduced its bilateral
trade deficit with the United States from 1975 to 1977,
accounting for nearly $1.5 billion of the adverse swing in
the U.S. trade balance during that period.
- 9 -
Trade, however, reveals the intimate interaction of
national policies. We do face serious pressures to restrict
imports, as do all other industrialized countries. And we
are now seeing clearly how policies and economic performance
in one major country, Japan, can jeopardize the openness of
the entire trading system via the reactions which it triggers
in other major countries. It is not too soon to ask whether
Brazilian policies might have somewhat similar effects in
the future.
Brazil maintains extremely high tariffs. In recent
years, it has instituted and tightened quantitative import
restrictions on a wide array of products. It extends export
incentives, often of considerable magnitude, to many of its
manufactured products — some of which can run directly afoul
of countervailing duty statutes in the United States and elsewhere. Through the "performance requirements" which it levies
on incoming multinational enterprises, such as minimum export
quotas and value-added tests, Brazil's policies also impinge
upon economic developments in other countries.
We fully recognize that Brazil has adopted many of
these measures in recent years under extreme balance of
- 10 -
payments pressures, and in response to a marked slow down
in world economic growth (and thus export markets). We
recognize that many, of them are intended to offset distortions elsewhere in the economy, and to accelerate the
diversification of Brazil's economy. We recognize that some
are intended to counter what is perceived as the excessive
strength of firms based outside Brazil. We know that current
practices cannot be eliminated overnight. Yet we are deeply
concerned that prolonged continuation, and certainly any
further tightening, of such policies will help bring about
the very response which Brazil is so right to fear, and
which would be so injurious to its own vital interests.
EXPORT SUBSIDIES AND COUNTERVAILING DUTIES
In particular, we are facing potential problems on subsidies
and countervailing duties which, if a solution is not found
speedily, could be a major source of conflict in U.S.-Brazil
trade relations — and, indeed, in overall relations between
our countries.
The problem is not a new one. Brazil's export promotion policies have prompted numerous countervailing duty
complaints, and as a result the United States has placed
additional duties on several products imported from Brazil.
- 11To date, there have been no serious disruptions to trade.
Several pending events, however, threaten to change that
picture for the worse.
First, Treasury's authority to waive the application of
countervailing duties under certain circumstances expires on
January 3, 1979.
Loss of the waiver authority would elimin-
ate any flexibility to work out bilateral arrangements on subsidy
/countervailing duty problems.
Given the wide array of
Brazilian export subsidies, it would almost certainly produce
a large number of tariff hikes against Brazilian sales to the
United States.
A major trade impact could result.
There are also several specific results which can be
foreseen.
There would be an immediate imposition of counter-
vailing duties on handbags from Brazil.
Late in the last
Administration, Treasury ruled that these handbags were
receiving bounties or grants and should be assessed a 14
percent countervailing duty.
imposition of the duties.
However, it agreed to waive
Brazilian exports of handbags
to the United States accounted for $6 million in 1977.
- 12 Two other countervailing duty cases are cause for
serious concern — footwear and textiles. The countervailing
duties now in effect on Brazilian footwear were calculated
according to conditions prevailing in 1973. Treasury at
present is seriously considering recalculating these duties
to take into account apparent recent changes in Brazilian
policy. We are not certain what changes would result from a
recalculation. Higher duties are a possibility. Recalculation
in itself could have an unsettling effect on imports of Brazilian
footwear.
Textiles also pose potential problems. Treasury
is now investigating a countervailing duty complaint
against a wide array of Brazilian textile imports. Exact
figures are not available, but millions of dollars in annual
imports are at stake. I would not want to prejudge this case
in any way — Treasury has not yet issued a final determination, and will not do so until it conducts a thorough investigation. But I do want to flag it as an example of the potential
trade disruption that could ensue if we do not resolve the
subsidy-countervailing duty issue.
The importance and urgency of this matter has led us
- 13 to conclude that the old case-by-case waiver approach is
grossly inadequate for dealing with the problem, and may
indeed even be counterproductive by falsely allaying
concern over the need to find a comprehensive solution.
This is why, early in the current Administration we decided
not to provide such waivers on imports from Brazil of
cotton yarn and scissors and shears.
To deal with the
problem effectively, we instead place top priority on
reaching an agreement on subsidies and countervailing
duties in the Multilateral Trade Negotiations:
—
We need to put a lid on the growing use of subsidies
to spur export-led growth at the expense of other trading
nations.
—
We need to reinforce the commitment already accepted
by most industrial nations not to use export subsidies.
--
We need new international discipline to guard against
the disguised protection of domestic markets through internal
or production subsidies.
-- We need to strengthen the present GATT provisions on
dispute resolution to ensure that these rules are enforced
effectively.
- 14 This approach must be balanced, however.
New guide-
lines on the use of countervailing duties should go hand in
glove with increased discipline on subsidies.
As a general
rule, duties should be applied only when a subsidy threatens or
causes injury to a domestic industry.
However, when there is
a specific commitment not to use certain subsidies, countries
should be able to take quick counteraction if that commitment
is violated.
There must be effective implementation of rules
on both subsidies and countervailing duties.
We of course recognize that subsidies can play an
important role in national economic policymaking.
Flexibility
in the rules is needed for countries on different rungs of the
development ladder.
We expect fully developed countries to
subscribe to all the provisions of an eventual agreement.
At the other extreme, the poorest developing countries with
the greatest need should be accorded special and differential
treatment.
For those nations which lie between these two categories ~
Brazil and other ADCs —
the new code should recognize their
growing responsibility in the world trading system, and provide for increased obligations as their industries become
internationally competitive.
Naturally, we do not expect
- 15 this to happen overnight.
A commitment to freeze the
existing level of subsidization of exports might be a
first step.
And then might it not be sensible for Brazil, and
other ADCs, to embark on a deliberate and announced course
of winding down — and eventually eliminating — their export
subsidies? This could be negotiated to occur over a certain
period of time. In return, guarantees might be included in
the MTN agreement to ensure that other countries respond
constructively, and apply countervailing duties only when
a subsidy is shown to have injured an industry in the domestic
market.
Such an arrangement would be similar in many respects
to a recent agreement between Treasury and the Government
of Uruguay regarding subsidies and countervailing duties.
Uruguay agreed to phase out all its export subsidies on leather
products by the beginning of 1979, and on all other products
by 1983. In return, Treasury agreed to waive application of
countervailing duties on footwear and leather products receiving
export subsidies. We believe this agreement, which demonstrates
both the merits and the practicality of a comprehensive approach,
will greatly improve the climate for trade between Uruguay
and the United States by neutralizing a major disruptive
threat to Uruguayan exports.
- 16 An agreement regulating the use of subsidies and countervailing duties is one area of the MTN where positive action by
Brazil is crucial. It seems to us that the United States and
Brazil should work closely together on all these issues, shari
as we do the perspective of great exporters of both industrial
and primary products. Surely it would seem that such an
emphasis would more benefit Brazil's stature and interests
than any continuing focus on receiving "special and
differential treatment" and bindings of tariff preferences —
which hardly seem likely to be the central issues for Brazil's
trade relations through the 1980s, the period for which the
MTN will provide the global trading framework.
None of the steps mentioned are easy to undertake, for
either our countries. All confront economic and political
pitfalls. Yet a failure to face them would be a dereliction of duty on the part of countries, like ours, whose own
vital interests would be deeply affected by a relapse into
trade restrictions around the world. We will of course take
into consideration Brazilian efforts in this area (as well
as in the tariff negotiations and work on other NTB codes),
as part of the overall MTN package, in determining the
concessions which we will offer in return.
CONCLUSION
I have spoken at some length today about U.S. trade
- 17 relations with Brazil as an example of measures which each of
our countries can take to improve their economic ties and
begin to implement a greater sharing of the responsibilities
for maintaining an open and mutually beneficial international
trading system.
Brazil today is clearly one of the most advanced of the
world's developing economies. It is moving toward the front
ranks of the world's economic powers. We fully recognize
this new status and welcome Brazil, as we welcomed Japan
in the late 1950s and early 1960s, as a nation prepared
to play an enhanced role on a whole range of international
economic issues.
The economic relationship between the United States
and Brazil — indeed, much of our political relationship as
well — is likely to focus increasingly on ways in which these
responsibilities can be exercised more effectively. The recent
lengthy discussion in Brasilia of problems of the Middle East
between President Carter and President Geisel is a further
indication of our desire to more fully consult with Brazil
on the widest possible range of issues.
Brazil's new position offers a unique opportunity to help
pave the way for other ADCs to also share in the greater
responsibilities and benefits of enhanced consultation on the
management of the international economic order. We hope that
Brazil will accept this challenge and this opportunity, both for
- 18 itself and for other nations who may soon be ready to follow in
its footsteps.
tartmentoftheTREASURY
HINGT0N,D.C. 20220
TELEPHONE 566-2041
i
FOR RELEASE AT 4:00 P.M.
May 9, 1978
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 5,600 million, to be issued May 18, 1978.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,628 million
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,200
million, representing an additional amount of bills dated
February 16, 1978, and to mature August 17, 1978
(CUSIP No.
912793 S7 2 ) , originally issued in the amount of $3,509 million
the additional and original bills to be freely interchangeable
182-day bills for approximately $3,400 million to be dated
May 18, 1978,
and to mature November 16, 1978 (CUSIP No.
912793 U4 6 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing
May 18, 1978.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,228
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and B r a n c h e s , or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
• C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, May 15, 1978.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the T r e a s u r y .
B-893
-2Each 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 in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
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 weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on May 18, 1978,
in cash or
other immediately available funds or in Treasury bills maturing
May 18, 1978.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.
-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her 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 Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
oOo
Contact:
Carolyn M. Johnston
(202) 634-5377
FOR IMMEDIATE RELEASE MAY 11, 1978
TREASURY SECRETARY BLUMENTHAL NAMES WILLIAM D. UTZINGER
SAVINGS BONDS CHAIRMAN FOR WYOMING
William D. Utzinger, President of Salt Creek Freightways,
Casper, Wyoming, has been appointed Volunteer State Chairman
for the Savings Bonds Program in Wyoming by Treasury Secretary
W. Michael Blumenthal. The appointment is effective immediately.
Mr. Utzinger will head a committee of business, banking,
labor, government, and media leaders who, in cooperation with
the U.S. Savings Bonds Division, will assist in promoting bond
sales throughout the state. He succeeds Robert L. Parmalee,
Vice President and Wyoming General Manager, Mountain Bell.
Mr. Utzinger is a graduate of the University of Wyoming
where he received a Bachelor of Science degree in Business
Administration. He served in the U.S. Army for two years,
where he was commissioned a 1st lieutenant. Upon his discharge
in 1955, he went to work for Salt Creek Freightways.
-- over -B-894
- 2-
In 1969 Mr. Utzinger was elected President of the
Wyoming Trucking Association and served in that capacity for
two years.
He has served on the Board of Directors of the
United Fund, Chamber of Commerce, First National Bank, Western
Highway Institute and Rotary Club.
In 1969 he was elected
Industrialist of the Year by the Wyoming Realty Association.
In 1971 he was appointed Vice President of Wyoming for the
American Trucking Association of Washington, D.C.
In 1972
he served as President of the Rotary Club and as SecretaryTreasurer of the Federal Highway Administration Unit, a
National Defense Executive Reserve.
He is also a member of
the Board of Governors of Truck Insurance Exchange, Los
Angeles, California.
Mr. Utzinger and his wife, Jackie, reside in Casper.
They have two children, Jalene of Jamestown, North Dakota,
and Jim, a student at the University of Wyoming.
FOR RELEASE ON DELIVERY
EXPECTED AT 1:30 P.M., EST
THURSDAY, MAY 11, 1978
REMARKS BY THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE CONFERENCE BOARD
NEW YORK CITY
Competition and Change
In the International Trading System
The challenge of "Meeting Foreign Competition", which
you have chosen as the theme for this conference, is both
timely and critical. American businessmen, I know, are
seriously concerned about our record trade deficit last
year. There is a need for a clearer perception of the
reasons for the deterioration in our trade position,
and what we must do to correct it.
I propose to concentrate on the issue of the U.S.
competitive position and measures we need to take now
to meet foreign competition better in the future. I
will then turn to some of the longer-term problems of
the present international trading system and propose
some specific objectives which I consider important
in creating a "new international trading framework"
to meet the demands of a rapidly changing global economy.
B-895 .
- 2 -
The U.S. Competitive Position
In discussing the U.S. competitive position, I want to
emphasize that there is a distinct difference between price
competitiveness and market performance.
Changes in relative
price competitiveness should produce their full effect on
market performance only after an 18-month to two-year
lag.
Our record 1977 trade deficit and the slight reduction
in the U.S. share of industrial country exports of manufactured goods to countries other than the United States
during the past two years may partly reflect the trade
weighted average appreciation of the dollar in 1975.
In nominal terms, that appreciation has now been roughly
reversed.
But a more meaningful picture of changes in international price competitiveness is offered by trade-weighted
exchange rate movements adjusted for different national
inflation rates.
In price adjusted terms, exchange rate movements
between December 1976 and March 1978 have resulted in:
A substantial deterioration in the trade competitiveness of:
Japan, where yen appreciation outpaced
relative price gains;
France, where relative inflation increases
- 3 -
outstripped exchange rate depreciation; and
The U.K. , where exchange rate appreciation and
relatively poor price performance combined to
worsen competitiveness.
At the same time, trade competitiveness was improved
for :
Canada, as exchange rate depreciation exceeded
m V
relative price worsening; and
The U.S., where some exchange rate depreciation
occurred in the presence of no loss in relative
price performance.
On the other hand, German trade competitiveness was
virtually unchanged as exchange rate appreciation matched
superior inflation performance.
The trade weighted real exchange rate of the dollar
relative to the currencies of seven major industrial
countries has fallen about 3 percent since the third
quarter of 1977. These adjustments in the real value
of the dollar should in time be reflected in improved
U.S. market performance abroad and a modest reduction
in our trade deficit, provided U.S. industries take
advantage of the improvement in their price competitive
position.
The current debate about market shares and whether the
United States is gaining or losing against other suppliers
- 4 has focused on share calculations made vis-a-vis other industrial country suppliers. This focus misses a major development in the world economy: the emergence of developing
countries as important competitors in industrial markets
has risen steadily during the 1970's. LDCs increased their
share of industrial country non-oil imports by two percentage
points between 1970/72 and 1977, a gain worth over $12 billion.
Much of this gain has come from the powerful economic
advances in Asia — South Korea, Taiwan, Singapore, Hong
Kong. Perhaps the most dramatic result of that gain can
be seen in changes in the U.S. share of the Japanese market.
Since 1968-70, developing Asia has significantly
increased its share of the Japanese market in each of six
major categories of manufactures imports — capital equipment,
chemicals, finished metals, consumer durables and nondurables
and textiles. Increases range from 6-10 percentage points
(chemicals, finished metals, capital equipment, textiles) to
20-30 percentage points (consumer durables and nondurables).
At the same time, the U.S. share fell in each category.
Compared with 1968-70, the U.S. share of Japan's imports
in 1976-77 fell from 32 to 12 percent for consumer nondurable
goods, from 39 to 27 percent for consumer durable goods,
from 61 to 51 percent for capital equipment, and by lesser
amounts in other categories. This has happened despite the
- 5 -
fact that the United States has advantages over other
industrial country suppliers:
a history of close trade
ties with Japan and a high technology economy.
Clearly, it is no longer sufficient to look at market
shares only by comparison with other industrialized
countries. I would also note that these rapidly advancing
developing nations are by and large outside the "adjustment
process" as we usually think of it. Most have tied
their exchange rates to the dollar or to-other major
currencies.
Some maintain capital and trade controls,
yet benefit from special LDC status in trade relations.
More effort is needed to bring the advanced developing
nations more fully into the system —
and they must accept
the responsibilities as well as gain the benefits of a
growing and open world economy.
At the same time, we must recognize that the growth
of these developing countries also provides us with export
markets for our manufactures.
Our exports of manufactures
to these four dynamic Asian countries more than doubled between 1970 and 1976, making them together rival Japan as a
market'for our manufactured goods by the latter year.
The
development of these emerging markets presents new opportunities to exporters.
- 6 Increasing U.S. Exports
President Carter has created a Cabinet-level task
force chaired by Commerce Secretary Juanita Kreps to
look into possible measures to improve U.S. export
competitiveness in world markets.
The task force will
address both the current impediments to our exports
(whether due to governmental measures or to the failure
of private business to take advantage of available
opportunities overseas) and possible remedies for these
problems.
The Administration has already proposed to double
Commodity Credit Corporation credits to support agricultural exports and to increase Export-Import Bank lending
activity sharply.
We intend to make sure that American
business has full support from the government in meeting
export credit competition from official agencies of
other governments.
Nevertheless, there are some problems which only
private business can address:
Competition with subsidiaries.
We may not, for example,
be getting energetic competition for foreign markets
because many of our firms have subsidiaries abroad
with which they are not prepared to compete for markets.
There may even be a tacit geographical division of markets
among .related firms which greatly slows the response
to relative price changes and to new market opportunities.
- 7Improved competition, even with our own subsidiaries,
may stimulate both greater efficiency and U.S. exports.
Market sales.
It is natural that U.S. producers
concentrate their sales effort on a U.S. market whose
size is increasing by $90 billion a year rather than
on a series of individual foreign markets, the very
largest of which is growing at a rate of $35 billion
per year.
On the other hand, foreign producers may also
find that the huge and dynamic U.S. market is the most
profitable place to concentrate their sales effort.
Foreign manufacturers may make a special "export model"
just to sell in the U.S.
Not many U.S. manufacturers
will make a special model to sell in Japan— or in France,
or in Brazil.
Consequently, we have often failed to take
foreign market tastes, preferences, specifications and
opportunities into account in the design and production
of U.S. goods.
For example, although there are a few
U.S. mills that cut lumber to Japanese measurements, most
do not, and those that do can't keep up with the demand.
Distribution Systems.
U.S. industry has become
accustomed to highly organized, sophisticated distribution/sales systems which reap the benefits of
economies of scale.
In most foreign economies, exporters
still face "mom and pop" stores, non-integrated markets,
and inefficient distribution systems which deal with
small volume.
Inventory management and distribution
- 8 networks are far more complicated.
This is particularly true in Japan, where there
are hundreds of thousands of retail outlets, most
small, poorly financed and located on small premises.
No company could conceivably bear the cost of reaching
a significant number of these shops through direct
distribution.
In retail food distribution, for example,
nearly all of the successful U.S. export efforts have
been achieved through using the distribution system of
a well-established Japanese company.
For industrial or large ticket consumer products,
the situation is considerably different.
Here, U.S.
exporters too often try to obtain market entry without
out-of-pocket expense.
A general trading company may b«
engaged as a distributor, but these are not generally
effective distributors of products requiring promotion
and service.
More effort must be put into studying
the market and selecting the proper distribution
network, even at substantial initial expense.
Also, under traditional U.S. accounting standards,
the costs of establishing a customs clearing firm,
creating a network of distributors, applying for
product approval, and other start-up costs are treated
as expenses for the year in which they are incurred,
even though benefits from these capital outlays may
- 9 not be seen for five to ten years.
The heavy toll of
these expenses on the income statement for the period
of start-up costs tends to further discourage U.S.
business from even trying to enter the market.
The export promotion task force is looking into
these kinds of problems to see what can be done
to alleviate them.
Japan in particular seems to
provide an excellent example of the potential
for closer cooperation between U.S. exporters and
Japanese distributors, or between U.S. marketing chains
and Japanese importers.
Market information.
There may be a good bit more
we can do, both through the public and the private
sector, to get better market information about trade
opportunities abroad.
The U.S.-Japan Trade Facilitation
Committee inauguarated in October is a recent effort on the
part of both of our nations to enhance information
about what we have to sell and they want to buy, as
well as providing a forum for reviewing particular
trade problems.
Investment.
At home, our goal must be to assure
that we produce efficiently those goods in which
we can be competitive —
markets.
in both domestic and foreign
This means more effort to encourage invest-
ment where it can be most productively used, stronger
research and development programs, new flexibility
- 10 -
to keep up with changes in domestic market tastes,
and a conscious effort not to write off sectors in
which we can be competitive with the proper production
and investment strategies —
whether these be consumer
goods or intermediate products which we tend now to
import because of superior quality, individual preference, or effective marketing techniques.
I don't
mean that we should try to produce to meet all our
domestic needs —
too great a cost.
that would be impossible and come at
But we can choose more rationally
the goods in which we can realistically compete and
begin now to adjust production with that objective in
mind.
These are by no means the only measures we can
take to reduce our trade deficit.
But they may provide
some food for thought as we tackle the problem of
meeting foreign competition both at home and abroad.
And we can anticipate a more comprehensive picture
of both government and private steps to improve
our trade position once the interagency task force has
had an opportunity to study these problems in more
detail.
Toward a New International Trading Environment
The steps I have mentioned so far and the work
of the interagency task force will address primarily
-lithe immediate problems of a record U.S. trade deficit
and our need to improve our export performance.
There are longer-term problems, however.
In the
Multilateral Trade Negotiations which began in 1973 and
are slated to be completed this summer, we are not only
engaged in the traditional efforts to further reduce
national tariff barriers, but also are seeking to negotiate
new international codes.
The codes would be designed
to deal with the increasing tendency of many governments
—
including the United States —
to intervene actively
in domestic and international markets to regulate or
distort trade flows.
Such intevention may take the
form of restrictive government procurement policies
which discriminate against foreign suppliers;
"safeguard" action to restrict imports of particular
products which appear to threaten the competitive position
of domestic industries in home markets; and direct and indirect subsidies to domestic industries. With economies
grpwing slowly and unemployment high, as in Europe at the
present, there has developed a destructive tendency to
subsidize production at inefficient plants simply to maintain
employment.
It is reliably
reported that such subsidies
total a startling 2-3 percent of GNP in several European
countries, and the amounts appear to be growing rapidly
in some cases.
- 12 -
The present rules and regulations on trade - as
incorporated in the General Agreement on Tariffs, and
Trade - do not adequately cover these problems.
We
need a series of codes which would provide a new
trading framework for this purpose.
They should provide:
(1)
rules that deal with the growing government
involvement in trade;
(2)
an understanding on acceptable measures of
response to unfair trade practices or to disruptive
surges in import competition, with special rules for
trade with the developing nations; and
(3)
a new mechanism for cooperative dispute
settlement.
The new framework would have to be flexible,
and recognize that the needs and problems of domestic
economies will differ among nations.
Yet it must pro-
vide acceptable guidelines and limitations upon actions
that interfere with trade flows.
As Bob Strauss has pointed out, one of the sine qua non
of U.S. adherence to a final MTN package is an agreement on
the use of subsidies and countervailing duties.
This is an
area of critical interest to the Treasury, the administraing agency.
We need to reinforce the commitment already
accepted by most industrial nations not to use export
- 13 -
subsidies on manufactured goods.
We need new discipline
to guard against the disguised protection of domestic
markets through internal or production subsidies. And we
need to strengthen the present GATT provisions on dispute
settlement to ensure that these rules are enforced
effectively.
This approach must be balanced, however. New guidelines on the use of countervailing duties should go hand
in glove with increased discipline on subsidies. As a
general rule, duties should be applied only when a
subsidy threatens or causes injury to a domestic industry.
When there is a specific commitment, however,
not to use certain subsidies, countries should be
able to take quick counter-action if that commitment
is violated.
Although we recognize that flexibility in the
rules is needed for countries in different phases
of development, we expect developed countries to subscribe to all provisions of an eventual agreement.
And for the most advanced developing nations, the
new code should reflect their growing responsibility
in the world trading system, and provide for increased
acceptance of obligations as they become full-fledged
international competitors.
- 14 -
An understanding is also essential on the use of
safeguard measures which governments may take in.
emergency situations to permit domestic industries to
adjust to dramatic changes in trade flows. Such an understanding should clearly limit the circumstances in which
governments can impose restraints on trade and should
assure that those restraints are temporary.
We have achieved some success in bilateral
talks with Japan in helping to open the door to
foreign suppliers on public procurement of computers.
Negotiations with the European Community have been difficult
partly because the EC has not been able to achieve an
internal consensus on the use of "buy European" policies
in such important sectors as telecommunications, computers,
and heavy electrical equipment. Countries in strong balance
of payments positions might wish to consider opening their
procurement markets unilaterally, as one additional measure
of encouraging increased imports.
Clearly, however, we must address this issue in
the MTN. Excessive and disruptive government procurement regulations are wasting tax dollars, increasing
consumer costs, and barring efficient foreign industries
-15 - :
from competing for government contracts in many domestic
markets.
In addition to these new codes and understandings,
we also need to begin now to look beyond the MTN.
We
need improved mechanisms for cooperation in tradeso
that trade problems can be addressed and mutually
resolved before they erupt in open conflict.
And we
need to maintain the momentum for continuing trade
liberalization as an essential element of trade cooperation. We must begin to consider now the means and mechanisms
for increasing participation by the more advanced developing
nations in the global economy —
both through improved
consultation and rights, and through their acceptance
of greater responsibilities in international trade.
***
These are important goals for us and for the
future of the international community as a whole.
We will work to strengthen our governmental mechanisms
to promote exports in the immediate future, and
we urge American businesses to give careful attention to
the steps that only they can take to improve U.S. export
performance.
We hope that the MTN will provide a
- 16 -
meaningful basis for the regulation of government intervention in trade and the resolution of future trade
disputes.
And we look forward to continued cooperation
in the years ahead as we strive to maintain a trading
framework which responds effectively to the demands of
an ever-changing world economy.
Department theTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 566-2041
For Release at 11 a.m
Friday, May 12, 1978
EDT
REMARKS OF
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE BUSINESS COUNCIL
HOT SPRINGS, VIRGINIA
MAY 12, 1978
Today and tomorrow you will hear an array of both private
and official views on the dollar. To spare you from repetition,
and to get right to the point, I will keep my comments brief. I
shall be glad to expand upon them in the discussion which will
toiiow Mr. Emminger*s speech.
Over the past year there have been complaints that United
states authorities have engaged in deliberate "neglect" of the
dollar. During the last few weeks these expressions of concern
have subsided. I would like to assure you now that it has not
been, is not now, and will not be the policy of the United States
government to "neglect" the dollar either benignly or in any
other Greater
way.
stability of exchange rates is a widely-held
objective and one which the United States supports strongly. But
tne experience of recent years is vivid proof that such stability
is impossible without stable economic and financial conditions in
tne major economies of the world.
Th
f, e United States government is ever ready to intervene in
rtiL 2 r e J g n e x c h a n 8 e market to bring order to an otherwise
axsorderly market. The resources available for this purpose are
flihVi - The F e d e r a l Reserve/Bundesbank swap has been doubled to
m.rb
"£ W e h a V e a S r e e d t o s e l 1 600 million SDR's for German
a $5 b i l l i o n
will H W S
reserve position in the IMF which we
0
3S n e c e s s a r y
currencies "'
' t o acquire additional foreign
m*ri,.?J\.Wf:,?? n0t mea5ure a country's interest in exchange
2 ? u " l t y b y i t S r e a d * n e s s to send its monetary
raiu 6 S i n t ° t h e f o r e i S n exchange markets to hold or fix a
- | H - We measure that interest by the readiness to adopt and
at.h-i . ? r o u g n s o u n d domestic economic policies. Lasting
rec ui
nati
5 J"es both a readiness on the part of all major
ad
the »!!fi.? ° P t t n e appropriate macro-economic programs -- and
<-ne ability to do so.
B
-896
-2We must acknowledge that our economies and our societies are
not all alike. Our economic priorities differ. Some countries
place higher priority on price stability than others. Some
governments have more control over economic policy than others.
There are important differences in our basic political systems
which make policy approaches feasible in one country but
impossible in another.
Yet we can work toward exchange market stability by
developing some common views on the relative priorities to be
assigned to the various objectives of economic policy, such as
price stability and rates of growth, and on the approaches
required to achieve these objectives. In all candor we must
acknowledge that such a set of common views does not yet exist
today. Nevertheless', we are striving for improvement and I am
confident that we can achieve important progress.
We well know that nations will pursue what they believe to
be the best interest of their own people. No nation will always
do what others urge it to do. In the final analysis German and
Japanese growth policy.is made by German and Japanese authorities.
French and British trade policy is made by the French and British
authorities. American policy is made by American authorities —
the President and the Congress. Our political system is
democratic and broad domestic support is required for all our
policies.
Only if all nations perceive a "best interest of others
policy" to be in their own long-run interest as well, will they
attempt sucn a policy. Thus, the United States places high value
on consultation and exchange of information with its trading
partners. We acknowledge our interdependence.
%»
All of the major countries have a responsibility to wor,^
toward the internal discipline that is essential to meaningT
stability in the international monetary system. This is the
reason why President Carter will be meeting with his counterparts
at the Bonn Summit in July. The Summit will not be a dramatic
decision making event. It is designed instead to foster the very
kind of gap bridging of domestic macro-economic policies that is
necessary in our interdependent world for a smoothly functioning
exchange market for goods and money.
Tne United States* Role
As the largest economy and the provider of the world's
vehicle and reserve currency, the burden falls especially heavily
on the United States to achieve economic discipline, and to set
the fundamentals right.
Last year, we had a deficit in our current account of $20
billion. That is only 1 percent of the U.S. GNP. But in
absolute terms and in the eyes of the foreign exchange markets
that was a large number. And when the market saw no action on
-3our part to temper our imports of energy, no progress in reducing
inflation and no clear prospect of a reduction in the deficit,
exchange rates began to move rapidly. In six months the dollar
rate, measured on a trade weighted basis against all OECD
countries declined 7 percent, reversing the appreciation which
had occurred in 1975 and 1976, and dropping the dollar 1 percent
or so below the level which immediately followed the general move
to floating in 1973. Against some countries, the dollar
depreciated markedly, while against others it appreciated almost
as much. That is past history. Now our responsibility is to
pursue domestic policies that achieve both the growth which
brings high employment and rising living standards, and the
stability of prices which preserves the value of the assets of
individuals and firms. And critically, we must reduce our
current account deficit.
^ In the current situation the United States faces three basic
tasks:
(1) To recuce our dependence on imports of energy;
(2) To reduce the rate of domestic inflation; and
9»
(3) To increase the export consciousness of American firms.
We will pursue these goals in our own interest and in the
interest of all others. We will pursue them with vigor. Our
success will preserve the integrity of the dollar. It will
promote greater exchange market stability.
Energy
On the energy front, we are now enjoying a temporary respite
from the growth of oil imports. Alaskan production is reaching
pipeline capacity, enabling us to meet from domestic sources the
increase in oil consumption which accompanies rising GNP. For
1978 the oil price freeze combined with the effects of Alaskan
production should enable us to avoid any significant increase in
our oil import bill, while putting some 100 million barrels of
oil in the Strategic Petroleum Reserve.
Unfortunately, we do not have an Alaska coming into
production each year. As the economy continues to grow in 1979
we will again face the spectre of a rising oil import bill,
despite our increased conservation efforts. We must do something
to alter that prospect.
Thus, in his address to American newspaper editors on April
11, President Carter urged the U.S. Congress to adopt meaningful
energy legislation without further delay and indicated that, if
Congress did not act, oil imports would have to be limited by
administrative action under present law. We are working hard
with the Congress to have action on energy and we must have it
soon.
-II-
Inflation
We are also working hard to stem inflation. The inflation
situation has worsened a little in recent months. Consumer
prices rose at more than a 9 percent annual rate during the first
three months of the year and at an 8 percent rate even after the
food and energy components are removed. It is not clear that the
current upswing in the inflation rate has run its course.
Wholesale prices at early stages of the chain of production,
primarily agricultural products, have been rising rapidly and
these increases may not have worked their way fully through the
retail level. Some relief is likely to be felt later in the
year. Last year, consumer prices also rose more rapidly in the
first half of the year, at about an 8-1/2 percent annual rate
before falling back to less than 5 percent in the second half.
We hope history repeats itself. But we cannot afford to depend
upon it.
There are worrisome signs of deterioration in the crucial
wage-productivity area. This is fundamentally more serious than
any temporary upswing in food and raw material prices. The
.*
upward ratcheting of cost pressures tends to be reflected broadly
across most sectors of the economy. Productivity, as we measure
it, fell off in the first quarter partly for special causes.
Labor compensation per manhour rose more rapidly, partly due to
some self-inflicted wounds in the form of Federally mandated cost
increases and because wage settlements came in quite a bit higher
— the coal settlement was a major factor. The net result has
been more pressure on costs and prices.
There is no reason for extreme pessimism. We see no
evidence that the inflation rate has been jolted upward more than
temporarily. But at a time when a deceleration of inflation is
clearly in the national interest, recent cost and price
developments should serve as a warning — and an incentive.
There is a need for an even deeper resolve and a closer spirit of
cooperation. The present inflationary process is benefiting no
major group. We must make greater progress in turning the
inflation situation around. The clear need now is to wind the
process down, rather than see it intensify any further.
In his April 11 speech, the President announced a set of
comprehensive new measures to combat inflation. This was not a
toothless pledge. We mean business. President Carter is
committed to:
— limiting the size of the 1979 and future federal budget
deficits, by veto if necessary;
— restricting the salary increase of Federal government
employees to about 5.5 percent this year and urging simil
wage restraint on state and local governments and private
businesses;
-- reducing the inflationary effect of past and future
regulatory actions by the government.
-5His speech signalled a dogged determination to bring
inflation down without resort to wage or price controls. The
government bureaucracy and the business community are beginning
to respond. I am confident that we will see widespread support
and steadily growing success towards this end from all of you.
Exports
The success of this anti-inflation program is critical to
restoring confidence in. the U.S. economy. It is also needed to
maintain the price competitiveness of U.S. goods and to sustain
the growth of U.S. exports. In addition, it is essential to the
maintenance of a domestic investment climate which will attract
capital inflows.
U.S. export growth in recent years has, frankly, been
disappointing. In the last two years the volume of our exports
nas only grown by H percent, compared to a 40 percent rise in our
volume of imports. In part, this has been due to the slow rate
of growth of U.S. export markets. During the 1960's the United
States experienced a slower rate of average real growth than the
rest of the industrial world, but since the energy crisis this
relationship has been dramatically reversed. This divergence in
the paths of growth is obviously a major factor in explaining why
our current account position has shifted from a $12 billion
surplus in 1975 to a $20 billion deficit in 1977. It has made it
difficult for us to balance the surge in imports we have
experienced with a compensating increase in exports.
At the same time, it is evident that the U.S. business
sector is not exploiting all of the opportunities which are
available in foreign markets. We need to know why. For this
reason, the President has commissioned the special Cabinet-level
task force under Secretary of Commerce Kreps announced in his
speech.
Let me make it clear that we will not engage in trade
warfare. We are only seeking to activate what we believe is a
dormant export potential. We have proposed an expansion of the
activities of our Export-Import Eank in an effort to make sure
that U.S. exporters have available a source of supplementary
financing that matches the terms offered by the export credit
agencies of other industrial countries. We have already proposed
to double Commodity Credit Corporation credits to support
agricultural exports. And the Export Tax Force is investigating
now best to encourage the exports of small and medium firms,
offset the heavy initial costs of opening up foreign markets, and
provide tax incentives to export sales in a more efficient manner
than is currently offered by DISC and other devices.
But in the final analysis, there are limits to what the
government can do to enhance exports. Our success will depend on
whether business takes advantage of the opportunities available
ln
foreign markets.
-6We are not now an export-oriented nation. We must become
one. Doing so will require recognizing the structural changes
that have been taking place here and abroad. For example, in the
case of our second largest export market, Japan, we have lost our
earlier market share, especially to a group of rapidly developing
Asian countries. There are real economic factors at work, which
cannot be ignored. Still, our difficulties in selling to the
Japanese market are too often attributed to presumed
protectionist measures and internal restrictions in Japan which
may no longer exist. Certainly impediments to U.S. exports
remain which need to be addressed on a government-to-government
level. But there are now large sectors of the Japanese economy
wnich are highly competitive and open to foreign producers. U.S.
companies must continually re-assess export opportunities in
foreign markets like Japan, in the light of rapidly changing
conditions and not solely on the basis of past experience.
The evidence is that we are now more price competitive.
There is good potential for profit in exports. Our firms will!
benefit by going after export markets with the same kind of h>
tenacity as our trade rivals. In its own interest, U.S. business
should waste no time and lose no opportunity to get on with the
job.
New Investment
To export competitively and retain a sound economy at horr^e,
tne United States must also aggressively pursue an expansion of
real investment in plant, equipment, and productive processes.
Tne record here is distressingly grim.
Consider the period 1960-to-1974, before the last recession.
In the United States, non-residential fixed investment averaged
13-1/2 percent of national output. The average was 18 percent
for tne larger OECD countries. It was 20 percent for West
Germany, 25 percent for Japan. As one might expect, these
differentials in investment contributed to sharp differentials in
average real growtn rates over the period: For the U.S., 3.8
percent; for Germany, 4.6 percent; for Japan 9.7 percent.
Last year, of course, the situation reversed itself. We
grew considerably faster in real terms than most OECD countires.
Our rate of growth in real investment, about 8 percent, also
outpaced that in many of those countries. But there is little to
suggest tnat this relative success of ours, in climbing out of
1974-75 recession, portends a long term recovery of our growth
prospects. For that to occur, a genuine sea change is needed in
the trend of private investment.
Tne task before us is truly enormous. The Administration
estimates that, to bring this recovery along a safe and balanced
path to full employment, and to prepare for the massive capital
needs we will face in the 19P0»s, real fixed investment in
productive facilities must rise by about 10 percent annually.
That is markedly more than last year. It is very substantially
-7more than recent trends. Looking at the 1970's as a whole, the
annual increase in real investment has been less than 2 percent.
We are very far behind schedule. Unless we begin catching up,
and quickly, we will pay a serious price at home and abroad in
the 1980's
I am especially concern ed about how the composition of our
investment relates to advanc ed techn ology. The stakes here are
exceptionally high. In inte rnationa 1 trade, we depend very
heavily on our exports of R& D intens ive manufactured products.
Indeed, in manufactured prod ucts tha t are not R&D-intensive, our
trade balance is negative. Unfortun ately, our investment
patterns are doing far too 1 ittle to preserve our comparative
edge in high technology prod ucts. A s a share of GNP, R&D
spending declined in the Uni ted Stat es by more than 25 percent
between the mid 1960's and t he mid 1 970's. Scientists and
engineers, as a share of our populat ion, have also declined,
wnile that ratio has increas ed in th e Soviet Union, West Germany,
and Japan. Tne number of U. S. paten ts granted to foreign
residents has doubled. Our acquisit ion of foreign patents has
declined .
These are mere straws in the wind; but it seems quite clear
to me that the wind is blowing strongly in the wrong direction.
Our technological supremacy is not mandated by heaven. It can
disappear. Unless we pay close attention to it, and invest in
it, it will disappear. Along with it will go our competitive
edge.
Conclusion
Successful efforts on the energy, inflation and export
fronts, together with judicious monetary management by the
Federal Reserve, are needed to protect the integrity of the
dollar. Accelerated investment in our economic plant is needed
to sustain the dollar's strength. The Carter Administration is
dedicated to these goals.
But to repeat once more, we need your help. The Business
Community plays a critical role. Energy conservation in the
business sector can make an important contribution to reducing
our dependence on imported oil. Business* cooperation in
decelerating U.S. inflation is essential if the dollar is to
maintain its value at home and abroad. The extent of
businessmen's efforts to maintain or recoup their share of the
U.S. market and of world export markets will determine the
success or failure of our export expansion efforts.
Government can help, and will do so. But it cannot succee
alone.
oOOo
FOR IMMEDIATE RELEASE
May 12, 19"78"
t
Contact:
Brian M. Freeman
376-0321
EMERGENCY LOAN GUARANTEE BOARD ISSUES FINAL REPORT
TO CONGRESS
The Emergency Loan Guarantee Board's Sixth Annual and
Final Report to Congress was made available in printed form
today for public distribution. The Report reviews the history
of the guarantee program and the operations of the Board and
Lockheed Corporation under it.
Congress established the Board in 1971 to extend and
monitor the Government's guarantee of up to $250 million of
private bank debt to Lockheed Corporation which was then
experiencing a severe liquidity crisis in which it was unable
to obtain private financing.
The guarantee terminated on October 14, 19 77, by mutual
agreement of the parties. On January 31, 1978, the Board
formally completed the Final Report and terminated its
operations.
The Report indicates that, in approving termination,
the Board found that Lockheed had restored itself to a
position which afforded it access to the normal credit
markets under reasonable terms and conditions without further
need for the guarantee. It also found that the risks facing
Lockheed were no longer materially different than those facing other major airframe manufacturers. In requesting early
termination, Lockheed and its banks also expressed confidence
in Lockheed's financial condition, fundamental viability and
future prospects.
The Report closes by stating that "the successful
operation and conclusion of the . . .program. . .demonstrated
that business and Government can work together to solve their
mutual problems when their relationships are properly structured.
B-897
-2"...The program served its...intended purposes, especially
the broader public interest. It permitted the avoidance...
to the California and national economies of a Lockheed failure
and such a failure's potential adverse ramifications for
Lockheed's suppliers, customers, and others. It also avoided
a potentially large negative impact on Federal, state, and
local revenues, as well as the accompanying social welfare
costs. It assured Lockheed's continued production under
national defense contracts without disruption, permitted
airlines. . .to obtain the aircraft in which they had invested,
and allowed continued competition by Lockheed in the commercial passenger aircraft manufacture industry."
The Government earned $26.6 million in fees on the
program, plus $5.6 million in interest on those fees, without being called on to lend or otherwise expend funds on
behalf of Lockheed or its lending banks. The Government's
administrative costs were slightly more than $1 million.
Throughout, its position was secured by a first lien on
Lockheed's assets consistently valued in excess of the maximum guarantees.
oOo
PRESS CONFERENCE OF
THE HONORABLE ANTHONY M. SOLOMON
U.S. UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
AT THE INTERNATIONAL MONETARY INTERIM CONFERENCE
HOTEL PRESIDENTE CHAPULTEPEC
MEXICO CITY
APRIL 29, 1978
As you know, the ground rules here are that we don't talk
about what other countries representatives say. So I'm simply
going to give you a summary of what Secretary Blumenthal said
today, and then I will be able to take a few questions. I
have to get back into' the room so this cannot be too protracted.
The Secretary started in by saying that with ratification this
month of the new IMF Articles, we are entering a new phase of
monetary history. We are launching our new system at a time
when the world economy shows some signs of improving in some
respects, and has some discouraging aspects in other respects.
We believe that the world outlook is somewhat brighter;
there is slightly higher growth; lower inflation and a better
payments balance. But, on the other hand, there are two formidable and related problems, low investment and high unemployment, which may reflect structural changes in the world economy
that are not yet clearly preceived or understood, and which we
may have to deal with if we are to find the key to widespread
and supstained economic growth.
Even though the OPEC current account surpluses are declining very sharply this year, you do have still remaining
and very prominent imbalances among • the industrialized countries,
with the United States on the one hand with a large deficit of
about 20 billion and the aggregate surpluses of Japan, Germany
and Switzerland of an equivalent amount.
Now, there are different ways of approaching a large payments imbalance. The United States has approached the problem
in accordance with the philosophy of the new monetary system and
the new Article IV. We believe that the new Article IV is at
the very heart of that system, and surveillance is at the heart
of Article IV. The concept of that article is that international
monetary stability cannot be imposed on countries from without
as in the par value system but must be developed by countries
B-898
- 2 from within through the application of sound, underlying
economic and financial policies appropriate to the situation
in those individual countries.
We in the United States are trying to attack those fundamentals—one by the adoption of a program to reduce our dependence on foreign oil; two, by the President's initiation of
comprehensive effort to counter inflation using fiscal restraint
as well as the cooperation of business and labor in slowing down
price and wage advances, as well as some other means; and three,
a new emphasis on improving our export performance. I would like
to emphasize that point again— that the new system permits a
variety of exchange arrangements but emphasizes a more comprer
hensive and continuous analysis and attention to fundamental^
factors such as the ones that I have just discussed. As con-v
trasted to the old system, with its emphasis on par values,
which was more mechanical in approach.
The future of the system depends on how well the Fund
performs its surveillance and we must make sure, as the Secretary
said, we are doing everything possible to see that this is
performed successfully. And then he made some specific suggestions for strengthening the processes of surveillance and thereby improving the balance of payments adjustment process.
First, in the category of provision of information it is
absolutely essential, we believe, for the Fund to get much
more information than it presently has if it is to play its
surveillance role correctly. Information on intervention
and exchange market conditions is one important area where it
must be adequately informed. Data on borrowing in international
capital movements might be another. A careful survey should be
made of the possible needs for all kinds of information.
In the area of organizational changes, the Fund has already
taken some important steps both on a set of procedures that
were agreed on by the committee, the Interim Committee, at this
last meeting. Also, the Managing Director has established a
separate office within the Fund's organization to concentrate
on surveillance and the operation of the adjustment process.
One further possibility that the Secretary suggested today is
that since the new Articles permit the establishment of the
Council as a permanent organ with decision-making powers to
replace the Interim Committee, he felt that this should be
seriously explored — this possibility — at an early date.
The United States sees merit in the Council and provided there
is the necessary widespread support would agree to its establishment.
- 3 ^
In a third area — submission of reports — we feel that
the Fund might consider the preparation, and perhaps the publication, of a separate annual report or other periodic reports
on the operation of the adjustment process and how it is being
affected by economic developments in, and policies of, individual
countries, both those in surplus and those in deficit.
The Secretary went on to address a different area by saying
that in addition to preparing the Fund for handling its new
surveillance duties effectively, we want to make sure it's well
equipped for its other responsibilities, and that brings us to
the question of resources and other developments of the monetary
system in the quotas and the SDR.
He went on to indicate that with respect to the seventh
quota review, the United States does not feel that the time is
yet right for a decision. We believe that there is still a
wide diversity of views, both with respect to the overall size
and with respect to distribution, and we believe it is worth
getting a few more months experience before deciding about a
quota increase, which also will give us some experience on
the level of resources, additional resources that the Fund might
need, because recently there have been come changes in that
situation.
With respect to the SDR--well, perhaps I should also say
he also indicated that with regard to the SDR interest rate
which has been discussed in the board, we would agree to an
increase above present levels, and we also believe that it
will be desirable for the remuneration rate to remain equal
to the SDR interest rate.
In regard to an SDR allocation, the Secretary pointed out
that there are arguments against it on grounds that there is
an excess of international liquidity and we must consider those
arguments. There are also arguments in support of an allocation
on grounds of the need to maintain viability and credibility
of the asset.
He pointed out that the SDR is a key component of the
monetary system with important long-run potential, and therefore he made the suggestion that one possibility would be to
have a modest allocation for three to five years with provision
that the next quota increase call for some SDR payment by
members. He suggested that the executive board in the coming
months study these points and consider a tie between allocations
and a quota increase with a view to preparing recommendations
for our next meeting.
- 4 He went on to comment in addition, regarding the associated proposal for currency substitution, pointing out that .
the United States does not seek any such agreement and we would
not ourselves propose its consideration — that he has doubts
as to its helpfulness to the system and its feasibility. On
the other hand, if others wish to see the idea studied, we
would not object.
I believe that that sums up the various points he made
and the broad philosophy in regard as to how the United States
sees the monetary system and.Its evolution. I'll take some
questions now for about ten minutes.
Q: Why are the new surveillance provisions so important
for the United States?
A: We believe that they focus attention on what we call
fundamental policies, as opposed to the previous mechanical
arrangements in the par value system. We believe that surveillance will promote a healthy adjustment process both by surplus
countries and by debtor countries.
Q: * Why is the time right for decision on the modest allocation of SDR's but not in the seventh quota increase?
A: I think you misunderstood me. I specifically said
that the two should be considered together and the board should
consider them together and should also consider our suggestion
that part of the quota increase would be paid with SDR's. So,
I think you misunderstood.
Q: Mr. Solomon, how much is modest, when you speak of
modest allocation? 1 billion? 2 billion?
A: We don't have a view on that one. There have been
various discussions at previous times as to what modest means,
and I think probably most people would assume it's somewhere
in the neighborhood of two, three, four. We don't have a
particular view. We have not focused at this point on the
exact number. I think the concept and the possible structure
adaptation—all these are much more important than the exact...
Q: Is that two, three, four, over a period, or annually?
A: The usual discussion has been annually, but I think
you are overemphasizing. I wouldn't want you to carry away
the impression that we have focused on a number — we feel
that the concept, the credibility of the concept, is one
chief argument for considering an allocation in connection
with the quota increase — that we are suggesting a
- 5 new possibility. There are more important points in our
suggestion and we ourselves have not particularly examined
the exact size within what might be called the modest range.
Q: Can you say anything about the reaction to linking
the quotas with this modest allocation?
A: We haven't heard any reaction yet. The Secretary
has just made this statement...
Q: There's been no discussion of it yet?
A: Right, no*.
Q: Did the Secretary mention or indicate that the
Carter Administration expects very soon the ratification of
the Witteveen facility? Did he indicate that this ratification
of the Witteveen facility might also ease up American
consideration of a quota increase in the seventh review?
A: The agenda item reporting on the status of the
Witeveen facility comes this afternoon. The Secretary did not
make any comments on that but he will this afternoon.
Q: Aside from getting more information for the IMF to
do its job, do you discern whether the United States or anybody
else favors any further sanctions in country situations?
A: I'm not sure I understand what you mean by sanctions.
Sanctions, in the sense that if the Fund were to feel that a
country has basically broken principles - agreed upon
principles — I would not underestimate the importance of the
Fund initiating a special consultation because of concern about
the member's exchange rate policies and the discussion of that
both first with that member country, and then under certain
conditions, the management can bring that to the board for a
discussion. This is, I think, an important factor, and given
the way the Fund operates, it should not be underestimated in
terms of the weight of public opinion, of broad international
monetary opinion, as reflected by all the member countries in
the Fund. And I think that this is more of a factor, and I
don't think that sanctions as such, as I see it at this point,
make much sense — any explicit sense. Now, we recognize this
is going to be an evolving role, this is, in a certain sense
a new area and I don't know that will happen in the long run,
and whether we will perceive a need for some changes.
- 6 Q: While the Minister of Finance of Japan has pointed
out that the dollar must be supported so that it continues
being the strong currency, the Finance Ministers of Great
Britain and France are in favor of SDR' s becoming the reserve
of the Fund. What is the United States attitude on this,
taking into account the weakness of the dollar in the international exchange markets?
A: Your question was, as I understood it, the actual
question was, what does the United States think about the
weakness of the dollar? Is that it?
Q: Yes.
A: Sorry, I wasn't sure I understood. If you look at
the history of important bilateral exchange rate movements,
since we went on floating rates, not just the dollar, but if
you look at the charts you will see very substantial cyclical
type swings. The particular swing that we have seen this year,
starting from the beginning of 77 or the middle of 77 depending
on how one measures it, until now, is not greater on a tradeweighted basis than it was in some earlier swings early in the
70's. Now, there have been some larger swings, in regard to
one or two other currencies. There also one has to look at
questions of differentials in inflation and one has to look at
the real exchange rate relationships. The dollar, as I say,
has been stronger in the past, will be stronger in the future;
there are periods in the flexible exchange-rate system where
there will be movements down as well as up, and one has to
accept that and recognize that if this is what the world
wants — and this is what seems the best type of monetary
system, namely a flexible exchange rate system — that there
will be these kinds of movements. One has to be reasonably
sophisticated about this and these kinds of adjustments have
to be understood. There is no country in the world that
believes that stronger and stronger and stronger currencies
make sense; there has to be a balanced relationship in terms
of the adjustment process. This is the only way I can answer
your question. If you look at it in the very narrow shortterm frame then obviously you are aware that the United States
has taken actions in the last few months to show its concern
about the disorderly markets, to intervene as necessary. It's
taken some further actions; we determined to protect the
integrity of the dollar and will continue to do so. But I
think that one should not assume that the fact that there will
be periods of decline as well as strength in most any currency,
that does not mean that there is a fundamental weakness. That
is our view.
- 7 Q: Do you think the dollar is now bottoming out as some
of the experts may hold?
A: I wouldn't want to give a hard view. Obviously there
is a considerable sentiment around. One hears this in
foreign exchange markets, financial circles, industrial circles.
There is a fairly widespread view along those lines. I think
it is quite possible. I don't like to make forecasts pn
exchange-rate movements. Thank you.
*
*
*
*
*
*
*
*
*
*
partmentoftheTREASURY
IHINGTQN.D.C. 20220
TELEPHONE 566-2041
PRFSS CONFERENCE OF
THE HONORABLE W. MICHAEL BLUMENTHAL
U. S. SECRETARY OF THE TREASURY
AFTER THE
INTERNATIONAL MONETARY FUND INTERIM COMMITTEE TREATY
MEXICO CITY
APRIL 30, 1978
I will make some brief comments to being with, essentially summarizing our view of the outcome of this meeting.
As I understand it, M r . Witteveen and Mr. Healey will be
having a press conference later at which the communique will
be available to you, so I will not be commenting on the
contents of that, nor will I comment on the positions of
other countries, but rather on our views and our impressions
of this meeting.
I would just like to refer briefly to the two major
elements that were discussed here in the course of the two
days that we m e t — o n e relating to our discussion of the
world economy, and in particular, the U. S. economy in that
context, and secondly, with regard to the various IMF-related
issues that were mentioned.
With regard to the world economy, I think there was good
progress made in exchanges of views and in understanding of
the problems that different countries have. The general feeling was that there is a problem of unsatisfactory growth rates,
and high unemployment in the world, as well as a problem of
difficult-to-solve inflation, a general feeling that if these
factors are not brought under control, the pressures for protectionism will intensify. That is certainly a view that we
expressed as well, emphasizing that the multilateral trade
negotiations in Geneva, therefore, assume particular importance.
We found an encouraging degree of support for our position
that we really had to deal with the fundamental issues as far
as the United States is concerned, and in that regard the addressing of these issues by the President in the statement of
April 11th relating both to the anti-inflation program and
the emphasis on the final passage of the energy program, received a great deal of support and encouragement.
There
clearly was a lot of attention on energy and I would say that
we were told clearly that that is an important matter that
will contribute greatly to world stability and growth, and to
exchange rate stability in the future.
B-899
- 2 ~
I was encouraged by the fact that there is a general understanding that intervention in exchange markets is not the
way to bring about stability, that one has to deal with the
fundamentals, that under certain circumstances to counter
disorder intervention is appropriate, but that basically the
fundamentals of fighting inflation, of dealing with proper
domestic non-inflationary growth policies, are what will determine our overall progress.
Generally speaking we were encouraged that at this point
most of the countries acknowledged and are in agreement with the
sum total of the efforts that we have made to make our contribution to achieving greater exchange rate stability. Although
some countries expressed the view that there is concern — that
they are concerned about the lack of stability— I was impressed
by the fact that there is general agreement that the fundamentals are what come first.
On the IMF issues, again, the emphasis was on fundamentals,
Our comments were tied very much to the amended articles and
to the importance of making the surveillance mechanism work
as efficiently as possible. I guess you are aware of the proposals that we made, to make a contribution toward making the
surveillance mechanism work better— to provide more information, to make certain organizational changes, and possibly
for the preparation of certain reports. All these matters
are going to be studied and I*m satisfied that they were well
received.
On guota increases and SDR allocations, I feel that we
made progress although no decisions were, of course, reached
here. I think that we have set a stage for further work so that
hopefully in the fall we can try to achieve some decisions on
these matters after some further work by the IMF, I guess
you will see these matters described in the communique to some
extent.
I think, basically, that describes our general feeling
that it's been a productive meeting. No major decisions were
made; there was progress in the discussions , identifying the
orders of priority, indicating further work that needs to be
done, leading toward, hopefuliy, some decisions later in the
year.
I should say a word about the so-called Witteveen Facility. There's obviously a great deal of interest in putting
that facility into effect. There was obviously some interest
a^bo>ii'tour progress, since they cannot come into effect without action by the United States.
- 3 We explained that there had been some initial delays, and
explained to our colleagues that we now were satisfied that
progress was accelerating. We said we were optimistic that
we could expect action by the Congress within the foreseeable
future, that is some time over the next two or three months.
I think that's all I'll say.
Q: Mike, can you discuss the "Big Five" meeting this morning with us briefly?
A: No, I cannot. We met for breakfast and had a very
general discussion., of some of the same issues ; that I have
touched on, obviously in a more relaxed atmosphere, discussing also the fact that we will be seeing each other again in
various other meetings — at the OECD ministerial meeting,
for example, and then at the summit in July.
Q: Mr. Blumenthal, you discussed at the very outset the
fact that there was a general need for world-wide economic
growth. Was there any discussion, and will a communique contain any explanation of the general feeling of whether stimulus in a number of countries is required at this time or in
the near future?
A: You will be able to read the communique. Obviously
there was a considerable amount of discussion, both formally
and informally, on the need for adequate growth in the principal countries and some descriptions by various countries of
the measures that were being taken, the kinds of aims and objectives that they had. Talking about our own situation, we
did explain that we were satisfied that based on the track that
we're on at the moment, and based on the tax proposals that the
President has presented to the Congress, we would achieve our
target which I thought would be around four and a half percent
in real terms.
Q: Mr, Secretary, did you discuss the role and position
of the dollar and whether or not the dollar might continue at
the current rate, or whether it might fluctuate at different
levels?
A: We did not get into the problem either of what the proper rate was or whether we expected it to go up or down. We
really dealt essentially with the underlying policies that
countries were following and should follow, and emphasized the
point that it is these policies that will determine the fundamental exchange rate levels.
-4Q: Mr. Blumenthal, I would like you to explain, in simple
terms that common people will understand, the position of the
United States towards the developing countries.
A: The United States has a long history of supporting
growth and development in the developing countries. We are
particularly concerned that the opportunities for meeting
basic human needs are achieved as rapidly as possible in
all of these countries. And the long history of my country
in that regard, of a policy which has really been unchanged
over many years, is exemplified by the substantial amounts-"
of foreign assistance that we have made available from ove£;
many years. It is for this reason that we support strongly
the work of the various international financial institutions,
particularly the World Bank, the Interamerican Development £
Bank, the Asian and African Development Banks, and so forth-.
We believe that is is also important that the developed
^'
countries work together with the developing countries harmoniously to lower trade barriers to the exports of the developing countries wherever possible. We further believe that we
must cooperate together to help the developing countries which
are primarily exporters of commodities and primary products
to achieve better prices, and stable prices, for their products.
Q: (In Spanish) Mr. Secretary, you say that the rate ofn
growth has been slowed down and that in the United States unemployment is creating grave problems for your economy. This
does not mean that the contributions which the United States
makes to international organizations such as IDB could be reduced? That is to say, not only to the IDB but also to the IMF?
A: I think I understood your question. We are presently
testifying before the Congress and working with the Congress
for the approval of very substantial amounts of resources for
the Development Banks. Actually, this year more than in the
previous year, and in a good many years; so there's no intention to reduce those contributions. Equally so in the Supplementary and Financing Facility — the Witteveen Facility —
we are asking for approval for support of that facility in a
very substantial amount, involving some 1.7 billion dollars.
Q: Mr. Secretary, was there discussion here by you of
the recent Federal Reserve Board moves to increase the federal
fund rate unless it tends to slow down excessive growth, and
what do you think of that...?
A: There was no specific discussion of that point. There
was obviously a discussion of the totality of the moves in the
United States, both fiscal and monetary, and the impact that
we felt these moves would have both on the domestic economy,
on confidence as well as on international exchange rates.
- 5 Q: Mr. Secretary, do you think that at the summit in
Bonn there will be decisions made by the surplus countries
to stimulate, or do you think it would be a stand-off where
everybody does what he really wants?
A: It's difficult for me to speculate what the Heads of
State will decide in Bonn next July. I'm encouraged by
watching the preparations for the Summit —that there is a
good spirit of cooperation, and that the responsibility that
each of the countries that will be represented at the Summit
feels, not only for the health of its own economy, but also
for the impact that its policies have on other countries,
is very keenly felt. I think in the light of that sense of
responsibility I certainly expect that the decisions will
reflect that.
Q: Will the instability of the dollar affect that spirit
of cooperation?
A: I think that based on the measures that have been taken
by the United States and the cooperation that exists between
the Federal Republic of Germany and ourselves in various ways,
the basic soundness of the dollar is being underlined. And
I think that, based on the discussions that I've had here, I'm
convinced that most of the countries, all of the countries,
recognize that we are dealing with the fundamentals, that we
are collaborating to eliminate disorderly market conditions,
and that that is generally appreciated.
Q: Mr. Blumenthal, you mentioned at the outset that there
are problems of unsatisfactory growth and went on to say that
if these problems are not dealt with, protectionist pressures
won't intensify. How are we going to deal with this problem of
unsatisfactory growth?
A: Obviously, the goal has to be for all of the developed
as well as the developing countries to bring about faster
growth rates than those that have pertained over the last year.
That is a decision, the specific steps that countries have to
take. That depends, obviously, on each individual situation,
and that is a decision that each country must make on its
own. In some instances it relates to increased government
spending, in other instances it relates to reduced taxation,
and in other instances it relates to specific measures to deal
with structural requirements, to stimulate business investment,
and to reduce unemployment, and assistance to the developing
countries to achieve better growth, requires that the overall
level of growth in the OECD countries also is accelerated.
Thank you very much, ladies and gentlemen.
0O0
MmentoftheJREASURY
MGTON,D.C. 20220
TELEPHONE 566-2041
QUESTIONS AND ANSWER PERIOD
FOLLOWING ADDRESS BY
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE FINANCIAL ANALYSTS FEDERATION
BAL HARBOUR, FLORIDA
MAY 8, 1978
QUESTION: Mr. Secretary, would you comment on Congressman Ullman's proposal to relieve some of the double
taxation of dividends by integrating corporate and individual taxes?
REPLY: Well, I think you got a hint of my view on
this. We oppose that in this particular bill, not because we oppose the basic notion; indeed, as most of you
know, we favor the basic notion. Indeed, it was one of the
issues that President Carter felt very strongly about, and
we examined it in great detail. The cost of doing this is
high. We^only have about $7 billion available for the total
effort in this area, and we asked ourselves the question
of how that $7 billion can most usefully applied, and we
concluded that a reduction in the corporate tax rate by
4 percentage points, based on all the information and evidence we got, was the most effective way of doing that. If
we got into the question of...if we took some action on reducing the double taxation of dividends, we would have to
take the money from some place, and it would mean that we
would be reducing our proposed reduction of the corporate
tax rate — four to three or to two. And, on balance, that
in our judgement would not be a desirable step to take at
this time.
Secondly, we believe that, once you get into this problem, you're really into -- logically, technically and
equitably — into the whole question of dealing with capital
gains, and the marginal rates of unearned income as well.
And we feel that, when you approach this problem, you need
to approach it as a whole, and you need to look at the
totality of this, rather than this one issue. It is for
this reason that we have been indicating to Chairman Ullman
that in our view this is not the right time, regrettably
B-900
to move in that direction.
- 2 QUESTION: Mr. Secretary, I have a series of questions
here about capital gains taxes and specifically the Steiger
proposal in the Ways and Means Committee to roll back the
capital gains tax to a maximum of 25 percent. There have
been a series of studies, I think -7 the Chase Econometrics
model, the Data Resources Econometrics model — that indicate
that, over a period of several years, the Government's
revenues will actually increase with this proposal. Would
you comment on that?
REPLY: Well, let me again reiterate the basic point
that I am making, which I guess boils down to saying that
the President or the Treasury is broke. We don't have the
money, and I wish some of you could participate in the excruciating meetings in which I have the dubious pleasure
of participating, when we look at the Budget and try to
figure out how to bring the Budget'toward balance.
Incidentally, one of the key requirements to getting
inflation under control, in my judgement, is to get that
deficit down, down as quickly as possible and get it
toward balance. How to do that'—given the fact that most
of the Budget is mandated by law and that it is just virtually impossible to get the Congress to agree to change some
of those laws? We're locked in. So you begin with some
of these very good ideas, and the first thing you ask yourself, particularly when you're Secretary of the Treasury, is
how much? Well, I'll tell you* in 1978 numbers, the Steiger
proposals would cost about $4-1/2 billion. That's
by 1978 numbers, and I learned at the Bendix Corporation and
on various other financial committees, under the "falling
off the cliff theory," it is useful to ask: How much is
it in'79,'80, and'82?
There's a favorite sport in Washington called "phasing
in." "Let's phase it in slowly," they say. Well, you
phase things in slowly—we've been phasing them in slowly
for the last 20 years — and that's why we have the kind
of Budget problems we do, because we have now laws and
statutes under which things" only cost a quarter of a billion
dollars," and now they cost $10 billion, because we phasedthem-in a few years ago. The $4-1/2 billion in 1978 will
rise substantially in succeeding years.
Secondly, the large portion of the benefits of that
kind of proposal would accrue to people making more than
$200,000 a year. We don't think that that's acceptable.
Ninety-seven percent of the Steiger proposal, as it relates
- 3to the changes in the alternative tax, would accrue to people
making more than $200,000 a year. Fifty-six percent of the
revenues would go to people making more than $200,000 a
year, as it refers to that part of the proposal which deals
with the elimination of the minimum tax. And so forth and
so on. So, if we did it, we would virtually have to scrap
the reduction in the corporate tax rate — which in my
judgement would not be desirable — for we couldn't afford
$7 billion and another $4-1/2 this year, which would rise
to $5 or whatever next year and beyond.
And then I just don't see how we could defend giving
that kind of break essentially to people that make more
than $200,000 a year and certainly most of it to those
who make more than $100,000 a year. It would accelerate
capital formation to some extent, but as my presentation,
I think , intended to show, the best way to increase capital
formation, along with controlling inflation and government
regulations, is to increase profitability of American business overall. And we think that the reduction in the corporate tax rate really does that better than any of these
alternative approaches.
COMMENT: I've been asked by my fellow panelists to
request of those who make questions that they print plainly
—we're having a little difficulty interpreting some of
these.
QUESTION: Mr. Secretary, I have a question for you.
It's of a little different dimension. The capital formation
problem is a worldwide one. It weakens the dollar and
causes inflationary pressures on other economies. What
series of steps are next in mind, or what's the next line
of defense, should the dollar come under attack again. I
know we've taken some, but it's never a certainty. What
proposals will be introduced next if that event should occur?
REPLY: Do you really expect me to tell you? This is
a very, very difficult problem, and it requires a great deal
of care and caution, and if there is one thing that I have
learned in the last 16 months, it's just how much care and
caution it does require. We are living in a world of flexible exchange rates. We have $500 billion of capital out
there in the Euro markets—$500 billion—floating around, able
to move rather rapidly. There is no way in which we can
seek to maintain an exchange rate at a particular point or in
a particular target zone as we did under the old Bretton
Woods system. We scrapped that system some years ago because
we recognized that.
Under
flexible
system
in the aUnited
States,,
and of exchange rates, we believe
- 4 we have been following that policy steadfastlyB that
countries must deal with the fundamentals of economic circumstance. The fundamentals relate to the control of inflation, for it is differential rates of inflation that
cause changes in exchange rate relationships; the rate of
growth, for it is differences in the rate of growth that cause
these same changes; and the elimination of surpluses and
deficits in the current accounts of the major countries. The
United States has been following and will continue to follow
a policy of emphasizing these fundamentals in order to deal
with the exchange rate problem.
If we do not bring the problem of inflation under control, the maintenance of stability in the dollar will be
that much more difficult. If we do not maintain an adequate growth rate, and if other countries do not achieve
adequate rates of growth, then again, the stability of the
dollar will be that much more difficult to maintain. That
indeed has been one of the problems over the last year or
two—that we were more successful emerging from the recession than other countries. We grew at a substantially
faster rate than other countries. As a result, we were
unable to export to the slow-growing economies where many
of our customers are, and we sucked in imports more quickly
into our more-quickly growing economy.
The only thing we can do beyond that—dealing with
these fundamentals, and that is increasingly understood
by other countries—is to, well let me deal with one other
fundamental first, which is to reduce our unacceptably large
balance-of-trade deficit, over $30 billion last year. And,
again, that relates importantly to the competitiveness of
American industry in traditional products, technology^-intensive products, and we are specializing in the exports of
technology-intensive products, and that's why the lack of
investment in R & D is such a worrisome thing in this country
but, also the question of energy. Amongst the problems that
are the most important, or candidates for the most important,
clearly the problem of energy is high up on the list. And
our inability after 13 months of showing the national will
to pass energy legislation and to show the world that we
have an energy policy clearly is also an important factor
that causes the instability of the dollar.
If we can pass an energy policy, which means that the
world can see that we will be reducing gradually dependence
on imported oil, we will be reducing that very, very large
bill of $45 billion for imported oil—or at least not increasing
beyond
to deal
exchange
of
disorder.
that
with
markets,
it—that
are
the
Wecertain
elimination
have
to
toocounteract
will
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have
a of
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impact
speculation
that
deal.
are
on available
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We
conditions
and
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that
anto
kind
agreein
And
usthe
- 5ment with the Germans—this was announced some time ago—
which signals a variety of ways in which we can marshall
and are marshalling the resources, and it is that kind of
policy that we will continue in close collaboration with
other countries.
QUESTION: Mr. Secretary, there are a number of questions
focusing on the general issue of the level of government
spending which are summed up, I think, by this one question.
Total spending by Federal, State, and local government in
the U.S. is about 34 percent of the GNP. What can the Administration do to bring it down more in line with 19 to 21
percent spending level in Japan and West Germany?
REPLY: Well, a year ago, many of the business and
financial audiences that I addressed, and many of the discussions that I had, and questions and comments, that I got,
reflected a concern by the listeners that there was not a
clear indication of the philosophy and goals of the new Administration as regards econ^nic policy. I certainly was
impressed by the prevalence of that concern, and therefore
I, along with some of my colleagues, urged strongly that we
correct that impression. I think the President's Budget
statement and Economic Message of January of this year does
so.
It states clearly that there is an intention of his
part to bring the government Budget into balance by 1981,
substantially reducing the deficit in the interim, and that
Federal expenditures as a percentage of GNP are to be reduced from the 22.6—23 percent—down to 21 percent, over
this period. This being done by a tight lid on Federal spending, a tight lid which is very, very difficult to keep
tight. And you look at the daily reports in the newspapers
of actions in the government to increase spending—for
foreign purposes, for water projects, for a whole host of
things that make some sense in an individual setting but
that tend to bust the Budget—and you look at all of the
good ideas for reducing taxes and therefore revenue, which
would further unbalance the Budget—for tuition tax credits, for urban tax credits, for Social Security and a whole
host—there are dozens of good tax credit ideas... We
are going to move down to 21 percent, we are trying to keep
income taxes at no more than 14 percent of personal income—
no, total taxes at no more than —for Federal, 14 percent—
and income taxes at about 10.4 percent.
- 6 The only way to do this is, month after month, year
after year, to try to implement that policy, and the President in his April 11 speech said it clearly. He is prepared to use all the powers of his office, which means veto
powers, to avoid the spending of additional money and to
let the economy grow while keeping the government Budget
down. It's a very difficult job, and it needs your support.
- 7QUESTION: Mr. Secretary, in contrast to your comments
on the high consumption rate in this country, the tax program still seems to be focused primarily on increasing
consumption rather than on increasing investment. Are
decisions in this area based on what's good politics rather
than what's good economics?
REPLY: Well, if I told you that decisions on economic
matters are made without an eye toward the political impact,
you wouldn't believe me, anyway. (Laughter) So I would not
say in a democracy, both as regards the executive as well as
the legislative branches of government, the political impact
of particular decisions is not considered. But, I would say
that the program that the President proposed is not a political program in that sense.
Witness the fact... and I would say it is a pro-business
program in the sense that about between a third and a quarter
of the cuts are directed to business; they are, in fact, designed to increase profitability and to stimulate capital
investment, which has been lagging; and they tend to concentrate the personal income tax cuts to those levels of
taxpayers who are most hurt and most affected by the high
level of taxation, because of inflation, and by the increasing
need to tax more on Social Security in order to keep the
Trust Funds in good shape. I don't think that you can say
it's political to have most of the tax reductions go to people
who make 14, 15, 16, 18 thousand dollars a year, for it's
hard to raise a family on that. But we have put a great deal
into the business sector, we have responded to the desires of
the business community, and I therefore think it would be
unfair and incorrect to label the President's program as
being political without due consideration of the economic
goals that we're seeking to achieve.
QUESTION: Mr. Secretary many of the questions that have
been submitted reflect a great deal of cynicism about the
prospective efficacy of the inflation program—namely, exhortation or jaw-boning. I think the basic debate relates to how
much room is left in the economy to grow without putting
increasing inflationary pressures into play. There've been
several studies that suggest that perhaps our estimates of our
ability to output goods are too high. To introduce on that
basis the full employment deficit notion in formulating fiscal
policy may meet with an endless trap, because it seems to
take more and more to do less and less. What kind of test,
or what kind of examination, can be done to resolve what I
think is really kind of a pivotal question?
REPLY: I think it's a very important and a very good
knows
question,
enough
andabout
I would
thesay
problem,
that no
the
country,
causes and
including
the cures
our own,
of
- 8 modern inflation. I once was an economist, and I don't
mention that too often because I don't have much pride in
my former profession, in that regard. For the economic
profession really is bankrupt when it comes to the theory
of modern inflation.
When I look at the mail that I receive, or samples—
I get so much of it I can't see all of it—samples of the
mail that I receive, I'm impressed by the fact that thoughtful people throughout the country all have a simple explanation
of inflation. Generally, inflation-fighting and the cures
for inflation that people suggest are much like taxation; it's
somebody else's ox that is to be gored. Most people think
inflation is caused only by the government—my colleagues in
the government think it's caused only by big companies, and
many big companies think it's caused only by monopolistic
unions.
The fact of the matter is—this is the Blumenthal theory
of inflation, probably worth as much as the others—(Laughter)
that inflation is caused by a number of factors that act
together and interact in strange and mysterious ways. Some
of it clearly is government fiscal policy and monetary policy;
some of it is government regulation; some of it is external
factors, the price of oil, the decisions OPEC makes, the
weather, these exogenous factors have an impact on inflation.
Some of it is clearly is business and labor trying to run
faster in order to keep up and thereby pushing up wages and
prices. The solution on the problem of inflation, therefore,
at any level in an economy which is not truly flexible and
which does not function the way classical theory teaches us
has to be to attack all of these problem in some coherent
fashion.
But clearly, as long as we have still six million people
unemployed, as long as we still have 83 percent of industrial
plant utilized there is room, although there are these inflexibilities. We have found that, even at much lower levels of
plant utilization, we have these inflationary pressures. I
don't think that we can cure inflation with a low level of
economic activity—even when there's no growth we've had
inflation—we've seen that. The worst inflation we've had
was when we were in the worst recession. But if that's true,
if you can't cure inflation by stagnating the economy, then
at 83 percent also we have some room for reducing the number
of unemployed further and at the same time dealing with the
problem of inflation. What we're trying to do is to attack
both of those problems at the same time because they do not
fully interact in the way in which we originally thought they
did.
- 9 -
QUESTION: Mr. Secretary, you mentioned in your prepared remarks the greater productivity in capital formation
in several other nations. Would you please comment on the
capital gains taxation in other countries, specifically,
West Germany and Japan.
REPLY: I think it is difficult to ascribe a
particular result to any one... related to any one particular
cause. Actually, the level of taxation on individuals, on
the average, is higher in most of Europe than it is in the
United States. Relatively speaking, we pay—although we
don't feel that way, we feel very oppressed—on the average,
we as individuals pay somewhat less in taxes than the
Europeans do. Equally, business taxation in many of the
European countries is as high er higher on the average than
it is in this country. And it is my feeling that it is the
overall level of taxation and of profitability which tends
to determine how much people save and how they apply those
savings.
I think it is true that the climate, the relationship,
between government and business is very different in Germany
and in Japan and in Europe than it is in this country. We
tend to look upon each other with a certain amount of skepticism, and government and business does not have a close
relationship, and as someone who has been on both sides of the
fence, I think I have a very clear feeling of the depths of
this sense of suspicion. That's not true in the European
countries and in Japan. Therefore, questions such as government regulations—the extent of those—the form of taxation,
what needs to be done, how much needs to be exported, how
R & D is to be financed and applied are really settled in a
much more cooperative spirit. I can tell you that that's
difficult to do in the United States, even the problem of
inflation.
The President took a decision to keep government wage
increases to 5-1/2 percent if he can. He took a decision to
freeze executive pay. He took a number of other important
decisions which politically are very difficult—talking about
the politics of these things. It's very, very difficult to
get a private sector to do its part and to comply. They
don't want regulations, and also don't really feel comfortable
about supporting these kinds of government initiatives. I
think that's the essential difference between these other
countries and ourselves. And I think we need to work on that
and establish a better climate in which these decisions are
made, rather than any particular one.
- 10 -
QUESTION: Mr. Secretary, would you comment on the
proposition that a reduction of capital gains tax would
actually increase government revenues through the stimulative effect on investment.
REPLY: I can aomment very simply—there is no evidence,
no objective evidence that this is so. Let me give you one
example—people frequently say the Kennedy tax cut, and they
say, "look at the Kennedy tax cut. He cut taxes greatly and
government revenues increased greatly in succeeding years."
The problem is that cause and effect are very difficult to
ascertain—to correlate. You can correlate the amount of
sunshine in certain years with the numbers of births in
Bangladesh... But it's not necessarily true that one had
anything to do with the other.
We don't know what would have happened in the American
economy in the absence of that kind of a tax cut. Indeed,
there is a lot of evidence that the U. S. economy.was, willynilly, in a strong growth mode during this period, and that
much of the increase in revenue had very little to do with
that particular tax cut—we just don't know.
All of the evidence that we have indicates that a reduction in the capital gains tax certainly would be £ beneficial
thing, and I'd love to see it. It would be stimulative in
many ways, but it would not increase Federal revenues... If
that were clear, I would be really out there—so would the
President and everyone else—cutting the dickens out of capital
gains taxes, because that would be the way to balance the budget. Unfortunately, that is an option that none of the computers,
and none of the economists, and none of the observers that do
that analysis tell us is open to us. Thank you very much.
(END)
FOR RELEASE UPON DELIVERY
"EXPECTED AT 10:00 EDST
MAY 17, 1978
STATEMENT OF THE HONORABLE BETTE B. ANDERSON
UNDER SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON HISTORIC PRESERVATION! AND COINAGE
OF THE HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
Thank you, Mr. Chairman, for this opportunity to appear before
your Subcommittee today in support of legislation the Secretary has
recornnended for a new dollar coin. We particularly appreciate the
promptness with which this hearing has been called following the
submission of the proposal, since time is an important element in
the Department's recommendation.
The proposal before you, Mr. Chairman, is essentially simple.
Ws are reconmending that the current dollar coin, which, because of
its size and bulk, has never achieved acceptance by the American
public, be replaced by a smaller, lighter dollar coin. The objective
of our proposal is basically twofold — to provide for a useful
denomination in our coinage system and, at the same time, to effect
savings for our Government and the economy as a whole.
By way of a brief background, the current cupro-nickel clad
dollar was first authorized by the Cbngress in the Act of
B-901
- 2 -
December 31, 1970, as a replacement for the standard silver dollar.
In that Act, the Congress repealed the Department's statutory authority
to mint and issue the standard 90% silver dollar and authorized in
its stead a base metal dollar coin having essentially the same size.
Thus, the current dollar has a diameter of 1.5 inches and weighs
nearly 23 grams.
Since 1971, when the Mint first started to issue the clad dollar
coin, it has not succeeded in becoming a useful part of our coinage
system. Because of the lack of public demand, the dollar coin has
represented less than one percent of the Mint's annual production
each year. Indeed, even this minimal demand for the dollar can be
attributed, to a great extent, to its usage in gaming machines rather
than to its useability as a medium of exchange. According to our
studies, the lack of public interest in the current dollar coin is
directly attributable to its cumbersome size and weight. It cannot
readily be carried by our citizens in their purses and pockets. In
addition, the large size of the coin has made it iitpracticable for
the automated merchandising industry to adjust their equipment to
accept the large dollar coin.
The smaller coin we are now proposing would be sized between
the quarter and half-dollar with a diameter of approximately one inch
and a vreight of approximately 8 grams. We hope that such a smaller,
more conveniently sized coin would be far more acceptable to the
general public and would ultimately gain widespread usage.
- 3 -
If the proposed dollar is accepted by the general public, it
could result in considerable savings both for our Government and the
economy as a whole. Since the coin would last at least 15 years in
circulation, conpared to 18 months for a one-dollar note, each coin
wDuld save over 80% of the production costs of the notes displaced.
With nearly 3 billion one-dollar Federal notes in circulation today,
even a modest displacement by the dollar coin could result in savings
of millions of dollars in production costs. Moreover, according to
our estimates, even a 20% displacement of notes by the coins would
permit Treasury to defer a costly facility expansion at the Bureau
of Engraving and Printing for the foreseeable future.
To the extent that the new coin circulates at least as widely as
the current clad dollar, there would be immediate savings for the
Government. The cost of producing the proposed dollar would be 3 cents
a coin as conpared to the current production cost of 8 cents per dollar
coin. Thus, even if the Mint were to issue no greater quantity of
the new dollars than the large dollar coins it has produced annually
since 1971, the Government would still save approximately $4.5 million
a year.
To comment briefly on the design of the new dollar, the
Department has selected a modernized version of the classic Liberty
design for the coin. At the same time, to honor and commemorate
President Eisenhower, whose image now appears on the dollar coin,
the Department would continue to be authorized to mint 40% silver
- 4 clad Eisenhovrer dollar coins in the current 1.5 inch diameter size.
These silver clad dollar coins would not be part of our circulating
coinage but would only be available to collectors and the general
public in proof and uncirculated quality.
This, Mr. Chairman, completes my general comments on the dollar
proposal. The Director of the Mint, Mrs. Stella B. Hackel, will
describe some of the more technical aspects of the proposal for the
Subcommittee.
#
#
#
partmentoftheJREASURY
5HINGT0N,D.C.
20220
TELEPHONE 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 EDST
MAY 17, 1978
STATEMENT OF THE HONORABLE STELLA B. HACKEL
DIRECTOR OF THE MINT
BEFORE THE SUBCOMMITTEE ON HISTORIC PRESERVATION AND COINAGE
OF THE HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
As Under Secretary Anderson has indicated, Mr. Chairman, my
testimony will deal with the technical aspects of the dollar coin
proposal. I appreciate this opportunity to appear before you,
Mr. Chairman, in support of this proposal. If the proposed bill insets
the approval of the Congress, it would result in a significant
iirprovement in our coinage system.
The limited usefulness of the current dollar coin has been of
concern to the Bureau for several years. It has been clear to us
for some time that, primarily due to its cumbersome size and weight,
the dollar coin cannot effectively serve as a medium of exchange. Our
views have been reaffirmed by an independent study conducted by
the Research Triangle Institute, concluded in 1976. It was the finding
of the study that a smaller $1 coin, sized between the current quarter
and half-dollar, would be far more acceptable to the general public
than the existing coin.
B-902
- 2 PHYSICAL CHARACTERISTICS
In determining the appropriate physical size of a new coin,
the Mint has considered several factors, including handling
convenience and the potential for counterfeiting or slugging. The
recanriended weight of 8.1 grams is the lcwest possible weight for
convenient handling by the general public, while at the same time,
being sufficiently heavy to be readily distinguishable from the
quarter. The quarter weighs 5.67 grams, thus, the proposed coin would
be 43% heavier than the quarter.
I should point out, Mr. Chairman, that the weight for the new
dollar proposed in our legislation is specified as 8.5 grams. However,
after submission of the proposal, we were advised by the coin sorting
manufacturers that a dollar coin with a slightly lcwer weight would
facilitate high speed coin sorting. Since coin sorting machines are
used by all major retailers and banks, we feel this is a legitimate
consideration; thus, we now recommend that the weight be changed in
the proposed bill from 8.5 grams to 8.1 grams.
The new dollar would be distinguishable from the quarter by
touch as well as by sight. The design proposed would have an
eleven-sided inner border on both sides of the coin within the outer
circular configuration. This design element would provide a means
for tactile recognition by the visually handicapped.
- 3 -
For purposes of high uti.lizat.ion in automatic niee hmdi-;i.n<|
devices, it is essential that the size of the coin preclude she usi.
of readily available low value foreign coins of identical sL/e to
slug the equipment. A diameter of 1.043 inches in size (20. > :ui.1.1.ureter
best meets this requirement and has been endorsed by the rna jor
manufacturers of automatic coin handling equipment.
Further, to prevent the slugging of the new coin by reducing the
diameter of the current half-dollar, the thickness of the cupro-nickel
outer layers would be increased. The clad layers would constitute
50% of the total thickness of the coin as conpared to one-third in
our current cupro-nickel clad on copper coins.
COMPOSITION
Except for the two minor coin denominations, the cent and the
nickel, all circulating U.S. coins are made of a cupro-nickel alloy
bonded on both sides to a pure copper core. This composition has
many advantages, including superior surface wear and appearance, and
relative low cost to produce. Overall it is approximately W co. *-er,
and economically, fabricated into coinage strip for high relief. coins.
Also, the unique electrical properties and density of this cupro-nickel
("sandwich") laminate make it very difficult to counterfeit- or sluq.
Many materials — including several copper alloys, tj.tam.Di,
and other clad combinations — were tested to determine the rnr.t
suitable composition for the new coin. The results of the studies
- 4 indicate that the best overall material is a 75% copper/25% nickel
alloy clad on a 100% copper core.
Except for the thickness of the cupro-nickel cladding for the
new smaller dollar coin, this laminate is the sane material now
being used in all of our coin denominations other than the five cent
and one cent coins. Manufacturing cost is estimated at 3 cents per
coin compared to 8 cents for the current 1.5 inch diameter dollar coin
DESIGN
Throughout our history various Liberty designs have been
predominant on our circulation coins until the last few decades when,
on historically significant occasions, U.S. Presidents were selected
for such honor. Benjamin Franklin, who holds a unique position in
our history, appeared on the half-dollar for a period of fifteen years
and is the lone exception to the abstract or Presidential designs.
The recommended design for the obverse is a modern or stylized
female Liberty Head. This historic design appeared on the first
U.S. coins minted in 1793, and appeared in various forms on almost
all denominations of our coins through modern times. The female
Liberty Head is symbolic of and honors all women rather than any
particular individual. It is accompanied by the Phrygian Cap which
has been a symbol of freedom for over 2500 years and has repeatedly
appeared on our coins. It is most appropriate that such a historic
American design once again return to an American coin.
- 5 -
The recommended design for the reverse is a Soaring or Volant
Eagle. The eagle has appeared on the reverse of every dollar coin
since 1794 with the exception of the gold coins. The recomirended
design, though similar to the 1916 quarter-dollar eagle, is a irore
vivid rendition emphasizing the independence and spirit which
characterizes this national symbol.
Many distinguished American men and women have made substantial
contributions to our country which are worthy of recognition. A select
few have been honored on limited issue comremorative coins. The new
dollar coin is intended to circulate widely; thus, a design consistent
with the historical precedents established by the Secretary of the
Treasury and the Congress would be most appropriate. In our view,
expanding the field of design selection beyond historical abstracts
and U.S. Presidents would set an unwise course in coin design, and
invite a controversial debate which would tend to damage the overall
success of the proposal.
EISENHOWER DOLLAR
As the Ifiider Secretary noted in her testimony, the proposed bill
would authorize the Department to continue the minting of the 40%
Eisenhower silver dollar in its present size. If approved by the
Congress, the bill would thus authorize the first commemorative
U.S. coin to differ not only in design and alloy but also in size
from the circulating coin of identical denomination.
- 6 -
PRODUCTION PLAN
At such time as the legislation is approved by the Congress,
the Mint would immediately start the contracting process for the
necessary coinage strip. This would take approximately three months;
at that point, we could start the actual production of the coins.
Were the recommended, design adopted, approximately two months would
be required for the Mint to complete the fabrication of dies and the
procurement of the production tooling necessary for the new coin,
during which time the coinage strip would also be procured.
Our plan is to undertake production at an accelerated rate,
producing 500 million pieces of the new coin in six months, prior
to their release to the public. Such a large inventory of coins
prior to initial distribution would assure an equitable and adequate
supply of coins throughout the Nation.
This statement concludes my prepared remarks, Mr. Chairman.
I would be pleased to answer any questions you may have.
#
#
#
FOR IMMEDIATE RELEASE
May lb, 1978
Contact:
Charles Arnol'd
566-2041
TREASURY ANNOUNCES COUNTERVAILING
DUTY INVESTIGATION OF IMPORTS OF
OLEORESINS FROM INDIA
The Treasury Department today announced an investigation to determine whether the Government of
India is subsidizing exports of oleoresins. The investigation results from a petition filed on behalf
of domestic interests. An oleoresin is a thick liquid
extract of the flavor of a spice used primarily as a
seasoning in the food industry.
The Countervailing Duty Law requires that the
Secretary of the Treasury collect an additional duty
that equals the size of the "bounty or grant" (subsidy)
paid on the exportation or manufacture of merchandise
imported into the United States.
A preliminary determination in this case must be
made not later than September 21, 1978, and a final
determination no later than March 21, 1979.
Notice of this action will appear in the Federal
Register on May 16, 1978.
Imports of oleoresins from India amounted to
approximately $1.5 million during calendar year 1977.
«.»..
/»
B-903
«.»«.
/»
•.»/>
Department of thefREASURY
TELEPHONE 566-2041
IN6T0N, D.C. 20220
May 15, 1978
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,200 million of 13-week Treasury bills and for $3,400 million
of 26-week Treasury bills, both series to be issued on May 1 8 , 1978,
were accepted at the Federal Reserve Banks and Treasury today. T h e details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturine August 1 7 , 1978
26-week b i l l s
maturing November 16, 1978
Price
Discount
Rate
Investment
Rate 1/
Price
98.411
98.396
98.403
6.286%
6.345%
6.318%
6.48%
6.54%
6.51%
96.466 6.990%
96.447
7.028%
96.454
7.014%
Discount
Rate
Investment
Rate 1/
7.35%
7.39%
7.37%
Tenders at the low price for the 13-week bills w e r e allotted
Tenders at the low price for the 26-week bills w e r e allotted
TOTAL TENDERS RECEIVED AND A C C E P T E D
BY FEDERAL RESERVE DISTRICTSAND T R E A S U R Y :
Location
Received
Accepted
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
&
an Francisco
$
$
$
Treasury
TOTALS
29,490,000
3,484,550,000
22,730,000
46,565,000
31,120,000
36,835,000
297,975,000
46,745,000
24,725,000
43,305,000
13,930,000
295,805,000
5,925,000
$4,379,700,000
29,490,000
1,697,350,000
22,730,000
46,565,000
31,120,000
36,835,000
72,975,000
24,705,000
24,725,000
43,305,000
13,930,000
150,805,000
5,915,000
33,145,000
5,057,955,000
23,410,000
161,545,000
32,995,000
28,215,000
386,385,000
41,190,000
26,175,000
32,730,000
8,680,000
314,820,000
8,600,000
$2,200,450,000a/: $6,155,845,000
eludes $397,760,000 noncompetitive tenders from the public.
^eludes $212,910,000 noncompetitive tenders from the public.
bivalent coupon-issue yield.
Accepted
$
23,145,000
2,851,055,000
23,410,000
91,545,000
13,995,000
27,660,000
94,835,000
13,190,000
23,175,000
32,730,000
7,680,000
189,350,000
8,600,000
$3,400,370,000 b/
FOR RELEASE ON DELIVERY
(Approximately 1;30 PoM0> May 15, 1978)
Remarks by The Honorable Anthony M. Solomon
Under Secretary of the Treasury for Monetary Affairs
Before the
International Herald Tribune^ Forex Research Ltdo Conference
on
"Managing Foreign Exchange Risk"
New York, May 15, 1978
Exchange Market Developments and U0S0 Policy
I appreciate the opportunity to participate in this
conference on managing foreign exchange risko Many here today
are in a real sense on the front lines of the international
monetary system, making operating decisions that collectively
can have a profound effect on the operation of that system
and the stability of the world economyG It is important
that we in government understand your concerns and problems
and that you understand the objectives of government policies0
The Value of the Dollar
The UoSo current account balance deteriorated rapidly in
the latter half of 1976 and in 1977. By the fourth quarter of
last year, the deficit was running at an annual rate of
$28 billion0 The rapidity and extent of the deterioration did
not become fully apparent until the third quarter of 1977 and,
to some extent, caught the markets by surprise0
B-905
- 2-
Two major factors in the deterioration are by now
well known:
The UoS0 has been growing markedly faster
than other industrial countries., Since 1975,
industrial production in 13 other leading OECD
countries has grown only 14 percent compared to
25 percent for the U 0 S 0
Last year, U a S 0
industrial production grew almost 6 percent
while production abroad failed to grow at alio
—
UoSo oil imports in 1977 were $45 billion, up
from $27 billion in 1975 and less than
$5 billion in 1972„
Continued delay in Congressional
action on the energy legislation served to highlight
the difficult structural adjustments that have to
be made to curb our voracious energy appetite»
As the fourth quarter of 1977 approached, growing awareness of the change in our position and doubts about early
correction led to a change in expectations about the dollar
exchange ratee
Changing expectations, in turn, brought
uncertainty and disorder in the markets0
In this atmosphere,
there was an outflow of private capital, plus unrecorded
transactions, of some $10 billion in the fourth quarter of
1977, compared to an outflow averaging $1% billion during
each of the first three quarters0
With exchange markets
- 3-
under substantial pressure, countries in surplus intervened
heavily to slow the appreciation of their currencies.
Official dollar holdings rose $15% billion in the fourth
quarter, primarily through accumulations by a small group
of industrial countries in strong surplus positions.
Uncertainty and disorder continued periodically through
most of the first quarter of this year.
Gradually, in recent
weeks, the tone of the foreign exchange market has improved.
The amount of official intervention has abated sharply, and
the intervention that has taken place has more frequently
taken the form of dollar sales rather than dollar purchases -indeed, there have been net invention sales of dollars on
the order of $2-3 billion since March.
The dollar has
appreciated against OECD currencies by about 1% percent
since the end of March, with larger increases against the
currencies of the main industrial countries in surplus.
In part, this change in tone reflects greater awareness
of U.S. determination to take the fundamental measures
required for a sound dollar.
It may also reflect greater
recognition of some important improvements in the underlying
economic situation.
With an improvement in market confidence,
interest rate differentials have begun to exert more influence
on the direction of capital flows.
The performance of the
stock market may also be having an impact.
- 4 Before discussing the U.S. approach to exchange market
developments, I want to put recent exchange rate movements
in perspective,.
The two formal dollar devaluations in 1971
and 1973 were part of major multilateral realignments of
exchange rates designed to correct the over-and-undervaluation of a wide range of currencies that had accumulated
during the post-var period.
Since the general move toward
more flexible rates in March 1973, several currencies have
appreciated substantially against the dollar -- the Swiss franc
by 64 percent, the German mark 35 percent and the Japanese yen
by 17 percento
However, during the same period, other
currencies have depreciated against the dollar, including the
Canadian dollar by 11 percent, the pound sterling by 26 percent
and the Italian lira by 35 percento
There are various calculations that attempt to measure
overall changes in the exchange values of currencies. The
Treasury publishes an average for the dollar vis-a-vis the
currencies of all other OECD countries, with individual
exchange rate changes weighted on the basis of U 0 S 0 bilateral
trade with the countries concernedo
On this basis during the
past few years, the dollar has fluctuated within a narrower
range than against some individual currencies.
The recent move-
ment, a decline of about 6 percent since September, is large but
substantially less than the press reports might suggest. Such
changes have occurred in the past in both directions when
economic conditions were particularly unsettled.
In the latter
- 5 half of 1973 the dollar rose by 13 percent, and during
the last three quarters of 1975 by 8 percent.
On balance the
dollar is at present about 2 percent above its March 1973
level on this average basis.
That the dollar should have depreciated in relation to
some currencies while rising in relation to others over the
past five years should not be surprising, in view of the wide
disparities in economic performance among major countries on
growth, inflation, and external imbalances.
less
There have nonethe-
been charges that the U.S. has practiced a policy of
benign or even malign neglect on exchange rate matters in
order to gain a competitive advantage.
The evidence simply
does not support such a charge, and I can assure you that
that is not and will not be U.S. policy.
The impact of exchange rate changes on competitiveness
is extremely difficult to measure.
Exchange rate changes
reflect capital movements as well as trade.
quality, delivery, financing —
competitiveness.
Non-price factors --
also play an important part in
Comparisons are also sensitive to the base
from which one starts.
However, independent analyses show
that changes in dollar exchange rates have generally offset
relative inflation rates and that there was virtually no net
change in the U.S. competitive position —
price adjusted exchange rates —
first three quarters of 1977.
as measured by
between mid-1975 and the
The most recent exchange rate
movements have, of course, led to a modest improvement in the
U.S. competitive position.
But even taking these changes
- 6 into account, at the end of March 1978 the dollarfs
position on this measure was only about 1 to 2 percent above
the level prevailing at the time of the general move to more
flexible rates five years earlier.
Exchange rate changes
for the dollar have broadly kept pace with inflation differentials in the last few years ~ not significantly more.
The experience of other major countries on this measure
of "real" exchange rates since the move to more flexible
exchange rates in March 1973 has been mixed.
As of the end
of March 1978:
--
Italy, Canada and Japan had experienced modest
improvements in their competitive positions.
In Italy and Canada, the rate of exchange
rate depreciation more than offset relatively
poor price performance producing "real" exchange
rate changes on the order of 5 - 10 percent.
In Japan, yen appreciation was more than fully
compensated by a relatively good record on
inflation, resulting in a gain in price competitiveness of somewhat less than 5 percent.
--
Germany and the United Kingdom had experienced
deterioration in their competitive position on
the order of 5 - 10 percent.
The appreciation
of the German mark has more than offset relatively
- 7 -
good price performance.
Relatively poor price
performance in the U.K. was only partly offset
by a depreciation of sterling.
-- France, like the United States, was in roughly
the same position as five years ago, with only
a very minor deterioration in the competitive
position.
The evidence suggests that, with some exceptions, exchange
rate changes over the period as a whole have tended to stabilize "real" exchange rates.
That is, they have been in the
direction needed to offset or partly offset relative price
differentials, and thus have resulted in smaller "real"
exchange rate changes than would have occurred otherwise.
This is a sensible result:
it has probably helped in the
correction of existing imbalances in some cases, and has
certainly helped to avoid the emergence of even larger
imbalances in others.
The Outlook
In terms of the market, what happened yesterday, let alone
last year, is history.
Your concerns are about today, tomorrow
and, perhaps, next year.
Your program suggests that some
- 8 speakers may be willing to offer exchange rate forecasts.
I wish them success but will not join in a forecasting
effort.
What I will do is offer my view of underlying
trends in the world economy and discuss U.S. exchange
rate policy.
As I look at the world economy for 1978,three positive
points stand out.
First, real growth will be somewhat better
balanced among countries.
U.S. growth will be somewhat
slower than last year although the 4 to 4% percent rate which
we now expect will still be enough to reduce unemployment
further. Although first quarter growth has been disappointing
in Europe —
as well as in the U.S. —
European and Japanese
growth should pick up modestly later in the year.
On average,
these countries may reach 3% percent this year, about % percent
higher than in 1977. The EC is aiming at an average growth
rate of 4% percent by mid-1979.
The developing countries
should experience more vigorous growth than their industrial
country counterparts, perhaps 5% percent.
By the latter
part of the year, growth rates abroad should be nearly equal to
that of the U.S. This expected convergence of growth rates
among industrial countries should tend to reduce existing
payments imbalances„
- 9 -
Second, the OPEC current account surplus should drop a
startling $10-15 billion in 1978 to about $20 billion or so.
The principal factors include the decision to freeze prices,
new sources of supply from the North Sea and Alaska, more
efficient utilization of energy, and the slower growth in
industrial countries which leaves total demand below earlier
expectations. Moreover, an increasing portion of OPEC's
financial surplus is being invested at medium term, and, as
the world's largest capital market, the U.S. receives a
substantial share.
We estimate that some 70 percent of
the cumulative OPEC surplus has been placed in dollar
instruments, about 25 percent in the U.S. market itself.
Contrary to some press reports, there is no evidence of an
OPEC shift away from dollar investments during the recent
exchange market disorders.
Indeed, very preliminary
information for the first quarter of this year indicates
that a high and perhaps even larger proportion of OPEC
assets was placed in the United States.
An OPEC surplus
in the range expected in 1978 is manageable in the medium
term and should allow the industrial countries to return toward
a more traditional position of current account surplus.
Third, inflationary pressures are continuing their slow
decline—at least for the developed world as a whole.
In
1978, consumer price rises in industrial countries may average
7 percent, following 8 percent last year, with the disparity
in inflation rates narrowing.
Inflation in the U.K. is moving
below double digit rates for the first time in five years. With
the possible exception of the United States, all OECD nations
are expected to hold current inflation rates or register some
-
-
JLU
improvement this year.
Even with the prospect of somewhat higher growth and
slower inflation in most areas, there is widespread concern
about the economic outlook.
This is particularly true in
Europe where even the higher growth rates now in prospect
are too low to reduce unemployment.
In many of these countries,
unemployment continues at near-record levels.
The short-term
outlook for plant and equipment investment in most European
countries remains weak, especially for this phase of the
recovery cycle, and particularly in light of the need to
replace capital stock rendered obsolete by the sharp increase
in energy costs.
The current account imbalances among industrial countries
remain large.
The U.S. deficit was $20 billion last year.
It is likely to be at least as large in 1978 as a whole given
the very high trade deficit of more than $11 billion in the
first quarter, though that deficit is expected to decline in
the last three quarters.
The surpluses of Japan, Germany
and Switzerland are equally large.
the OPEC surplus.
In fact they now proximate
Clearly there is a need for more adjustment
by all four of these major industrial countries.
For Japan,
Germany and Switzerland, that adjustment should come primarily
from faster growth, an opening up of markets, and structural
change in production patterns.
- 11 -
For the United States, the responsibility is three-fold.
On April 11 President Carter announced important new action
to carry out those responsibilities.
He has:
first, announced a comprehensive program to
curb inflation by limiting the size of federal
budget deficits; by restricting federal wage
increases as part of a general deceleration of
wage and price rises; by acting to reduce the
inflationary consequences of government regulations,
and by resisting legislative proposals that would
add to inflation.
second, pressed hard for Congressional action on
comprehensive energy legislation and indicated
that oil imports would be limited by administrative
action under present law if Congress fails to act.
third, initiated work on a program to promote exports.
The President has chosen his course.
one.
It is the right
Now we must deliver, and we are determined to do so.
We trust that others will meet their responsibilities as
well.
U.S. Exchange Rate Policy
Recent exchange market developments have raised fears that
exchange rate instability may thwart economic recovery by
undermining business investment and consumer spending.
In
- 12 part, such concerns reflect the difficulty other major countries
are having in spurring domestic expansion —
but which they
were clearly experiencing before the recent exchange market
disturbances.
For many countries, the foreign sector plays
a much more dominant role than in the U.S. and has traditionallj
been a major source of economic growth and employment.
Thus,
the Netherlands exports 54 percent of its GNP, Germany 28
percent, Japan 14 percent and France 19 percent.
The U.S.
exports about 7% percent of GNP.
It is not surprising that such concerns generally surface
during episodes of dollar weakness in the exchange markets.
The U.S. economy is substantially larger than any other
individual country, accounting for 40 percent of total
OECD GNP.
The yearly increase in U.S. output is equivalent
to half the total output of a country the size of the United
Kingdom.
Countries are naturally concerned about a loss of
their competitive position in the large U.S. import market
or vis-a-vis U.S. exporters.
In addition, the large role
of the U.S. capital market and the dollar in international
financial transactions and balances also leads to concerns
at times of dollar instability.
The U.S. capital market is
as large as all other major financial markets combined and
constitutes a major source of finance and investment for the
entire world economy.
In the past few years, 60 percent of
all Euro-bond issues have been denominated in dollars.
proportion of external claims denominated in dollars by
The
- 13 banks in G-10 countries is about 75 percent.
The dollar
is also the principal vehicle for international transactions
and continues to constitute over 80 percent of official
foreign currency reserves.
Concerns about the possible effects of exchange rate
instability have spawned suggestions which focus on efforts
to achieve greater stability through financial means,
including exchange rate zones supported by massive official
intervention, greatly expanded credit arrangements, foreign
currency borrowing by the U.S., and "substitution" arrangements
to sterilize official currency reserves.
Such proposals
treat the symptoms rather than the causes of present economic
problems.
Experience of the past decade has demonstrated
repeatedly that exchange rate stability cannot be imposed on
the system but must be the result of sound domestic economic
policies.
The world economy has undergone fundamental changes since
the Bretton Woods par value system was established.
The
growth of international trade and payments, the ability of
many countries to tap world capital markets and the existence
of large liquid balances provide a scope for capital movements
that dwarfs the ability of official institutions to control
rates through exchange market intervention or artificial
barriers.
Attempts to prevent exchange rates from reflecting
basic trends would lead to a repetition of the disturbances that
punctuated the latter part of the Bretton Woods era and could
be extremely disruptive for the world economy.
- 14 In recognition of this fact of life, the members of
the IMF have agreed on a different approach.
The basic
philosophy of the new monetary system incorporated in the
amended IMF Articles, in particular Article IV on exchange
arrangements, is that international monetary stability
cannot be imposed from without, but must be developed by
countries from within, through the application of sound
irnderlying economic and financial policies.
In line with that concept, our program for assuring
a strong and healthy dollar relies on fundamental economic
performance, not on market operations to hold or attain a
particular exchange rate or maintain a particular exchange
rate zone. We do recognize, of course, that markets can
become disorderly, subject to great uncertainty, dominated by
psychological factors and speculation.
We have made clear
that we are fully prepared to intervene in the markets to
counter such disorders. We have intervened, at times in
large amounts, for that purpose. And we have taken other
steps, such as interest rate moves by the Fed and announcement
of gold sales by the Treasury, that appear to have been
useful in strengthening the tone of the market.
The resources
at our disposal for intervention are very large and we are
prepared to use them if and as required to counter market
disorders.
- 15 -
IMF Surveillance
With the entry into force of the new IMF Articles, we are
emerging from a long period in which the international monetary
system has been operating without the benefit of an effective
legal foundation.
The new exchange rate provisions give members
wide latitude in the choice of exchange rate practices best
suited to their needs, and can accommodate a wide variety of
exchange rate mechanisms —
for example, freely or managed
floating rates, rates pegged to a currency or basket of
currencies, and the common margins arrangements of the EC
snake.
One can easily imagine expanded European monetary
arrangements in the broad framework of the new system, as
some European leaders seem to be considering in an effort
to give renewed impetus to their longstanding goal of monetary
union.
But neither such arrangements,nor other exchange rate
mechanisms, can create stability if there is instability in
the domestic economies of major countries.
It is the
underlying stability which, correctly, is the focus of the
obligations placed on countries by the new Article IV.
Under this provision, each member undertakes a general
obligation relating to efforts to direct its policies toward
orderly growth with reasonable price stability, and a specific
obligation to avoid manipulating exchange rates to prevent
balance of payments adjustment or gain unfair competitive
- 16 -
advantage.
The IMF is given the responsibility for conducting
a continuing surveillance over the operation of the international
monetary system and members' compliance with their obligations
regarding exchange rate policies.
This is the heart of the
new system, and it represents the potential both for a
stronger IMF role in the operation of the balance of payments
adjustment process and for a more effective and symmetrical
operation of that process.
The central, recurrent international monetary problem
in the past half-century has been the system's inability to
encourage orderly adjustment in a manner that was generally
considered to be equitable and balanced —
and which was
elastic enough to accommodate widely differing political
and social systems and to provide time and scope for
adjustment measures that were not unduly harsh or abrupt.
The mechanisms of the gold standard and the Bretton Woods
system in the end could not meet these tests.
Efforts
over the years in the IMF, in the OECD and in periodic
Summit meetings have not produced lasting improvements in
the adjustment process» Nor were the negotiators in the C-20
reform effort able to construct a mechanical apparatus that
was adequate to the task.
- 17 -
The new Article IV thus focuses on the fundamental
sources of imbalance and instability -- national policy.
All agree in principle that countries in both surplus
and deficit have responsibilities for balance of payments
adjustment.
To date, the IMF's ability to influence
national policies has been limited for the most part to
those members borrowing in the IMF's credit tranches.
The new provisions on IMF surveillance provide the
potential for IMF influence on the policies of all members,
in surplus and deficit alike, as they bear on the operations
of the international adjustment process.
In a real sense, the new system will rely on analysis
and judgment -- rather than mechanical rules and operating
procedures --in the continuing effort to achieve a stable
and smoothly operating international balance of payments
adjustment process.
The key to successful implementation of the new
provisions rests with governmental commitment and efforts
to work with and through the IMF to make "surveillance"
effective.
The United States is committed to making this
process work and thereby improving the balance of payments
adjustment process.
We have made a number of proposals of
a procedural nature aimed at ensuring that the IMF has
a) the information it needs to ensure that surveillance
applies equally t<^surplus and deficit countries;
- 18 b) a political level body that is capable of dealing effectively with the difficult issues involved in adjustment;
and c) a means of bringing the full force of its moral suasion
to bear on individual countries.
We will continue to work to
make the new system of IMF surveillance a strong force
for a stable international monetary system.
We hope that
others will join us in this important task.
Conclusion
Some have argued that flexible exchange rate arrangements remove discipline from the world economy by providing
governments with an easy way out of their economic problems.
Events of the past year highlight the fallacy of that view.
Exchange rate changes are a highly visible and merciless
barometer of whether a country is pursuing the right policies
on growth, inflation and balance of payments adjustment.
The market sets an exacting standard which governments cannot
ignore.
Some progress has been made in the past year on
achieving underlying economic and financial stability, and
the new IMF provisions on surveillance represent the potential
for much greater —
and lasting — progress. Much obviously
remains to be accomplished.
The daily decisions regarding
exchange risk management which you in this audience will
make will constitute the report card of howwell governments
meet the challenge.
oo 00 oo
FOR IMMEDIATE RELEASE
May 15, 1978
Contact:
George G. Ross
(202) 566-2356
Secretary Blumenthal Opposes Ad Hoc Changes
In Tax Rules for Capital Gains
The Treasury Department today released a letter from
W. Michael Blumenthal, Secretary of the Treasury, to members of
the House Ways and Means Committee, in which he stated Treasury's
strong opposition to any attempt to reverse the reforms of
capital gains taxation enacted since 196 9.
In addition to the more than $2 billion annual cost to the
Treasury that reverting back to pre-1969 tax rules would incur,
Secretary Blumenthal noted that the fairness of the tax system
was at issue. Rolling back the tax treatment of capital gains
would erode the progressivity and equity of the U.S. income tax
system, he wrote.
In the letter, Secretary Blumenthal emphasized that President
Carter has placed a substantial increase in the rate of real
capital formation "at the heart of his strategy for sustaining
the economic recovery into the 1980!s." The capital gains tax
accounts for only about 10 percent of the total tax burden on
capital income. "Focusing tax relief in this limited area would
severely unbalance the allocation of resources within the
investment sector," the letter states.
A copy of the letter, with the three tables which accompanied
it, is attached.
B-906
FOR IMMEDIATE RELEASE
Wednesday, May 15, 1978
Contact:
Charles Arnold
202/566-2041
THE TREASURY DEPARTMENT REQUIRES
RECORDS OF CERTIFICATES OF DEPOSIT
Under Secretary Bette B. Anderson announced today that beginning
June 1, 1978, financial institutions will be required to keep records
identifying persons buying or cashing certificates of deposit.
Treasury has amended its recordkeeping regulations (31 CFR 103)
so that banks, savings and loan associations, and credit unions will
record the name, address, and taxpayer identification number of
customers involved in such transactions. A similar requirement has
been in effect with respect to other types of bank deposits for
several years.
The additional recordkeeping is expected to make the concealment
of financial transactions related to illegal activities more difficult.
The amendment will also affect the sale of so-called "honor bonds" and
other bearer certificates of deposit which have been promoted on the
basis of the anonymity offered to investors.
The amendment will appear in the Federal Register on May 19, 1978.
oOo
B-907
FOR RELEASE UPON DELIVERY
Estimated at 10:00 A.M.
May 16, 1978
STATEMENT BY GARY HUFBAUER
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL FINANCE
OF THE
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS AND
THE SUBCOMMITTEE ON SCIENCE, TECHNOLOGY AND SPACE
OF THE
COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION
UNITED STATES SENATE
U.S. TECHNOLOGY AND U.S. TRADE PERFORMANCE
Mr. Chairman, I am pleased to testify on an issue that
has sparked the concerns of many in government, industry
and the academic community: a perceived decline in U.S.
technological leadership and its effects on U.S. trade
performance.
The scientific and technological resources of the
United States are essential both for maintaining our domestic standard of living and for advancing our international
trade position. We should thus carefully consider the
evidence available to us in order to determine whether there
has, in fact, been a decline in innovation and research,
and what effect this might have on our exports.
Mr. Hufbauer is a Deputy Assistant Secretary of the
Department of the Treasury. However, this statement reflects
his private views and is not an Administration position.
B-908
- 2 Let me begin by reviewing the status of industrial
research and development (R&D) expenditures in the United
States and abroad.
Research performed outside of industry
has less importance in the context of international competitiveness.
Medical research, for example, has obvious
social value, but only indirectly affects the rate of
productivity growth in American industry.
Total industrial R&D spending, that is, spending by
both the Federal Government and business on R&D performed
within industry, has barely kept up with inflation.
Measured in constant 1972 dollars, this spending has hovered
within the range of $19 to $21 billion during the last
ten years.
Much of this stagnation in total real industrial
R&D has been accounted for by a shrinkage in federallyfunded R&D, which declined in every year but one between
1966 and 1975, averaging a 5.5 percent yearly drop.
However, industry's own funding for R&D, which now accounts
for two-thirds of total industrial research, increased
in real terms in every year except two since 1966, averaging
a 3.8 percent annual real gain over that period.
Preliminary
figures suggest that real increases accelerated in 1976
and 1977, averaging a 5.3 percent annual rise. As might
be expected, the two periods when industry-funded R&D did
not rise at all or rose very slowly were in recessionary
periods, namely 1970-71 and 1974-75.
- 3 In my opinion, private industry spending on R&D
probably exerts a more immediate payoff for the economy
than federally-funded industrial research.
Federal spending
is mostly associated with Defense Department and NASA projects.
Occasionally these projects create spectacular offshoots in
the private economy, for example narrow and wide-bodied
jets and advances in integrated circuit technology.
But
on the whole, I am inclined to think that private R&D
spending produces findings which are more readily translated
into new products and processes. Thus, I find the solid
gains in industry-funded R&D encouraging, and I would
contrast them with the generally somber pronouncements
made about R&D trends in the United States.
For example, economists commonly attempt to show a
deterioration in our national R&D effort by comparing
R&D spending with Gross National Product (GNP).
Industrial
R&D spending as a percentage of GNP did in fact decline
gradually in the last decade, from 2 percent in 1967 to 1.6
percent in 1977.
However, as an indicator of U.S. performance in
industrial growth and productivity, the ratio of R&D
spending to GNP is misleading.
The composition of GNP
has shifted over the last twenty years.
In particular,
the manufacturing sector, where a major portion of
federally-funded and enterprise-funded research and
-4development in the U.S. is performed, has been declining
relative to total GNP.
The service sector, where relatively
little R&D is undertaken, has contributed a rising share
of GNP.
Therefore, a measure which compares R&D with
GNP has become progressively more distorted because GNP
is growing faster in those sectors which are less R&Dintensive.
A comparison of our R&D performance with the performance
of other nations reveals that the United States still leads
in absolute levels of gross expenditures on R&D, in concentration of R&D spending to industrial production, and
in the ratio of R&D manpower to total population.
But while
the data for cross-country comparisons are weak, it appears
that the United States lead is being slowly eroded, most
notably by Japan and Germany.
Perhaps the most telling statistic is that, in Continental Europe and Japan, Government R&D efforts are considerably less devoted to space and defense programs that
in the United States, and are much more heavily focused
on industrial programs, university programs, and private
non-profit research institutes. Japan for example, allots
fully 78 percent of its federal R&D budget for these
activities; this amounts to one-fifth of all R&D carried
out in Japan. As I mentioned earlier, R&D spending for
defense and space research may be less effective in stimulating
growth in the economy of a nation than R&D expenditures
- 5 which are more directly related to the problem of discovering
new products and improving production methods.
Taken as a whole, then, the various measures do
suggest that in the past decade overall R&D effort in
industry for the United States has been sluggish, except
, for industry's own R&D financing, and that governments
and firms abroad have raised their own levels of R&D
activity.
Yet these developments on their own do not
automatically support a conclusion that the U.S. economy
is weakening or that our trade position will deteriorate.
Many other factors, such as the availability of capital,
labor attitudes, and government regulatory policies, must
be taken into account when examining trends in industrial
production and trade.
Product innovation and research
are surely important, but they are only one contributing
factor out of many.
I would like to turn now to our trade performance.
Technology-intensive goods, that is goods produced by industries with above-average concentrations of applied R&D
spending, comprise about 40 percent of U.S. manufactured
goods exports.
A recent Staff Economic Report of the U.S.
Commerce Department found that this compared with only
about 28 percent for Germany, Japan, France and the United
- 6 Kingdom, and somewhat lesser percentages for the rest of
the OECD.
Technology-intensive goods included electronics,
aircraft, computers, engines, petrochemicals and drugs.
The low-technology category contains such items as automobiles, construction machinery, semi-manufactures and textiles.
Our overall manufactures trade balance has fluctuated
markedly in the past half-decade: in 1972 we experienced
our first post-war manufactures trade deficit; in 1975
we had a record surplus close to $20 billion, and by the
end of 1977 we were down to a $3.3 billion surplus.
This
uneveness is the cause of some concern, and has prompted
fears that the traditionally strong U.S. trade position in
manufactures has been eroded, in part due to a slowdown
in U.S. R&D activities.
If we examine our trade balance in technology-intensive
goods it appears that, prior to 1972, we had a fairly
constant surplus of about $6 billion.
In the past four
years the average yearly surplus in this category of goods
has doubled to over $13 billion.
Thus, high technology
goods trade has been a source of strength in our trade
picture.
By contrast, low-technology goods trade has
largely caused the recent fluctuations in our overall
manufacturing balance.
This is not to say that we have excelled with all our
trading partners in all high technology products.
Our
- 7 experience with Japan in the consumer electronics industry,
namely in televisions, radios, audio and transceiver
equipment, shows some of our weaknesses. We had a $3.6
billion trade deficit in 1977 with Japan in high-technology
goods, and about two-thirds of this was accounted for by
imports of consumer electronics goods. Japan's consumer
electronics production has quintupled in the last decade,
from $2 billion in 1967 to $10 billion in 1977 by one
estimate. Our trade relations with Japan have of course
been a major concern for this Administration. We want to
see greater U.S. exports to the Japanese market, both through
a reduction in Japanese import barriers and through more
energetic export efforts by American firms.
So much for past performance. Is it possible to
establish a connection between levels of R&D spending
in the U.S. and a possible future worsening of our trade
performance? The few statistical studies that have
attempted to find a correlation between R&D intensity and
exports show a positive and significant relationship.
These findings have been based on various definitions of
export performance. For example, the Commerce Department
study I referred to earlier found that the United States
exported a greater share of total OECD country exports
in those product groupings which had higher concentrations
of R&D. Other studies, such as one undertaken by Branson
- 8 and Junz, show that the U.S. trade balance is more favorable
in those product groups which were more R&D-intensive.
What the studies do not show is how R&D affects
trade performance independently from other important
influences, such as skilled labor effects, industryconcentration effects, and scale economy effects.
These
other effects are frequently associated with just those
industries which have high R&D levels.
In addition, there
are often long lag times between particular expenditures
on R&D and observed effects on trade.
Past studies have
examined a cross-section of goods in a given time period,
and have not attempted to quantify changes over time.
"
Finally, there is an important circularity in causation.
R&D.
R&D stimulates trade, but trade also stimulate
Most academic analysis has focused on only one half
of the loop.
Yet market demand is commonly viewed as an
important determinant of technological innovation in the
firm, and these effects should apply to export demand
as well as domestic demand.
In sum, while we can safely presume that there is a
positive connection between R&D spending and exports, the
relationship is not simple, nor can it be mechanically
quantified.
It is unlikely that larger R&D spending would
improve our trade balance in the short-run, but it could
well have a positive impact in five or ten years.
- 9 However, we should recognize that certain shifts in
comparative advantage away from the U.S. and in favor
of other countries are probably inevitable.
Since at least
the early 1950s foreign markets have grown faster than
American markets, and it should not be surprising that
some foreign industries have likewise matured and become
more competitive With U.S. industry.
Two other issues have emerged in the debate on technology and export competitiveness.
First, what are the
experiences of small versus large firms in technological
innovation and trade?
Second, does the transfer of technology
and research activities abroad undermine the technological
superiority and trade position of the United States?
The data are very thin for comparing the technological
activity of small and large companies.
One study by
Gellman Research Associates composed a sample list of major
U.S. technological innovations, and then examined the
distribution of the innovations in five size groupings.
For 1967 to 1973, firms of 100 or less employees accounted
for 20 percent of the innovations, while whereas firms
with 10,000 or more employees accounted for 43 percent of
the total.
A measure was then devised to compare major
innovations per R&D dollar, by size group.
Companies
- 10 with 1-1000 employees produced 24 times as many innovations per R&D dollar as companies with over 10,000 workers.
The Gellman study should be interpreted with care
since the underlying samples of major innovations may not
accurately represent the "true" distribution of the
population.
The data do suggest, however, that small
companies are more "efficient" with their R&D money.
It
should be noted that minor innovations, such as modest
improvements in efficiency, were not considered.
Much
R&D expenditure is devoted to these improvements, and
they are an important source of productivity growth.
It
is widely recognized that developing and commercializing
a new product or process is the most costly phase of the
innovation process: the rule of thumb, according to Gilpin
and others, is that the cost ratios between basic research,
applied research and commercial development are one to
ten to one hundred.
The last stage may be best suited
for the large firm which has greater production, financial
and marketing resources.
The trade of small high-technology companies has not
been examined to my knowledge.
The 1975 "White Paper"
prepared under the supervision of the Commerce Technical
Advisory Board on the role of new technical enterprises
in the U.S. economy claims that these companies have the
-liability to create new job opportunities and products
competitive in world markets, but the paper does not
investigate their actual trade performance. As a general
rule, we know large manufacturing companies in the U.S.
export a higher proportion of their total shipments than
do small firms, twice as much by some calculations. Using
Census of Manufactures data for 1972, firms with less than
1000 employees exported an average 2.5 percent of their
total shipments, whereas firms with greater than 1000
workers exported 5.7 percent of their total shipments.
More recent data from U.S. corporate tax returns also
support this point. Domestic International Sales
Corporations (DISCs) with small corporate majority
shareholders ($5 million or less in assets) accounted for
4.4 percent of gross receipts from DISC exports, while that
same size category of all U.S. companies accounted for
14.6 percent of all business receipts. The figures suggest
that large companies play a relatively more significant
role than small companies in exports. This relationship
makes economic sense, since large firms have a bigger foreign
sales base to spread out the high overhead costs of exploring
foreign markets.
Turning to the transfer of technology, we know
less about the scope and magnitude of these transfers than
- 12 we should. A basic problem is finding a satisfactory
measuring stick for technology transfer.
In the absence
of a better figure, we are forced to rely on royalty and
fee data, namely payments made for technology sales
through licenses of patents, know-how and other intangible
property.
These data tell very little about the nature of
the technology being sold.
Another difficulty is that the
data do not measure the technology embodied in personnel
who might transfer their know-how by working overseas.
A final drawback is that the fee and royalty channel
includes payments for trademarks and other purposes
unrelated to the transfer of technology.
In general, these data show that fourth-fifths
of the royalty and fee income from overseas is from
affiliated enterprises and one-fifth from unaffiliated
enterprises.
Fourth-fifths come from Europe, Japan, and
Canada and one-fifth from the developing world.
We receive
ten times the amount of fees and royalties from abroad
that we pay out.
One notable finding from these unsophisti-
cated measures of technology flow is the very close connection between direct investment and technology transfers.
The location and size of R&D facilities of U.S.
multinational corporations is not readily known.
A U.S.
Government census of U.S. MNCs undertaken this year will
- 13 eventually provide this information, along with data on
R&D personnel overseas and other aspects of technology
transfer.
A 1974 study done by the Conference Board
suggests that about 10 percent of U.S. MNC-financed
spending on R&D was undertaken abroad in 1974, and a study
done by Edwin Mansfield projects that this will rise to
about 12 percent in 1980.
The Mansfield study goes on
to state that principal reason given by companies for
undertaking R&D overseas was to answer the special design
needs of overseas markets.
Other reasons included lower
cost of R&D talent, and the ability to monitor foreign
R&D activity.
Specialized studies looking at particular industries or
licensing agreements offer a better picture of what and how
technology is transferred.
These studies often attempt
to make estimates of the impact on the economy and comparative advantage of the United States.
One recent study
by Jack Baranson indicates that in the twenty-five case
studies he examined of transfers of technology to
unaffiliated foreign enterprises, the technology released
was frequently the most sophisticated and competitive
technology possessed by the U.S. firms, and that these
transfers could conceivably exert an adverse impact on
U.S. trade and employment.
However, the Baranson study
also found that in at least eighty percent of the case
. - 14 studies there were alternative foreign sources for the
technologies.
While it is probably true that the increase in
foreign skill levels arising from certain transfers of
technology to other countries will create greater
competition for U.S. goods, it is equally true that the
U.S. stands to gain from other transfers.
New export
markets for U.S. products may result from technology
licensing agreements.
Improvements in the technology
may flow back to the United States.
And foreign firms
often locate production facilities in the United States
in order to exploit their new technology here.
In short,
it is virtually impossible to determine the overall effect
of the technology transfer process.
While the analysis is incomplete, and while definitive
answers may never be possible, I believe that restrictions
on the outflow of technology would not be in the national
interest.
The administrative aspects of a technology
licensing system are truly mind-boggling.
A Technology
Review Board would be a boon to Washington attorneys and
bureaucrats, but very costly to firms with technology
to sell.
Many U.S. firms rely on their earnings from
foreign sales of goods and technology both to finance and
to justify new research activity.
If U.S. firms are forced
to pass-up foreign opportunities, French, Japanese, and
German firms will very probably step in.
Competition
- 15 from abroad can also stimulate the design of better
products in the United States: I mention automobiles
and consumer electronics as examples. Finally, the flow of
technology goes in both directions, and the street can be
blocked at one end as well as the other. In sum the
generation of new technology can be stimulated in various
ways by the diffusion of technology from the existing
pool. Our national interest lies not in the creation
of new barriers but in exposing U.S. firms to the stiff
breeze of competition and fresh ideas from abroad.
I have covered much ground this morning, skimming
over the surface of complex questions. One fundamental
topic that I have not attempted to examine can be summarized in two questions: What is the role of R&D in furthering
economic growth and productivity? And what policies should
the U.S. Government adopt to increase our R&D activity?
I will leave these vital questions for another occasion.
0O0
eparlment of theJREASURY
ASH1NGT0N,D.C20220
TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
HAY 17, 1978
CONTACT:
(Treasury)
Charles Arnold
202/566-2041
(Smithsonian)
Geraldine Sanderson
202/381-6586
TREASURY DEPARTMENT TRANSFERS TO SMITHSONIAN INSTITUTION
UNIQUE COLLECTION OF UNITED STATES CURRENCY
The Treasury Department today transferred to the Smithsonian
a collection of 800 pieces of U.S. currency with a face value of
more than a half a million dollars. Many of the pieces of currency
are rare and the numismatic value of the collection is incalcuable, according to O.H. Tomkinson, Deputy Assistant Commissioner
for Banking and Cash Management in the Treasury Department's
Bureau of Government Financial Operations.
The formal transfer of the collection will take place at 2 p.m.
May 17t in the reception suite of the National Museum of History
and Technology, Constitution Avenue between 12th and 14th St.,
N.W. Deputy Secretary Robert Carswell will represent the Treasury
Department while the collection will be accepted for the Smithsonian by John Jameson, Assistant Secretary for Administration.
The collection, with a face value of $578,365.79 includes
at least one note from nearly every issue of currency between the
Civil War and the early 1960's. The earliest item in the collection
is an interest bearing note yielding 7 3/10 percent with a face
value of $51.82 issued by Treasury in 1861. The collection includes
several unissued notes of each of four denominations of Gold
Certificates, Series 1934. This series was issued only to Federal
Reserve Banks in exchange for gold the banks turned over to the
Treasury and includes the only $100,000 note issued. This series
was added recently to the collection.
According to Mr. Tomkinson, the collection is "among the
most complete, if not the most complete, anywhere," and contains
the first notes of some issues. A very rare item is the S100
Federal Reserve Note 1914 Series B 1726775 A on which the front
a
nd the back are reversed.
Dr. and Mrs. Vladimir Clain-Stefanelli, the Smithsonian's
curators of numismatics, praise the collection. "Before today,
our coin collections were renowned but our collection of U.S. paper
currencv was extremelv limited," thev said in a statement. "We are
now t h e grateful recipients of one of the best currency collections
in the world.1'
B-909
- 2The Treasury and the Smithsonian arranged the transfer
because the Smithsonian has the unique facilities to secure, preserve and display the currency.
Attached is an inventory of the collection and a reproduction
of a $100,000 Series 1934 Gold Certificate.
oOo
Page 1 of 45
INVENTORY OF TREASURY CURRENCY COLLECTION TRANSFERRED
TO SMITHSONIAN INSTITUTION MAY 17, 1978
BOOK 1
Kind
Interest Bearing Note,
7 3/10%
Face Value Series or Date Seal Serial No
$
51.82
1861
Red
oonmn
227602
Refunding Certificate 21.30 Apr. 1, 1879 Red A 3103479
Compound Interest „..rt
Bearing Note
23.88
Apr. 15, 1864
Compound Interest ,0-70/1*'
Bearing Note
59.70
One Year S%
Bearing Note
10.50
Mar.30, 1864
Red
52149
Red
12786^
Red
64784
One Year 5%
Bearing Note
21.00 Apr.18, 1864 , Red 191534
Two Year 5%
Bearing Note
110.00 Apr.14, 1864 Red 18114
Compound Interest
Bearing Note
119.40 Dec.15, 1864 Red 59535
U.S. Fractional
Currency
.25 1874 Ked No. #
U.S. Fractional
Currency
.25 1874 ^d No. #
U.S. Fractional
Currency
.50
1875
,
Red
V!
u
No. -
Page 2 of 45
Kind
Face Value
Three Year
7-3/10%
$
Series or Date
Seal
Serial No.
60.95
1865
Red
126378
Compound Interest
Bearing Note
11.94
Jul.15, 1864
Red
40993
Two Year 5%
Bearing Note
55.00
May 27, 1864
Red
32596
Three Year
7-3/10% Note
107.30
Jun. 15, 1865
Red
272963
1.00
Jul. 24, 1866
Red
A 635032
Treasury Note
ti
tt
1.00
Jul 24, 1866
Red
K 1181640
ii
tt
1.00
1890
Brown
A 113-
u
it
1.00
1890
Brown
A 4645210
it
tt
1.00
1891
Red
B 4132733!
tt
it
2.00
1891
Red
B 975496
ti
tt
2.00
Jul. 24, 1866
Red
E 5152488
tt
tt
2.00
Jul. 24, 1866
Red
E 4964756
tt
tt
2.00
1890
Brown
A 806927
tt
tt
2.00
1891
Red
B 8363384
it
tt
2.00
1891
Red
B 8363383
it
tt
5.00
Jul. 24, 1866
Red
K 2755734
tt
tt
5.00
Jul. 24, 1866
Red
K 2755762
tt
it
5.00
Jul. 24, 1866
Red
K 1203341
it
tt
5.00
1890
Brown
A 28
tt
tt
5.00
1891
Red
A 3885814
tt
ti
5.00
1891
Red
B.2489390
M
tt
5.00
1891
Red
B 12464264
Page 3 of 45
Kind
Face Value
Series or Date
Seal
Serial No.
Red
A 2599784
Blue
A 25928190 A
Treasury Note ? 5.00 1891 Red B 17259901
n » 10.00 1869 Red H 3364279
it »i 10.00 1869 Red H 5719007
tt II 10.00 1869 Red H 5719011
ti " 10.00 1891 Red B 2
tt " 10.00 1891 Red B 3205745
II » 10.00 1891 Red B 6027901
u it 10.00 1890 Brown A 3074026
tt " 20.00 1890 Brown A 172211
" » 20.00 1890 Red A 1214279
it II 20.00 1891 Red B 1147901
II " 20.00 1891 Red B 30
II II 20.00 1890 Brown A 571191
20.00 1869ttRed A 1575551
ti
tt
20.00
1869
*
ti
50.00 1869 Red Y 13549
tt
50.00 1891 Red B 3
it
100.00 1890 Brown A 104451
it
100.00 1891 Red B 79901
ii
1,000.00 1890 Brown A 11623
n
1,000.00 1891 Red B 31973
Fed. Res. Bank Note
Boston
1.00
1918
Page 4 of 45
Kind
Face Value
Scries or Date
Seal
Serial No.
Fed. Res. Bank Note
New York
$
1.00
1918
Blue
B 97414503 A
Fed. Res. Bank Note
Cleveland
1.00
1918
Blue
D 543 A
Fed. Res. Bank Note
Kansas City
1.00
1918
Blue
J 2445613 A
Fed. Res. Bank Note
Dallas
1.00
1918
Blue
K 2057376 A
Feci. Res. Bank Note
San Francisco
1.00
1918
Blue
L 13619363 A
Fed. Res. Bank Note
Boston
2.00
1918
Blue
A 8960932 A
Fed. Res. Bank Note
New York
2.00
1918
Blue
B 12810497 A
Fed. Res. Bank Note
Cleveland
2.00
1918
Blue
D 543 A
Fed. Res. Bank Note
Minneapolis
2.00
1918
Blue
I 1478876 A
Fed. Res. Bank Note
Chicago
2.00
1918
Blue
G 9122059 A
Fed. Res. Bank Note
San Francisco
2.00
1918
Blue
L 2835307 A
Fed. Res. Bank Note
New York
5.00
1918
Blue
B 3910636 A
Fed. Res. Bank Note
Cleveland
5.00
1918
Blue
D 2278152 A
Fed. Res. Bank Note
Atlanta
5.00
1918
Blue
F 840723 A
Fed. Res. Bank Note
San Francisco
5.00
1918
Blue
L 407162 A
Fed. Res. Bank Note
Kansas City
5.00
1915
Blue
J 472 A
Page 5 of 45
Kind
Face Value
Series or Date
Seal
Serial No.
Fed. Res. Bank Note
Kansas City
$
1918
Blue
J 87979 A
Fed. Res. Bank Note
Kansas City
•
10.00 1915
Blue
J 382411 A
Fed. Res. Bank Note
Chicago
10.00 1918
Blue
G 157407 A
Fed. Res. Bank Note
Atlanta
10.00 1918
Blue
F 65643 A
Fed. Res. Bank Note
Dallas
20.00 1915
Blue
K 45855 A
Fed. Res. Bank Note
Atlanta
20.00 1918
Blue
F 76341 A
Fed. Res. Bank Note
Kansas City
20.00 1915
Blue
J 3372 A
Fed. Res. Bank Note
Kansas City
1.00 1918
Blue
J 13321189 A
Fed. Res. Bank Note
St. Louis
50.00 1918
Blue
H 3396 A
Fed. Res. Bank Note
St. Louis
50.00 1918
Blue
H 797 A
Total Value, Book 1
$ 3,459.79
5.00
Total number of notes
(81)
Page 6 of 45
BOOK 2
ue
Scries or Dat
Seal
Serial No.
00
257-New York
Red 452
00 153-New York
Red 3475
00 3-New York
None 66352
00 11-Phila.
None 51880
00 12-Boston
None 59787
00 82-New York
Red 3160
00 32-New York
Red 16401
00 58-New York
Red 17890
00 New Series 68
New York
Red 37734
00 New Series 56
New York
Red 98538
00 Series 5
New York
None 49557
00 33-New York
Red 73245
00 New Series 50
New York
Red 33570
00 New Series 1
New York
Red 83920
00 1861-Phila.
None 36687
00 25-New York
Red 51
00 3-New York
Red 62052
00 New Series 2
New York
Red 33579
Page 7 of 15
Face Value
Scries or Date
Seal
Serial No.
$
New Scries 9
New York
Red
64202
50.00 Series 2New York
Red
83666
50.00 Series 5
New York
Red
8100
Red
73149
100.00 New Series 1
New York
Red
95812
100.00 New Series 1
New York
Red
50986
Red
49519
New Series 2
New York
Red
23657
1.00
1874
Red H 341843
1.00
1875
Red H 5126730
1.00
1875*
Red K 1158825
1.00
1878
Red A 3828439
1.00
1878
Red A 494351
1.00
1880
Brown Z 14451012
1.00
1880
Brown Z 44888682
1.00
1880
Brown Z 31237654
1.00
1880
Brown Z 44S88684
].00
1880
Red A 3041315
1.00
1880
Red A 5628322
1.00
1917
Red A 47184370 A
1.00
1917
Red II 97209609 A
3.00
1917
Red T 4 345809 A
20.00
*
100.00
1862-New York
500.00 New Series 1
New York
1,000.00
.
Page 8 of 45
Kind
Face Value
U.S. Note
$
1.00
Series or Date
Seal
Serial No.
1923
Red
A 320 B
ti
2.00
1874
Red
B 6730509
tt
2.00
1875
Red
B 7477937
tt
2.00
1875
Red
B 3246522
tt
2.00
1878
Red
A 3022248
n
2.00
1878
Red
A 3022737
n
2.00
1880
Brown
Z 21928590
tt
2.00
1880
Red
A 3687510
tt
2.00
1880
Brown
Z 22717861
it
2.00
1917
Red
A 148505 A
it
2.00
1917
Red
A 89705059 A
it
2.00
1917
Red
D 23540241 A
u
2.00
1917
Red
A 74434291 A
tt
1.00
1917
Red
N 555 A
it
2.00
1917
Red
D 48332460 A
ti
5.00
1875
Red
B 4993269
it
5.00
1875
Red
B 3284700
tt
5.00
1880
Brown
Z 10733265
u
5.00
1880
Brown A 19516253
ti
5.00
1880
Brown A 18509853
it
5.00
1880
Brown Z 14855365
ti
5.00
1880
Red
A 7034259
ii
5.00
1880
Red
A 33152363
u
5.00
18S0
Red
A 53727014
M
5.00
1880
Red
A 44931648
Page 9 of 15
Kind
Face Value
Series or Date
Seal
Serial No.
U.S. Note
$
5.00
1907
Red
D 21
5.00
1907
Red
E 34085107
5.00
1907
Red
E 80846626
5.00
1907
Red
M 48005929
u
5.00
1907
Red
M 29146947
it
5.00
1907
Red
A 52
5.00
1907
Red
B 50277643
5.00
1907
Red
B 121*27950
5.00
1907
Red
E 67022880
ti
tt
Total Value, book 2
$ 2,220.00
Total number of notes (74)
Page 10 of 45
BOOK 3
Face Value
Scries or Date
Red
A10.00
34809161880
$
Brown10.00
Z 3244151
1880
Brown10.00
A 10057021
1880
Brown10.00
A 10057014
1880
Brown10.00
Z 986135
1880
Brown10.00
Z 5962590
1880
Red A10.00
18011061880
Red A10.00
67598341880
Red A10.00
50676851880
Red A10.00
11921641875
Red A 10.00
23810962
1880
Red A 10.00
33673406
1880
Red A 10.00
12966894
1880
Red A 10.00
29247879
1880
Red A 10.00
19503058
1880
Red E 10.00
14902794
1901
Red * 10.00
28219991
1901
Red D 10.00
43318461901
Red A 10.00
8
1901
Red B 10.00
9669710 1901
Red D 10.00
4331845 1901
Seal
Serial No.
Page 11 of 45
Face Value
Series or Date
Seal
Serial No.
$
1901
Red
E 1947730
10.00
10.00 1901 Red D 13558750
»
10.00
1901
10.00 1901 Red E 57675550
10.00 1923 Red A 14685 B
10.00 1923 Red A 672036 B
20.00 1880 Red A 2520525
20.00 1880 Brown Z 653358
20.00 1880 Red A 5372741
20.00 1875 Red A 1067250
20.00 1878 Red A 682666
20.00 1880 Brown Z 246205
20.00 1880 Brown Z 1150156"'
20.00 1880 Red A 660059
20.00 1880 Red A 1646188
20.00 1880 Red A 356179 A
20.00 1880 Red A 8501096
20.00 1880 Red B 8124
20.00 1880 Red A 2956323 A
20.00 1880 Red A 11904104
20.00 1880 ^d D 163369
20.00 1880 Red A 2929994 A
Red
E 1947718
Page 12 of 45
Kind
Face Value
U.S. Note $ 20.00 1880 Red D 375654
tt ft 50.00 1874 Red E 420462
tt n 50.00 1878 Red A 160519
tt it 50.00 1880 Brown A 434450
ti it 50.00 1880 Red A 385343
II " 50.00 1880 Red A 45264
it ii 50.00 1880 Red A 806713
II II 100.00 1880 Red A 1634
»• H 100.00 1880 Red A 4437
" II 100.00 1869 Red W 346542
» » 100.00 1875 Red A 18075
tt »i 100.00 1878 Red A 148731
ti ti 100.00 1880 Brown Z 111882
it it 100.00 1880 Red A 81780
II II 100.00 1880 ' Red A 249293
ti tt 100.00 1880 Red A 623328
ti it 500.00 1869 Red N 16035
n it 500.00 1874 Red Z 30645
II M 500.00 1875 Red A 20164
ii it 500.00 1875 Red A 46900
ti II 500.00 1878 Red A 12336
ii H 500.00 1880 Red A 13468
Scries or Date
Seal
Serial No
Page 13 of 45
Kind
Face Value
Series or Date
Seal
Serial No.
U.S. Note
$
500.00
1880
Red
A 43029
500.00
1880
Red
A 48235
500.00
1880
Red
A 75902
500.00
1880
Red
A 88070
1,000.00
1880
Red
A 27395
1,000.00 1880
Red
B 10050
1,000.00 1878
Red
A 21998
1,000.00
Brown
Z 6498
Total value, book 3
$10,810.00
1880
Total number of notes
(73)
Page 14 of 45
BOOK 4
Face Value
Scries or Date
Seal
Serial No.
$
1st. N.B. of
Portsmouth, N.1I.
Jan. 2, 1865
Red
9185
2.00 Valley N.B.
Lebanon, Pa.
Jan. 17, 1865
Red
875
5.00 1st. N.B.
Ithaca, N.Y..
Feb. 20, 1864
Red
U 89781
1.00
5.00
1st. Nat. Gold
Bank Stockton, Ca.
Feb. 15, 1873
Red
K 929857
5.00 1st. Nat. Gold
Bank San Fran, Ca
Nov. 30, 1870
Red
K 275970
10.00 1st. Nat. Gold
Bank San Fran, Ca
Nov. 30, 1870
Red
Z 784366
10.00
The Nat. Bk. of
111. Chicago, 111
Aug. 25, 1871
Red
B 899761
10.00 1st. Nat. Gold
Bank Stockton, Ca
- Feb. 15, 1875
Red
B 233265
20.00 1st. Nat. Gold
Bank Oakland, Ca
Feb. 15, 1875
D 525117
Red
5.00 Central N.B. Bait.
Md. Mar. 15, 1871 Red
H 61178
5.00 The Stockgrowers
N.B. (scries 1875)
of Cheyenne, Wyo.
Jul. 10, 1890
Red
Y 358331
Page 15 of 45
Face Value
Series or Date
Seal
Serial No
$
The West Chester
County N.B. of
Peekskill, N.Y.
(series 18S2)
June 14, 1885
Red
R 249897
The Cumberland
N.B. of Portland
Maine (series
1875) Oct. 2,
1865
Red
H 8480
10.00
5.00
The Rochester
N.B. (series 1875)
Rochester, N.H.
Mar. 20, 1874
Red
B 919945
The Stones River
N.B. (series 1875)
of Murfreesboro, Tn.
Jul. 15, 1872
Red
X 123300
5.00
1902-May 4, 1
T 177156
5.00
1902-Jun. 11,
1904
Red
R 291243
1902-Apr. 25,
1905
Red
N 764050
1902-Jun. 30,
1902
Red
A 48197
5.00
5.00
5.00
5.00
K 175254
5.00
1902-Jul 1, 1
5.00
1902-Feb 25,
1903
Red
T 116238
1902-Nov 6,
1904
Red
D 145328
1902-Nov 6, 1904
Blue
E 913017 E
5.00
5.00
5.00 1902-Apr 2, 1912 Blue A 780137 D
Page 16 of 45
Face Value
al Currency
$
5.00
Scries or Date
Seal
Serial No.
1902-Nov 13,
1902
Blue
Y 325892 A
tt
5.00
1902-Sep S, 1916
Blue
346619
tt
5.00
1902-Sep 12,
1917
Blue
X 305133 H
1902-Feb 25,
1903
Blue
9481
11
5.00
tt
5.00
1882-May 4, 1885
Brown
A 176666 A
u
5.00
1882-Apr 12,
1898
Brown
R 779275 B
1882-Apr 26,
1885
Brown
Z 824808
1882-Jan 14,
1885
Brown
B 233559 B
1882-Jun 20,
1900
Blue
D 35721
tt
n
it
5.00
5.00
5.00
it
5.00
1882-May 6, 1895
Blue
E 482649
ii
5.00
1882-Aug 29,
1900
Blue
U 292791
ti
5.00
1882-Nov 2, 1901
Blue
U 128177
it
5.00
1882-Aug 11,
1900
Blue
N 226379
ti
5.00
1882-Jan 4, 1902
U 498539
Blue
ti
5.00
1902-Jan 11,
1905
Blue
D 440373
tt
10.00
June 25, 1897 Blue N 527631
ti
10.00
May 19, 1900 Blue R 273298
M
10.00
Apr 19, 1905 Blue A 271590
11
10.00
May 31, 1892 Blue D 619280
Page 17 of 45
Face Value
$
Scries or Date
Seal
Serial No.
10.00
1882-Feb 9, 1902
Blue
U 576693
10.00
1902-Sep 6, 1909
Blue
5855
10.00
1902-Oct 13,
1906
Blue
B 155610 K
1902-Nov 15,
1922
Blue
R 984697 H
1902-Jan 20,
1911
Blue
142106
10.00
1902-Sep 2, 1919
Blue
V 516875 E
10.00
1902-Aug 7, 1912
Blue
Y 136468
10.00
1902-Jun 3, 1903
Red
B 126131
10.00
1902-Nov 2, 1902
Red
A 379916
10.00
1902-Apr 13,
1905
Red
N 468472
1902-Jan 10,
1903
Red
T 353070
1902-Aug 9, 1907
Red
A 479464
Red
H 631369
10.00
10.00
10.00
10.00
10.00 1902-Nov 21,
1902
• •
10.00 1882-May 1, 1885 Brown X 9261896
10.00 1882-Sep 3, 1895 Brown B 81365 B
10.00 1882-May 11,
1901
Brown
Y 953359
10.00 1882-Jan 12,
1901
Brown
Y 438210
Brown
II 589150 II
10.00
1882-Dcc 21,
1901
Page 18 of 45
Kind
Face Value
National Currency
$
it
it
ti
Series or Date
Seal
Serial No.
1882-Dec 15,
1897
Brown
B 750519
10.00 1882-Jan 14,
1885
Brown
U 871712
10.00 1875-Jul 10,
1890
Red
K 919064
1882-Oct 24,
1895
Brown
V 508500 V
10.00
10.00
n
10.00
1882-Mar 1, 1888
Brown
V 119286
H
10.00
1875-Mar 15,
1879
Red
D 202992
1875-Jan 23,
1883
Red
R 105985
Red
D 751648
ti
20.00
u
20.00
1882-Jul 1, 1865
it
20.00
Aug 7, 1865
ti
20.00"
1875-Feb 3, 1865 Red
E 564440
ti
20.00
1875-Jul 15,
1880
Red
K 855816
1882-Feb 26,
1883
Brown
B 605591
1882-Dec 30,
1898
Brown
U 473073 U
1882-Jan 14,
1885
Brown
U 766910
Blue
M 822697
it
it
tt
20.00
20.00
20.00
^
A 126219
Red
it
20.00
Oct 15, 1900
it
20.00
Apr 5, 1901 Blue M 953642
it
20.00
Jul 23, 1S95 Blue T 125833
tt
20.00
1902-Dcc 27,
1906
Red
Y 30833
Page 19 of 45
Face Value
Scries or Date
Seal
Serial No
$
1902-Jun 3, 1902
Red
A 804179
20.00 1902-Feb. 25,
1903
Red
K 84081
20.00 1902-Feb 25,
1903
Red
V 419681
20.00 1902-Sep 24,
1902
Red
N 985788
20.00 1902-Jan 28,
1903
Red
U 80881
20.00 1882-Jul 31,
1886
Brown
Y 77316
20.00 1882-Feb 17,
1885
Brown
Y 928981
20.00 1882-Jul 31,
1901
Brown
Z 172556
20.00 1882-Oct 16,
1900
Brown
R 627993 R
20.00 1882-Jan 18,
1891
. Brown
20.00 1882-May 11,
1885
Brown
Z 344130
20.00 1902-Feb 24,
1912
Blue
X 575204 II
20.00 1902-Mar 15,
1922
Blue
R 984696 H
20.00 1902-Mar 19,
1906
•' Blue
20.00
B 574592 B
K 820530 H
20.00 1902-0ct.l, 1902 Blue 7560
20.00 1902-Nov 30,
1909
Blue
M 552100 E
20.00 1902-Feb 20,
1920
Blue
8474
Page 20 of 45
Face Value
Scries or Date
Seal
Serial No.
$
20.00
1875-Nov 2, 1863
Red
E 519956
20.00
1882-Oct 12,
1S82
Brown
A 163359
50.00
1875-Jul 1, 1865
Red
A 59097
50.00
Oct. 6, 1864
Red
10581
50.00
Sep. 13, 1901
Blue
A 150013
50.00
Jan. 24, 1890
Blue
A 35129
50.00
1882-Oct 23,
1901
Brown
B 566774
50.00
1882-Oct 7, 1892 Brown
A 746799
50.00
1902-Jan 29,
1905
A 847118
Blue
50.00
1902-Apr 3, 1817 Blue
1250
50.00
1902-Feb 25,
1903
Red
A 377437
50.00 1902-Dec 14,
1921
Blue
A 938277
100.00 1882-Jan 16,
1907
Brown
B 605886
100.00 1882-Jan 16,
1907
Brown
B 605822
100.00 1882-Feb 10,
1900
Brown
B 396588
100.00
1875-Jul 1, 1865
Red
A 145208
100.00
July 24, 1901
Blue
A 148915
100.00 Jan 16, 1907
Blue A 27468
100.00 1882-Dec 15,
1901
Blue A 168622
100.00 Sep 13, 1901
Blue A 149828
Page 21 of 45
Kind
Face Value
Scries or Date
Seal
Serial No.
National Currency
$
1902-Feb. 25,
1903
Blue
5008
1917
Blue
698
1921
Blue
A 938341
1908
Blue
A 268347
1902-Nov 2, 1904
Red
A 146473
100.00
n " 100.00 1902-Jul 3, 1905 Blue 11744
u " 100.00 1902-Sep 2, 1910 Blue A 894668
ii " 100.00 1902-Aug 30,
u " 100.00 1902-Dec 14,
u it 100.00 1902-May 7 1902 Red A 180069
ti n 100.00 1902-Jun 1, 1905 Red A 303249
II » 100.00 1902-Nov 21,
n
100.00
it
500.00 May 10, 1865 Red M 16428
Total value, book 4
$ 3,823.00
Total number of notes (126)
Page 22 of 45
BOOK 5
Kind
Face Value
Scries or Date
Seal
Serial No.
Fed. Res. Note
$
5.00
1914-1A
Red
A 373SS4 A
5.00
1914-2B
Red
B 4475251 A
5.00
1914-3C
Red
C 1194260 A
5.00
1914-4D
Red
D 540890 A
5.00
1914-5E
Red
E 970323 A
5.00
1914-6F
Red
F 1161454 A
5.00
1914-7G
Red
G 944120 A
5.00
1914-8H
Red
H 1084680 A
5.00
1914-91
Red
I 30817 A
5.00
1914-2B
Red
B 13598237 A
5.00
1914-11K
Red
K 1255908 A
5.00
1914-12L
Red
L 548231 A
10.00
1914-1A
Red
A 66813 A
10.00
1914-2B
Red
B 1992586 A
10.00
1914-3C
Red
C 608893 A
10.00
1914-4D
Red
D 779242 A
10.00
1914-5E
Red
E 578903 A
10.00
1914-6F
Red
F 378864 A
10.00
1914-7G
Red
G 168652 A
10.00
1914-8H
Red
11 716585 A
10.00
1914-91
Red
I 591809 A
10.00
1914-10J
Red
J 341638 A
10.00
1914-11K
Red
K 527503 A
Page 23 of 45
Face Value
Series or Date
Seal
Serial No.
$
10.00
1914-12L
Red
L 183100 A
20.00
1914-1A
Red
A 34543 A
20.00
1914-2B
Red
B 4400 A
20.00
1914-3C
Red
C 228654 A
20.00
1914-4D
Red
D 246212 A
20.00
1914-6F
Red
F 89949 A
20.00
1914-7G
Red
G 82257 A
20.00
1914-10J
Red
J 6646*2 A
20.00
1914-12L
Red
L 125603 A
50.00
1914-1A
Red
A 31536 A
50.00
1914-2B
Red
B 44812 A
50.00
1914-3C
Red
C 22764 A
50.00
1914-4D
Red
D 16079 A
50.00
1914-5E
Red
E 32976 A
50.00
1914-6F
Red
F 19741 A
50.00
1914-7G
Red
G 2418 A
50.00
1914-8H
Red
H 167 A
50.00
1914-91
Red
I 1088 A
50.00
1914-10J
Red
J 11571 A
50.00
1914-11K
Red
K 19629 A
50.00
1914-12L
Red
L 6918 A
100.00
1914-1A
Red
A 53 A
100.00
1914-2B
Red
B 55426 A
Page 24 of 45
Face Value
Series or Date
Seal
Serial No.
$
100.00
1914-3C
Red
C 4765 A
100.00
1914-4D
Red
D 24997 A
100.00
1914-5E
Red
E 23614 A
100.00
1914-6F
Red
F 8126 A
100.00
1914-7G
Red
G 1142 A
100.00
1914-91
Red
I 2882 A
100.00
1914-10J
Red
J 13688 A
100.00
1914-11K
Red
K 15774 A
100.00
1914-12L
Red
L 24803 A
5.00
1914-1A
Blue
A 6079828 A
5.00
1914-2B
Blue
B 25617903 A
5.00
1914-3C
Blue
C 70525005 A
5.00
1914-4D
Blue
D 22879631 A
5.00
1914-5E
Blue E 14313792 A
5.00
1914-6F
Blue F 1684343 A
5.00
1914-7G
Blue G 45232762 A
5.00
1914-8H
Blue H 21872318 A
5.00
1914-91
Blue I 22546972 A
5.00
1914-10J
Blue J 28701810 A
5.00
1914-11K
Blue K 11659088 A
5.00
1914-12L
Blue L 70555784 A
1914-1A
Blue A 3590237 A
ID. 00
Page 25 of 45
Face Value
Series or Date
Seal
Serial No.
10.00
1914-2B
Blue
B 75092854 A
tt
10.00
1914-2B
Blue
B 63813922 A
n
10.00
1914-5C
Blue
C 37286075 A
tt
10.00
1914-4D
Blue
D 22007862 A
tt
10.00
1914-5E
Blue
E 882915 A
tt
10.00
1914-6F
Blue
F 15783903 A
tt
10.00
1914-7G
Blue
G 12336977 A
ti
10.00
1914-8H
Blue
H 21475107 A
tt
10.00
1914-91
Blue
I 1762926 A
it
10.00
1914-10J
Blue
J 16060568 A
tt
10.00
1914-11K
Blue
K 11778978 A
it
10.00
1914-12L
Blue
L 40540249 A
n
20.00
1914-1A
Blue
A 22338746 A
it
20.00
1914-2B
Blue
B 58563985 A
n
20.00
1914-3C
Red
C 220864 A
n
20.00
1914-3C
Blue
C 15321407 A
ii
20.00
1914-4D
Blue
D 19605065 A
n
20.00
1914-5E
Blue
E 16507699 A
ii
20.00
1914-6F
Blue
F 356432 A
ii
20.00
1914-7G
Blue
G 4914419 A
it
20.00
1914-8H
Blue
H 2929040 A
ti
20.00
1914-91
Blue
I 5871923 A
20.00
1914-10J
Blue
J 8742110 A
Note
$
Page 26 of 45
Face Value
Series or Date
Seal
Serial No.
20.00
1914-11K
Blue
K 4467310 A
20.00
1914-11K
Blue
K 2782865 A
20.00
1914-12L
Blue
L 12013259 A
50.00
1914-1A
Blue
A 802093 A
50.00
1914-2B
Blue
B 4081541 A
50.00
1914-3C
Blue
C 1036248 A
50.00
1914-4D
Blue
D 48336 A
50.00
1914-5E
Blue
E 482.330 A
50.00
1914-6F
Blue
F 767873 A
50.00
1914-7G
Blue
G 3941929 A
50.00
1914-8H
Blue
H 389213 A
50.00
1914-91
Blue
I 138520 A
50.00
1914-10J
Blue
J 21910 A
50.00
1914-11K
Blue
K 185392 A
50.00
1914-12L
Blue
L 1021128 A
100.00
1914-1A
Blue
A 195372 A
100.00
1914-2B
Blue
B 1726775 A
100.00
1914-2B
Blue
B 563823 A
100.00
1914-3C
Blue
C 384635 A
100.00
1914-4D
Blue
D 96955 A
100.00
1914-5E
Blue
E 284215 A
100.00
1914-6F
Blue
F 441397 A
Page 27 of 45
Face Value
Series or Date
Seal
Serial No.
$
1914-7G
Blue
G 156433 A
100.00
1914-8H
Blue
H 168231 A
100.00
1914-91
Blue
I 57175 A
100.00'
1914-10J
Blue
J 178122 A
100.00
1914-12L
Blue
L 1045400 A
500.00
1918-1A
Blue
A 290 A
500.00
1918-2B
Blue
B 1A
500.00
1918-3C
Blue
CIA
500.00
1918-4D
Blue
D 1 A
500.00
1918-6F
Blue
F 19990 A
500.00
1918-7G
Blue
G 1 A
500.00
191S-8H
Blue
H 2515 A
500.00
1918-10J
Blue
J 5156 A
500.00
1918 12L
Blue
L 6451 A
1,000.00
1918 1A
Blue
A 16149 A
1,000.00
1918-2B
Blue
B 1 A
1,000.00
1918-3C
Blue
CIA
1,000.00
1918-4D
Blue
D 1 A
1,000.00
1918-6F
Blue
F 28477 A
1,000.00
1918-7G
Blue
G 15703 A
1,000.00
1918-8H
Blue
II 1998 A
100.00
Page 28 of 45
Kind
Face Value
Scries or Date
Seal
Serial No
Fed. Res. Note
$ 1,000.00
1918-12L
Blue
L 13607 A
II n II 5,000.00 1918-2B Blue B 1 A
n n n 5,000.00 1918-4D Blue D 1 A
n n II 10,000.00 1918-2B Blue B 1 A
it u it 10,000.00 1918-4D Blue D 1 A
Total value, book 5
$46,810.00
Total number of notes (139)
Page 29 of 45
Face Value
Series or Date
Seal
Serial No.
$
N.Y. Oct 1, 1869
Red
112853
100.00
100.00 N.Y. Jan 2, 1877 Red B 13104
500.00 N.Y. May 1, 1874 Red A 25770
20.00 Dept Scries-1882 Red C 15318215
20.00 1882-Sep 1, 1882 Brown A 293447
20.00 Dept Serics-1882 Brown A 337644
Sep 1, 1882
20.00 Dept Series-1882
Sep 1, 1882
Brown20.00
C 145614
Dept Series-1882
Brown50.00
A 965691882-Sep 1, 1882
Red C50.00
5745
Sep 1, 1882
Brown 50.00
C 57783Dept Series
Red E 50.00
46231 Dept Series
Red H 50.00
229816 Dept Series
Red M100.00
205662 Dept Series
Brown100.00
A 2281 Sep 1, 1882
100.00
Red C 6389
Dept Series
Sep 1, 1882
Brown100.00
C 73783Dept Series
Red D100.00
223468 Dept Series
Red E100.00
33954
Dept Series
Red H100.00
442655 Dept Scries
Red N100.00
1992256 1922
Brown
A 5230D2
Page 30 of 45
Face Value
Series or Date
Seal
Serial No.
$
Dept Series
Red
K 182639
100.00
Dept Series
Red
M 99456
100.00
Dept Series
Red
M 769739
500.00
Dept Series
Red
C 110795
500.00
Dept Scries
Red
D 2104
500.00
1922
Red
E 29435
1,000.00
Sep 1, 1882
Brown
A 10199
1,000.00
Dept Series
Sep 1, 1882
Brown
A 18818
Dept Series
Sep 1, 1882
Red
C 6477
1,000.00
Dept Series
Brown
C 23847
1,000.00
Dept Series
Red
D 15131
1,000.00
1922
Gold
E 66888
10.00
1907
Gold
A 50
100.00
1,000.00
10.00
1907
Gold B 1059909
10.00
1907
Gold B 29331089
10.00
1907
Gold E 5075887
10.00
1907
Gold D 2033040
10.00
1922
Gold K 56452476
10.00
1907
Gold E 29910995
20.00
1905
Red A 2689605
20.00
1906
Gold
D 3373921
Pago 31 of 45
Kind
Face Value
Series or Date
Seal
Serial No.
Gold Certificates
$
20.00
1906
Gold
D 13922828
20.00
1906
Gold
H.7863196
20.00
1906
Gold H 11541535
20.00
1922
Gold
K 60842422
50.00
1913
Gold
A 369927
50.00
1913
Gold
A 483109
50.00
1922
Gold
B 290455
tt
50.00
Dept Series
Red
H 180618
tt
100.00
1922
Red
N 2192022
1,000.00
1907
Gold
A 13296
it
it
Total value, book 6
$11,140.00
Total number of notes (52)
Page 32 of 45
BOOK 7
Face Value
$
Scries or Date
Seal
Serial No.
1.00
1886
Red
B 17
1.00
1886
Red
B 23584379
1.00
1886
Red
B 41706835
1.00
1886
Brown
B 55745598
1.00
1886
Brown
B 67199805
1.00
1891
Red
E 1957127
1.00
1891
Red
E 50087787
1.00
1896
Red
117
1.00
1896
Red
56091554
1.00
1899
Blue
H 7548992
1.00
1899
Blue
R 29759029
1.00
1899
Blue
Y 68426490
1.00
1899
Blue
H 23 H
1.00
1899
Blue
69371718
1.00
1899
Blue
N 21 N
1.00
1899
Blue
X 50311091 X
1.00
1899
Blue D 82572755 A
1.00
1899
Blue K 41086080 A
1.00
1899
Blue
X 36 A
1.00
1923
Blue
A 12 D
1.00
1923
Blue
V 66202020 D
Page 33 of 45
Kind
Face Value
Seric
Seal
Serial No.
Silver Certificates
$
1.00
1923
Blue
Z 90566961 D
n
2.00
1886
Red
B 7
it
2.00
1886
Red
B 13055187
ti
2.00
1886
Brown
B 18870546
it
2.00
1891
Red
E 40
tt
2.00
1891
Red
E 20987902
it
2.00
1896
Red
27
2.00
1896
Red
196029L83
ti
2.00
1899
Blue
K 21395533
it
2.00
1899
Blue
58
n
2.00
1899
Blue
M 21
tt
2.00
1899
Blue
N 1999
ii
2.00
1899
Blue
N 97299001
ti
2.00
1899
Blue
D 45684458
it
2.00
1899
Blue
N 61297059
ti
2.00
1899
Blue
N 35395125
it
5.00
1886
Red
B 1930976
ti
5.00
1886
Red
B 11988734
n
5.00
1886
Brown
B 31807386
it
5.00
1886
Red
B 21136331
n
5.00
1886
Red
E 27610006
n
5.00
1886
Red
E 3625090
ti
11
Page 34 of 45
Kind V
Face Value
Scries or Date
Seal
Serial No.
Silver Certificates
$
1896
Red
5054048
5.00 1896
Red
34428996
it
5.00
ti
It
5.00 1899
Blue
18
ti
It
5.00 1899
Blue
B 20
it
II
5.00 1899
Blue
D 82761967
11
tt
5.00 1899
Blue
E 43494189
M
tt
5.00 18*99
Blue
E 80953807
it
tl
5.00 1899
Blue
M 31808598
ti
II
5.00 1899
Blue
H 1750835
11
It
5.00 1899
Blue
N 64421333
n
tt
5.00 1899
Blue
M 94077308
ti
tt
5.00 1923
Blue A 334 7311
it
tt
5.00 1923
Blue A 2070083 B
tt
11
5.00 1923.
Blue A 3347310 B
it
It
10.00 1878
Red
A 12509
it
11
10.00 1880
Brown
B 2841993
tt
tt
10.00 1880
Red A 245437
ti
ti
10.00 1880
Brown B 7313302
it
It
10.00 1880
Brown B 4178616
tt
tt
10.00 1880
Brown B 383514
It
11
10.00 1886
Red B 9507261
II
It
10.00 18S6
Red B 3299448
Page 35 of 45
Certificates
Face Value
Series or Date
Seal
Serial No.
$
1886
Brown
B 12208347
10.00
" 10.00 1886 Red B 1274823
" 10.00 1891 Red E 3
" 10.00 1891 Red E 34159690
» 10.00 1891 Red E 17154258
» 10.00 1891 Red E 23153739
" 10.00 1908 Blue B 954904
" 10.00 1908 Blue D 2249108
» 10.00 1908 Blue A 10
" 20.00 1878 Red A 70140
» 20.00 1878 Red A 28862
" 20.00 1880 Brown B 3153820
" 20.00 1880 Brown B 2903031
20.00tt 1886 " Red B 131
20.00ii1886 Brown B 779807
20.00n 1891 Red E 3
20.00it1891 Red E 7467239
20.00 1891 Red E 1709726
20.00u 1891 Red E 9090364
20.00 ti1891 ' Blue H 42900
50.00 H 1880 Brown B 15875
50.00 n1880 Red A 219274
Page 36 of 45
Kind
Face Value
Series or Date
Seal
Serial No.
Silver Certificates
$
50.00
1880
Brown
B 168478
50.00
1880
Brown
A 67173
50.00
1891
Red
E 456253
50.00
1891
Red
E 824260
50.00
1891
Red
H 175704
50.00
1891
Blue
K 610812
100.00
1878
Red
A 8782
100.00
1880
Red
A 116022
100.00
1880
Brown
A 16546
100.00
1891
Red
E 184127
500.00
1878
Red
A 672
500.00
1880
Brown
B 1742
1,000.00
1880
Brown
B 12638
Red
E 1
1,000.00 1891
Total value, book 7
$ 4,342.00
Total number of notes (101)
Page 37 of 45
BOOK 8
Face Value
$
Series or Date
Seal
Serial No.
1.00
1928
Blue
A 00000001 A
1.00
1928 A
Blue
Y 00777777 B
1.00
1928 B
Blue
V 51000250 A
1.00
1928 C
Blue
B 29449621 B
1.00
1928 D
Blue
D 82598421 B
1.00
1928 E
Blue
F 72000212 B
1.00
1934
Blue
A 00001065 A
1.00
1935
Blue
C 00000015 B
1.00
1935 A
(R) Exp erimental
Blue
S 71563941 C
1.00
1935 A
(S) Experimental
Blue
S 73884850 C
1.00
1935 A
Blue
Z 76518101 A
1.00
1935 C
Blue
M 90551120 D
1.00
1935 F
Blue
P 81000039 I
1.00
1935 F
Blue
P 81000040 I
1.00
1935 F
Blue
P 81000041 I
1.00
1935 G
Blue
B 54000104 J
1.00
1957
Blue
A 00002500 A
1.00
1957
Blue
A 00004000 A
1.00
1957 A
Blue
A 00000646 A
5.00
1934
Blue
A 00000330 A
5.00
1934 A
Blue
F 76928701 A
•
Page 38 of 45
Kind
Face Value
Scries or Date
Seal
Serial No.
Silver Certificates
$
5.00
1934 B
Blue
K 97810424 A
II
u
5.00
1934 D
Blue
S 34739061 A
it
it
5.00
1953
Blue
A 00000001 A
tt
it
10.00 1933
Blue
A 00000005 A
tt
it
10.00 1934
Blue
A 00000170 A
it
ii
10.00 1934 A
Blue
A 85340015 A
it
u
10.00 1934 C
Blue
B 30422989 A
tt
tt
10.00 1953
Blue
A 00004001 A
it
it
10.00 1953 A
Blue
A 10440001 A
tt
11
1.00 1935 A
Yellow B 99003407 C
ti
it
5.00 1934 A
Yellow K 37465004 A
tt
it
10.00 1934 A
Yellow A 94486001 A
it
ti
1.00 1935 A-Hawaii
Brown
5.00 1934 A-Hawaii
Brown L 55592993 A
Federal Reserve Notes
C 00000417 C
it
it
tt
10.00 1934 A-Hawaii
Brown L 50410047 B
u
tt
ti
20.00 1934 A-Hawaii
Brown L 77867361 A
1.00 1928
Red A 00000001 A
2.00 . 1928
Red
A 00000001 A
2.00 1928 A
Red
B 08319203 A
2.00 1928 B
Red
B 08325766 A
2.00 1928 C
Red
B 89579S00 A
2.00 1928 D
Red
D 07775007 A
U.S. Note
Page 39 of 45
Kind
Face Value
Series or Date
Seal
Serial No.
U.S. Note
$
2.00
1953
Red
A 00000004 A
ti
11
2,00
1953 A
Red
A 45363697 A
u
ii
5.00
1928
Red
A 00000001 A
ii
it
5.00
1928 A
Red
C 80075030 A
it
H
5.00
1928 B
Red
E 08222222 A
it
tt
5.00
1928 C
Red
G 31369409 A
it
it
5.00
1928 D
Red
G 56190151 A
it
ti
5.00
1928 E
Red
G 64406510 A
H
tt
5.00
1953
Red
A 00000002 A
5.00
1929
Brown
A 048896
5.00
1929
Brown
B 00001022 A
n
10.00
1929
Brown
A 012979 A
it
10.00
1929
Brown
B 00312011 A
20.00
1929
Brown
A 000056
20.00
1929
Brown
D 00000010 A
50.00
1929
Brown
B 00004005 A
50.00
1929
Brown
C 001716 A
100.00
1929
Brown
B 000211 A
100.00
1929
Brown
D 00000010 A
5.00
1928
Green
J 04S22471 A
National Currency
it
Federal Reserve Notes
it
ti
5.00
1928 A
Green
J 05907348 A
it
tt
5.00
1928 B
Green
J 09045947 A
Page 40 of 45
erve Notes
Face Value
Series or Date
Seal
Serial No.
$
1928
Green
G 00004000 A
Green
E 00001000 A
10.00
" » 10.00 1928 B Green B 64206990 A
II II 10.00 1934 A Green B 16S66S07 D
II «i 10.00 1934 B Green B 76982505 D
II II 10.00 1950 Green E 00280033 A
ii it 20.00 1928 Green G 00003000 A
it II 20.00 1928 A Green D 09920678 A
n it 20.00 1928 B Green D 12769810 A
it it 20.00 1934 Green E 09883210 A
it it 20.00 1950 Green E 00280010 A
it it 50.00 1928 Green J 00012718 A
n it 50.00 1934 Green J 00000007 A
it t» 100.00 1928 Green G 00000077 A
II it 100.00 1934 Green G 00000001 A
n ti 500.00 1928 Green G 00000001 A
500.00
1934
tt
it
11
tt
1,000.00 1928 Green G 00000001 A
ti
tt
1,000.00 1934 Green G 00000001 A
tt
tt
5,000.00 1928 Green G 00000001 A
tt
ti
5,000.00 1928 Green E 00000654 A
ti
tt
10,000.00 1928 Green B 00000001 A
tt
it
10,000.00 1934 Green E 00000390 A
Page 41 of 45
Face Value
Kind
Gold Certificate
ti
it
U.S. Note
tt
Federal Reserve Note
Total value, book 8
Series or Date
Seal
Serial No.
10.00
1928
Gold
A 00000001 A
20.00
1928
Gold
A 00000001 A
50.00
1928
Gold
A 00000001 A
100.00
1928
Gold
A 00000001 A
500.00
1928
Gold
A 00000001 A
1,000.00
1928
Gold
A 00000001 A
5,000.00 1928
Gold
A 00000001 A
10,000.00 1928
Gold
A 00000001 A
2.00
1963
Red
A 01576301 A
5.00
1963
Red
A 01792001 A
1.00
1963
Green
E 05833601 A
$50,729.00
Total number of notes (98)
Page 42 of 45
DISPLAY NOTES
Face Value
Kind
Old Demand Notes
$
5.00
Series or Date
58
Seal
Serial No.
17889
n
tt
tt
5.00 50
43656
it
tt
it
10.00
42821
it
11
tt
10.00 6
42002
Treasury Notes of 1890'
1.00
1891
B 54815431
n
ti
tt
tt
1.00
1891
B 6156714
u
tt
tt
n
10.00
1891
B 543635
ti
it
ti
ti
10.00
1891
B 2705237
1.00
1917
M 97983038 A
n
1.00
1917
M 37889195 A
it
2.00
1917
B 9799645 A
it
2.00
1917
D 78718614 A
tt
5.00
1907
II 6363136
ti
5.00
1907
H 17207320
it
10.00
1901
E 9896466
tt
10.00
1901
B 45451934
1.00
1899
K 79565710 A
U.S. Notes
Silver Certificates
ti
it
1.00
1899
V 35551300 A
ti
it
5.00
1896
15479925
tt
it
5.00
1896
33906616
n
it
10.00
1908
D 3428646
Page 43 of 45
Kind
Face Value
Scries or Date
Silver Certificates
$
1908
u
10.00
Seal
Serial No.
A 4059209
it
50.00 1891
H 124693
u
50.00 1891
E 1018973
5.00 1875
V 314073
National Bank Notes
n
it
it
5.00 1875
V 314172
it
ti
tt
10.00 1882
H 20329 H
II
tt
n
10.00 1882
V 573037
it
ti
tt
20.00 1882
W 922984 E
ti
ii
ti
20.00 1882
U 766951 E
II
u
50.00 1882
A 980904 E
tt
tt
50.00 1882
A 980886 E
u
Federal Reserve Bank Notes
tt
1.00
1918
J 19276299 A
1.00
1918
J 19276292 A
tt
it
it
u
5.00 1918
B 3655557 A
it
ti
5.00 1918
B 910385 A
it
u
10.00 1918
F 15368 A
ti
H
10.00 1915
J 233452 A
it
tt
20.00 1915
J 48751 A
u
ti
20.00 1915
J 157979 A
5.00 1914
E 17628217 A
Federal Reserve Notes
u
it
5.00 1914
G 64876000 B
it
ti
10.00 1914
A 37739399 A
n
it
10.00 1914
A 46827529 A
Page 44 of 45
Face Value
Kind
, «
vt 4-~o
Federal Reserve Notes
n
ii
ti
ii
n
Series or Date
Seal
Serial No.
<:
90 no
1914
G 40170146 A
?
zu.uu
20.00
i->i *
1914
G 43250136 A
50.00
1914
F 695340 A
50.00
1914
Total value, Display Notes $632.00
•
F 695339 A
Total number of notes {AS)_
Page 45 of 45
UNISSUED COLD CERTIFICATES
Kind
Face Value
Scries or Date
Seal
Serial No.
Gold Certificate
$
100.00
1934
A 00000001 A
100.00
1934
A 00000510 A
100.00
1934
A 00000511 A
100.00
1934
A 00000512 A
1,000.00
1934
A 00000001 A
1,000.00 1934
A 00000058 A
1,000.00 1934
A 00000059 A
1,000.00 1934
A 00000060 A
10,000.00 1934
A 00000001 A
10,000.00 1934
A 00000538 A
10,000.00 1934
A 00000539 A
10,000.00 1934
A 00000540 A
100,000.00 193.4
A 00000001 A
100,000.00 1934
A 00020108 A
100,000.00 1934
A 00020109 A
100,000.00 1934
A 00020110 A
Total value of unissued
Gold Certificates
$444,400.00
Total number of notes (16)
This is a Gold Certificate Series 1934
Treasury note issued only to Federal
Reserve Banks in exchange for gold
they turned over to the Treasury. It is
the only $100,000 note ever issued as
United States currency, and is part of
a collection transferred from the
Treasury to the Smithsonian Institution.
Federal law 18 U.S.C. 5 0 4 permits illustrations of paper m o n e y in black and white of a size less than % or more than 1J4 times the size
of the genuine obligation for newsworthy purposes in books, journals, newspapers or albums. Other reproductions are strictly prohibited.
foment of theJREASURY
GTON.D.C. 20220
TELEPHONE 566-2041
FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.fiT
MAY 16, 1978
STATEMENT OF
JOHN E. RAY
DIRECTOR, OFFICE OF INTERNATIONAL TRADE
DEPARTMENT OF THE TREASURY
BEFORE
THE SUBCOMMITTEE ON MERCHANT MARINE
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman, I am pleased to discuss with you
the Treasury Department's preliminary comments on H.'R.
11862. This bill is intended to facilitate implementation
of reciprocal ocean transportation agreements between
United States and foreign flag carriers.
The Treasury Department shares your concern that
the United States should have a coherent, rational
ocean shipping policy. As you are aware, Mr. Chairman,
the Administration has begun a thorough study of U.S.
ocean shipping policy. This review will address a broad
range of issues involved in ocean shipping.
We believe that the issues raised in H.R. 11862 can best
be addressed as part of the larger study of shipping policy.
B-910
- 2 A unified approach is much preferable to a piecemeal
analysis of separate but related proposals designed
to aid the U.S. shipping industry.
As with other maritime
legislation this Subcommittee has considered recently, the
Treasury is prepared to offer preliminary comments. We
expect to present a more definitive position when the
Administration's review is completed.
H.R. 11862 is particularly appropriate for consideration in a broader policy context because it touches
on a fundamental question concerning U.S. ocean
shipping policy —
should we encourage competition
in our ocean trades, or should we permit "rationalization,
that is, extensive collective action by carriers to
regulate rates, capacity, sailing frequencies, and other
aspects of a trade. The particular approach suggested
in this legislation can only be evaluated once the broader
questions about the direction of our ocean shipping
policy have been answered.
As you know, the Treasury Department believes that
competition in ocean shipping, as in other sectors of
the economy, is desirable. We welcome the pro-competitive measures announced by the Civil Aeronautics Board.
We would like to see a similar approach to ocean shipping.
We fear that new limitations on competition between shipping
firms could lead to greater inefficiencies and increased
costs, without providing improved services to the shipping
- 3 public. Since the intent of this legislation is to
sanction private agreements that would otherwise violate
U.S. antitrust laws, and thereby reduce competition in
shipping, we think it should be evaluated carefully.
I would like to comment on specific aspects of
this legislation.
Section 2(c) of the bill appro-
priately places on the proponents of a sanctioned
agreement the burden of proof to show that the agreement
should become effective. We are concerned, however,
by the provision that agreements will automatically become
effective unless the FMC acts positively to suspend them.
Automatic approval could result in abuse. To be sure,
the FMC is granted authority to suspend agreements if it
suspects they are unjustly discriminatory, unfair, detrimental to U.S. commerce, or are contrary to the public
interest. However, we believe it would be difficult for
the FMC to police effectively all the agreements that
would result.
If private shipping agreements are
sanctioned by U.S. law, we may wish to consider whether
private parties should have the right to question those
agreements in court and win multiple damages if those
agreements are unjustly discriminatory, unfair, detrimental
to U.S. commerce, or are contrary to the public interest.
We would also want to ensure that new carriers
would not be blocked from entering a trade as party
- 4 to an agreement. Section 2(b)(1) specifies that new
carriers shall not be prevented from participating on
a "fair, reasonable and equitable basis."
We are
not sure how these terms would be defined and we are
concerned that, in practice, potential entrants could
find it difficult to join an existing agreement.
We are similarly concerned about the bilateral
approach in this bill.
Agreements entered into under
this legislation would be between carriers of countries
in which the cargo originates and for which it is destined?
Section 2(b)(1) also provides that third flag carriers may not
be prohibited from entering any agreement "on a fair, reasonable, and equitable basis." Again, since these terms are
not defined, third flag carriers might be excluded from the
trade.
A proliferation
@FedFRASER