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Treas.
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10
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v.219
U. S. Dept. of'Treasury
Press releases.

LIBRARY
MAR1 \ :op.^

FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
FEBRUARY 1, 1979

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TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE APPROPRIATIONS COMMITTEE

Mr. Chairman and Members of this distinguished
Committee:
I appreciate this opportunity to discuss with you the
President's economic and budgetary plans for 1979 and 1930.
The American economy is at a critical juncture. Since
the deep recession of 1974-75, we have enjoyed an
unprecedented recovery of employment and production, but we
have had less success in maintaining the value of our
currency at home and abroad. This imbalance in our
achievements cannot persist. Either we shall right the
balance ourselves by bringing inflation under orderly
control, or events will reassert equilibrium for us, by
bringing the economic recovery itself to a disorderly close.
There is no doubt which alternative best serves the public
interest. The only question is whether we in Washington,
subject as we ail are to the usual political cross-currents,
can find the will to choose and hold to the correct path.
The stakes are high. In decidina upon this budget, the new
Conqress will largely determine whether or not we enter the
1930's with a firm foundation for long term prosperity.
We reach this decision point after several years of
truly exceptional eccnomie performance. Since President
Carter assumed office, the gains in employment and output
have outpaced even optimistic expectations:

B-1375

-2Over 7 million new jobs have been created. This is
the largest gain in employment during any two year
period in our history, and the ratio of%employed
persons to the working-age population is at an
all-time high.
The number of unemployed has been cut by more than 1
million persons, and the rate of unemployment has
been reduced to below 6 percent. By way of
reference, the rate peaked at 9 percent in 1975 and
was still close to 8 percent at the end of 1976.
Real output has expanded by 10 percent, and
industrial production has risen by 13 percent.
Real disposable personal income — income after
taxes and corrected for inflation — has risen by
almost 9 percent. Corporate profits have also
increased — by more than a third — even after
adjusting for the rise in replacement costs.
But all of these achievements now stand threatened by
inflation. Unless we assure the integrity of our currency,
both at home and abroad, the economy's forward progress will
reach the familiar dead-end of recession and financial
dislocation. We can avoid these evils, but only if we are
prepared now, and for an extended period, to move the fight
against inflation to the top of our list of economic
priorities.
That is the message of the President's budget. I
believe the American people are prepared to respond to that
message —
to join earnestly in a common effort to
re-secure the fundamentals of economic progress for the next
decade. I do not sense that the people share the
superficial view that this budget lacks interest because it
is short on new ideas for spending their tax dollars. They
realize that in its very spareness the budget constitutes a
new initiative of major importance: an initiative to assert
responsible control over our economic destiny.
I» The inflation problem
Over the 1970!s, inflation has posed a critical threat
to economic progress throughout North America, Europe, and
Japan. It has made all of our other problems much worse.
In some countries, inflation has compromised political

-3stability and democratic procedures. More than once, it has
seriously shaken the international monetary system.
Everywhere it has retarded economic growth and social
progress. Inflation has proved to be far more destructive
of prosperity, and far more intractable, than any of us
would have imagined possible ten years ago.
As the decade comes to a close, however, we have
learned that inflation is not like death and taxes: we can
rid ourselves of it. In 1974, Japan suffered a 22-1/2
percent rate of inflation; the Japanese inflation rate is
currently running at 4 percent. Similarly, Germany has
reduced its inflation rate from 7 percent to 2-1/2 percent
over the past 4 years, and the British brought their
inflation rate down from 24 percent to 8-1/2 percent between
1975 and 1978.
That is cause for hope. But it is also reason for
impatience about our own experience. The inflation record
of the United States has been less than admirable. The
dollar's buying power has been cut in half since 1967. In
the 1970's, inflation here has rarely gone into the double
digits — but it has averaged 6-3/4 percent. Last year, the
inflation rate experienced a disturbing acceleration. At
the end of 1978 the CPI was 9 percent higher than at the end
of 1977. This constituted an increase of more than 2
percentage points over the previous year's inflation rate.
The roots of our inflation problem are numerous and
deep. There is no one cause for the problem, and we cannot
expect to solve it either quickly or with any single
panacea.
In the spring of last year, the President moved the
fight against inflation ahead of all other objectives and
began to mobilize the full arsenal of weapons necessary to
win the fight.
During the spring and summer of 1978, the President
worked with the Congress to reduce the FY 1979 budget
deficit to less than $38 billion. In late October and
November, the President added important new weapons to the
arsenal. He set a target of $30 billion or less for the FY
1980 budget deficit; he announced that the Federal Reserve
Board would take strong steps to contain credit expansion;
he arranged with Germany, Japan, and Switzerland a
far-reaching program to stabilize and strengthen the dollar

-5against inflation to win temporary victories. Our goal is
not a momentary pause in the wage-price spiral, but an
economy securely settled on a path of long-term price
stability and sustainable progress in growth and employment.
This will require a long-term commitment to hold down the
government's claims on the economy's real and financial
resources, and a long-term commitment to keep the supply of
dollars from validating excessive demands.
The President's FY 1980 budget sets an example of
restraint for the economy:
Federal spending will be nearly frozen in real
terms. After adjusting for inflation, Federal
outlays in 1979 will grow by only 0.3 percent and
those of 1980 will be only 0.7 percent higher than
in 1979. These are the smallest increases in five
years and far below the 3.2 percent average increase
for the previous 8 years of this decade.
Federal spending will be held to levels that absorb
a smaller share of total output. Outlays in 1980
will be down to 21 percent of GNP, compared with the
recent high of 22.6 percent in 1976.
The Federal deficit will be below $30 billion for
the first time in five years and will be barely more
than 1 percent of GNP.
Federal employment will actually be reduced.
Civilian employment in the government will be less
by the end of 1980 than it was when President Carter
took office.
To achieve this degree of budgetary restraint is a
major feat. Our long-term defense needs are substantially
dictated by foreign dangers beyond our control. About
three-quarters of federal budget outlays — over $400
billion of the $531.6 billion — are mandated by continuing
statutes or obligations which are nearly impossible to alter
in the short term. About one-half of budget outlays — over
$250 billion — represent transfer payments for individuals,
which are usually indexed to the rate of inflation, so that
total spending has a nearly inexorable tendency to rise in
times of inflation. This leaves only a relatively small
portion of the budget susceptible to practical control on a
year-to-year basis by the President and the Congress.

-6-

In his budget the President has taken great pains to
allocate the needed cutbacks fairly and sensibly among the
many competing public demands, showing particular regard for
those groups most in need of federal help and support. But
make no mistake: The budget makes a major contribution to
the poor and the disadvantaged in its very restraint, its
very emphasis on fighting inflation. For it is society's
most vulnerable members that suffer most grievously from
inflation.
Fiscal austerity must be complemented by monetary
restraint until the inflation problem is brought firmly
under control. As Chairman Miller stated last week: "The
Administration's wage-price standards and other
anti-inflation initiatives can be successful only if they
are backed up by macro-economic policies of restraint...We
must find the courage to adhere for a sustained period to
the course of policy we have charted."
Innovations in our financial system are keeping
monetary restraint from concentrating its impact
predominantly on the housing industry, which in previous
cycles was the earliest victim of increased credit
stringency. The impact of monetary restraint is now less
discriminatory, but it remains a powerful and necessary
component of our anti-inflation arsenal. And it is being
used.
Our tight budgetary policies are easing the task of the
monetary authorities. With a reduced deficit, and with
off-budget financing activities being monitored more
closely, Federal demands on financial markets will be
substantially reduced. Federal borrowing from the public
this year and next will be declining both absolutely and
relative to the total amount of credit raised in financial
markets. In 1976, the federal government accounted for over
a fifth of total credit demands. This year, federal
borrowing will be less than a tenth of the total, and the
share of credit absorbed by the government will decline
further in 1980. This means that monetary aggregates can be
restrained without choking off essential flows of credit to
the private sector.

-7III.

Sluggish productivity growth

Another major source of our inflation problem is
sluggish productivity growth —
a low rate of increase in
real output per hour of work. On this criterion, we have
been finishing dead last among industrial nations throughout
most of the 1970's.
Productivity growth is the fulcrum between wage
inflation and price inflation. Over the long term, one can
usually approximate the figure for price inflation by
subtracting productivity growth from the rate of wage
inflation. From 1948 to 1968, productivity in the private
non-farm business sector rose about 2-1/2 percent a year;
labor compensation rose at 5 percent; and price inflation
averaged below 3 percent. Over the last ten years however,
productivity growth in the private non-farm business sector
has averaged only 1-1/2 percent, and last year it fell to an
abysmal 0.8 percent. This means that average wage increases
and price inflation now run at nearly the same rate: last
year, for instance, compensation per hour (wages plus
fringes) rose by about 9-3/4 percent; with productivity
growth depressed, price inflation tracked right along at
about 9 percent.
To improve productivity growth requires a long term
effort to increase our investment in productive resources
and to refrain from imposing excessive regulatory burdens
upon the private sector. Last year's tax bill, involving
substantial incentives for investment, will help. The
President's new program for reviewing regulatory costs and
benefits will help.
But it will take persistent policy attention over a
number of years to return productivity growth to the high
rates that made life so cheerful for economic advisers in
the 1960's. Until then, price inflation will parallel
average wage inflation: to bring down price inflation, we
must bring down wage inflation, and vice versa.
IV. The momentum of the wage-price sprial
Central to our long-term inflation problem is the
sheer, self-reinforcing momentum of the wage-price spiral.
Inflation persists because everyone expects it to
persist. Expecting high inflation, business sets high
prices, labor demands high wages — and we thereby generate

-8precisely the high inflation that was expected.
The wage-price spiral is enormously stubborn. Demand
restraint can have some effect on it, and is clearly a
necessary part of any cure; but, acting alone, demand
restraint works its cure quite slowly and harshly. The U.S.
inflation rate in the 1970's has declined with painful
slowness even during periods of great slack in labor and
product markets. Even when aggregate demand is sharply cut
back, business and labor continue for a substantial period
to act upon deeply ingrained expectations of high inflation.
The inflationary momentum persists and, while it does, the
decline in demand delivers its impact on the only remaining
targets: employment and real growth. It is only after a
considerable period of demand restraint that inflationary
expectations finally begin adjusting to the changed economic
conditions.
To succeed in reducing inflation, we must learn
patience, but we must also seek to speed up the response of
wages and prices to conditions of demand restraint. Every
advanced nation has recognized this. Each has established
its own particular procedures and institutions for braking
wage-price momentum — for overriding unrealistic
inflationary expectations — so that demand restraint can
reduce inflation without socially wasteful delays.
It is for this purpose that the President promulgated
voluntary wage-price standards last October. These
standards describe a path for wages and prices consistent
with the general moderation of economic activity that is
assured by our application of fiscal and monetary
discipline. If these standards are followed, the inflation
rate will adjust downward to the slowing pace of the
economy. We will avoid an unnecessary, sharp fall-off in
real growth rates and an unnecessary, large increase in
unemployment.
The wage-price standards are voluntary. The President
strongly opposes mandatory controls. The U.S. experience
with controls, and that of virtually every other nation, is
that they saddle the economy with enormous bureaucracy,
miles of red tape, and crippling inefficiencies. Very
quickly, mandatory controls collapse under their own weight.
Controls are an attempt to usurp the roles of the
marketplace and the collective bargaining table in setting
every price and wage throughout the economy. That's an

-9absurd and unnecessary project. Our purpose is merely to
brake the momentum of wages and prices that is unresponsive
to basic macro-economic conditions. That vital, but
limited, purpose can be accomplished without excessive
governnment interference in allocating resources and incomes
throughout the economy.
But voluntarism raises a basic issue. It requires that
everyone forego apparent short-term economic gains in
exchange for long-term economic improvements of a much more
substantial, general, and lasting character. Every working
person has the legitimate concern that his or her compliance
with the program will not be matched by others and will
accordingly result in reduced real income as inflation
continues beyond a 7 percent level. Wages are set for
extended periods — 6 months, a year, sometimes several
years. Compliance on the wage side constitutes a relatively
long-term commitment, and thus triggers a particularly acute
concern about real income loss. This is the concern that
drives the wage side of the wage-price spiral.
The President has proposed an innovative program for
real wage insurance to meet directly this central concern .of
working people. The proposal would materially reduce the
financial risks of compliance; it would lead to more
widespread compliance, and thus to a more rapid and
pronounced impact on the inflation rate.
The proposal in effect sets up an insurance contract.
In this contract, we ask wage restraint from each employee
group, so as to reduce inflation for the benefit of all; in
return we offer to share the risk that inflation will in
fact exceed the wage increase ceiling. This is a novel, but
natural, response to a dilemma that has evaded solution for
many years. In the overall structure of our anti-inflation
policies, real wage insurance plays an important role for
which there are no readily imagined substitutes.
V. The need for a strona and stable dollar
—

The dollar's value cannot be protected at home if it is
weak abroad, and we cannot maintain its integrity abroad if
it is shrinking at home. Last year, that maxim received a
sharp and painful illustration. The acceleration in
domestic inflation served to weaken the dollar on the
foreign exchange markets, and this in turn raised the
domestic price level even further — as the cost of imported

-10goods rose and provided an umbrella for domestic price
increases. We estimate that the dollar's depreciation last
year may have added as much as one full percentage point to
our inflation rate.
The President moved forcefully on November 1st to put
an end to this vicious cycle. He endorsed the imposition of
greater monetary restraint domestically and arranged with
Germany, Switzerland and Japan a program of closely
coordinated intervention in the foreign exchange markets.
The U.S. has mobilized most of the $30 billion in
foreign exchange resources being used to finance our share
of this effort. These funds have been obtained partly
through use of U.S. reserves and partly by borrowing,
including the issuance of foreign currency denominated
securities.
The increase to $15 billion in the central bank swap
lines with those three countries took effect immediately on
announcement. Drawings on the IMF in Deutschemarks and
Japanese yen, amounting to the equivalent of $2 billion and
$1 billion, were made in early November. Later that month
we sold about $1.4 billion equivalent in SDR's for
Deutschemarks and yen. To date we have undertaken two
issues of foreign currency bonds totaling the equivalent of
$2.8 billion — a DM issue of about $1.6 billion in January,
and a Swiss franc issue of about $1.2 billion in January.
We expect to borrow additional amounts during the fiscal
year but have not yet decided upon the details of further
issues.
The shift in intervention practices announced on
November 1 was designed to restore order in exchange markets
and a climate in which rates can respond to the improved
outlook for the economic fundamentals that underpin the
dollar's value. We are not attempting to peg exchange
rates, nor to establish target zones, nor to impose exchange
rates inconsistent with the fundamental economic and
financial realities.
The initial response in the foreign exchange markets to
the November 1 actions was good. From its low point on
October 31 the dollar recovered on a trade-weighted basis by
12 percent by November 20. Against the DM and the yen the
recovery was also 12 percent; against the Swiss franc, 18
percent. Subsequent pressures from political developments

-11in Iran and the OPEC decision to increase oil prices
substantially were met by forceful action from monetary
authorities and by the resiliency of two-way trading. The
dollar has stabilized and, today, on a trade-weighted basis,
the dollar is over 9 percent above the October low.
We are beginning to see a change in tone and
expectations in the foreign exchange and domestic money
markets. Markets have been much more orderly and better
balanced, although there is still some nervousness and
uncertainty. I believe we will see increased stability as
our determination to persevere becomes more evident.
The United States is determined to prevent any
resurgence of the kind of conditions in the foreign exchange
markets which led to the actions on November 1. Our
resources are very substantial, and we will not hesitate to
use them as necessary to achieve our objectives. The other
participants have committed their own substantial resources
to those joint operations. There is, in fact, no
quantitative ceiling on the total resources which the four
countries are ready to use.
Other members of the IMF are also dedicated to assuring
exchange market stability. The recently amended IMF
Articles of Agreement provide for strengthened surveillance
of members' economic policies to insure achievement of this
objective.
We are prepared to consider with an open mind ideas for
evolutionary change in the monetary system. What is
important is that any change be an improvement and that the
transitions be accomplished smoothly and in a manner which
strengthens our open international trade and payments
system.
To conclude this discussion of the international
dimensions of our economic situation, let me stress that to
keep the dollar firm, the United States must continue
reducing its trade and current account deficits. The
portents are hopeful on this front. Containing inflation at
home will make our goods more competitive both at home and
abroad. Foreign economies, and thus markets, will grow^
faster than our own economy in 1979 for the first time in
five years, and this will provide better export
opportunities.

-12Our trade balance showed marked improvement during
1978, and we expect this to continue. In the second and
third quarter of 1978, the trade deficit narrowed to a
$31-1/2 billion annual rate (balance of payments basis),
some $14 billion below the rate of the preceding six months.
In the fourth quarter of the year, the trade deficit
averaged about $2-1/2 billion, a $30 billion annual rate.
Export volumes have risen strongly since March 1978; growth
in non-oil import volume has slowed down substantially. We
expect continued strong export growth and a very small
increase in import volume in 1979. Although the oil price
rise will add about $4 billion to oil imports, the trade
deficit should decline to about $25-to-28 billion for the
year as a whole and, owing to our growing net invisibles
surplus, the currenct account deficit could drop by about 50
percent from the $17 billion estimated for 1978.
VI. The road ahead
We are mobilizing every element of economic policy
behind the fight against inflation — fiscal policy,
monetary policy, international financial policy, regulatory
policy, wage-price policy, and more. None of this will work
instantly; for success, we will need a long-term commitment
by the entire federal government, supported by a determined
nation, to keep the anti-inflation effort at the top of our
list of priorities for a number of years.
This does not mean that we face a bleak future. Quite
the contrary. It is only by turning firmly against the
forces of inflation, and then holding our course, that we
can save our economy from economic turmoil in the short run
and the trap of stagflation in the long run. If we show the
requisite discipline, this economy can be successfully
steered, without a recession, on to a path of price
stability and steadily enlarging prosperity.
I am well aware that some are forecasting a recession
for 1979 or 1980. In passing, I would note three points:
First, we have been hearing such forecasts for better than a
year now; as the economy shows continued resiliency, the
predicted recessions keep getting a rain check. Second, the
recession scenarios all involve much milder and much shorter
downturns than we experienced in 1974; no one sees us on the
road to a serious bust. Third, with very rare exceptions,
the forecasters are not suggesting that we should seek to
avert a downturn by now liberalizing our fiscal or monetary
policies; this could only lead to a much more severe and
prolonged recession.

-13-

My major point, however, is that the path we are now
pursuing need not involve a recession. We do foresee a
definite slowing in the pace of real growth — from 4-1/4
percent last year to the 2-to-2-l/2 percent range this year
— and a concommitant moderation in the pace of inflation —
from 9 percent last year to about 7-1/2 percent this year.
Our projected growth rate is just about where we ought to be
— for the economy to cool itself off in a measured fashion,
for inflation to turn resolutely away from the double digit
range, for the trade deficit to narrow significantly, and
for the dollar to firm up substantially.
Our projected moderation in inflation will come from a
number of sources: the slowdown in growth itself, a fall
off from last year's abnormally high rate of food price
increases, the renewed stability of the dollar, a slower
pace of advance for housing costs, and the discipline of the
wage-price standards.
The respectable, though clearly diminished, rate of
real growth in 1979 will follow from the continued
resiliency and balance of the recovery. On this point, I
believe, the private forecasters have been too bearish. Let
me draw you attention to a number of hopeful signs.
Momentum: Contrary to most forecasts, the economy
was growing at the end of 1978 at a very strong
annual rate of over 6 percent. One million new jobs
were added in the last quarter of the year, three
million for the year as a whole, and we entered the
new year with the ratio of civilian employees to the
population at a record high.
Inventory balance: We have avoided excessive
inventory accumulation throughout this recovery.
Businessmen have been alert in keeping their
stock-building close relative to sales. Even after
adjusting for the inflationary bias in
inventory/sales ratios (sales are recorded at
current prices, but inventories may be carried at
earlier and lower prices), these measures show
reasonably good balance in most industries.
Housing: While housing activity can be expected to
taper down some next year, partly in response to the
high prices of new housing and partly because of the

-14high level of financing costs, there is no reason to
expect the sharp drop in housing activity that has
been characteristic of past cyclical swings in the
economy. Usually an early victim of credit
stringencies, housing starts have been at over a 2
million unit rate since last winter. This strength
reflects in part the strong support of the mortgage
market by government housing agencies, but more
importantly, the changes in financial structure that
have enabled the housing sector to compete for funds
in the financial markets despite sharp increases in
interest rates. At the same time, social and
demographic changes in family structure should
continue to support strong housing demand.
Consumer spending: The ratio of consumer debt to
personal income _is high by historical standards and
bears very careful watching. But the reasons may be
due more to demography than to a serious abuse of
consumer credit. There are now an unusually large
number of consumers in the 25- to 44-year age group.
People in this age category are typically the
heaviest users of credit — they are forming
households and buying homes and durable goods with
the reasonable expectation of rising incomes in the
future. The increasing trend toward two wage-earner
households is another factor encouraging durable
goods purchases often financed on credit. In view
of these demographic factors, and of the fact that
delinquency rates have been relatively stable over
the past three years, the rise in consumer debt
appears somewhat less alarming. It remains in need
of careful monitoring, but a consumer-led recession
does not at this point appear likely.
Exports: Exports are finally becoming a potent
source of growth, as domestic demand abates and
recent exchange rate changes work to increase the
foreign demand for U.S. goods. Signs of accelerated
export growth are already clear—nonagricultural
exports in the latest three months, SeptemberNovember, increased by more than 20 percent from
levels of six months earlier.
. Investments: Signs here are more mixed. The recent
surveys indicate somewhat slower real growth for
1979 in business fixed investment, compared to the

-15past two years. However, other advance signs of
capital spending, such as new orders for capital
goods and construction contract awards, indicate
continued strength in this vital area. Our attack
on inflation requires that we accelerate the
extremely slow pace of productivity advance, and
this means we need increased capital formation, to
upgrade and modernize our capital stock. This was a
primary emphasis in last year's tax bill, and I
expect its enactment will help this sector toward at
least moderate, continued advance in the coming
year .
Taken in sum, this evidence points to a pronounced but
orderly easing of the economy's advance; it does not point
to an actual reversal. Obviously, all economic forecasts
leave a great deal to be desired, but the available evidence
does not justify a gloomy view of our prospects.
VII. Budget issues of particular Treasury concern
Mr. Chairman, at this point I would like to mention
briefly four budget issues of particular concern to the
Treasury.
a. Real wage insurance
This innovative proposal plays a key role in the
President's anti-inflation program. The proposal involves a
tax credit, keyed to the excess of inflation over 7 percent,
for workers in groups complying with the 7 percent wage
standard.
We have budgeted this tax credit proposal at $2.5
billion for FY 1980 — $2.3 billion in revenue costs and
$0.2 billion in outlays (for the refundable portion of the
credit) .
The program's cost varies directly with the number of
employees complying with the wage standard and inversely
with the 1979 inflation rate. Because high compliance
produces lower inflation, the program's costs are to a large
extent self-limiting. We have assumed a moderate rate of
wage standard compliance — 47 million workers out of 87
million potentially eligible for the program. Our inflation
estimate is 7.5 percent for the relevant period,
October-November 1979 over October-November 1978. With 100
percent compliance, the inflation estimate would be lower,
and the program cost would be zero.

-16-

The program involves a very modest cost for a
significant impact on inflation.
b. Targeted fiscal assistance and countercyclical
assistance
The Administration will propose a two-part targeted
fiscal assistance and anti-recession assistance program.
Part one involves a transition?.! fiscal assistance program
carefully aimed at 500 or so local governments that have not
fully recovered from the 1974-1975 recession. To ease these
needy governments from the previous funding received under
the anti-recession program, the new program will provide
$250 million in FY 1979 and $150 million in FY 1980. Part
two involves a separate, standby countercyclical assistance
program to provide assistance to State and local governments
in the event of a recession. The trigger level on
unemployment rates exceeds current economic assumptions, and
no outlays are expected for the part two program in 1980.
c. The multilateral development banks
This year we are requesting budgetary authority for
our participation in all the multilateral development banks,
and approval of authorizations for our participation in the
replenishments of the Asian Development Fund and the African
Development Fund, and in the increase in resources of the
Inter-American Development Bank.
These institutions are today the main source of
official development assistance throughout the world. Such
assistance is vital to the economic growth and the political
stability of many developing countries. By funnelling
development assistance through these institutions, we serve
our own economic and foreign policy interests in several
very concrete ways:
. We assure broader markets for our exports and thus a
stronger dollar and a stronger U.S. economy. The
non-OPEC developing countries purchase about
one-fourth of our exports, supporting over 1 million
jobs in this country.
. We assure that our money will be spent on projects
that have been expertly designed for
cost-effectiveness. The various banks and funds are

17central repositories of this expertise, and they
exercise an objective and demanding economic
scruntiny over the projects they finance.
. We assure that our money will go to those most in
need. The multilateral banks and funds have put ever
increasing stress on projects that reach the poorest
people in the developing nations.
. We get maximum leverage for our money. Other
countries contribute three dollars for every dollar
we provide. In addition, backed by callable capital
which does not involve any U.S. budgetary outlay, the
banks borrow extensively from the world's private
capital markets. Ninety percent of their ordinary
capital resources are now raised in this manner, and
we expect this percentage to increase further in the
future.
For this fiscal year, we are requesting total budgetary
authority of $3,624.9 million for the multilateral
development banks. Of this, 1,842.6 million represents
paid-in contributions, which involve a budgetary impact.
The rest of the request is for callable capital, which
serves as a guarantee for the banks' borrowings in private
capital markets, but involves no budgetary outlay, and would
be called only in the highly unlikely event of massive
default on the part of a number of the banks' developing
country borrowers.
The request for each development institution is as
follows:
($ Millions)
IDA
IBRD
IFC
IDB
ADB
AFDF
TOTAL
Capital FSO
Capital ADF
1092.0 1025.8 33.4 687.3
325.3 248.2
171.3 41.7
3624.9
The request includes $989 million from a shortfall in
our FY 1979 request involving previously authorized amounts,
of which approximately half is for callable capital for the
World Bank.
The paid-in amounts requested — $1,842.6 million —
constitute a significant reduction — 1 6 percent— from the
paid-in amounts requested for FY 1979. This reduction

-18reflects the Administration's effort to keep the budget as
stringent as possible, while still meeting our vital
economic interests and our international obligations.
Restraint will also characterize the authorization
proposals which the Administration expects to submit during
the course of FY 1980 for U.S. participation in the resource
replenishments of the Asian Development Fund and the African
Development Fund and in the increase in resources for the
Inter-American Development Bank. For example, contributions
for U.S. participation in the IDB will be smaller over the
four-year life of the new replenishment (1979-1982) than was
the case in the previous replenishment period (1975-1978) .
d. Statutory debt limit
The Administration believes that the public debt
would be more effectively controlled and more efficently
managed by tying the debt limit to the new Congressional
budget process. I hope that we can work together to devise
an acceptable way to do this.
The present statutory debt limit is not an
effective way for Congress to control the debt. In fact,
the debt limit may actually divert public attention from the
real issue — control over the Federal budget. The increase
in the debt each year is simply the result of earlier
decisions by the Congress on the amounts of Federal spending
and taxation. Consequently, the only way to control the
debt is through firm control over the Federal budget. In
this regard, the Congressional Budget Act of 1974 greatly
improved Congressional control over budget outlays,
receipts, and thus the public debt. This new budget process
assures that Congress will face up each year to the public
debt consequences of its decisions on taxes and
expenditures.
The statutory limitation on the public debt
occasionally has interfered with the efficient financing of
the Federal Government and has actually resulted in
increased cost to the taxpayer. For example, when the
temporary debt limit expired on September 30, 1977, and new
legislation was not enacted on the new debt limit until
October 4, and again when the limit lapsed from July 31,
1978 to August 3, 1978, Treasury was required in the interim
periods to suspend the sale of savings bonds and other
public debt securities. The suspension of savings bonds

-19sales, in particular, resulted in considerable public
confusion, additional costs to the Government, and a loss of
public confidence in the management of the government's
finances.
VIII. Conclusion
I began by noting that the American economy is at a
critical juncture. Let me close with a word of guarded
optimism.
It has been just three months since the President took
a series of bold and coordinated steps in fiscal, monetary,
exchange rate, and wage-price policy. These steps have set
in motion broad and hopeful trends throughout the economy.
The dollar has rallied by more than 9 percent against
OECD currencies, and the stock market has gained
substantially, since the President acted. Financial
leaders, both here and abroad, now recognize that this
government is determined to see the inflation fight through
to a successful conclusion. It is no longer the smart bet
to wager against the prospects of the American economy. The
recovery remains balanced and resilient. The American
people have ignored the cynics and have shown a genuine
receptivity to a common, voluntary effort to restrain wages
and prices.
All this adds up to strong evidence that our economy
can indeed be steered to a deflationary path without
dislocation, turmoil, and recession.
These hopeful signs do not of course mean we have won
this fight, but they give us a genuine chance to win it -if we can retain the momentum.
What is needed now, to maintain our momentum, is a
clear sign that the Congress too is committed to securing
the foundations of our prosperity for the decade ahead. I
look forward to working with you on this important
enterprise.

FOR IMMEDIATE RELEASE
FEBRUARY 1, 19 79

Contact:

Alvin M. Hattal
202/566-8381

TREASURY TO START ANTIDUMPING
INVESTIGATION ON 45 R.P.M.
ADAPTORS FROM THE UNITED KINGDOM
The Treasury Department today said it will start an
antidumping investigation of imports of 45 R.P.M. adaptors
from the United Kingdom.
Treasury's announcement followed summary investigations
conducted by the U. S. Customs Service after receipt of a petition
filed by Aldshir Manufacturing Co., Inc., of Tuckahoe, New York,
alleging that firms in the United Kingdom are dumping 45 R.P.M.
adaptors in the United States.
This case is simultaneously being referred to the U. S.
International Trade Commission. Should the Commission find,
within 30 days, no reasonable indication of injury or likelihood
of injury to a domestic industry, the investigation will be
terminated. Otherwise, the Treasury will continue its investigation. A tentative determination would then be made by April 30,
1979.
The petition alleges that imports of 45 R.P.M. adaptors
are 'being sold in the United States at "less than fair value."
(Sales at less than fair value generally occur when imported merchandise is sold in the United States for less than in the home
market.)
If sales at less than fair value are determined by Treasury,
the U. S. International Trade Commission will subsequently decide
whether they are injuring or likely to injure a domestic industry.
(Both sales at less than fair value and injury must be determined
before a dumping finding is reached. If dumping is found, a
special antidumping duty is imposed equal to the difference between the price of the merchandise at home or in third countries
and the price to the United States.)
Notice of the start of this investigation will appear in
the Federal Register of February 2, 19 79.
Imports of 45 R.P.M. adaptors in the first ten months of
1978 were valued at $57,000.

B-1376

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FOR IMMEDIATE RELEASE
February 1, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES FIRST DETERMINATION
IN ANTIDUMPING INVESTIGATION BEGUN AS A
RESULT OF STEEL TRIGGER PRICE MECHANISM
The Treasury Department today announced its tentative
determination that exports of carbon steel plate from Poland
produced by Stahlexport Przedsiebiorstwoa (Stahlexport) are
being sold at "less than fair value" in the United States.
Accordingly, appraisement of shipments will be withheld
and bonds sufficient to cover potential dumping duties of 20
percent will be required of importers as of February 5, 19 79.
This investigation, conducted under the Antidumping Act, is
one of two pending "fast track" investigations initiated on the
basis of information collected through the Trigger Price Mechanism (TPM), created to monitor imports of steel mill products. A
determination with respect to the other investigation, involving
carbon steel plate from Taiwan produced by China Steel Corporation,
has not yet been made but is expected shortly, also on an
expedited basis.
Both of these "fast track" investigations were initiated in
October 19 78 after evidence had been developed indicating that
each company was selling significant quantities of carbon steel
plate to the United States at prices significantly less than the
applicable trigger prices, and, according to information developed
in administering the TPM, apparently at less than "fair value."
The investigation conducted to date indicates that sales of
carbon steel plate by Stahlexport to the United States were made
at less than "fair value" with margins as high as 44 percent.
Sales at less than fair value generally occur when imported
merchandise is sold in the United States for less than in the
home market or to third countries. However, the Antidumping Act
does not permit the use of prices in either the home market or
to third countries when the country in which the product was manufactured is a state-controlled economy, such as Poland. In those
cases, fair value is determined from the home market prices or
prices to third countries of that product manufactured in a market
B -1 3 7 7

(MORE)

-a economy country at a comparable stage of economic development.
For purposes of this action, the Treasury Department used home
market prices of carbon steel plate in Spain, a market economy
considered to be at a stage of development comparable to Poland.
Under the Antidumping Act, the Secretary of the Treasury
is required to withhold appraisement and obtain bonds to cover
potential duties when he has reason to believe that sales at less
than fair value are taking place. Withholding of appraisement
means that valuation for Customs duty purposes of goods imported
after the date of the tentative determination is suspended until
completion of the investigation. This is to permit assessment of
any dumping duties that are ultimately imposed on those imports.
If a final determination of sales at less than fair value is
made, the case will be referred to the U. S. International Trade
Commission to determine whether an American industry is being or
is likely to be injured by such sales. Both "sales at less than
fair value" and "injury" must be found to exist before a dumping
finding is entered.
Notice of this action will appear in the Federal Register of
February 5, 19 79.
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FOR IMMEDIATE RELEASE
February 1, 1979

Contact: Alvin M. Hattal
566-8381

TREASURY DEPARTMENT ANNOUNCES WITHHOLDING OF
APPRAISEMENT AND DETERMINATION OF SALES
AT LESS THAN FAIR VALUE WITH RESPECT TO
PERCHLORETHYLENE FROM BELGIUM, FRANCE, AND ITALY
The Treasury Department today said it has determined that
perchlorethylene imported from Belgium, France, and Italy is
being sold in the United States at "less than fair value." The
case is being referred to the U.S. International Trade Commission,
which must decide within 90 days whether a U.S. industry is
being, or is likely to be, injured by these sales.
If the decision of the Commission is affirmative, dumping
duties will be collected on sales found to be at less than
fair value. (Sales at less than fair value generally take place
when imported merchandise is sold in the United States for less
than in the home market or to third countries.)
Under the Antidumping Act, the Secretary of the Treasury
is required to withhold appraisement when he has reason to
believe that sales at less than fair value are occurring.
(Withholding of appraisement means that the valuation for Customs
duty purposes of goods imported is suspended. This is to permit the assessment of any dumping duties as appropriately determined
on those imports.)
Appraisement will be withheld for three months on imports
of perchlorethylene from Belgium, France, and Italy, beginning
on February 2, 1979. The weighted-average margins of sales at
less than fair value in these cases were 150 percent, 47.82
percent, and 30 percent for Belgium, France, and Italy, respectively.
Interested persons were offered the opportunity to present
oral and written views before this determination.
Imports of perchlorethylene from Belgium, France, and Italy
during 1977 were valued at about $1.7 million for each of the
countries.
Notice of this determination will appear in the Federal
Register of February 2, 1979.
B-1378

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FOR IMMEDIATE RELEASE
EXPECTED AT 10 A.M. EST
MONDAY, FEBRUARY 5, 1979
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE
SENATE FINANCE COMMITTEE
The International Economic Situation
In the year since I last appeared before this subcommittee,
we have made considerable progress in addressing the economic
problems facing the world economy.
Among these problems, the most serious were those related
to the global imbalances in trade and payments associated
with the oil-price increases in 1973 and 1974. The OPEC
members registered enormous trade and current-account surpluses. The major industrial countries experienced a severe
recession, and there were very large trade imbalances within
the group. The deficits of the non-OPEC developing countries
mushroomed.
Forty years earlier, the major countries responded to
economic difficulties by blocking trade and restricting

B-]379

-2capital movements. The result was massive unemployment and
a decade of misery.

This time the approach was different,

and the costs were vastly reduced.

We are now more certain

that cooperation among governments in formulating and implementing consistent and responsible economic policies can be
achieved.

And we are now more aware of the capacity of

international capital markets to function as shock absorbers.
(AM

During the past year, the global pattern of trade and
payments has changed significantly.

In particular, the

surpluses of the OPEC members have declined sharply, while
the deficits of the non-OPEC developing countries have risen
only moderately.

At the same time, a few large imbalances

remain among the industrial countries, particularly the United
States, Germany, and Japan.

While the current-account deficit

for the United States in 1978 was unsustainably high at around
$17 billion, we are confident that our deficit in'1979 will
be much smaller—by 50 percent or more.

The bad news in this

area is the oil-price increase announced by OPEC in December.
The increase will hurt growth, inflation, and balance-ofpayments adjustment prospects.
There were several noteworthy actions taken during the
past year.
—

Among them were:

implementation by the United States of a broad array
of economic policies to establish the fundamental

-3economic conditions required for a strong dollar at
home and abroad.

Most importantly we are acting

forcefully to bring inflation down through a coordinated program of fiscal austerity, monetary tightening,
and voluntary wage-price restraint.

In addition, we

have joined with other major countries in closely
coordinated direct action in the foreign exchange
market to prevent any resumption of the disorders
which led to the precipitate decline of the dollar
last fall;
—

substantial completion of a package of agreements
within the Multilateral Trade Negotiations, with
final texts expected to be submitted to Congress by
early April.

This is, of course, a matter of great

concern to the Congress, and I expect to get to know
many of you a lot better while exchanging views on
the subject in the months ahead;
—

the strengthening of the international monetary
system by the adoption of revised Articles of Agreement for the IMF and measures to increase the IMF's
ability to provide balance-of-payments financing
including the establishment of the Supplementary
Financing Facility, agreement on new allocations
of Special Drawing Rights (SDRs) during the next

-4three years, and approval, subject to the necessary
legislative approval by member governments, of a 50
percent increase in IMF quotas;
—

the enactment of energy legislation by the Congress
which should reduce oil consumption in the United
States by 500,000 barrels per day by the end of
1979.

This is equivalent to $2.5 billion in annual

imports at the prices recently announced by OPEC.
International Debt
In this context, I want to present our views on international debt.

Last year I pointed out in these hearings

that the easy distinction between creditor countries and
debtor countries has become blurred.

It is no longer the

case that developing countries are debtors and industrial
countries are creditors.

Developments in the U.S. balance

of payments during the past year have emphasized this point
only too well.
The composition of international debt has also been
changing.

In the early post-war years, international debt

was largely associated with short-term trade financing.

In

the 1960s, the composition shifted in the direction of longterm official flows as bilateral and multilateral aid programs
became an important channel of international funds.

-5The multilateral development banks—the International
Bank for Reconstruction and Development, the Inter-American
Development Bank, the Asian Development Bank, and the African
Development Bank—have become the primary source of official
assistance to less developed countries.

In 1979, it is

expected that their commitments will reach $12.5 billion and
that their disbursements will amount to more than $5.5 billion.
This level of lending activity has enabled the banks to play
an extremely effective role in stabilizing and lengthening
the overall maturities of the international debt structure
of less developed countries.

Following the 1973 increases

in oil prices, the banks have been particularly constructive
in recycling funds, raising revenues from bond issues in
surplus countries and relending them for soundly-conceived
projects with lengthy maturities in developing countries.
The continuity of bank lending, the choice of projects, the
maturities and grace periods of loans have given these
countries much needed additional flexibility to carry out
their development programs.

The banks have also played

another indirect but extremely important role in the adjustment process of these countries by recommending and assisting
with necessary economic policy changes.
In the 1970s, we have also seen the emergence of mediumand long-term commercial bank lending as the major component

of international debt.

From the present vantage point, we

would expect private capital markets to continue to finance
the bulk of the world's current-account deficits.

This is

likely for two reasons:
—

Official lending has grown rapidly during the past
decade, but tight budgets are likely to have a
restraining effect on this growth in the next decade;

—

The international banking community has demonstrated
an impressive capacity to channel financial assets
to deficit countries.

Compared to several years ago, we now have a considerable
amount of data on international lending.

The data on public

borrowing by developing countries are quite detailed and
comprehensive.

The World Bank recently published a report

on the public debt of 96 developing countries.

This report

puts the total public debt of these countries at $160 billion
at the end of 1976—an increase of 23 percent from the
year-end 1975 figure.

Preliminary estimates for 1977 suggest

a comparable increase.
These are very rapid rates of increase.

However, these

increases are directly related to the huge but temporary
global imbalances I mentioned earlier, and future increases
in LDC indebtedness will be more moderate as the world continues to develop a more stable pattern of trade and payments.

-7There are other reasons to be confident about the LDC debt
situation:
— The aggregate current-account deficit of the non-OPEC
developing countries seems to be flattening out at a
level of about $25 billion which does not strain the
available sources of financing;
— While net external borrowing remains at a high level,
a significant part of it is in excess of current
needs, and has been used to build up foreign-exchange
reserves;
— Rising exports from the non-OPEC developing countries
in aggregate are keeping pace with rising debt-service
payments;
— Ample liquidity in international capital markets has
enabled numerous LDCs to replace maturing debts with
lower-cost, longer-term debts. For example, according
to market reports, recently South Korea was able to
borrow at 3/4 percent over LIBOR and Mexico borrowed
at 1/2 percent over LIBOR; and
— During the past two years, only four countries have
found it necessary to reschedule debt-service payments
to their official creditors (Peru, Sierra Leone,
Turkey, and Zaire).

-8As long as world economic conditions remain favorable,
there is no reason to expect that the developing-country debt
situation will deteriorate.
Debts Owed to U.S. Banks
There Has been considerable interest during recent
years in the level and composition of U.S. banks1 claims on
foreigners.

Last year, I was able to provide you with some

new data showing overseas lending by U.S. banks as of June
30, 1977.

By now, we have three semi-annual reports, the

last one containing data as of June 30, 1978.

The data

indicate that U.S. bank lending to foreigners grew slowly
in the first half of 1978.

In fact, measured in real terms,

there was a decline in claims on foreigners in this period.
This contrasts sharply with the rate of growth experienced
in the 1974-76 period which was on the order of 15-25 percent
per year in current terms.
The composition of this lending is also of interest.
Concern has been expressed that banks may be relying heavily
on short-term deposits to fund much longer-term loans to
foreigners.

The data do not confirm this.

About two-thirds

of the $20U billion in the non-local currency claims of U.S.
banks on foreigners as of June 3U, 1978, had a maturity of
one year or less.

Another 25 percent had a maturity of 1-5

-9years. Only 7 percent of the claims were longer than five
years.
Similarly, concerns have been expressed that the banks
are too heavily exposed in loans to developing countries.
Only one-fourth of U.S. banks' foreign-currency claims were
on borrowers in developing countries, and only about 8 percent on public borrowers in these countries.

Over 70 percent

of the claims were on developed countries that are members
of the OECD, OPEC countries, and off-shore banking centers.
A full 50 percent of all U.S. bank claims on foreigners were
on other banks.
During the past year, the Federal Reserve, the Federal
Deposit Insurance Corporation, and the Comptroller of the
Currency have taken further steps to carry out their regulatory responsibilities in the area of international lending
more effectively.

Particularly notable is the joint system

they have created for evaluating country risk associated
with U.S. bank lending abroad.

Bank losses on foreign loans

continue to be smaller than losses on domestic loans.
Debts Owed to and Guaranteed by the U.S. Government
Judging by the mail we receive, the American taxpayer is
more concerned about debts owed by foreigners to the U.S.
Government than about debts owed to U.S. banks.

We receive a

-10steady stream of letters asking about the status of World War I
and World War II debts, demanding that the OPEC members prepay their debts, or suggesting that the best way to make the
dollar stronger is to get Japan and Germany to pay off their
debts to us.
We assure each correspondent that we care about these
debts, and we do.

We point out that all of them have resulted

from programs authorized by the Congress to facilitate U.S.
exports and to provide foreign assistance.

We remind them

that the vast majority of the post-World War II debts are
paid on time.

We explain how we are attempting to collect

the relatively small portion of this debt which is in arrears,
noting that adverse political situations have caused most of
the overdue payments.
As of September 30, 1978, the total foreign debt on the
books of the U.S. Government amounted to $73.2 billion.
composition of the debt is summarized in Chart One.

The

The

largest category, $45.7 billion, is post-World War II debt.
About 99 percent of this debt was accounted for by long-term
credit programs:

aid loans to developing countries, military

credits, agricultural credits, and loans from the Eximbank.
The remaining 1 percent was accounted for by short-term
credits and accounts receivable.

-11The smaller category, $27.5 billion, consists of World
War I debts. I regret to say that, during the past year, we
have made no progress in collecting these debts beyond the
continuing repayments from Hungary and Greece. They have
been carried on our books for so long that the interest now
exceeds the principal—even though the interest accrues at
less than 4 percent per year uncompounded.
About $1 billion in principal and $2 billion in interest
was collected in the years immediately following the end of
World War I. But the financial disorder in Europe in the
1920s and 1930s provided an excuse for these countries to
stop payment. The unilateral termination of war reparation
payments by Germany also contributed to the breakdown since
most countries were owed more by Germany than they in turn
owed the United States. Naturally, World War II—which has
left Germany divided—did not help matters. The closest we
came to settling these debts was in 1953 when the United
States participated in an agreement on German external
debts. In this agreement, we agreed to defer action on
World War I debts "until a final general settlement of this
matter". The agreement was ratified by the Senate. Candidly
speaking, I believe that the settlement of these debts lies
beyond the foreseeable future.

-12Arrearages and Delinquencies
The prospects for reducing arrearages and delinquencies
are somewhat better. As of September 30, 1978, total arrearages
and delinquencies on post-World War II debt stood at $612
million. I am sorry to admit that this is $21 million higher
than the figure I reported to you a year ago. The increase
is attributable largely to technical factors, however. It
does not reflect any slackening in our effort to reduce
arrearages.
Two-thirds of the increase or $14 million is accounted
for by Zaire. As you will recall, the United States agreed
to reschedule debt-service payments from Zaire falling due
in 1976 and 1977. When implementing agreements between
Zaire and the individual USG creditor agencies are signed,
$23 million of the $34 million in arrearages due from Zaire
will be eliminated. Another $7 million shows up in Category
III.A. (Chart 2) on Turkey's account. As soon as all of the
agency implementing agreements are signed pursuant to the
multilateral rescheduling arrangement we took part in last
May—which we expect to occur shortly—these amounts will no
longer appear as arrears. Unfortunately, these increases
conceal the significant progress we have made in reducing
arrearages in short-term loans and accounts receivable, and
in military sales and other military accounts.

-13-

You will notice in Chart 2 that the largest category of
arrearages, about $200 million, relates to logistical support
provided to other countries during the Korean War. While
most countries to whom we provided such support have repaid
the United States or are in the process of doing so, six
countries have objected to paying—Colombia, Ethiopia,
Greece, the Philippines, Thailand, and Turkey. The House
Committee on Government Operations has recommended that
Congress consider legislation to remove these debts from the
records of the U.S. Treasury. The National Advisory Council
on International Monetary and Financial Policies has endorsed
this recommendation.
The second largest category of delinquencies is also
the subject of special interest at the present time. As of
September 30, 1978, there were about $108 million in arrearages on payments listed as due from the authorities on Taiwan.
In addition, as footnote 1 to Chart 2 indicates, the United
States is owed about $50 million in principal and interest
due in connection with four Eximbank loans extended to China
in 1946. There also remain some other debts which we will
be discussing with the People's Republic of China at an
appropriate time.

-14Contingent Liabilities
Before concluding, I want to say a few words about guarantees provided by U.S. Government agencies for the repayment
of debts owed by foreigners to U.S. banks and other American
lenders. These "contingent liabilities" represent off-budget
activities with budgetary implications that are potentially
quite large. The Treasury Department is particularly concerned
about such programs because they have a significant impact
on the allocation of funds generated by the savings and
investments of private individuals and financial institutions
throughout the country.
The latest Treasury Department report on contingent
liabilities of the U.S. Government shows that, as of
June 3U, 1978, our contingent liabilities totalled $13.3
billion. These liabilities arise from guarantees provided
by the Eximbank, the AID Housing Office, the Department of
Defense (for military sales), and the Overseas Private
Investment Corporation (OPIC). The Eximbank accounts for
more than 56 percent of these contingent liabilities. There
is some measurable risk involved in these guarantees because
on rare occasions borrowers fail to make payments, and the
guarantees are called. When this happens, the agency concerned must pay off the private lender. Usually, this is
done out of the reserves of the agency. However, most payments that are missed are subsequently made to the guaranteeing
agency.

-15There is another category of contingent liabilities
that is not included in Treasury's quarterly report. This
category includes the "callable capital" subscriptions of the
United States to the multilateral development banks of which
it is a member—the World Bank, the Inter-American Development
Bank, and the Asian Development Bank. Total callable capital
of all member countries, amounting to $44 billion as of
September 30, 1978, stands behind the bonds floated by these
banks in the international capital markets.
The chance that callable capital will ever need to be
used to service the funded debt obligations of the multilateral
development banks is extremely unlikely. In the first place,
all of these banks have substantial resources for servicing
*"

,

•

-

* •

''

their bonds. Paid-in capital and accumulated reserves total
over $6.U billion at the World Bank, over $1.9 billion at the
IDB, and $1.5 billion at the ADB. In the second place, the
countries which have borrowed from these banks have an extraordinarily good record of repayment. For example, in the more
than thirty-year history of the World Bank, there has never
been a loan default. Furthermore, since annual repayments
from any individual borrower are only a small portion of these
»

banks' capital and liquidity, it would take the simultaneous
cessation of all loan repayments for an extended period of time
by many major borrowers before a call on callable capital would
be necessary. hence, it seems most unlikely that these particular contingent liabilities will ever be drawn down.

-16-

Conclusion
I appreciate this opportunity to share with you some of
our views on the international economic situation and international debt.

Rather than speculate on the levels of debt

that will be attained during the next twelve months, I would
like to close by reflecting briefly on the three-fold virtues
of international debt, which is, of course, the same thing
as international credit.
First, credit facilitates trade.

If trade were all

conducted on a cash-and-carry basis, much less of it would
take place.
Second, credit also fosters economic growth.

Low-income

countries that find it difficult to generate high levels of
internal savings can borrow externally and thereby achieve
significantly higher rates of growth than would otherwise be
possible.

Conversely, countries that generate excess savings

are afforded opportunities to invest them profitably abroad.
Third, credit is an indispensable element of a smoothly
functioning international monetary system characterized by
150 separate national currencies.

Without access to credit,

international payments imbalances would lead to greater
exchange-rate instability, and deficit countries would try
to eliminate their deficits by restricting economic growth
and erecting barriers to free trade.

-17-

International credit is thus an integral part of an
effectively functioning world economy.

Properly managed and

supervised, it facilitates the daily operation of our own
economy.
Indeed, one of the great successes of the international
economic policy of the United States in the postwar period
has been the development and evolution of an open system of
international capital and money movements.

Such a system

comports with our philosophy of free markets as well as with
our pragmatic need for more trade, jobs, and income.

We

should seek its further strengthening in the years ahead.

Chart 1
TOTAL FOREIGN DEBT OUTSTANDING TO THE U.S. GOVERNMENT
AS OF SEPTEMBER 30, 1978
(in $ millions)
I-

$27,463

World' War I Indebtedness 1/

25,541

World War I Credit
German World War 12/
Indebtedness
II. Post World War I Indebtedness
on USG Credits

1,922
45,715
45,013

A. Long-Term Credits
Foreign Assistance
& Related Acts

20,403

Export-Import Bank Act

11,436

Agriculture Trade
Development &
Assistance Act

7,029

Lend-Lease and Other
War Accounts

1,336

Commodity Credit Corp.
Export Credits

1,916

Other Credits

2,893
414

B. Accounts Receivable Credit
Military Logistical Support

218

Military Sales Act

37

Atomic Energy Act

93

Other

66

C.

Outstanding

288

Short-Term Credits

Commodity Credit Corp. 288
III.

Public and Private U.S. Claims Settled
by tne U.S. GovernmentJ/
GRAND TOTAL

1/
2/
2/
Zf

Includes interest due and unpaid
Actual indebtedness is denominated in Reichsmarks
These figures are estimates only.
Includes 1966 •Freeloc" settlement with France.

32
73,210

Chart 2
ARlerAJjACTJS^OF 90 OR MORP DAYS ON^ FORKTHM LOANS AND CRHDIT5
OF UTS*. GOvET<NMi:NT*AGi;NC 1LSjfe * c f \u\l tVr^nr Id "War**! "CcLts V

(7iT$ MlITTbnB)
X. EXTRAORDINARY POLITICAL ARREARAGES Scptombcr_30, 1978
1. Authorities on Taiwan $107.6 i/
2. Cuba
3. Vietnam and Cambodia
4. Unresolved Korean War
Logistical Support
TOTAL POLITICAL 407.6
(percent of overall total)

76.0
24.3
199.7
(67%)

II. MAJOR ARREARAGES - Public long-term
1. Iran 36.1
2. Zaire
TOTAL MAJOR ARREARAGES 70.1
(percent of overall total)

34.0 £/
(11%)

III. OTHER MAJOR ARREARAGES
A. Public
JT. Long-Term
2. Short-Term 6 Accounts
Receivable, of which:
Foreign Military Sales,
Logistical Support,
M.A.A.G.
Lend-Lease
Post Office
Other
B. Private
TI Long-Term
2. Short-Term & Accounts Receivable
TOTAL OTHER ARREARAGES 134.1
(percent of overall total)

34.9
84.1

46.1
.6
18.6
18.8
13.0
2.1
(22%)

IV. OVERALL TOTAL - Groups I, IIf III 612.0

Note:
2/

Items may not add to totals due to rounding.

Eicludes, at of September 30. 1976. $49.8 million of principal
and interest due from the authorities on Taiwan from assets left on
the Asian continent, for which Export-Import Bank by agreement
With that Government has deferred from pressing.
2/ Includes amounts rescheduled by bilateral rescheduling agreement
With Zaire, T.I.A.S. No. 6731 (1976), Once implementing agreements
have been concluded by the agencies concerned, these amounts will
ao longer be reported as being in arrears. N e g o t i a t i o n s are
being finalized to reschedule 1977 a r r e a r a g e s .

Chart 3

LONG-TERM 0E3T OUTSTANDING TO THE U.S. GOVERNMENT BY PROGRAM, EXCLUDING WORLD WAR I DEBT
(in millions of dollars and equivalents)
Dec.31
1974

Dec.31
1975

Dec.31
1976

Dec.31
1977

$12,635

$12,998

$13,435

$14,010

$14,872

1,627

2,270

3,462

4,779

5,531

2x:JJ:C-Import 3ank Act

8,126

9,621

10,594

10,949

11,436

Agricultural Trade Development
una Assistance Act

5,040

5,721

6,208

6,578

7,029

Other Programs 2/ V
(Lend-Lease/Surplus Property
and other war accounts)

5,352
(1,649)

4,979
(1,520)

5,122
(1,421)

5,294
(1,368)

6,165
(1.336)

$32,780

$35,589

$38,821

$41,610

$45,633

Sept. 30
1978

Foreign Assistance Act
t related programs:
Development Assistance
Military Sales

Total

1/ Primarily 1946 British loan, lend-lease and other war accounts,.and Commodity Credit Corp.
2/ Includes 1966 "Freeloc" agreement with France.

FOR RELEASE AT 4:00 P.M.

February

2, 1979

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 February 15, 1979.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,711 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,800
million, representing an additional amount of bills dated
November 16, 1978,
and to mature May 17, 1979
(CUSIP No.
Y
912793 5 9 ) , originally issued in the amount of $3,409 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $2,900 million to be dated
February 15, 1979, and to mature
August 16, 1979 (CUSIP No.
912793 2G 0) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing February 15, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,162
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. 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,
Friday, February 9, 1979.
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-1380

-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 bookentry records of Federal Reserve Banks and Branches. 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
must be made or completed at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt on February 15, 1979, in cash
or other immediately available funds or in Treasury bills maturinj
February 15, 1979.
Cash adjustments will be made for difference
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, 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.

fASHINGTON,D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
February 2, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES PRELIMINARY
COUNTERVAILING DUTY ACTION ON
AMOXICILLIN TRIHYDRATE FROM SPAIN
The Treasury Department today announced its preliminary
determination that the Government of Spain is subsidizing
exports of amoxicillin trihydrate to the United States. A
final decision in this case must be made by July 27, 1979.
This investigation was begun after a petition was received July 27, 1978, on behalf of Biocraft Laboratories,
Elmwood Park, New Jersey.
The Treasury found a subsidy paid in the form of an
overrebate upon exportation of the Spanish indirect tax, the
"Desgravacion Fiscal." The overrebate consists of three elements:
(1) taxes on services and inputs not physically
incorporated in the final product, (2) a credit for a tax on
transactions between manufacturers and wholesalers which, in
fact, is not levied on export sales, and (3) a number of Spain's
"parafiscal" taxes included in the computation of the rebate,
which are charges assessed for services provided and which are
not levied on an ad valorem basis on the product.. The Department1 s countervailing duty policy regarding this sort of tax
system was set out in a Federal Register notice of January 17,
1979 (43 FR 3478).
The Countervailing Duty Law requires the Treasury to
assess an additional customs duty equal to the net amount of a
subsidy paid on imported merchandise.
Notice of this action appears in the Federal Register of
February 2, 19 79.
Imports of amoxicillin trihydrate from Spain during 1977
were valued at $1.2 million.

B-1381

FOR RELEASE AT NOON, PST
Friday, February 2, 1979
REMARKS BY THE HONORABLE
W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
LOS ANGELES WORLD AFFAIRS COUNCIL
FEBRUARY 2, 1979
I have been looking forward to addressing the World Affairs
Council for some time. My originally scheduled appearance before you
late last October, had to be cancelled because we were putting the
finishing touches on the November package of measures designed to
reverse the wayward course of the dollar. That last minute
cancellation was for a good cause. The dollar has strengthened since
November 1. Order has been restored to the foreign exchange markets.
And most importantly, I can now talk about something other than the
dollar!
So, today, I would like to deal with a broader subject ~
international trade. Specifically: what is our present situation,
what problems do we face, and what we can do to overcome them?
Trade is more important to the U.S. economy than most Americans
realize. And it is becoming increasingly more important. In 1970
trade — our exports plus our imports — accounted for 8-1/2 percent
of our Gross National Product. In 1978 it accounted for 15 percent.
We know what the economic benefits of trade are. We depend on imports
for essential raw materials; for a wide range of choice in consumer
goods; for needed domestic competition and a spur to more efficient
production; and as a source of jobs in import-dependent industries.
And we depend on export markets as « means of selling a growing share
of our national production; for job's; and — as we are finally
beginning to realize — to pay for our imports.
In political terms, trade is the source and substance of the
relations between nations. m It has been the source of war, and the
lubricant of peace. When heads of state gather, as they did in Bonn
last year and will again in Tokyo this summer, the talk is of trade.
When nations form new links, the most concrete.'manifestation of that
linkage is trade. The visit of Chinafs Vice-Premier Deng Xiaoping is
a case in point.
So we know that trade is important to us for economic and
political reasons. Yet we also know that all is not well for United
States* trade. We are importing far in excess of what we are
B-1382
exporting. We are not realizing our potential in world markets.

-2In 1977 and 1978 we ran record trade deficits of $31 billion and
$3** billion respectively. The outlook for 1979 is for improvement:
our trade deficit will move closer to $27 billion. But though some
significant improvement is clearly in sight, the basic problem
remains. We can and must do more to reduce our trade imbalance. We
cannot continue to run deficits of these magnitudes and expect to
maintain confidence in the dollar, or combat inflation, or'enjoy
continued solid growth of our own economy.
Let me quickly review the reasons for the improvement we expect
this year.
Part of our trade deficit is cyclical in nature — it reflects
differences between rates of growth in the major industrial' nations.
And it reflects the high cost of oil imports and reduced price
competitiveness due to exchange rate changes in 1975-1976. Recently
we have seen a distinct turn-around in these underlying trends.
American goods have become more price competitive; a cheaper dollar
has assisted the saleability of our products. Our growth rate has
slackened: in 1977 the U.S. economy grew at a 5-1/2 percent pace; in
1979 we project a 2-1/4 percent rate. And growth differentials
between nations have begun to change. While our lower growing economy
pulls in less foreign exports, faster growing economies abroad are
buying more American goods.
The benefits of these underlying improvements began to show up in
last year's trade flows. For example, U.S. trade performance in
manufactured goods improved considerably between the first and last
quarters of 1978. And slower growth at home, combined with our new
domestic energy program, should help retard the growth of U.S. oil
imports, even though higher oil prices will add to our import bill
this year.
To summarize: We will see a substantially reduced trade and
current account deficit in 1979. But further fundamental improvement
will still be needed. The underlying problem of poor trade
performance remains.
WHAT CAN'T WE DO?
What can we do? There are, I Relieve, five major options.
— First, we could entertain suggestions made by some
irresponsible observers that we seek to drive down the value
of the dollar on the assumption that this would improve the
competitiveness of our goods;
Second, we might reduce domestic economic growth in order to
lower aggregate demand for imports;
— Third, we could act to constrain imports by imposing economywide import restraints;
— Fourth, we could focus;on the other side of the equation and
actively seek to increase U.S. exports; and

-3—

Fifth, to facilitate acceptance of our exports and free trade
everywhere, we could work to eliminate other countries
barriers to trade and unfair competitive practices.
Let me deal with these "options11 one-by-one.
The first is, quite simply, out of the question. We will indeed
reap some benefit from the depreciation of the dollar that took place
last year. But that depreciation came as a natural consequence of our
then growing trade imbalance and rates of inflation. The dollar is
clearly not overvalued now. It does not follow that further declines
in the dollar would be good for trade. Besides, competitive devaluations do not work. It has never been the policy of the United States
to seek them. And it never will be. From the standpoint of the
domestic economy, we have found that the dollar's decline has serious
inflationary consequences. It can threaten to undermine our antiinflationary efforts by increasing the cost of imports and importcompetitive goods by creating an atmosphere of instability and by
damaging the climate for investment. Lastly, from the standpoint of
today's market place, the tide is running the other way. Underlying
economic forces, and our monetary and fiscal policies, point to a
strong dollar.
The second option — reducing domestic growth to lower demand for
imports — makes little sense. Imports now account for 8 percent of
GNP. In its extreme form, the advocates of this let-the-tail-way-theday approach are calling for a recession. Indeed, I have heard a few
extremists argue that point, but they are not the ones that would be
standing in line to collect unemployment checks.
The Administration is committed to maintaining a growing economy.
To attempt to cure our trade problems with a recession would be
foolish.
We will experience a lower rate of growth this year with the
deliberate efforts of tighter monetary and fiscal policy. And this
will slow down import growth. But the effort to slow growth is based
on the need to combat inflation. I believe that this will be tolerated — if not demanded — by the American people, who increasingly
have come to realize that inflation is a cancer.
The third option is also a non-starter. We cannot afford to
restrict imports which are not coming into the country unfairly. Such
measures would create massive distortions in the market. They would
rob us of the benefits of en open world economy. They would likely
generate similar import restraints by other nations in retaliation,
which in turn would damage our exports. The final result would be an
increase in prices for a wide range of products, throughout the world.
We learned during the interwar period that beggar-thy-neighbor
policies and trade restrictions provide no lasting benefits for
anybody.
Maintaining open markets for foreign goods in a stable dollar
environment is an important complement to our fight against inflation.
U.S. import restraints already in place probably cost American consumers at least $20-$30 billion a year. The American public would be
ill-served if we added to this already heavy burden.

This is not to deny that import restraints can selectively
facilitate the orderly development of trading relations with other
nations. It is important, for example, to protect our manufacturers
against unfair dumping practices of other nations — from their selling goods here at lower prices than they can be sold at home. And we
must see to it that new imports do not rapidly and radically disrupt
the production structure of the economy. For example, in normalizing
relations with China we have opened up our market to a new supplier of
textiles. Too rapid an infusion of Chinese textiles would clearly
have disruptive consequences for our domestic industry. Thus we are
presently negotiating an agreement with the Chinese for orderly growth
in their exports to the U.S. of these materials.
My point is that there are cases to be made for selective
restraints. The Administration will take action against unfair or
disruptive practices by others in our home market. But we are best
served by an open economy. Under today's conditions the wide-ranging
restraint of all imports into the United States is not a practical
policy.
WHAT WE CAN DO
The conclusion drawn is that the first three options do not
obtain. We are left with the latter two, which are the right ones:
— We must focus our efforts on exports
— We must reduce the barriers that inhibit their acceptance
abroad.
I would like to concentrate the remainder of' my remarks on how to
get on with this important job.
IMPROVING OUR EXPORT PERFORMANCE
The government and the business community must work as partners
toward improving our competitiveness in world markets. Let me review
what I consider to be the four key areas where work is needed.
— First, we must develop an "export mentality" throughout the
business sector;
Second, we must succeed in gaining a larger share of the
important Japanese, market;
— Third, we must overcome the low rate of growth of U.S.
productivity of recent years;
Fourth, we must take advantage of new markets as they become
accessible in the LDC's and other developing countries like
the Soviet Union and the People's Republic of China.
First let's look at our export mentality. The industries which
are now engaged in exporting are*primarily the "giants". Reginald
Jones, the Chairman of General Electric, told me recently that his
company alone contributes $2 billion net to our balance of trade. But

smaller firms have not been as active, in part due to the high initial
costs of entering foreign markets, and in part because they have
concentrated on production for the domestic economy. And too, the
route to the top of the corporate ladder is rarely through the
international side, even in the largest corporations. There is little
incentive for executives to think exports.
It is natural that U.S. producers concentrate their sales effort
on the U.S. market. Foreign producers do too. They find that the
huge and dynamic U.S. market is a profitable place. So they make a
special "export model" just to sell in the United States. But not
many U.S. manufacturers will make a special model to sell in Japan —
or in Europe, or in Brazil and other developing nations.
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.
U.S. industry has also become accustomed to highly sophisticated
distribution and sales systems. But in many foreign economies, exporters still face "mom and pop" stores and inefficient distribution
systems that are designed.for small volumes. Inventory management and
distribution networks are far more complicated. Unusual effort must
be put into studying and working these markets. Corporations that
focus on short term earnings per share often find these start-up
expenses to be onerous.
There may be a good bit more we can do, both through the public
and private sector, to improve our export mentality. The government
must learn to work for, rather than against, the interests of
exporting businesses. The U.S.-Japan Trade Facilitation Committee,
inaugurated in October 1977, exemplifies the kind of effort needed to
improve information about what we have to sell, what foreigners want
to buy, and to provide a forum for examining particular trade
problems. But we still need export-minded firms to take advantage of
these new efforts on the part of the government.
I can point to Japan as a case where American corporations could
do more than they realize. The Government of Japan does inhibit
imports in many ways quite inappropriate for their type of advanced
economy. U.S. exports to Japan are still limited by residual import
quotas on agricultural goods; by high tariffs on a range of manufactured goods; by deliberately protective tariffs in such important
sectors as computer equipment, film, photographic equipment and some
semiconductors; by lengthy approval procedures for imports of
manufactured goods; by government procurement rules with a strong
"buy-Japan" tilt; and by special import restraints for politically
sensitive industries.
A number of these problems have been discussed within the
Multilateral Trade Negotiations; and we hope to secure a substantial
liberalization in some of these areas. But more liberalization is
needed from the Japanese Government. The Carter Administration and
the Congress are determined to continue working with the Government of
Japan to assure that their market — particularly for manufactured
goods and the agricultural products with which the U.S. is'especially
competitive — is as accessible to us as ours is to the Japanese.

-6.

But we must also acknowledge that American corporations have
themselves been slow in realizing that Japanese import barriers.have
already begun to weaken. Japanese markets for many modern manufactures, for example, are largely open to foreign competition. The
concept of "Japan Inc." is losing relevance as markets for basic and
semi-processed materials are opened to import competition. Yet the
U.S. share of most export markets in Japan has been shrinking for a
number of years. Japan is an example of where a "can't do" mentality
hurts us. Businessmen from other countries face the same barriers to
marketing in Japan as we do. But they have increased their market
shares at our expense. The U.S. share of consumer non-durable imports
by Japan, for example, fell from 32 percent in 1968-70 to 13 percent
in 1976-77; from 40 percent to 27 percent for consumer durables; and
from 61 percent to 51 percent for capital equipment.
American exports to Japan will not improve simply because the
Japanese remove trade barriers. In Japan, as elsewhere, competitors
from the Pacific basin, Latin America and Western Europe will rush in
as barriers come down. To out-perform this competition we will have
to overcome our low rate of productivity growth.
U.S. output per manhour in the manufacturing industries increased
only slightly more than 25 percent between 1970 and 1976, while
Japanese productivity grew by more than 50 percent, and German,
French and Italian productivity grew by more than 35 percent. Last
year, American manufacturing productivity grew an abysmal 0.8 percent.
Many factors determine the rate of growth of labor productivity.
One of the most important of these is the rate at which we expand our
capital base. The stock of productive capital per worker increased
every year in the post-war period up to 1974. Since then, the process
of capital accumulation has come to a complete hait.
There are many reasons for this: declining real profit margins,
uncertainties about energy costs and availabilities, excessive regulation. We have taken steps to remove these roadblocks.
Our anti-inflation program will help restore after-tax real profits. A stronger dollar will enhance the environment for portfolio
investment. Our recently enacted tax program should also assist
investment through a cut in the corporate rate, a reduction in capital
gains taxation, and an improved investment tax credit. These initiatives should result in a net reduction of some $7 billion in taxes on
income derived from capital investment. The energy legislation
enacted by the last Congress will work to eliminate uncertainties
about the supplies of energy, particularly natural gas.
It is remarkable how, with the enactment of one bill by Congress,
a permanent geological scarcity can suddenly turn into a glut of
natural gas — at least temporarily. Perhaps we can find a formula
for doing the same for crude oil.
Finally, investment should benefit from our efforts to get
control of the unnecessary preempting of resources by regulatory
authorities. The Carter Administration is the first Administration

7ever to institute an internal program for a cost-benefit assessment of
individual regulations. The costs are staggering. We intend to pare
them down.
Still, more must be done to stimulate R&D and increased productivity. I would welcome any suggestions you might have as to how.
A fourth area where we need to make a special effort is in
exploiting new markets. I needn't say much on this common sense
subject. The developing countries obviously provide a great opportunity. And the Soviet and Chinese markets must not be neglected.
U.S. exports to the Soviet Union have quadrupled to $2.2 billion
since we signed our first major trade agreement with them. But most
of this total is agricultural goods. We only exported some $500 million in manufactured goods to the U.S.S.R. last year. This compares
with manufactured exports of nearly $3 billion by Germany, $2 billion
by Japan, $1-1/2 billion by France, and $1 billion by Italy. The
opportunities for the U.S. are self-evident.
Obviously, the United States will not export goods to the
U.S.S.R. which are of strategic consequence. However, in the nonstrategic, non-defense related areas where the Germans and others have
been doing a better job, the potential is considerable.
As for China, normalization offers a great deal. China's
ambitious economic goals to spur modernization, and her recent
liberalization of foreign trade and finance policies have marked an
"opening to the West". We have gotten off to a late start in this
game. Now we have the opportunity to begin making up lost ground.
We still have many obstacles to overcome. We have yet to put in
place the basic arrangements needed for the conduct of a normal
trading relationship between our two countries. There is no civil
aviation agreement. There is no shipping agreement. We have no trade
agreement with the Chinese. And in striving to put these arrangements
in place we must overcome the obstacles posed by the need to settle
the claims/assets issue, the absence of most favored nation status and
the lack of official credit facilities.
The Chinese market is vast. TraQe between the U.S. and China
increased two-fold in 1978 to approximately $1 billion. Again, much
of this is agricultural trade and much, much more can be done on the
industrial side. The potential is there. But it will take time to
materialize; the process will be a gradual one. The Chinese need to
develop improved means of financing purchases. They need to put in
place the facilities like housing and American consular offices that
are needed to support American businessmen. And#the facilitation of
business applications by the Chinese bureaucracy .will have to be
further rationalized.
The Administration will be working hard in the coming weeks and
nonths, together with the Chinese, to pave the way for American
corporations to do business in China.

-8REDUCING BARRIERS ABROAD
To guarantee the acceptance of American goods everywhere, the
Administration continues to negotiate with our trading partners to
reduce tariffs and quotas on imports from the United States. This is
done within a multilateral context in Geneva and bilaterally in the
form of trade agreements with specific countries.
Increasingly a new form of barrier or interference is cropping up
in our dealings with major competitors. This is the problem of
overnment subsidies to aid exporting and domestic producing
ndustries.
The roster of state-assisted industries reads like a "Who's Who"
of current sectoral problems: steel, data-processing, aircraft, autos,
shipbuilding, textiles, shoes, machine tools, electronic components.
The aids have spread rapidly from country to country in a vain attempt
to gain a competitive edge in both domestic and foreign markets, and
at considerable cost to national treasuries.
Government action to.aid these industries is not surprising.
Their importance to national economies generates very strong political
and economic pressures for government protection and assistance. Such
assistance is usually introduced in the name of laudable domestic
economic goals: increased employment, greater industrial efficiency, '
and longer term research and development efforts. However, in many
cases it has become a means of avoiding structural adjustment and
represents one of the most troublesome areas in our trade relations.
Efforts now being made in the Multilateral Trade Negotiations
being finalized in Geneva offer an opportunity to help govern the
international use of these subsidies. These efforts have borne fruit.
The Brazilians, for example, have just announced that they will be
phasing out all of their export subsidies over the next four years.
Progress in these areas should help assure that trade is more fair, as
well as more open, in the future.
CONCLUSION
In summary, the Carter Administration is working hard to improve
the nation's export performance and*reduce its trade imbalance. But
like most other tasks in our mixed economy, we as a government cannot
to it alone. We need your support for the initiatives that we have
aken to pave the way for improved export performance by our
corporations. We need your suggestions for further initiatives. And
we need a new determination by corporations of all sizes to identify
and exploit the export opportunities that are already abundant.
oOOo

f

tpartmentoftheJR[A$URY
NGT0N,D.C.
11
20220

TELEPHONE 566-2041

Ms>

FOR IMMEDIATE RELEASE
Friday, February 2, 1979
REMARKS OF THE HONORABLE
W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE OLD MINT
SAN FRANCISCO, CALIFORNIA
FRIDAY, FEBRUARY 2, 1979
I'm pleased to join with members of this community today
as we mint the first Susan B. Anthony dollar coin here in
San Francisco.
I know many of you worked very hard for passage of the
legislation which enables us to be here today. This is a
significant event — not only are we introducing a coin which
will be cost efficient to business and to government, but we
are breaking an old government tradition — and believe me that
is no easy feat.
In the past, most coins had a liberty figure obverse design.
But for this new coin Congress has chosen to honor a real woman,
one of the first suffragists, Susan B. Anthony, instead of a
mythical figure. Isn't it refreshing to know that we have finally
decided to move away from myths and toward reality. It's time
we all realized that women have as much a right to be depicted
on our coins as men, Indians and even buffalos and eagles, time
to realize that women be given the credit they deserve, and time
to recognize them for their accomplishments. They should not
merely be the obverse side of coins, of men or of anything, but
they must be fully recognized as persons in their own right. As
Victor Hugo said, "There is one thing stronger than arms, and
that is an idea when its time has come." Ms. Anthony -- this is
your time. We honor Susan B. Anthony on this dollar coin for all
she has done for the struggle for human rights, and especially
for her striving to help women gain the right to vote. It is
particularly appropriate to do so at a time when our nation has
become so conscious of helping others with their quest for human
rights.
It is time the United States portrayed a woman on a coin,
for we are one of the few countries which until now had no real
female likeness represented on any of our coinage. Perhaps that
B-i|83
is why the dollar was in some trouble. When Susan used to

- 2crusade from town to town to advocate women's rights, she was
backed by her father's money. Now we need Susan to back our money.
When President Carter signed the new coin act, he said,
"This new coin will be a constant reminder of the continuing
struggle for the equality of all Americans." It reminds me too
of our constant struggle to stabilize the dollar. Susan Anthony,
I sure hope you can help us now.
I'm not going to recite a litany of accomplishments and
praises for the person we honor in this way. From what I understand about her, she wouldn't have wanted that. As she once
said of President Roosevelt, "When will men do something besides
extend congratulations? I would rather have President Roosevelt
say a word to Congress in favor of amending the constitution to
give women the suffrage than to praise me endlessly."
In response to her wishes, I will not congratulate her, but
will ask all those here today to join in a conscious effort to
continue the fight for human rights — the fight she began so
many years ago. If you all remember her motto, "Failure is
Impossible," it will help provide us with the inspiration to proceed
As for the new dollar coin itself, we anticipate much success.
With your cooperation, that of retail firms, commer^ykl banks, y
and the general public, it will soon become an effective medium
of exchange. It is smaller and lighter than the present Eisenhower
coin and it will replace demand for one dollar bills. The
Government will save 60 percent on the cost of minting dollar
coins — this will amount to a savings of roughly $4.5 million
dollars a year — a fact of no small significance to an Administration that is striving to balance its budget.. With increased
production generated by successful circulation, the savings will
multiply.
The Anthony coin will be advantageous to private industry —
including major retailers, banks, and transit companies — becausfe
of faster, easier handling of coins compared to notes. Also the
automated merchandising industry will be able to offer, a far
wider range of products to consumers. Time will be saved at cash
registers. It will be faster to count money both manually and
automatically. Even a 20% displacement of notes by coins would
permit Treasury to defer for at least the foreseeable future, a
costly expansion program at the Bureau of Engraving and Printing.
In addition, the new design has an inner border — providing
a means for tactile recognition by the visually handicapped- The
sandwich laminate of cupro-nickel makes the coin difficult to
counterfeit or slug.
Susan Anthony was once described as having a "finely organized constitution and a good degree of compactness and power."

- 3 I wish to describe our new dollar coin in the same way.
As to the concern that the new coin is inflationary —
this simply is not the case. The increased use of higher value
coins in this and other developed countries is the consequence
rather than the cause of the general inflationary trend.
As the purchasing power of the lowest denomination rate
declines, the highest value coin becomes a far more necessary
component of a nation's coinage and currency system.
My feeling is that this coin could be one of the most
valuable coins one can possess — for it underlies a dual issue —
this nation's tremendous concern with human rights and with
inflation. The intention is that we will succeed in extending
the former and halting the latter.
In closing, let me relate a piece of advice Susan Anthony
received from an uncle. He said to her, "If you want to be a
real success, you have to make the world notice you." She replied,
"I'll make them stare." Little did she know that the whole world
would one day be staring at her likeness on a one dollar coin.

o

0

o

FOR RELEASE ON DELIVERY
EXPECTED AT 11:00 A.M.
FEBRUARY 5, 1979

TESTIMONY OF STEPHEN J. FRIEDMAN
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ANTI-TRUST AND MONOPOLY
OF THE
SENATE COMMITTEE ON THE JUDICIARY
Mr. Chairman and Members of this distinguished
Subcommittee:
I am pleased to present the views of the Treasury
Department on the important issues being considered by this
Subcommittee. I am accompanied by Mr. Michael Melton of the
Treasury's Office of Tax Policy and Mr. William Posner of
the Internal Revenue Service. They will be available to
answer questions concerning the application of the Federal
tax laws.
The role of pension funds as investors is central to
the equity markets and to the broader questions of corporate
legitimacy now being widely considered. They present a
textbook case of the evolution of legal and financial institutions. Pension funds have grown in importance as sources
of employee savings and of equity capital. Their nature has
changed with their size and with evolving theories of portfolio management so that they now severely strain traditional
concepts. The old ideas no longer fit.

B-1384

- 2 The issues under consideration by this Subcommittee
illustrate that evolution, in a pension trust the location
of ownership — that is, legal title — is clear. But as the
differing obligations and interests of fiduciaries, employees,
retirees and the employer become better understood, along with
the changes worked by ERISA, the fact of technical ownership
becomes less relevant. The allocation of the attributes of
ownership — voting rights and the power to determine investment policies — do not inevitably follow legal title.
Similarly, the rule of prudence has been with us for a
considerable time. But we have poured that old wine into a
a new bottle — and changed its character. It is now part
of the new complex of ERISA rules designed for employee
benefit plans, not common law rules developed for traditional
testamentary trusts with life estate and remainderman.
ERISA was the first major step in giving contemporary
form to the legal institutions that contain and shape the
development of employee benefit plans. This Subcommittee
is embarked on the next stage of that process. I would
like to suggest some principles that might guide the Subcommittee's work in this effort.
- We should distinguish between the effect of the
prudent investor rule and broader considerations
of public policy. A proposed course of conduct
involving social investment could be consistent
with the prudent investor rule but raise other
policy concerns for Congress.*
- It is important to maintain the principle of diversity in our financial markets. The interaction of
large numbers of decision-makers is important to the
efficiency of the markets in allocating capital and
imposing economic discipline on the management of
firms.
- We must look skeptically at suggestions that tend
to politicize the investment process. This nation
has a long history of distrust of the use of concentrated private economic power to secure private
social and political ends.
With that brief background, let me turn to the issues
now before this Subcommittee.

- 3 Voting Power
The legal status of passing through the voting power
of securities held by pension trusts to the ultimate participants and beneficiaries has not been fully clarified.
Most observers believe there is substantial latitude for
arrangements to share voting power. Nevertheless, that
practice is not widely followed. It is, in our view, too
early for the Congress to mandate a particular form of
participation.
We are not aware of any substantial abuse of the voting
power held by professional pension fund managers. Rather,
we are concerned that this voting power is not actively
exercised, or is generally exercised more or less automatically in favor of management. Professional pension fund
managers have made it abundantly clear that they do not
regard the exercise of voting rights as an important part of
their job. Their investment judgments are based on total
return and their remedy for dissatisfaction with a management
or its policies is to sell the company's securities.
At the same time that the proportion of equities held
by pension funds is increasing, the importance of the shareholder voting process is receiving increasing attention as
a way of giving reality to the ownership rights of shareholders. Thus, the SEC has amended its proxy rules to enhance
the effectiveness of shareholder participation. Open channels
are important to corporate legitimacy and as an antidote to
pressure for government regulation of corporations. Greater
individual participation should enhance the accountability
of management and increase the confidence in the financial
system of individual investors and pension fund participants.
But this approach rests on the assumption that individuals
can participate.
The more active exercise of voting power raises its own
problems. We can readily foresee the result if corporate
shares were actively voted by large financial institutions
to implement the social views of their management. There
would be concern about the concentration of voting power.
We would share that concern, and think that the more active
use of voting power should be accompanied by its diffusion.

- 4 That prospect raises myriad questions about pass-through
arrangements. Let me list a few.
- If the pass-through of voting rights is mandatory,
do we risk freezing the structure of this important
innovation before its true character is understood?
- What is gained by a pass-through of voting rights to
the employer in those plans that are not jointly
administered? There is, assuredly, a greater diffusion of voting power, but that voting power will
not necessarily be exercised more actively. And
there is no reason to think that in single-employer
plans the employees will be consulted more than is
the case now.
- Should voting rights be exercised by a joint laboremployer committee even in cases where the plan is
not jointly administered?
- Is it important to have, a neutral chairman? Should
the employer participate at all?
- In the case of jointly administered plans, should
it be assumed that the union officials appointed
to serve as trustees are necessarily the correct
persons to represent employees in voting shares,
or should a different group be elected by the
employees?
- What disclosure obligations should be imposed
upon the employee representatives to insure that
the employees know how their rights are being
exercised?
- Is it important that retirees be represented in the
voting process?
- How about insurance companies that manage pension
assets under annuity and other arrangements? Should
the right to vote the underlying securities remain
in the insurance company because the fund employees
have, in effect, invested only in the securities of
the insurance company — i.e., the annuity?

- 5 Our review of these and other issues suggests that we
do not now have an adequate fund of experience to determine
what problems are created by differing institutional arrangements and that it is far too early to codify any particular
form of employee participation. It is important to maximize
flexibility and experimentation and to permit an assessment
by the Congress of the costs and benefits of these arrangements.
Investment Decisions
I would like to turn now to the far more thorny question
of restricting or directing investment decisions for reasons
unrelated to return on investment. It is important to recognize that this is a relatively new development and that its
ramifications are only beginning to be understood. Ian Lanoff
of the Department of Labor will consider the application of
the prudent investor rule to the question of the extent
to which fiduciaries are free to consider what are called
social factors in choosing an investment. Suffice it to say
for my purposes that the prudent investor rule leaves to the
persons managing the portfolio a good deal of discretion
provided that the investment chosen carries a risk and a
return that is appropriate for the portfolio in light of
the relevant factors.
Moreover, there are other ways in which the preferences
of employers and participants can be expressed. For example,
they can make their views known on an informal basis without
restricting the portfolio manager's freedom of action. If
portfolio managers find even the expression of views unduly
restricting, they are free to decline to manage the funds.
During these hearings, the Congress has been asked to
approve conduct that may raise questions under current law.
In our view, it would be premature to act now. And we
believe there is even more reason in this area than in
the case of voting rights for the Congress to proceed slowly.
While the exercise of voting rights is an important
aspect of shareholder democracy, it is not an essential
element of the investment process. Hence, plans can experiment
with relatively little impact on existing arrangements for
money management or for resolving conflicts among the parties

- 6 to pension arrangements. That freedom is not present when
we look at investment rather than voting. In addition, the
direction of investment for social reasons may raise the
spectre of greater use of concentrated economic power for
noneconomic purposes and may well interfere with the markets'
allocative function. Let me elaborate.
Institutional Arrangements for Money Management
A direction not to invest in a particular company, or
even in a particular industry, may not so limit a portfolio
manager's choices that any legal question arises under the
prudent investor rule. Nevertheless, the portfolio manager may
feel inhibited from attaining the investment objectives that
have been set for him. He may choose to reject any significant limits on his freedom of choice.
The freedom to do so should be left with the managing
institution. If the plan sponsors prefer a more compliant
manager, they are free to choose another. On the other hand,
there is nothing in the current state of the law that prohibits such directions; it is simply that those giving the
directions have fiduciary responsibility for their actions.
The resulting diversity of approach is healthy, since it
provides us with<a wealth of experience.. In particular, it
permits the markets to demonstrate whether there is truly a
trade-off between investment performance and the acceptance
of directions related to social ends.
The Resolution of Competing Interests
The institutional arrangements for directing social investments must be adequate to accommodate the conflicting interest
involved. In a defined benefit plan, the employer has an
incentive to press for a high yield, since it reduces the
required contributions. Indeed, one of the functions of the
prudent investor rule is to restrain the thrust toward assuming
more risk than is appropriate.
Social investments could raise a different problem if the
Congress were to permit them to take the form of a lower
yield (or a higher risk in relation to the yield) than would
otherwise be chosen. What of the employer, whose funding
obligations would be increased by lower yielding investments?

- 7 If the percentage of the portfolio placed in such investments
is sharply limited by the prudent investor rule, then the
impact on the employer will be small, and the issue is not a
serious one. But if the amount is significant to the portfolio,
surely the employer should consent before its liability is
increased.
There are also other interests that must be accommodated.
As other witnesses in these hearings have suggested, the
interest of retirees must also be taken into account.
These are quite complex questions, and I suggest we are
seeing only the tip of the iceberg. We need considerably
more experience to see whether any serious problems are
involved.
Concentration of Economic Power
We are concerned about the use of large aggregations of
wealth to achieve political or social ends. If a large bank
trustee or the chief financial officer of a company with a
large, internally managed pension fund were to employ its
economic power to support a general anti-union animus, or
projects that support patterns of segregated housing or
education, we would be disturbed even if no violations of
the law were involved. The money invested is held in stewardship, and should not be used to further the personal views
of the steward — and certainly not at the cost of the beneficiaries. There has been a historic effort in this country
to divorce political decisions from economic power.
Our concern is no less because the power may be exercised by a union or other employee group instead of management.
For example, some have suggested a prohibition on investments
in nonunion companies. The labor laws strive to strike a
balance between the rights of employees and employers, and
the capital markets were not weighed in the balance when the
basic compromises were struck.
The balancing of risk and return in the investment process
imposes political neutrality on the investment process. When
we step off neutral ground, we must tred warily. This is not
to say that individuals, trustees and portfolio managers
must be blind to other concerns when funds are invested.
But we are dealing here with matters of degree. When the
social motivation comes to occupy a larger sector of investment
decision-making, it raises entirely new kinds of problems.

- 8 Allocation of Capital
Social investments may sometimes distort the markets'
basic function of allocating capital. That is seen most
clearly in suggestions that pension funds be reinvested in
the areas from which they are generated or be invested in
certain sectors of the economy. There are, of course, exampl
of credit allocation of this kind in our economy. Often,
they do not work well. They represent subsidies, which in
our view are often better generated and controlled by the
political process. And they would divert the major institutional source of equity capital from its basic role.
The strength of our markets has historically lain in
the free interaction of a large number of participants. This
process enables society to make decisions concerning the
risk-return evaluations among alternative uses. The process
is dynamic, and both reflects and affects the views of investors and users of capital. Decisions concerning the most
efficient use of resources are best made by individual
investors acting with full information. Impediments to that
process, including structural constraints which result in
the preference of one investment over another, are in general
to be avoided.
• * *

Mr. Chairman, that concludes my formal testimony. I
would be pleased to answer any questions the Subcommittee
may have.

tpartmentoftheTREA$URY
TELEPHONE 566-2041

INGT0N,D.C. 20220

February 5, 1979

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,807 million of 13-week Treasury bills and for $3,000 million
of 26-week Treasury bills, both series to be issued on February 8, 1979,
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 May 10, 1979

26-week bills
maturing August 9. 1979

Price

Discount
Rate

Investment
Rate 1/

Price

97.687
97.677
97.678

9.150%
9.190%
9.186%

9.50%
9.54%
9.53%

95.304
95.291
95.295

Discount
Rate
9.289%
9.315%
9.307%

Investment
Rate 1/
9.88%
9.91%
9.90%

Tenders at the low price for the 13-week bills were allotted 53%.
Tenders at the low price for the 26-week bills were allotted 87%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

' Received
$

150,825,000
5 ,291,795,000
20,145,000
29,415,000
51,015,000
33,505,000
339,595,000
39,955,000
18,225,000
20,195,000
13,175,000
217,320,000
14,880,000

$6,,240,045,000

Accepted
$

120,825,000
2 ,368,395,000
17,530,000
24,415,000
21,015,000
31,100,000
118,260,000
16,680,000
6,225,000
18,490,000
12,175,000
37,235,000

: Received
j\
::
:
:
:
:
:
:
:
:
:
:

14,880,000 :

$

36,830,000
5,362,695,000
10,110,000
104,430,000
25,055,000
82,940,000
214,400,000
32,300,000
15,960,000
22,010,000
10,315,000
265,035,000
14,050,000

$2,,807,225,000a/: $6 ,196,130,000

a/Includes $372,345,000 noncompetitive tenders from the public.
^/Includes $ 241,915,000 noncompetitive tenders from the public.
[/Equivalent coupon-issue yield.

^1385

Accepted
$

21,830,000
2, 719,695,000
9,530,000
71,530,000
15,055,000
27,390,000
18,385,000
12,300,000
7,960,000
21,985,000
10,315,000
50,035,000
14,050,000

$3, 000,060,000b

FOR RELEASE ON DELIVERY
EXPECTED AT 9:30 A.M.
February 6, 1979

STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE COMMITTEE ON FINANCE

Mr. Chairman and Members of the Committee:
I am here today to advise you of the need for an
increase in the public debt limit. I am also requesting
an increase in the authority to issue long-term securities
in the market and an increase in the statutory interest rate
ceiling on savings bonds. After discussing these specific
debt management requirements, I would like to comment on our
recent issues of securities denominated in foreign currencies.
Then, I will discuss the need to strengthen the process by
which Congress establishes the debt limit.
Debt Limit
Turning first to the debt limit, the present temporary
debt limit of $79 8 billion will expire at the end of March,
and the debt limit will then revert to the permanent ceiling
of $400 billion. Based on our current estimates, however,
the $798 billion ceiling will be exceeded sooner -- around
March 9. Legislation by that date will be necessary,
therefore, to permit the Treasury to borrow to refund
maturing securities and to pay the Government's other legal
obligations. This assessment on timing is virtually identical to that which I presented to you in testimony last July.
Thus, Congress was made aware at that time that the $79 8
billion limit probably would not be enough to carry us
through March 31.

B-15S6

- 2Let me explain why legislative action is needed by
early March. The debt subject to limit actually would
exceed the $798 billion sooner — by the end of this month —
unless we reduce our normal $15 billion cash balance assumption.
As a practical matter, we believe that we can get
through this month without any serious debt limit problems,
since the assumed $15 billion cash balance is more than we
need for this period.
Our cash balance requirements fluctuate substantially,
because of the seasonal flows of tar receipts and outlays,
but we think that we can safely run the cash balance down to
approximately $7 billion at the end of this month. At the
end of February last year our cash balance was $7.4 billion.
On this basis, the debt subject to limit could be ke^t below
$798 billion until approximately March 9.
In the circumstances, I strongly urge that Congressional action on the debt limit be completed as soon as
possible.
Over the longer term, our current estimates of the
amounts of debt subject to limit at the end of each month
through the fiscal years 1979 and 1980 are shown in the
attached table. The table indicates that the debt subject
to limit will increase to $833 billion at the end of
September 1979, and to $893 billion on September 30, 1980,
assuming a $15 billion cash balance on those dates. These
estimates are consistent with the budget estimates which the
President submitted to Congress on January 22. The usual $3
billion margin for contingencies would raise these amounts
to $836 billion in September 1979, and $896 billion in
September 1980. Thus, the present debt limit of $798
billion should be increased by $38 billion to meet our
financing requirement^ through the remainder of fiscal 1979
and by an additional $60 billion to meet the requirements in
fiscal 1980.
The amount of the debt subject to limit approved by
Congress in the September 1978 Budget Resolution is also
$836 billion for the fiscal year ending September 30, 1979.
Yet, since the Budget Resolution does not have the force of
law, it will be necessary for Congress to enact a new debt
limit bill before the Treasury can borrow the funds needed
to finance the programs approved by Congress last September.

- 3 Bond Authority
I would like to turn now to our 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.
Under this Administration, the Treasury has emphasized
debt extension as a primary objective of debt management, a
policy which we believe to be fundamentally sound. This
policy has caused a significant increase in the average
maturity of the debt, reversing a prolonged slide which
extended over more than 10 years. In mid-1965, the average
maturity of the privately-held marketable debt was 5 years,
9 months. By January 1976, it had declined to 2 years, 5
months, because huge amounts of new cash were raised in the
bill market and in short-term coupon securities. Since that
time, despite the continuing large needs for cash of the
Federal Government, Treasury has succeeded in lengthening
the debt to 3 years, 4 months currently.
Debt extension has been accomplished primarily through
continued and enlarged offerings of long-term bonds in our
mid-quarterly refundings as well as routine offerings of 15year bonds. These longer-term security offerings have
contributed to a more balanced maturity structure of the
debt in order to facilitate efficient debt management in
the future. Also, these offerings have complemented the
Administration's program to restrain inflation. By meeting
some of the Government's new cash requirements in the bond
market rather than the bill market, we have avoided adding
to the liquidity of the economy at a time when excessive
liquidity is being transmitted into increasing prices.
Congress has increased the Treasury's authority to
issue long-term securities without regard to the 4-1/4
percent ceiling a number of times, and in the debt limit act
of August 3, 1978, it was increased from $27 billion to the
current level of $32 billion. To meet our requirements in
the remainder of the fiscal year 1979, the limit should be
increased to $40 billion; and to meet our requirements in
the fiscal year 1980, the limit should be increased to $55
billion.
The Treasury to date has used about $30 billion of the
$32 billion authority, which leaves the amount of unused
authority at about $2 billion. While the timing and amounts
of future bond issues will depend on prevailing market
conditions, a $23 billion increase in the bond authority

- 4would permit the Treasury to continue its recent pattern of
bond issues throughout fiscal year 1980. We are currently
issuing long-term securities at an annualized rate of
approximately $15 billion.
Savings 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 19 70 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 if interest rates rise on competing forms of
savings.
The 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 sayings 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. In this regard, market interest rates
increased substantially in 19 78 and are currently close to
the historic highs reached in the 1973-74 period when the
savings bond interest rate was increased from 5-1/2 percent
to 6 percent. Moreover, there was a significant increase in
savings bond redemptions last year. Savings bond sales
exceeded redemptions by $748 million in 1975, $793 million
in 1976, and $840 million in 1977. However, in 1978, as
market rates of interest increased, redemptions exceeded
sales by $236 million. The resulting cash loss to the
Treasury, which has been steadily increasing in the past few
months, must be made up by increasing the amounts the Treasury
borrows in the market, and the Treasury is currently paying
significantly higher interest rates on its market borrowings.
If this situation continues, it may be essential to increase

- 5 the savings bond interest rate in order to avoid further
substantial cash drains to the Treasury and permanent
damage to the savings bond program.
Any 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.
While I continue to believe that the savings bond
interest ceiling should be removed, I recognize that it may
not be possible to gain prompt approval by Congress of a
proposal to eliminate the ceiling. Thus, I am requesting
that the ceiling be increased at this time from 6 percent to
6-1/2 percent. This one-half of one percent increase should
be enough to provide us with the flexibility we need at this
time.
Foreign Currency Issues
Let me turn briefly to the issuance of Treasury securities denominated in foreign currencies.
As you know, Mr. Chairman, on November 1, 1978, the
Treasury announced its intention to issue up to $10 billion
in securities denominated in foreign currencies. The
purpose of these borrowings is to acquire foreign currencies
which the United States can use in its exchange market
operations.
The securities are issued pursuant to Section 16 of the
Second Liberty Bond Act (31 U.S.C- 766), which provides
specific authority for the Secretary of the Treasury to
issue securities denominated in foreign currencies. These
are public debt securities, and, as such, are direct obligations
of the United States. The amount of their issuance is
subject to the public debt limit.
On December 15, 1978, the Treasury issued the first of
these obligations, in the form of three- and four-year notes
denominated in Deutsche marks, in an aggregate amount of
approximately DM 3.0 billion ($1-6 billion dollar equivalent).
Just recently, on January 26, 1979, the Treasury issued two
and one-half and four-year notes denominated in Swiss francs
totaling SF 2.0 billion ($1.2 billion dollar equivalent).

- 6The interest rates which the United States is paying on
these obligations are substantially below current domestic
interest rates. The notes were offered through the central
banks of Germany and Switzerland, acting as agent on behalf
of the United States. There were no commissions associated
with these offerings, and this is unprecedented in both
countries for a public offering of a foreign borrower.
There were special features associated with our German
and Swiss offerings which were intended to restrict final
investors. In each offering, the notes were placed only
with residents of the country in whose currency they are
payable. Also, only very limited transferability was
permitted among such residents. Further, the German Bundesbank and the Swiss National Bank maintain a register of
beneficial owners, and transfers are only effected after
each central bank checks to insure that the transferee is a
resident of the respective country. These limitations will
help minimize the extent to which dollar holdings might be
converted into foreign currencies for the purchase of the
securities, which would tend to counter the intended purpose
of the offerings.
The decision to sell these foreign-denominated securities, as part of the November 1 program, was made to help
deal with the severe and persistent disorders in foreign
exchange markets, and excessive declines in the dollar,
which were undermining our efforts to control inflation and
damaging the climate for investment and growth in the
United States.
Debt Limit Process
Mr. Chairman, I would now like to comment on the
process by which the public debt limit is established.
It is well recognized that the present statutory debt
limit is not an effective way for Congress to control the
debt. In fact, the present debt limit process may actually
divert public attention from the real issue —
control over
the Federal budget. The increase in the debt each year is
simply the result of earlier decisions by Congress on the
amounts of Federal spending and taxation. Consequently, the
only way to control the debt is through firm control over
the Federal budget. In this regard, the Congressional
Budget Act of 1974 greatly improved Congressional budget
procedures and provided a more effective means of controlling

-

7 -

the debt. That Act requires Congressional concurrent
resolutions on the appropriate levels of budget outlays,
receipts, and public debt. This new budget process thus
assures that Congress will face up each year to the public
debt consequences of its decisions on taxes and expenditures.
Moreover, the statutory limitation on the public debt
occasionally has interfered with the efficient financing of
the Federal Government and has actually resulted in increased costs to the taxpayer. For example, when the
temporary debt limit expired on September 30, 19 77, and new
legislation was not enacted on the new debt limit until
October 4, and again when the limit lapsed from July 31,
1978 to August 3, 1978, Treasury was required in the interim
periods to suspend the sale of savings bonds and other
public debt securities. The suspension of savings bonds
sales, in particular, resulted in considerable public
confusion, additional costs to the Government, and a loss of
public confidence in the management of the government's
finances.
Accordingly, I believe that the public debt would be
more effectively controlled and more efficiently managed by
tying the debt limit to the new Congressional budget process.
I hope that we can work together to devise an acceptable way
to do this.
Attachment

PUBLIC D^BT
SUBJECT TO LIMITATION
FISCAL YEAR 1979
Based on: Budget Receipts of $456 Billion,
Budget Outlays of $493 Billion,
Unified Budget Deficit of $37 Billion,
Off-Budget Outlays of $12 Billion
($ Billions)

Operating
Cash
Balance

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-Actual-

1978
September 30

22.4

773

October 31

15.5

778

November 30

12.9

784

December 29

16.3

790

15.1

792

1979
January 31

-EstimatedFebruary 2 8

15

804

807

March 30

15

809

812

April 30

15

807

810

May 31

15

822

825

June 29

15

810

813

July 31

15

819

822

August 31

15

826

829

September 2 8

15

833

836

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 19 80
Based on: Budget Receipts of $503 Billion,
Budget Outlays of $532 Billion,
Unified Budget Deficit of $29 Billion,
Off-Budget Outlays of $12 Billion
($ Billions)
Operating
Cash
Balance

Public Debt
Subject to
Limit

With $3 Billion
Mai:gin for
Cont:ingencies

-Es1timated-

1979
September 2 8

15

833

836

October 31

15

843

846

November 30

15

856

859

December 31

15

857

860

January 31

15

858

861

February 29

15

874

877

March 31

15

881

884

April 30

15

872

875

May 31

15

889

892

June 30

15

878

881

July 31

15

887

890

August 29

15

897

900

September 30

15

893

896

1980

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
February 6, 1979

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES

Mr. Chairman and Members of the Committee:
I am here today to advise you of the need for an
increase in the public debt limit. I am also requesting
an increase in the authority to issue long-term securities
in the market and an increase in the statutory interest rate
ceiling on savings bonds. After discussing these specific
debt management requirements, I would like to comment on our
recent issues of securities denominated in foreign currencies.
Then, I will discuss the need to strengthen the process by
which Congress establishes the debt limit.
Debt Limit
Turning first to the debt limit, the present temporary
debt limit of $798 billion will expire at the end of March,
and the debt limit will then revert to the permanent ceiling
of $400 billion. Based on our current estimates, however,
the $798 billion ceiling will be exceeded sooner — around
March 9. Legislation by that date will be necessary,
therefore, to permit the Treasury to borrow to refund
maturing securities and to pay the Government's other legal
obligations. This assessment on timing is virtually identical to that which I presented to you in testimony last July.
Thus, Congress was made aware at that time that the $798
billion limit probably would not be enough to carry us
through March 31.
BrJ387

- 2 Let me explain why legislative action is needed by
early March. The debt subject to limit actually would
exceed the $798 billion sooner — by the en* of this month —
unless we reduce our normal $15 billion cash balance assumption.
As a practical matter, we believe that we can get
through this month without any serious debt limit problems,
since the assumed $15 billion cash balance is more than we
need for this period.
Our cash balance requirements fluctuate substantially,
because of the seasonal flows of tax receipts and outlays,
but we think that we can safely run the cash balance down to
approximately $7 billion at the end of this month. At the
end of February last year our cash balance was $7.4 billion.
On this basis, the debt subject to limit could be kept below
$798 billion until approximately March 9.
In the circumstances, I strongly urge that Congressional action on the debt limit be completed as soon as
possible.
Over the longer term, our current estimates of the
amounts of debt subject to limit at the end of each month
through the fiscal years 1979 and 1980 are shown in the
attached table. The table indicates that the debt subject
to limit will increase to $833 billion at the end of
September 1979, and to $893 billion on September 30, 1980,
assuming a $15 billion cash balance on those dates. These
estimates are consistent with the budget estimates which the
President submitted, to Congress on January 22. The usual $3
billion margin for contingencies would raise these amounts
to $836 billion in September 1979, and $896 billion in
September 1980. Thus, the present debt limit of $798
billion should be increased by $38 billion to meet our
financing requirements through the remainder of fiscal 1979
and by an additional $60 billion to meet the requirements in
fiscal 1980.
The amount of the debt subject to limit approved by
Congress in the September 1978 Budget Resolution is also
$836 billion for the fiscal year ending September 30, 1979.
Yet, since the Budget Resolution does not have the force of
law, it will be necessary for Congress to enact a new debt
limit bill before the Treasury can borrow the funds needed
to finance the programs approved by Congress last September.

- 3Bond Authority
I would like to turn now to our 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.
Under this Administration, the Treasury has emphasized
debt extension as a primary objective of debt management, a
policy which we believe to be fundamentally sound. This
policy has caused a significant increase in the average
maturity of the debt, reversing a prolonged slide which
extended over more than 10 years. In mid-1965, the average
maturity of the privately-held marketable debt was 5 years,
9 months. By January 1976, it had declined to 2 years, 5
months, because huge amounts of new cash were raised in the
bill market and in short-term coupon securities. Since that
time, despite the continuing large needs for cash of the
Federal Government, Treasury has succeeded in lengthening
the debt to 3 years, 4 months currently.
Debt extension has been accomplished primarily through
continued and enlarged offerings of long-term bonds in our
mid-quarterly refundings as well as routine offerings of 15year bonds. These longer-term security offerings have
contributed to a more balanced maturity structure of the
debt in order to facilitate efficient debt management in
the future. Also, these offerings have complemented the
Administration's program to restrain inflation. By meeting
some of the Government's new cash requirements in the bond
market rather than the bill market, we have avoided adding
to the liquidity of the economy at a time when excessive
liquidity is being transmitted into increasing prices.
Congress has increased the Treasury's authority to
issue long-term securities without regard to the 4-1/4
percent ceiling a number of times, and in the debt limit act
of August 3, 1978, it was increased from $27 billion to the
current level of $32 billion. To meet our requirements in
the remainder of the fiscal year 1979, the limit should be
increased to $40 billion; and to meet our requirements in
the fiscal year 1980, the limit should be increased to $55
billion.

- 4 The Treasury to date has used about $30 billion of the
$32 billion authority, which leaves the amount of ^ u ff** .
authority at about $2 billion. While the timing and amounts
of future bond issues will depend on prevailing marKet
conditions, a $23 billion increase in the bond authority
would permit the Treasury to continue its recent pattern or
bond issues throughout fiscal year 1980. We are currently
issuing long-term securities at an annualized rate of
approximately $15 billion.
Savings 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 if interest rates rise on competing forms of
savings.
The 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. In this regard, market interest rates
increased substantially in 1978 and are currently close to
the historic highs reached in the 1973-74 period when the
savings bond interest rate was increased from 5-1/2 percent
to 6 percent. Moreover, there was a significant increase in
savings bond redemptions last year. Savings bond sales
exceeded redemptions by $748 million in 1975, $793 million
in 1976, and $840 million in 1977. However, in 1978, as
market rates of interest increased, redemptions exceeded
sales by $236 million. The resulting cash loss to the
Treasury, which has been steadily increasing in the past few

- 5months, must be made up by increasing the amounts the
Treasury borrows in the market, and the Treasury is currently
paying significantly higher interest rates on its market
borrowings. If this situation continues, it may be essential
to increase the savings bond interest rate in order to avoid
further substantial cash drains to the Treasury and permanent
damage to the savings bond program.
Any 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 flew of savings to banks and
thrift institutions.
While I continue to believe that the savings bond
interest ceiling should be removed, I recognize that it may
not be possible to gain prompt approval by Congress of a
proposal to eliminate the ceiling. Thus, I am requesting
that the ceiling be increased at this time from 6 percent to
6-1/2 percent. This one-half of one percent increase should
be enough to provide us with the flexibility we need at this
time.
Foreign Currency Issues
Let me turn briefly to the issuance of Treasury securities denominated in foreign currencies.
As you know, Mr. Chairman, on November 1, 1978, the
Treasury announced its intention to issue up to $10 billion
in securities denominated in foreign currencies. The
purpose of these borrowings is to acquire foreign currencies
which the United States can use in its exchange market
operations.
The securities are issued pursuant to Section 16 of the
Second Liberty Bond Act (31 U.S.C. 766), which provides
specific authority for the Secretary of the Treasury to
issue securities denominated in foreign currencies. These
are public debt securities, and, as such, are direct obligations
of the United States. The amount of their issuance is
subject to the public debt limit.

- 6On December 15, 1978, the Treasury issued the first of
these obligations, in the form of three- and four-year notes
denominated in Deutsche marks, in an aggregate amount of
approximately DM 3.0 billion C$1.6 billion dollar equivalent).
Just recently, on January 26, 1979, the Treasury issued two
and one-half and four-year notes denominated in Swiss francs
totaling SF 2.0 billion ($1.2 billion dollar equivalent).
The interest rates which the United States is paying on
these obligations are substantially below current domestic
interest rates. The notes were offered through the central
banks of Germany and Switzerland, acting as agent on behalf
of the United States. There were no commissions associated
with these offerings, and this is unprecedented in both
countries for a public offering of a foreign borrower.
There were special features associated with our German
and Swiss offerings which were intended to restrict final
investors. In each offering, the notes were placed only
with residents of the country in whose currency they are
payable. Also, only very limited transferability was
permitted among such residents. Further, the German Bundesbank and the Swiss National Bank maintain a register of
beneficial owners, and transfers are only effected after
each central bank checks to insure that the transferee is a
resident of the respective country. These limitations will
help minimize the extent to which dollar holdings might be
converted into foreign currencies for the purchase of the
securities, which would tend to counter the intended purpose
of the offerings.
The decision to sell these foreign-denominated securities, as part of the November 1 program, was made to help
deal with the severe and persistent disorders in foreign
exchange markets, and excessive declines in the dollar,
which were undermining our efforts to control inflation and
damaging the climate for investment and growth in the
United States.
Debt Limit Process
Mr. Chairman, I would now like to comment on the
process by which the public debt limit is established.
It is well recognized that the present statutory debt
limit is not an effective way for Congress to control the
debt. In fact, the present debt limit process may actually
divert public attention from the real issue —
control over
the Federal budget. The increase in the debt each year is

- 7 simply the result of earlier decisions by Congress on the
amounts of Federal spending and taxation. Consequently, the
only way to control the debt is through firm control over
the Federal budget. In this regard, the Congressional
Budget Act of 1974 greatly improved Congressional budget
procedures and provided a more effective means of controlling
the debt. That Act requires Congressional concurrent
resolutions on the appropriate levels of budget outlays,
receipts, and public debt. This new budget process thus
assures that Congress will face up each year to the public
debt consequences of its decisions on taxes and expenditures.
Moreover, the statutory limitation on the public debt
occasionally has interfered with the efficient financing of
the Federal Government and has actually resulted in increased costs to the taxpayer. For example, when the
temporary debt limit expired on September 30, 1977, and new
legislation was not enacted on the new debt limit until
October 4, and again when the limit lapsed from July 31,
1978 to August 3, 1978, Treasury was required in the interim
periods to suspend the sale of savings bonds and other
public debt securities. The suspension of savings bonds
sales, in particular, resulted in considerable public
confusion, additional costs to the Government, and a loss of
public confidence in the management of the government's
finances.
Accordingly, I believe that the public debt would be
more effectively controlled and more efficiently managed by
tying the debt limit to the new Congressional budget process.
Attachment
I hope that we can work together to devise an acceptable way
to do this.

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1979
Based on: Budget Receipts of $456 Billion,
Budget Outlays of $493 Billion,
Unified Budget Deficit of $37 Billion,
Off-Budget Outlays of $12 Billion
($

Operating
Cash
Balance

Billions)
Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-Acstual-

1978
September 30

22.4

773

October 31

15.5

778

November 30

12.9

784

December 29

16.3

790

15.1

792

1979
January 31

-EstimatedFebruary 28

15

804

807

March 30

15

809

812

April 30

15

807

810

May 31

15

822

825

June 29

15

810

813

July 31

15

819

822

August 31

15

826

829

September 28

15

833

836

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1980
Based on: Budget Receipts of $503 Billion,
Budget Outlays of $532 Billion,
Unified Budget Deficit of $29 Billion,
Off-Budget Outlays of $12 Billion
($ Billions)
Operating
Cash
Balance

Public Debt
Subject to
Limit

With $3 Billion
Mai-gin for
ContiLngencies

-Estimated-

1979

September 28

15

833

836

October 31

15

843

846

November 30

15

856

859

December 31

15

857

860

January 31

15

858

861

February 29

15

874

877

March 31

15

881

884

April 30

15

872

875

May 31

15

889

892

June 30

15

878

881

July 31

15

887

890

August 29

15

897

900

September 30

15

893

896

1980

For Release Upon Delivery
Expected at 11:30 a.m.
February 6, 1979
STATEMENT OF
DONALD C. LUBICK, ASSISTANT SECRETARY
OF THE TREASURY (TAX POLICY)
BEFORE THE
SENATE HUMAN RESOURCES COMMITTEE
FEBRUARY 6, 197 9

Mr. Chairman and Members of the Committee:
I am pleased to have the opportunity to appear before
you today to discuss S. 209 concerning the private pension
system.
S. 209 represents a revision of S. 3017 introduced in
the last Congress as to which this Department expressed its
views in hearings on August 15, 1978.
I would like to comment here today on the major
provisions of S. 209 which affect the Internal Revenue Code
and matters within the jurisdiction of the Treasury
Department—administration of ERISA, tax deductions for
employee contributions and tax credits for new plans,
and joint and survivor annuities.
We plan to submit shortly a brief analysis and the
position of the Department on the less far reaching
changes also proposed by S. 209.
B-1388

-2Dual Jurisdiction
As you know, the President's Reorganization Plan Number
4 went into effect on December 31, 1978. This plan to divide
rulemaking jurisdiction between the Departments of Treasury
and Labor is described in the testimony of the Department of
Labor. We are confident that this plan will reduce
substantially the difficulties caused by previously
overlapping rulemaking authority. The plan is designed to be
evaluated by the end of January, 1980. Based on that
evaluation, the Administration may submit legislative
proposals for a long term administrative structure for ERISA.
This interim plan does not prevent adopting a single agency
approach in the future, but we believe it would be premature
to enact a single agency structure at this time as S. 209
suggests.
We have not supported the single agency concept to date
in part because we are reluctant to thrust a new administrative system on the pension industry before there has
been a more in-depth analysis of the problems it raises.
There are two major areas of concern to the Treasury
Department. First, a single agency will not eliminate the
need to coordinate with the Internal Revenue Service; the
agencies will have to begin again to learn to cooperate on
a different basis. Second, reducing the role of the IRS
in determining eligibility for tax benefits may impair
equity in the tax system.
The first concern I stated arises because the private
pension system is now based on tax incentives and penalties.
Like other single agency proposals, S. 209 uses these
incentives and penalties, recognizing that the potential
loss of tax benefits may be a more effective deterrent than
the threat of injunctive relief or other action by an agency
other than the IRS. Under S. 209, the new agency would
certify the tax qualification or disqualification of a plan
to the Service. Such qualification affects issues left to
the Service, including taxation of participants on
distribution, the employer's deduction, and possibly the
assessment and collection of excise taxes under sections 4971
through 4975 of the Internal Revenue Code.
A few isolated precedents exist for certification by
another agency to the IRS for tax purposes. In general,
however, these cases involve a single factual determination
made at a single point in time. 1/ In contrast, in the area
of tax-qualified pension plans, tax qualification must be

-3based on the plan in operation. The result must be continued
certification of operational facts as affecting tax
liability; initial qualification does not suffice.
This procedure requires coordination of tax audits with
the other agency or, if all functions are transferred,
presumably an entirely separate audit of pension issues with
IRS auditors instructed not to raise such matters. If the
IRS is required to await determinations by another agency,
its ability to conclude audits of the employer and all plan
participants would be impaired. If an employer's plan fails
to be certified for a tax year in which other tax issues are
also present, and the total tax liability of the employer
must be litigated, substantial coordination of the issues
raised would be required between the IRS and the new agency.
In other words, new types of dual jurisdiction would exist.
Under S. 209, the Internal Revenue Service would not be
entitled to apply the excise tax that is now used to deter
the underfunding of pension plans. However, this valuable
enforcement tool would be available to the new agency only if
transferred to it by the President; in the absence of his
action, neither agency would be entitled to use the excise
tax deterrent. Further, such a transfer would add to the
duties of the new agency the assessment, litigation in the
United States Tax Court and collection of such taxes. These
duties are in all other cases reserved to the Internal
Revenue Service. If the bill were modified to allow the
Internal Revenue Service to impose the tax, another area of
dual jurisdiction would be established.
Furthermore, the more "certification" one places in a
single agency, the more likely it is that tax equity may be
compromised. S. 209 would transfer the Code's qualification
standards (including nondiscrimination and limits on benefits
for the highly compensated) to the new agency.
Discriminatory treatment and excessive contributions may
seriously compromise tax equity and yet may have little to do
with retirement security, as evidenced by the fact that they
are not presently a concern of the Department of Labor.
Therefore, continued IRS authority over these issues seems
appropriate.
To reiterate, the dual jurisdiction reorganization plan
developed within the Administration has important and
immediate benefits; it does not develop new problems, nor
does it weaken enforcement of employee rights. Nonetheless,
we recognize the importance of, and encourage, this dialogue
to fully examine the issues before the pension community may
again be subjected to a new form of administration.

-4Deductible Employee Contributions to Qualfied Plans
Under section 203 of S. 209, an employee who is an
active participant in any one of a number of types of
tax-favored plans may make a deductible contribution to the
plan. The deductible contribution is limited to the lesser
of 10 percent of compensation for the taxable year or $1,000.
However, deductions are not permitted for contributions by
"highly paid" employees unless an antidiscrimination test is
met.
As we have indicated in prior testimony, 2/ we are
concerned with the issues addressed by section 203 of the
bill, and we believe that consideration of the possibility of
deductions for employee contributions to all types of
retirement plans is appropriate, provided that there is
assurance of nondiscriminatory coverage and benefits, and
that the amounts deferred are not excessive.
We believe that Congress has made substantial progress
in addressing many of the related issues in this area by
enacting in the Revenue Act of 1978 the provisions relating
to cafeteria plans, cash and deferred profit sharing plans
and certain unfunded deferred compensation arrangements for
government employees. However, the issues involved in the
context of deductible employee contributions to IRAs and
retirement plans are different in terms of the impact on
qualified plans, the complexity inherent in providing
equitable solutions and the amount of revenue potentially
involved. Section 203 of S. 209 reflets a thoughtful and well
reasoned approach to this complicated problem. However,
there are a number of bills which have been or will be
proposed which also address these issues. Accordingly, we do
not wish to take a definitive position at this time regarding
the provisions of Section 203- We would like to continue to
work with you and your staff as well as other members of
Congress who have introduced legislative proposals in this
area and we hope to reach a mutually satisfactory conclusion.
Credits for New Plans
S. 209 provides a tax credit in the case of new
qualified plans. The credit begins at 5 percent in the first
plan year and ends with 1 percent in the fifth year, and is
applied to the employer's total plan contribution, up to the
deductible limit. The new plan credit is available to
employers which are "small businesses". A small business for
these purposes must have a monthly average of fewer than one

-5hundred employees, and net profits in the first credit year
not exceeding $50,000. No credit is allowed in a year during
which an employer terminates a qualified plan. The credit is
not allowed for contributions to an ESOP. It is, however,
available for contributions to Keogh plans.
According to a study appearing in the November, 1975
Social Security Bulletin, the portion of the nongovernmental
labor force covered by a retirement plan was 46.2 percent in
1975. Although that percentage was an increase from 42.1
percent in 1970, we have no reason to believe that much more
than one-half of the nation's labor force is now covered by
private pension plans. Employees working for small employers
tend to be among those who are least likely to be covered by
a private pension plan. The purpose of the bill is the
encouragement of such small employers in the establishment of
plans for their employees.
It is probably true that a major improvement in coverage
by private plans will not be accomplished within the present
framework of incentives. However, there is not to our
knowledge sufficient information about the gap in coverage so
as to be able to target tax benefits narrowly enough to
provide a substantial increase in coverage without an
unacceptably large revenue cost. Because of the number of
plans already in existence which may be replaced with a "new
plan", or which will be established by employers in any
event, there will be a substantial tax cost under the bill
even if no employer changes his or her mind as a result of
the offered credit. Although the bill provides for denial of
the credit in a year in which a prior plan was terminated,
there is no protection against termination in one year and
the reestablishment of the same program as a "new plan" in
the following year.
We are pleased that in this bill you have narrowed the
class of employers eligible for the credit. As you know, in
our testimony last year on S. 3017 we recommended considering
such a refinement, as well as considering the employees'
average pay or the amount of the assets of the employer as a
means of making the provision more effective. However,
without clearer information as to the gap in coverage and the
portions of that gap which might be affected by new
incentives, we cannot evaluate the appropriateness of the
change. Nor can we determine the need for some alternative
limitation. It is possible that employers with net income
under $50,000 are the least likely to be affected by the
proposed credit.

-6We understand that during 1979 both the Office of Policy
Planning and Research of the Department of Labor and the
Presidential Pension Task Force will be studying the make-up
of the employees not covered by any plan. We share your
desire to expand the coverage of our private pension system.
However, with the information these studies will provide, we
believe that a more direct and efficient system of
encouragements may be designed.
Master and Prototype Plans
In addition to the preceding measures designed to
encourage more savings for retirement, S. 209 would establish
mechanisms for special master plans.
The bill proposes that the master plan sponsor—the
bank, insurance company, or other investment manager—be
considered the plan administrator and named fiduciary for
purposes of Title I of ERISA. We concur in the Labor
Department's support of this part of the proposal.
As you know, the Internal Revenue Service is an
enthusiastic supporter of, and has developed several
different types of, master and prototype plans. The major
difference between S. 209 and existing IRS procedures for
master plans for corporate employers—from the perspective of
the tax law—is that under the bill employers are given the
protection normally afforded only after a determination
letter is issued without the need to apply for such a letter.
The IRS does not believe such a provision is workable unless
a plan covers all employees and has full and immediate
vesting. In the absence of this requirement, a determination
of qualification cannot be made without examination of the
employer's workforce.
The bill provides that, notwithstanding the general
qualification of the master plan, the Internal Revenue
Service may, upon audit, determine that the plan, in
operation, does not satisfy the qualification requirements.
This finding may not be retroactive unless there is also a
finding that the failure was intentional or due to willful
neglect. It is particularly difficult in the broad spectrum
of situations facing the Internal Revenue Service with regard
to plans and their qualified status to determine whether a
particular failure is due to intentional or willful neglect.
In many cases of small plans, records are unavailable and
development of proof of the willfulness required by the bill
would be extremely difficult. The effect of such difficulty
would perhaps invite many plans to take advantage of the

-7situation believing that in all probability if they were
caught they would merely be required to make a prospective
change.
The Internal Revenue Service is presently studying its
authority under section 7805(b) to selectively apply the
effects of the retroactive disqualification of a plan. This
may include the treatment of a plan as not qualified with
respect to those persons most directly involved with the
maintenance of the plan, coupled with the continued treatment
of the plan as qualified, or at least the prospective only
disqualification of the plan, with respect to those who are
innocent employees simply caught in the middle. Such
treatment has been applied with respect to a large
multiemployer plan, and should in some circumstances be
applicable in the case of a small plan.
Pending the further development of administrative
relief, it is recommended that this provision not be enacted.
Joint and Survivor Annuity
The changes proposed in S. 209 to ERISA's joint and
survivor annuity rules are highly technical. Yet they raise
broad and significant policy issues that must be addressed
before any changes are effected. Under both Title I of ERISA
and section 401(a) of the Internal Revenue Code, special
rules apply if a plan provides for the payment of benefits in
the form of an annuity. 3/ Under those rules, the annuity
benefits must be paid in the form of a qualifying joint and
survivor annuity to the participant and his or her spouse
unless the participant elects not to receive payment of the
benefit in that form. These rules apply generally where the
participant is entitled to receive benefit payments at or
after reaching normal retirement age, or at a plan's early
retirement age if it has one. The vesting rules of ERISA and
the Code provide that employer-derived benefits may be
forfeited upon the death of a participant (before or after
retirement), except in the case of a survivor annuity payable
under the joint and survivor annuity rules. Thus, the
employer-derived benefits (other than the survivor annuity)
can be forfeited even where a participant is fully vested and
dies prior to the commencement of any benefit payments.
Section 127 of S. 209 would, in substance, change the
vesting and joint and survivor annuity rules. First, the
surviving spouse of a participant in a plan normally
providing annuity benefits would be entitled to a survivor
benefit where the participant has ten years of service and

-8dies before receiving the vested percentage of his or her
employer-derived account balance or benefits.
Second, in plans not normally providing annuity
benefits, any death benefit must be paid to the surviving
spouse of the participant. No alternative is allowed.
The fundamental question is whether the vesting rule
which allows forfeiture of employer-derived benefits upon
death is a correct approach. The existence of any retirement
plan implies that employees have received reduced immediate
compensation in favor of the diversion of that compensation
into the retirement plan. It can be argued that death should
not result in the loss of the diverted compensation. On the
other hand, at least in the context of a defined benefit
plan, the diversion can be viewed as something like the
purchase of an annuity. It is not illogical to accept the
loss of future annuity payments on death, even if the
annuitant dies before any payments have been madeThe second question follows only if, as a result of
examination of the first question, the possibility of
forfeiture upon death still remains. The question then is
whether the death to be focused upon is solely that of the
plan participant or the death of the survivor of the
participant and his or her spouse. The current joint and
survivor annuity rules, in effect, mean that both deaths must
be taken into account in some situations. However, the
current rules deal with the problem in a very confused and
somewhat arbitrary manner.
The third question is whether, assuming there should be
survivor benefit requirements of some sort, the participant
should be allowed to elect against the payment of those
benefits to the surviving spouse. For example, is it
appropriate that the survivor benefits provided by the plan
be paid to the participant's spouse if the spouse has
sufficient other income, or is legally separated from a
participant who is caring for other dependents?
We believe these issues should be dealt with
specifically before this provision is adopted.
Mr. Chairman, that concludes my formal testimony. I
would be pleased to answer any questions the Committee may
have.

-9FOOTNOTES
1/ Examples of certification include, under prior law, the
Department of Commerce certifying import injury for purposes
of determining a taxpayer's entitlement to a special
five-year loss carryback established under the Trade
Expansion Act; the War Production Board certifying facilities
as war emergency facilities in connection with the special
amortization rules applicable to those facilities. Under
present law, there is a similar certification procedure with
respect to the amortization of pollution control facilities
(I.R.C. Section 169); there is also special treatment for
gain or loss under SEC orders (I.R.C. Section 1081) or FCC
policy changes for radio stations (I.R.C. Section 1071).
2/ We testified on these matters before the Subcommittee on
Oversight of the House Ways and Means Committee on February
16, 1978, before the Subcommittee on Private Pension Plans
and Employee Fringe Benefits of the Finance Committee on
March 15, 1978 and before a joint hearing of that
Subcommittee and the Subcommittee on Labor of the Human
Resources Committee on August 15, 1978.
3/ Under the Internal Revenue Service regulations
interpreting this provision, the special rules apply only
where the annuity is a life annuity. Thus, a plan's
provision for the payment of an annuity for a term certain or
for a term measured by the life expectancy of the recipient
would not, in itself, result in application of the special
rules.

FOR IMMEDIATE RELEASE

February 6, 1979

RESULTS OF AUCTION OF 8-YEAR NOTES
The Department of the Treasury has accepted $2,250 million of
$5,210 million of tenders received from the public for the 8-year
notes, Series B-1987, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 8.95%Highest yield
Average yield

9.02%
9.01%

The interest rate on the notes will be 9%. At the 9% rate,
the above yields result in the following prices:
Low-yield price 100.281
High-yield price
Average-yield price

99.888
99-944

The $2,250 million of accepted tenders includes $366 million of
noncompetitive tenders and $1,884 million of competitive tender from
private investors, including 52% of the amount of notes bid for at
the high yield.
In addition to the $2,250 million of tenders accepted in the
auction process, $931 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 February 15, 1979.

1/

Excepting 4 tenders totaling $30,000

B-1389

February, 1979

BIOGRAPHICAL NOTES
C. FRED BERGSTEN
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
C. Fred Bergsten, 37, of Annandale, Va., has been
Assistant Secretary of the Treasury for International
Affairs from the outset of the Carter Administration. In
that position, Dr. Bergsten has responsibility for the
formulation and execution of a wide range of U.S.
international economic and financial policies.
Dr. Bergsten graduated magna cum laude in 1961 from
Central Methodist College in Missouri. He received M.A.,
M.A.L.D., and Ph.D. degrees from the Fletcher School of
Law and Diplomacy, where he majored in international
economics and international relations.
Dr. Bergsten was a Senior Fellow at the Brookings
Institution from 1972 until joining the Carter/Mondale
transition team, where he was in charge of all aspects
of international economic policy, and then the
Department of the Treasury. He was a Visiting Fellow
at the Council on Foreign Relations during 1971-72 and
1967-69; Assistant for International Economic Affairs
to Dr. Henry A. Kissinger at the National Security
Council during 1969-1971; and an International Economist
at the Department of State during 1963-1967.
Dr. Bergsten is the author or co-author of nine books
and more than sixty articles on a wide range of international
economic and monetary subjects. His The Dilemmas of the
Dollar: The Economics and Politics of U.S. International
Monetary Policy was published by the Council on Foreign
Relations in early 1976. His latest volume, American
Multinationals and American Interests, was published in mid1978 by the Brookings Institution.
B-1390

- 2 -

Among his many honors, Dr. Bergsten is listed in
Who's Who in America and was named one of Time Magazine's
"200 Young American Leaders" in 1974. While at Brookings,
he was a frequent witness before Congressional committees,
testifying on such subjects as international monetary
reform, overall U.S. foreign economic policy, commodities,
trade, and international financial institutions.
Dr. Bergsten was born on April 23, 1941, in Brooklyn,
New York. He is married to Virginia Wood Bergsten. They
have a son, Mark David.

TON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
February 7, 1979

STATEMENT OF THE HONORABLE ROBERT H. MUNDHEIM
GENERAL COUNSEL OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TRADE
HOUSE WAYS & MEANS COMMITTEE
Mr. Chairman and Members of the Trade Subcommittee:
I am appearing this morning in support of the Administration's request that the Congress extend for a brief period
the authority of the Secretary of the Treasury to waive
temporarily the imposition of countervailing duties in
selected cases.
The authority to waive countervailing duties was included
in the Trade Act of 19 74 so that during the 4-year period
following its enactment, the Administration would be able to
conduct talks with our trading partners in an atmosphere conducive to reaching agreement on an international regime to
regulate the use of subsidies.
Governmental subsidies to domestic industries are an
increasingly important phenomenon. As Congress recognizes,
the best hope for preventing such subsidies from distorting
trade patterns lies in international agreement. Ambassador
Strauss has brought us close to successful conclusion of this
difficult task.
Unfortunately, it was not possible to conclude the
negotiations among a great many participants within the four
years originally foreseen by the Trade Act. Thus, the bill
before you has the very limited purpose of extending the
waiver authority for the brief period during which the negotiations
will be concluded. It does not commit you in any way to the
B-1391

-2substance of the MTN negotiations. You and your colleagues
in the House and Senate will have a full opportunity to review
what has been negotiated. In other words, the bill is intended simply to preserve the status quo for about 10 months.
Doing so helps make possible the conclusion of agreements
which will significantly benefit the United States.
When the waiver expired on January 2, orders that we had
published in December suspended final liquidation of imports
of the merchandise affected and required importers to deposit
estimated duties, provide bonds to cover those duties, or post
equivalent irrevocable letters of credit. Thus, if the waiver
is not extended, the revenue will be fully protected. However, if, as contemplated in this bill, the waiver authority
is extended, there will be no problem in making that extension
retroactive.
There are presently 12 waivers in effect. Attached to
my testimony is a chart showing all of the waivers granted
under the law, the subsidy initially found and any amount remaining at this time. As you will see, in some cases, such
as those involving Mexican steel or Brazilian handbags, there
has been a complete elimination of the subsidy so that a
revocation of the initial countervailing duty order was or is
now appropriate. In the other cases, the bill would extend
the waivers retroactively to January 3.
In addition, the bill would grant the Treasury authority
to waive countervailing duties during the remaining pendency
of the negotiations and Congressional consideration of the MTN
package. In two cases decided before the expiration of our
waiver authority -- concerning textiles from Brazil and fish
from Canada — we indicated that a waiver would be granted if
such authority existed at the time that the ITC has completed
its consideration of the case. There may also be one or two
additional cases presently under consideration in which the
subsidizing country may agree to significant reductions of
its subsidy practices and is playing a significant role in
the MTN negotiations so that a waiver might be appropriate.
However, we anticipate that throughout the remaining life of
the waiver authority, we would exercise the waiver authority
pursuant to the same terms and conditions as this Administration
has applied to the waivers granted — subject, always, of
course, to Congressional reporting and review. That course
should assure us and our trading partners that the remaining
months of the negotiations are not troubled by what may be
regarded by some as a needlessly provocative or unfriendly
act.

-3Finally, we will continue to review the waivers that
are now outstanding. The current bill contemplates that we
would revoke any waiver where changes in conditions under
which it was granted warrant such action. We have taken such
action in the past and would do so in appropriate circumstances
in the future.

o o o

Switzerland

1/8/76

COUNTERVAILING DUTY ACTIONS INVOLVING WAIVERS
Subsidy on
Publication
Subsidy on
Product
Feb.
1, 1979
Reference
Date of Waiver
Unchanged
Varied
Dairy Products
40 FR 21720
16.5-20 Units of
25-30 Units of
Canned Hams
40 FR 55639
Account per 100 kg Account per 100 kg
§.76/ton
Zero
Steel Plate
41 FR 1273
Soft cheese,
^
Cheese
41 FR 1275
$.02-$.40/poundl
Zero
Hard cheese,
I
$.20-$.33/poundJ
$.60-$.96/pound
$.40-$.65/pound
Cheese
41 FR 1468

Korea
Norway

1/9/76
5/27/76

41 FR 1587
41 FR 21767

Rubber Footwear
Cheese

0.7% ad valorem

Finland

6/18/76

41 FR 24703

Cheese

$.30-$1.70/pound

Sweden
Brazil

7/1/76
7/13/76

41 FR 27032
41 FR 28787

Cheese
Leather Handbags

$.40-$.50/pound
14% ad valorem

Canada
Denmark
Uruguay

4/12/77
1/5/78
1/30/78

42 FR 19327
43 FR 955
43 FR 3904

Fish
Butter Cookies
Leather Handbags

17% ad valorem
30% ad valorem

Uruguay

1/30/78

43 FR 3904

23%

Colombia

4/24/78

43 FR 18659

Non-Rubber
Footwear
Leather Handbags

Uruguay

6/1/78 43 FR 23709 Leather Apparel 12% ad valorem

Canada
Brazil

6/16/78
43 FR 25995
11/16/78,0,43 FR 53425

Fish
Textiles and
Apparel

17% ad valorem
37.2% ad valorem

Canada

12/29/78 44 FR 1728

Fish

1.17% ad valorem

EEC
EEC

Date of
Waiver
5/19/75
12/2/75

Mexico
Austria

1/7/76
1/7/76

Country

$.20-$.50/pound

17.4% ad valorem
ad valorem

5.5% ad valorem

Unchanged
Hard cheese-Zero
Soft cheese-Unchanged
Zero on emmenthaler

Remarks
Subsidy Increase
occurred 12/78
Finding revoked

Finding soon to
be revoked
Increase due entirely
to currency changes

Finding on emmenthaler
wheels) soon
6ffiI?i?5Y?ff1|\.66/lb. £oexcept
be revoked
Unchanged
Finding soon to
Zero
be revoked
1.17% ad valorem
Unchanged
Waiver revoked, liqui14.4%
ad valorem
dation suspended
Waiver revoked, liqui16.0% ad valorem
dation suspended
Finding soon to
Zero
be revoked
Waiver
revoked, liqui13.3% ad valorem
dation suspended
1.17% ad valorem
Remaining subsidy to be
17.0%
ad valorem
eliminated by 1/1/80
Unchanged

apartment of theJREASURY
TELEPHONE 566-2041

ON, OX. 20220

FOR IMMEDIATE RELEASE

February 7, 1979

RESULTS OF AUCTION OF 29-3/4-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF FEBRUARY FINANCING
The Department of the Treasury has accepted $2,001 million of the
$4,304 million of tenders received from the public for the 29-3/4-year
8-3/4% Bonds of 2003-2008, auctioned today. The range of accepted
competitive bids was as follows:
Approximate Yield
To First Callable
To
Price
Date
Maturity
High
Low
Average -

97.40
96.90
97.05

9.01%
9.06%
9.05%

9.00%
9.05%
9.03%

The $2,001 million of accepted tenders includes $ 62 million of
noncompetitive tenders and $1,939 million of competitive tenders from
private investors, including 45% of the amount of bonds bid for at the
low price.
In addition to
process, $ 800
from Government
in exchange for

the $2,001 million of tenders accepted in the auction
million of tenders were accepted at the average price
accounts and Federal Reserve Banks for their own account
securities maturing February 15, 1979.

SUMMARY RESULTS OF FEBRUARY FINANCING
Through the sale of the two issues offered in the February financing,
the Treasury raised approximately $1.3 billion of new money and refunded
$4.7 billion of securities maturing February 15, 1979. The following table
summarizes the results:
New Issues
Maturing
Net New
9% Notes
8-3/4% Bonds
Securities
Money
2-15-87
11-15-03-2008
Total
Held
Raised
Public
Government Accounts
and Federal Reserve
Banks
TOTAL $3.2

B-1392

$2.3

$2.0

$4.3

$3.0

Q.9

0.8

1.7

1.7

$2.8

$6.0

$4.7

$1.3

$1.3

FOR RELEASE ON DELIVERY
EXPECTED AT 3:00 P.M.
February 7, 1979

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS

Mr. Chairman and Members of this distinguished Committee:
I am pleased to appear before you today to discuss the
activities of the Treasury Department under the New York
City Loan Guarantee Act. My testimony this afternoon will
cover the following major areas:
-- A brief review of the fiscal crisis.
-- The City's financing plans — how the four-year
$4.5 billion long-term financing program has
been implemented and the circumstances under
which Treasury has issued guarantees.
-- The City's budget condition and budget outlook —
our assessment of the current fiscal year, and
prospects for fiscal 1980 and the 1981-1982 period.
A Brief History
Mr. Chairman, I'd like to put t>is issue into some
perspective by briefly reviewinq the history of the New York
City fiscal crisis. The City has made considerable progress
since 1975, but that progress often is obscured by local
political controversies.
B-1393

- 2 This crisis erupted in 1975 when the City lost access
to conventional sources of borrowing and teetered on the
edge of bankruptcy. It lost its ability to finance because
it was incurring enormous budget deficits and had borrowed
huge amounts of debt to finance them. Lenders had lost
confidence in its ability to repay.
Those budget deficits reflected years of unsound budget
practices and, in part, the severe national economic downturn
of 1975. In addition, its books were unauditable and its
financial reporting systems were not fuctioning.
The State of New York then undertook massive efforts to
solve the City's fiscal problems. Among other things, it
established the Municipal Assistance Corporation, the
Financial Control Board and advanced $800 million to the
City. It was not until Congress passed the New York City
Seasonal Loan Act of 1975, however, that the City was
actually saved from apparent bankruptcy.
In the intervening three and a half years, New York has
made major financial strides, including:
-- Its operating deficit has bean halved, and the
recently presented 1980 budget plan will reduce
that deficit to approximately one-third of the
1975 level.
-- The overhang of short-term debt has been funded.
Indeed, its short-term borrowing needs have bee"
cut from as high as $8 billion to the current
year's $750 million.
-- The City has been independently audited for the
first time and now is one of the few major U.S.
municipalities to maintain a policy of independent
audits.
— It re-entered the public credit markets last month
for the first time since 1975. The $125 million
note sale was oversubscribed by investors, and these
securities are now selling at a healthy premium.
— A $4.5 billion long-term borrowing plan has been
completed — the largest in municipal financing
history — and is expected to cover the City's
needs for the 1979-1982 period. A consortium of
local commercial banks, savings banks, insurance

- 3 companies and the City employee pension funds has
provided the core commitment to this plan.
Mr. Chairman, the City has met each of its budget goals
and otherwise made considerable progress since Federal
credit assistance was first provided in late 1975. We
continue to believe that the outlook for achieving real
budget balance and regaining full market access is good.
The Relationship of the Guarantee Act to the City's Financing
Plans
Last June, before this Committee, Treasury argued f^r
long-term Federal lending assistance for New York. We did
not think that its solvency could be assured otherwise.
This Committee and the overall Congress, of course, eventually
agreed and passed the New York City Loan Guarantee Act of
1978.
Both Treasury and Congress favored, however, a series
of budget and financing conditions, which should be satisfied
before any Federal guarantees were issued. Let me turn now
to a discussion of those financing conditions, and how they
have been met. I will discuss the budget conditions later.
Our support for Federal guarantees last year was
predicated on three key conditions:
-- That a financing plan be implemented to satisfy
all of the City's short and long-term borrowing
needs over the 1979-1982 period.
— That the relevant local lending parties —
clearinghouse banks, City employee pension funds,
and others — would make large, new, unguaranteed
long-term lending commitments to this plan.
— Federal guarantees would be issued only to the
extent that public and private lenders do not provide
the necessary funds on an unguaranteed basis. Our
hope was to avoid issuance of guarantees in the
later years of the Financial Plan.

- 4 As indicated below, Congressional support for these
conditions was made clear in Committee reports and throughout the legislative history. I would now like to discuss
the Guarantee Act and how these conditions which underlie it
were satisfied in assembling last fall the City's short- and
long-term financing plans.
The Act itself, of course, authorized the Secretary of
the Treasury to issue, over a four-year period, up to $1.65
billion of Federal guarantees of long-term City debt sold to
the City and State employee pension funds. Before issuing
any such guarantees, however, the Act requires the Secretary
to "find" that a series of these conditions have been met.
The crucial findings relative to financing include:
-- That there exists a four-year financing plan
which will satisfy the City's short- and longterm needs over the four-year period and return
New York to full market access by 1982, assuring
that the Financing Plan remains intact.
— That the City is eligible for guarantees because
it does not have access to credit elsewhere,
maximizing local participation in the financing.
y

—

That there exist sufficient prospects for repayment
of the guaranteed debt.
Once the Guarantee Act actually became law, negotiations
began in earnest over the requisite short- and long-term
financing plans. Let me briefly describe how these evolved.
First, the City, the Financial Control Board and
Treasury agreed that $4.5 billion was the correct amount of
long-term financing which should be sought over the fouryear period. This was divided as follows:
Table I
19 79-1982: Uses of Long-Term Funds
Purposes Amount ($ in Millions)
True Capital $2,300
Capitalized Expenses
Bonding of State Advance
MAC Capital Reserve Fund
MAC Refunding

900
400
300
600
$4,500

- 5Second, MAC, the City and Treasury sought the maximum,
unguaranteed long-term lending commitments from the local
parties. In addition, commitments on appropriate amounts of
accompanying public sales of MAC and City bonds over the
plan period were sought.
After three months of arduous negotiations, a long-term
borrowing plan, with the following major characteristics,
emerged:
— A consortium of the Clearinghouse banks, local
savings banks, insurance companies and the City
employee pension funds agreed to purchase $1.8
billion of MAC Second Resolution bonds over the
four-year period,
-- MAC agreed to sell publicly $1 billion of identical
Second Resolution bonds in 1979 and 1980.
— The City committed itself to use its best efforts to
sell $300 million of its own bonds in 1981 and $650
million in 1982.
— The City and State employee pension funds agreed
to divide equally between them a total purchase of
$750 million in federally guaranteed City bonds in
1979 and 1980. They also provided a stand-by
commitment to purchase $950 million of guaranteed
bonds in 1981 and 1982, if neither MAC nor the
City can sell that amount in those years.

- 6 Table II below provides a detailed year-by-year
breakdown of this long-term financing plan.

Table II
NEW YORK CITY
Long-Term Financing Plan FY 1979-1982

($ in Millions)
Source of Funds 1979 1980 1981 1982 Total
Private Placement
of MAC Bonds

$

401

$

537

$

537

$

325

$1,800

Public Offering
MAC Bonds
City Bonds

500
0

500
0

300 l\

650 /l

Federal Guaranteed
City Bonds

500

250

0

0

750

$1,401

$1,287

975

$4,500

Total

/l

$

837

$

1,000
950

Backed up by stand-by guarantee authority up to $900 million
if City and/or MAC bonds cannot be sold.

- 7Treasury's judgment is that this plan is sound. In
particular, we beliftve that the $1.8 billion in private
lending commitments is firm. It is subject only to a
limited number of conditions. While it would be preferable
to avoid any such conditions, this is impossible because
of the lenders' own fiduciary responsibilities to their
respective stockholders and beneficiaries. The participating
institutions are all affected to varying degrees by the
prudent man rule, as well as by investment standards overseen
by State and national regulatory agencies.
These private lending commitments, and the accompanying
guarantee agreements, are embodied in a series of lengthy,
technical documents, as follows:
— The Agreement to Guarantee (among the United States,
New York City, New York State, the Financial Control
Board, and MAC) authorizes the Secretary of the
Treasury to guarantee, pursuant to the Act, up to
$1,65 billion of City bonds. It specifically requires
that each of the conditions of eligibility under
the Act be satisfied each time guarantees are issued.
— The Guaranteed Bond Purchase Agreement (among the
United States, New York City and New York State
pension funds, and New York City) sets forth the
schedule of purchases to be made by the pension
funds of guaranteed bonds pursuant to the City's
financing schedule.
— The MAC Bond Purchase Agreement (among MAC, the
participating commercial banks, savings banks,
insurance companies and City pension funds)
establishes the conditions whereby the financial
institutions and pension funds commit to purchase
$1.8 billion in MAC securities through City FY 1982.
-- The Loan Agreement (among the City, the commercial
banks and City pension funds) which provided the
City with a line of credit for its seasonal financing
needs in FY 1979.

- 8 The City's Short-Term Borrowing Plan
The City also negotiated a $750 million 1979 line of
credit, supplied in equal amounts by the clearinghouse banks
and the City employee pension funds. This assured that its
seasonal needs could be fully satisfied this year, even if
the public note market was not available to the City.
Our judgment last fall was that the City did not need
to negotiate seasonal lines of credit beyond 1979. New
York's financial advisor, Dillon Read & Co., Inc., rendered
its opinion that the City could obtain its full short-term
needs from the public markets in 1980,' 1981 and 1982, assuming
that budget goals are met and that those markets are in
reasonable condition. In addition, we expect the banks and
City employee pension funds to renegotiate the lines of
credit on an annual basis, as a backstop.
The recent successful note offering reinforces the
likelihood that New York will be able to sell publicly the
needed amounts of notes beyond 1979. Its first public sale
in almost four years was completed a full year ahead of the
schedule set forth by the City last year. I recognize the
importance, Mr. Chairman, that you place on the City's
return to the public credit markets in a rapid and effective
a manner as possible. We share this objective. We think
the initial acceptance of the City's securities by the
credit markets, the rating services, underwriters and
investors is a recognition of the progress the City is
making.
Neither the Act nor Treasury's Agreement with the City
require it to re-enter the public bond market before 1981.
The recent note sale is encouraging and we hope that the
City will undertake a bond offering before 1981, if it is
possible. The City's re-entry into the bond market is more
difficult
than
its entry into the note market.
Issuance of
Guarantees
Our judgment is that this long-term financing plan, and
the accompanying private lending commitment, satisfies the
expectations of the Act concerning an overall plan for
financing all of the City's need through 1982 and concerning
maximum financing efforts by the relevant local parties.

- 9 I hope it is evident to this Committee that Treasury worked
diligently to ensure that the financing agreements met those
requirements.
On November 17, 1978, the Treasury, on behalf of the
United States, issued $200 million cf the $500 million in
guarantees scheduled to be issued in the City's 1979 fiscal
year. Treasury determined that all conditions of eligibility
set forth in the Act were met at the time of this issuance,
and your staff has reviewed the extensive documentation
which Treasury developed in this regard.
The United States has already received its first
payment from the City of the 1/2 percent guarantee fee
provided under the Act. This fee amounted to approximately
$123,000. This guarantee fee is payable quarterly under the
terms of our Guarantee Agreement with the City.
The City and the State have requested that we issue an
additional $150 million in guarantees on February 15, 1979.
We will ensure that the financing, budget and other conditions
in the Act are met by the City in this and all subsequent
take-downs.
The New York City Budget Oijtlook
Let me turn now to a discussion of the City's budget
outlook. This is the most important element in the
New York City situation, Mr. Chairman. New York originally
lost its ability to borrow because it was incurring high
budget deficits. In turn, the key to fully regaining that
ability is to achieve true budget balance. As you know, the
City's financial plan is aimed at true balance by 1982.
New York has implemented a four-year financial planning
process. In January of each year, it submits to the Financial Control Board a plan for closing the next fiscal year's
budget gap. The plan also includes estimates of revenues
and expenditures for the following four fiscal years, and
projected City, State and Federal actions to close any gaps
in those years. This four-year planning process itself
represents a major step forward for the City.

- 10 Like any large financial entity, the City revises its
financial plan frequently, to reflect changed trends in any
major revenue or expenditure category. No particular plan
should be viewed too rigidly, because such changes are
normal and inevitable. Furthermore, each revision must be
approved by the Financial Control Board before it can become
effective.
As you know, Mr. Chairman, the City submitted its most
recent Financial Plan on January 15. Treasury staff has
carefully studied it together with our accounting consultants
Arthur Andersen and Company — and in consultation with
other City monitoring groups. Our preliminary observations
on these most recent budget plans are as follows:
1979 Budget
The City's budget for the 1979 fiscal year appears to
be balanced in accordance with State law. The most recent
1979 budget modification was submitted January 15, 1979. It
involved a net increase of $17 million in revenues matched
by a corresponding increase in expenses.
The largest element of 1979 gross revenue loss is the
transfer of the estimated $80 million of Westway revenue
from fiscal year 1979 to fiscal 1980. It is worth noting
that instead of using these Westwav proceeds to reduce the
projected 1980 gap, the City has chosen to use this nonrecurring revenue as a reserve for 1981 wage settlements, a
decision with which we fully concur. To compensate partially
for the loss of Westway revenues, the unallocated portion of
the general reserve has been reduced from $100 million to $70
million.
The 1980 Gap Closing Program
On January 15, the City also submitted its fiscal 1980
Program to Eliminate the Gap ("PEG"). This is a detailed
program for eliminating the estimated $433 million potential
1980 budget deficit. It is not, however, an actual budget
submission. The 1980 City budget will not be submitted to
the City Council and Board of Estimate until May 1.

- 11 The table on the following page summarizes the 1980 PEG
program and certain aspects of the budget outlook for the
1980-1983 period.
As I indicated, the 1980 budget deficit is estimated at
$433 million — virtually identical to the amount projected
by the City last November. To put this estimate in perspective,
it is useful to remember that the City's total 1980 revenues
are estimated at $12.5 billion. The projected gap, therefore,
represents approximately 3.5 percent of projected revenues.

- 12 Table III
Revised Four-Year Financial Plan ($mm)
1980 1981 1982 1983
Estimated Gap (a) ($433) ($889) ($1,172) ($1,224
1980 City Actions
"Level I Program":
Attrition;
Uniformed Services
Health and Welfare
Other Mayoral Agencies
Board of Education
Non-Mayoral Agencies
Sub Total;
Other Actions:

14.3
16.4

9.3
83.3
17.7

141

15.8
17.6
10.0
89.5
19.1

152

Reduced Procurement (b) 23 23 23 23
Reduced Reserve on
Disallowances (b)
25
25
Increased Fees (b)
9
9
Future Program Reductions
and Tax Increases
—
79
Proposed Special Reserve (b)
(57)
—
Net Level I
"TO
TBI
Adjusted Gap After Level I (292) (601) (864) (896)
Projected State Aid Increases 192
Projected Federal Aid
Increases

15.8
17.6
10.0
89.5
19.1

15.6
17.6
IC.O
89.5
19.1

152

152

25
9

25
9

99
—
308

119
—
328

65

65

100

"Level II Contingency Program"
Further Attrition in Above
Categories
Remaining Gap After City Level
I and Level II Actions

52
($240)

Elimination of Special Reserve 57(b)
Needed Increases in State and/
or Federal Aid

183

Recurring State and/or Federal
Aid

65
($536)

($799)

($831)

18

183

201

201

$335

$598

$630

Projected City Actions
for Future Years to
Eliminate Remaining
Gap

(a)
(b)

_II

Does not make provision for increased labor costs in 1981/1982.
The City has proposed that a special reserve for contingencies
of $57 million generated by other action Level I savings be
established in addition to the $142 million general reserve
already in the 1980 budget.

- 13 Mayor Koch is proposing to close the $433 million gap
through: (1) $141 million in "Level I" City deficit
reduction actions — after giving effect to funding a
proposed $57 million special contingency reserve — ;
(2) $192 million of increased State aid; and (3) $100
million of increased Federal aid. He has also set forth
a "Level II" contingent plan involving $52 million of
further deficit reduction actions at the City level. His
position is that Level II will be implemented if there are
shortfalls in anticipated State and/or Federal aid.
Let me now turn to a detailed discussion of the City's
1980 budget Plan.
City Deficit Reduction Actions
Level I is divided into two parts. The first is an
attrition program aimed at saving $141 million by cutting
6,033 City-funded jobs — 3.6 percent of the current work
force. These jobs would be eliminated permanently and,
therefore, the amounts saved would recur in subsequent
years. Indeed, it is crucial that all the 1980 deficit
reduction actions involve recurring savings, in light of
the large potential gaps in 1981 and 1982.
The City's gross attrition rate recently has been
running at considerably higher rates than 3.6 percent,
and our judgment is that net attrition in this range
should be possible. Specifically, approximately 60
percent of the proposed 1980 attrition plan involves
teachers in the school system. In turn, this reflects
a projected decline in enrollment of approximately 45,000
students. Enrollment is declining this year at an
annualized rate of approximately that amount, and
demographic factors indicate that such reductions probably
will continue.
There are two uncertainties, however, regarding the
Level I attrition plan. The first stems from the changes
which the 95th Congress made in the CETA program. These
may require the City to phase out up to 3,000 CETA-funded
jobs by October 1, 1979. In turn, this will make attainment of the 1980 net attrition goal more difficult. To
offset this risk, the City has increased its $100 million
general reserve by approximately $50 million annually,

- 14 through 1982, to compensate for any shortfalls in CETA
funding and the related costs of personnel transfers.
These reserve provisions may make unnecessary the
proposed $57 million additional special reserve generated
by the second part of the Level I.
The second uncertainty simply concerns the implementation
of this attrition program. We have not received a plan
detailing the necessary administrative actions. Treasury
requested detail on the City's attrition control plans,
as well as quarterly reports on their progress.
The second part of the Level I program involves $57
million of deficit reduction actions, other than attrition,
principally as follows:
— Reduction of $23 million in previously budgeted
procurement of equipment and supplies. Last
year, actual spending on procurement was
approximately $200 million below budget. Shortfalls are continuing this year and probably will
substantially exceed this $23 million figure.
Nevertheless, we are awaiting sufficient detail
on the implementation of these reductions in
procurement.
— Increases in licensing fees and other revenues
of $9 million.
— A $25 million reduction in the reserve against
disallowed claims against the State and/or
Federal Government. The City has a $400 million
accumulated reserve in this category, and recent
disallowances have been small. Treasury staff
and Arthur Andersen believe, therefore that this
proposed reduction in the 1980 reserve is
acceptable.
Level II involves net attrition of 2,842 more Cityfunded jobs to save $52 million. This additional attrition
primarily would occur in agencies largely untouched by the
Level I attrition program. In particular, 40 percent of
the further attrition would occur in the police, fire,
sanitation and corrections departments. Again, the rates
of gross attrition in these and the other affected agencies
is sufficiently high to permit these amounts of net attrition.

- 15 Treasury's judgment is that the City actions involved
in this overall $250 million program are generally sound.
The attrition-related steps account for 77 percent of the
total savings and these obviously involve recurring savings.
The remaining steps are somewhat less permanent, but also
can be recurring.
Increases in 1980 State Aid
Governor Carey has consistently supported increases
in State aid in amounts necessary to help close New York's
budget gaps. By any standard, his record of providing
needed assistance to the City — State fiscal relief arid
otherwise — is solid.
As noted earlier, the City's 1980 PEG program projects
another major increase in State aid for that year, i.e.,
$192 million. Governor Carey's position is that: (1) the
State's Executive Budget, which was released last week,
includes increased aid to the City of approximately $100
million; and (2) that he will support further increases via
supplemental appropriations, to a total of $200 million, if
the City cannot otherwise balance its budget.
<[

:

City and State officials are continuing to debate the
recently submitted State budget. They have not yet reached
agreement on the exact amounts of increased aid which are
contained in it. Treasury is awaiting their, conclusions and
is continuing with its own analysis.
It is clear, however, that the State has the financial
capacity in 1980 to provide up to $200 million in increased
aid to the City. It also is clear that the combination of
proposed changes in the aid-to-education formula and further
City savings from the State take-over of the supplementary
security income program will involve major budget relief for
the City in 1980, leaving aside other State actions which
also are likely. Finally, Governor Carey's commitment on
increased amounts up to $200 million also seems firm.
We have concluded, therefore, that a major increase in
1980 State aid to New York can be expected. Governor Carey's
representatives have informed us that the minimum increase
will approximate $100 million and that the Governor will
support larger amounts, if they are needed. This compares to
the $192 million of total State and Federal aid, which is
needed after the Level I and Level II City actions.

- 16 Federal Aid to New York City
Treasury's preliminary analysis indicates that the
Carter Administration's 1980 budget proposes to increase
total Federal aid to the City by approximately $200 million.
This does not include a major increase in welfare and
medicaid entitlements.
With the exception of the Administration's proposal on
countercyclical revenue sharing, however, none of the
components of this overall increase involve unrestricted
fiscal assistance — aid available to close budget deficits.
In fairness, certain increases in categorical aid may
involve some savings to the City, and the Administration
also is working on a series of administrative actions
involving fiscal relief. Indeed, we will do our best to
pass the proposed countercyclical aid program, although it
involves non-recurring revenue and to complete other Federal
actions which will help close the 1980 deficit.
Yet, at the moment, there is not sufficient evidence to
conclude that any of the proposed Federal steps can be
counted on to provide recurring budget relief to the City.
Treasury Conclusions on the 1980 PEG Program
Treasury's study of the City's latest four-year financial
plan has primarily addressed two questions: . (1) whether the
1980 plan will result in budget balance (as defined under
State law); and (2) whether the 1980 plan represents "substantial progress" toward the ultimate goal of true balance by
1982. The Guarantee Act requires the Secretary to "find" in
the affirmative on these questions before further guarantees
can be issued.
In view of the City's current estimates of 1980 revenues
and expenditures, our preliminary conclusion is that the PEG
plan will result in balance (as defined), provided Levels I
and II of City actions (or equivalent measures) are implemented and reflected in the City's Executive Budget.
The magnitude of the projected deficits for 1981 and 1982
combined with uncertainties about increasing levels of
Federal and State aid, the 1980 wage negotiations, the
impact of changes in the CETA program on the attrition
goals, and the feasibility of City actions relating to the
Board of Education and Health and Hospital Corporation, make

- 17 it clear that both sets of City actions are needed.
Our preliminary conclusion on the 1980 budget plan also
is conditioned upon the City's supplying us and the Financial
Control Board with details concerning the administrative
steps required to implement the Level I and Level II programs.
These will permit Treasury to monitor their implementation
and to determine periodically whether additional actions
will be necessary or whether rescission of planned cuts is
feasible.
Let me turn now to the second key .question surrounding
the latest Financial Plan, i.e., are the 1981 and 1982
potential deficits manageable, or is the overall budget
program too backloaded?
The 1981/1982 Budget Outlook
At the moment, Mr. Chairman, it appears that the 1981
and 1982 budget goals will be more difficult to meet than
the 1980 target. Specifically, as Table III indicates, the
potential deficits in those years approximate $540 million
and $800 million respectively. Moreover, while these
estimates assume that 1980 Level I and Level II City actions
are fully implemented and recurring, they do not assume any
labor cost increases in those years. As you know, the
City's existing labor contract expire in mid-1980.
It is not possible to know today whether such gaps will
materialize or, if so, how they will be closed. A judgment
on whether deficits of that size can be closed depends on an
assessment of (1) whether gaps of this size are really
likely; (2) whether the City has the capacity to make
further large cuts and; (3) what can be expected on State
and Federal aid.
Treasury has assessed these factors in a preliminary
manner and has concluded that the City's prospects for
meeting its 1981/1982 budget targets are reasonable. Let me
turn to a brief discussion of these key factors:

- 18 -

City Actions Beyond 1980
The latest Financial Plan proposes a series of City
deficit reduction actions for 1981 and 1982. Mayor Koch
already is committed to several of these — the revenue
increasing actions <— and has outlined a series of contingent
expenditure reduction actions. These include the following:
-- The major City revenue raising action in 1981 and
beyond relates to a change in the real estate tax payment
schedule from quarterly to semi-annually. The City projects
this change will save $32 million in each of the three years
by primarily reducing seasonal loan requirements and attendant
costs. This is a reasonable program and the savings would
be of a recurring nature.
— A second real estate tax action, limiting veterans
exemptions, would yield approximately $7 million of annual
recurring revenues to the City. Again, this change would
require legislative action but the increases appear reasonable.
— The City also has proposed a series of further
expenditure reduction steps for the 1981/1982 period. These
are primarily composed of further reductions in the Board of
Education budget due to lower entrollment and stepped up
attrition in most other City agencies. The remaining actions
involve further restraint in the procurement budget and
various management improvement programs.
This program of City actions is similar to the contingency plan outlined by the City on October 6, 1978, which
was subsequently approved by the FCB on November 9. More
detail is required, of course, before those future City
actions can be fully evaluated.
It is unlikely, however, that New York can rely solely
on actions like these and on personnel actions to make the
needed 1981 and 1982 cuts at the City level. Our view is
that Mayor Koch must begin to undertake structural reforms
of the City's expenditure base. These should involve the
hospital and transit systems, as well as other major functions
which New York cannot fully afford any longer.

- 19 Other Reasonable Assumptions
The potential 1981 and 1982 deficits estimated in Table
II reflect very conservative revenue and expenditure assumptions,
except in the area of post-1980 labor cost. To put these
assumptions into reasonable perspective, it is useful to
consider a series of other factors which could affect the
City's budget and which are not,reflected in the current
Financial Plan. Let me cite a few of these factors.
Non-Recurring Revenues
Presently, the City's baseline projections make no
provision for non-recurring revenues. This is a fiscally
prudent practice which makes sense for planning purposes.
Yet, it ignores the historical perspective. Arthur Andersen
and Company has prepared an analysis indicating that since
1975 , the category of non-recurring revenues has averaged
$200 million per year. It is likely that such benefits will
continue and that, as a result, the actual 1981 and 1982
deficits may be smaller. A reasonable portion of this might
be included in the out years to facilitate the City's
ability to balance its budget.
Underspending
In 1978, City expenditures fell short of budgeted
amounts by approximately $200 million. There are indications
that this "underspending" has continued into, fiscal 1979 —
just as Federal spending shortfalls occurred in 1977 and
1978.
We have asked the City to accelerate its analysis of
this phenomenon to permit a detailed comparison of actual
audited results to the FY 1978 budget. This would enable
the City to prepare baseline projections on actual rather
than prior budget figures and would identify the specific
areas where underspending has occurred. In particular, it
would help determine whether savings from this source will
continue over the plan period.

- 20 State Aid
Another large variable in the City's plans to close its
budget gaps in fiscal years 1981-1982 is the outlook for
State aid in those years.
The City presently projects an increase of $200 million
in 1980 State aid and that this amount be recurring through
1982. Recent conversations with State officials, however,
indicate that these figures may be conservative. Aid to the
City may well increase by larger amounts, particularly in
the categories of aid to education and State revenue sharing.
Any greater growth, of course, would reduce the deficit
estimates discussed earlier.
Summary
In summary, though we are concerned with the prospects
for 1981 and beyond, it is not unreasonable to assume the
City will be able to balance its budget as required by the
Loan Guarantee Act. In addition, Treasury and the Financial
Control Board have asked the City to submit in May of this
year its program to close the 1981 gap. This will give us
more lead time to evaluate the City's prospects for 1981 and
1982.
Let me close by emphasizing that the City has shown the
willingness and wherewithal to take whatever steps necessary
to meet its statutory budget requirements. Mayor Koch's
commitment to continuing this record is clear. Governor
Carey remains committed to the City's solvency, as is our
Administration. We are satisfied, therefore, that the City,
the State and other interested parties, are making the
maximum effort to solve the City's fiscal difficulties.
This concludes the prepared portion of my testimony.
I will be pleased to respond to any questions at this point.
Thank you.

o 0 o

FOR IMMEDIATE RELEASE
Thursday, February 8, 1979

Contact:

Alvin Hattal
202/566-8381

TREASURY CALLS FOR EDUCATIONAL CAMPAIGN
ON DRINKING BY PREGNANT WOMEN
The Treasury Department today called for a broad educational
campaign to alert the public to the risks of alcohol consumption
by pregnant women.
Treasury said it would work with other Federal agencies,
including the Food and Drug Administration and the National
Institute on Alcoholism and Alcohol Abuse, the alcoholic
beverage industry and other interest groups to develop a program to raise the current level of awareness about this problem.
Richard Davis, Assistant Secretary of the Treasury for
Enforcement and Operations, said: "Scientific evidence establishes
clearly that the offspring of women who drink heavily during
pregnancy could suffer mental and physical defects known as the
fetal alcohol syndrome.
"Scientists disagree about the effects of moderate or binge
drinking. But since we are unable to determine a safe level of
drinking, it is important that the general public be made aware
of the problem so they can exercise the proper cautions."
Treasury decided not to require a warning label on alcoholic
beverage containers at this time since it wishes to avoid
unnecessary government regulation and to give the private sector
the opportunity to take appropriate action before imposing
regulations. Treasury will take polls at the beginning of the
campaign and after six months to a year to measure the success
of the educational effort. If the campaign does not prove effective,
Treasury said it would again consider requiring warning labels on
alcoholic beverage containers. In addition, if on-going scientific
research provides more certain evidence of the adverse effects of
lower levels of alcohol consumption, warning labels will be
reconsidered.
Davis said: "There is reason to believe women will review
their drinking habits during pregnancy if they are aware of the
possible dangers. Under the current circumstances, we believe that
a broadly based educational effort is the best means to provide
B-1394

- 2 them with the necessary information so that the birth defects
that may result in some circumstances from drinking can be
avoided."
The educational program is intended to include the distribution of a report on the effects of alcohol on the fetus,
distribution of brochures to the public and to the medical
profession, public service announcements on radio and television,
and educational programs in the schools. The program would be
designed to inform women before they are pregnant or see a doctor
and to educate men so that they can be supportive of any decision
involving alcohol.
Treasury will meet with interested public and private
organizations to plan specific elements of the program and to
coordinate the overall effort. "We want to call forth the
creativity and communications skills of the alcoholic beverage
industry to inform people of this problem," Davis said.
Today's measures follow from a January 1978 announcement
by Treasury that it would examine the effects of alcohol consumption on offspring and decide whether government action was needed.
Interested parties were asked to comment on the problem and
whether it justified warning labels.
Treasury's Bureau of Alcohol, Tobacco and Firearms, which
regulates the alcoholic beverage industry, received and analyzed
more than 3000 comments, including medical and scientific reports.
Most of the comments — 2772 — came from consumers. Most
consumers, and industry groups, opposed warning labels, chiefly
on the grounds that the problem affects a small percentage of
women and that labels would be costly and ineffective. The
medical profession was divided both on the effects of alcohol
on pregnant women and the advisability of warning labels.
Because of the highly technical issues involved, Treasury
adopted a recommendation by the President's Office of Science
and Technology Policy that non-governmental experts review the
comments and related evidence.
The experts were Dr. Sergio Fabro, a medical doctor with
advanced degrees in biological chemistry and who is professor and
director of the Fetal-Maternal Medicine Division, George
Washington University Medical Center, Washington; Dr. Judith Hall,
a medical doctor who is a specialist in genetics and Director of
the division of Medical Genetics at Children's Orthopedic Hospital
in Seattle, and Dr. Amitai Etzioni, a sociologist who is Director
of the Center for Policy Research and currently a visiting fellow
at the Brookings Institution.

- 3Dr. Fabro reported that the "full blown" fetal alcohol
syndrome — consisting of central nervous system dysfunctions,
growth deficiencies, a cluster of facial abnormalities and
variable other major and minor malfunctions — has been observed
only in offspring of chronic alcoholic mothers. He also stated
that while evidence indicates that with lower levels of alcohol
consumption the full-blown syndrome is highly unlikely, some
other poor pregnancy outcome (for example, low birth weight and
still birth) appears possible. He said further study is needed
to determine whether other than heavy drinking — for example,
two to three glasses of wine with dinner or a martini before
dinner — is harmful. He declined to offer an opinion on whether
a warning label is justified.
Dr. Hall reported overwhelming evidence that the fetal
alcohol syndrome exists where heavy drinking is involved and
said it is probable that other more subtle deleterious effects
occur in children whose mothers drink lesser amounts during
pregnancy. She pointed to mental retardation as one such
potential consequence. But, "this second type of the maternal
fetal alcohol spectrum has not yet been fully evaluated or
delineated." She recommended a warning label and a broad educational program.
Dr. Etzioni said that, in view of the present low level of
understanding about the effects of alcohol on offspring, other
methods of alerting the public might be more effective than a
warning label. He said public policies with regard to warnings
should vary depending on the strength of the data on the problem
and the magnitude of the danger.
The experts reports are summarized in a Treasury progress
report to be published in the Federal Register of February 9, 1979.
Previous government actions to inform the public of the
risks of drinking during pregnancy included the distribution by
FDA, in coordination with NIAAA, of a bulletin on the fetal
alcohol syndrome to a million health professionals. FDA has also
reprinted and distributed an article
on the subject for consumers.
#
#
#

FOR RELEASE UPON DELIVERY
EXPECTED AT 10 A.M.
FEBRUARY 8, 1979

TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SENATE BUDGET COMMITTEE

Mr. Chairman and Members of this distinguished
Committee:
I appreciate this opportunity to discuss with you the
President's economic and budgetary plans for 1979 and 1980.
You have heard extensive testimony from other
Administration witnesses concerning the general economic
outlook. At Chairman Muskie's request, I will instead deal
with a number of specific questions raised by the
President's budgetary and other economic policy proposals.
At the outset, however, I wish to emphasize four points
about the Administration's overall economic strategy.
First, the President believes that all the major tools
of economic policy must now be mobilized to fight inflation.
Since the deep recession of 1974-75, we have enjoyed an
unprecedented recovery of employment and production, but
these achievements cannot be held, much less enlarged,
unless we now take firm steps to maintain the integrity of
our currency, both at home and abroad.
Second , the centerpiece of our anti-inflation strategy
is firm and sustained restraint on aggregate demand,
effected th rough both fiscal and monetary policies. Over
recent mont hs, there have been warning signals of excess
demand -- o f tightness in selected product and labor
markets. I n response we must restrain both the budget
deficit and the growth of the money supply. Of eaual
importance, we must persist with that restraint over the
long term: No nation has been able to conquer inflation
without the unwavering and continued support of fiscal and
monetary di scipline.
B-1395

-2-

Third, long-term budgetary restraint will be possible
only if we keep a firm check on federal spending. It is
neither fair to the American people, nor politically
feasible, nor economically sensible to depend on steadily
escalating effective tax rates to maintain a balanced budget
over the long term. The most important number in the
President's budget is $531.6 billion -- the aggregate level
of FY 1980 outlays. The test of fiscal restraint is whether
that limit can be held. The President is prepared to use
all of the powers of his office to meet that test.
Fourth, if we show long-term fiscal and monetary
discipline, this economy can progress on a path of price
stability and sustainable growth without a recession. The
recovery remains remarkably resilient and well balanced, and
the American people are showing a genuine willingness to
draw together into a common effort to slow the momentum of
the wage-price spiral. Responsible action on this budget
can build a secure foundation for the American economy in
the 1980's.
Mr. Chairman, I will devote the remainder of my
testimony to the specific questions raised in your letter of
January 31.
Question 1: Major changes proposed by the Administration to
accelerate the payment of income and payroll
taxes to the Treasury. Why didn't the
Administration propose that these various
changes first become effective in 1980 so that
the interest savings on the public debt could
be realized sooner and the Federal deficit
could be reduced substantially in FY 1980? In
particular, why should the proposal to
accelerate employer deposits of withheld taxes
— a proposal which can be implemented by
regulation without new statutory authority -be deferred until 1981?
Answer: The budget includes several initiatives to
require taxpayers to make tax payments closer
to the time when tax liabilities occur. These
proposals will increase receipts by $2.2
billion in 1980, $5.0 billion in 1981, and $5.3
billion in 1982. The changes will be phased in

-3over three years to minimize the burden on
taxpayers in making the transition to the new
collection procedures.
Some of the changes require legislation.
Others can be implemented administratively. We
will require accelerated deposits by state and
local governments of withheld social security
taxes in 1980, as this change merely brings
state and local governments into conformity
with rules now applicable to private
businesses.
The Administration decided to make the other
cash management improvement proposals effective
at the beginning of 1981. This eases the
implementation problems, for both companies and
the government, and allows for careful
legislative consideration. Although the
proposals to accelerate employer deposits of
withheld taxes will be accomplished by
regulations, we delayed the effective date so
that Congress would have sufficient time to
exercise legislative oversight of
administrative changes in conjunction with its
consideration of those parts of the cash
management package that do require legislative
action.
If the Congress wishes to accelerate
implementation of these proposals, the
Administration would have no objection.
However, we would object very strongly to
increasing budget outlays to the extent of the
accelerated revenue gains. These cash
management proposals are not designed to
produce artificially reduced deficit figures or
to raise new money for federal programs. They
are designed solely to increase the efficiency
of tax administration and to save the
government money.
Question 2: The real wage insurance proposal. How does the
Administration justify as anti-inflationary a.
deficit-financed tax rebate that provides
windfall gains to most recipients and whose
cost could range from $2.5-$15 billion? How

-4high would the estimated revenue loss from real
wage insurance have to be before the
Administration withdrew its support from the
proposal? How does the Administration arrive
at its estimates of program participation and a
0.5 percentage point reduction in the inflation
rate? What factors influenced the
Administration's recommendations for program
eligibility? Why are Federal employees
eligible? Eow can this proposal be
distinguished from the ill-fated $50 rebate
that was withdrawn as inflationary in 1977?
Answer; The revenue cost of real wage insurance will be
modest. The program provides a tax credit to
workers in groups complying with the 7 percent
wage standard. The credit would be equal to
the worker's W-2 wages, up to $20,000, times
the amount by which 1979 inflation exceeds 7
percent, up to 10 percent inflation.
Accordingly, the revenue cost depends on the
number of workers who comply and on the 1979
inflation rate. Because increased compliance
directly reduces inflation, the revenue cost is
self-limiting to a large extent.
We estimate 1979 inflation at 7.5 percent for
the relevant period and assume wage standard
compliance by 47 million workers out of 87
million workers eligible for the program. This
entails $2.5 billion in revenue cost. If the
compliance rate were higher, the cost would be
somewhat reduced. The specter of high program
costs — e.g. $15 billion — requires that the
compliance rate and the inflation rate both be
very high. This could occur only if inflation
exceeded the average rate of wage increase in
the economy. Since the Second World War, this
has happened only once -- in 1974, when oil
prices quintupled and crop failures on several
continents caused food prices to explode. A
repetition of these extreme conditions in 1979
is very unlikely.
As for "windfall gains", real wage insurance
performs far more efficiently than most tax
incentives. Whenever a tax benefit is accorded

-5to these who perform in a particular way — as
is the case, e.g., with the investment tax
credit and the charitable deduction -- a
certain proportion (usually the vast majority)
of those receiving the benefit would have
performed even without the benefit. In the
case of real wage insurance, we estimate that
about 26 million of the 47 million likely
recipients would have secured wage increases of
7 percent or less in any case. However, the
availability of real wage insurance, and its
dampening impact on inflation, should have some
helpful impact on the wage demands of even
these workers. There is, at any rate, no way
to identify most of these workers. It would be
unfair to single out the few identifiable
groups — e.g. federal employees or workers
under existing contracts — who fall in this
category. These workers have, after all, made
a considerable financial sacrifice and are in
compliance with the wage standard.
The Administration estimates that 47 million
workers, out of 87 million eligible workers,
will comply with the wage standard if real wage
insurance is available. To derive this we
extrapolated recent patterns, trends, and
distributions of wage increase. These
extrapolations reveal that about 26 million
workers will be "locked in" to wage increases
over 7 percent by existing union contracts or
by minimum wage increases. Another 26 million
will fall below 7 percent without wage
restraint. Of the remaining 35 million, who
would have the ability to secure increases over
7 percent, we estimate that about 60 percent -or 21 million — will comply with the wage
standard. This includes nearly all of those
who could otherwise secure increases between 7
and 8.5 percent, and a declining proportion of
those who could secure larger increases. This
degree of compliance would reduce the total
wage bill for the economy by $10 billion or 0.7
percentage point, which in turn implies a 0.5
percentage point reduction in the inflation
rate.

-6The Administration has designed the program's
eligibility standards to be as simple,
universal, and even-handed as possible. Every
employee receiving a W-2 form is eligible, with
the exception of those owning a substantial
share of their employer company. The
self-employed are excluded because they
typically have discretionary authority to alter
the timing and form of their income, which
would open the program to abuse.
The proposal differs from the $50 rebate, and
indeed any other tax cut proposal, in the most
basic of ways: real wage insurance is
available only to those who contribute to a
lower rate of inflation. For this reason,
failing to enact the proposal would add to
inflation, and shifting the $2.5 billion to
added spending or to a traditional tax cut
would be doubly inflationary.
Question 3a: Future tax reductions
Under what circumstances would individual
income tax reductions be appropriate in FY
1980? Under what circumstances would payroll
tax reductions be appropriate in FY's 1980, 81,
or 82?
Answer: The centerpiece of the President's
anti-inflation program is sustained and
concerted restraint of aggregate demand,
effected through both fiscal and monetary
policy. This is a long-range program, not one
to be turned on and off in an attempt to fine
tune the economy.
Accordingly, we do not view any tax reduction
in FY 1980 as appropriate. The economy is
carrying considerable forward momentum at
present, and is pushing toward the danger zones
in rates of resource utilization that have been
associated with accelerating inflationary
pressures in the past. We are forecasting a
tapering of that momentum so that real growth
during the course of 1979 will be only a

-7moderate 2-1/4 percent, followed by some
reacceleration to about 3 percent during the
course of 1980. The added stimulus of a tax
cut in 1980 would be dangerous.
Should events depart very significantly in
either direction from the path we presently
foresee, then we would have to take a careful
look at the situation as it emerges.
Farther ahead, it is clear that the combination
of restrained growth of outlays and a
progressive tax structure will make tax
reductions both possible and desirable.
However, the appropriate timing, size, and
composition of any major tax change will depend
on economic developments, the budgetary
situation, and a variety of other factors which
cannot be forecast with any degree of
reliability at this time.
If our proposals for social security benefit
reforms and hospital cost containment are
enacted, a reduction in social security taxes
beginning in 1981 could be considered, though
this would of course have to be weighed against
alternative uses of the savings.
Question 3b: Is the Administration committed to reducing
taxes rather than raising spending in future
years to stimulate the economy and expend the
"fiscal margin" which is indicated in the
Administration's 5-year budget projections?
Answer: Yes. This Administration is determined to
restrain the growth of Federal expenditures and
to rely principally on the private sector as
the source of economic growth.
Last year at budget time, the Administration
announced goals for reducing the share of
Federal outlays to GNP, and we have done the
same this year. We are projecting outlays at
about 21 percent of GNP in FY 1980, which puts
us a year ahead of the earlier schedule. This
compares with 22.6 percent in FY 1976.

-8Question 4:

Structural tax issues left unresolved last
year. When will the Administration make public
its proposals with respect to fringe benefits
and the tax treatment of workers as either
independent contractors or employees? Will
either or both of these proposals be likely to
substantially affect revenue collections in FY
1980? If so, do you have any preliminary
estimate of the likely FY 1980 revenue impact
of the proposals?
Answer: The Administration expects to make its
recommendations to the Congress concerning the
tax treatment of fringe benefits within the
next month. Our recommendations relating to
the determination of whether persons who
perform services are independent contractors
or employees will probably be made this spring.
Estimates of the budget impact of these
proposals are difficult to make, as the figures
are not available from current tax return data.
However, we would not expect either proposal to
affect revenue collections substantially in FY
1980. The earliest effective date of any
recommendation would be January 1, 1980. To
the extent either proposal involved a
significant change from current practice, we
could expect a further delay in the effective
date.
Question 5: Balancing the Federal budget. What year would
be an appropriate target for attaining a
balanced budget? What unemployment and
inflation rates would be consistent with
budgetary balance in your target year? Should
the Congress adopt a formula approach to
balancing the budget such as a Constitutional
amendment mandating budetary balance?
Answer: The Administration wishes to achieve budget
balance at acceptable levels of taxation as
soon as possible.
In the FY 1980 budget documents, we have shown
rough balance in FY 1981, assuming outlays at
current services levels, with unemployment at
5.4 percent in the fourth quarter of calendar

-91981, inflation at 5.2 percent, measured from
the fourth quarter of 1980 to the fourth
quarter of 1981, and real growth at 4.6
percent.
It is, however, premature to make final
decisions on the FY 1981 budget. The
unemployment, inflation, and growth numbers
cited for 1981 are assumptions that will no
doubt require refinement in light of future
economic developments. Economic science has
not reached the point where forecasting two
years ahead is a reliable exercise.
Equally important, it is possible that tax
reductions may be appropriate for FY 1981,
which would move the budget off balance in the
absence of even greater spending restraint.
Other than economic circumstances, the chief
obstacle to budget balance is the difficulty in
restraining outlays. Outlays must be steadily
reduced as a percentage of GNP if balance is to
be attained at levels of taxation acceptable to
the American people over the long term.
It would be a serious error to seek budget
balance by means of a statutory or
Constitutional formula.
Both the actual and the desirable levels of
outlays and receipts depend, at any particular
time, on rates of economic growth, of
inflation, and of unemployment, none of which
are predictable with accuracy even in the short
term. A legal mandate for balance would
require very frequent and highly disruptive
changes in tax laws and in federal program
levels. This would create great uncertainties
in the private sector and serious
inefficiencies in the public sector. In times
of economic downturn, such a legal mandate
would guarantee an even deeper recession, for
we would have to raise tax rates as incomes and
revenues fell. Fiscal policy would become a
source of economic policy.

-10A formula approach would also invite endless
abuse and evasion. It is a relatively easv
matter to remodel spending programs into
off-budget expenditures, loans, guarantees, and
the like. A balanced budget law might well end
up balancing an almost meaningless budget.
The current congressional budget process
provides a fully adequate formal mechanism for
controlling spending and the deficit. The real
task before us is not to write new statutes and
Constitutional amendments about the need for
budget balance but to use the existing legal
machinery to achieve balance in fact. The test
of fiscal restraint is not what we say but what
we do.
Question 6: "Crowding out".
To what extent will Treasury financing in FY
1979 and FY 1980 "crowd out" other borrowers,
in particular, businesses borrowing to purchase
new plant and equipment? What would the
Federal Reserve have to do to avoid or offset
the "crowding out" phenomenon?
Answer: Federal credit demands will be somewhat lower
in calendar year 1979 than those of 1977 and
1978 and will be considerably lower in 1980.
Direct Federal borrowing from the public in
1979 will be reduced to an estimated 12 percent
of the total and even further to about 9
percent, in 1980, substantially below the over
14 percent level of 1977. Even if one adds to
the total of direct Federal borrowing the
credit demands of Government sponsored
agencies, such as FNMA and the Federal Home
Loan Banks, the Federal government share of
total credit flows drops from the 21 percent in
1977 to an estimated 15 percent in 1980. Given
the decline in federal borrowing and the
tapering off in the demand for consumer credit
which accompanies the somewhat slower economic
growth, we see the business share of total
credit flows increasing to about 37 percent in
1979 and 40 percent in 1980, up from its 32
percent and 35-1/2 percent shares in 1977 and
1978. Because of the fiscal restraint

-11demonstrated in the budget, the Federal Reserve
will be able to keep the monetary aggregates
under firm control without choking off flows of
credit to the business sector.
Question 7: Anti-inflation initiatives.
Aside from adhering to the Administration's
budget and enacting real wage insurance, what
do you recommend that the Congress do this year
to fight inflation? What can the Federal
Government do to boost productivity?
Answer: It is essential that the Federal Government
provide leadership in the battle against
inflation. In practice, this means more
effective allocation of limited Federal
budgetary and financial resources. Full
Congressional support and initiative is needed
in this important effort. Ineffective programs
must be eliminated and continuing programs made
more effective.
The most urgent economy measure proposed in the
budget is hospital cost containment for
medicare and medicaid. Enactment of hospital
cost containment would save nearly $25 billion
over the 1980-82 period, including $9.8 billion
in Federal outlays.
To improve productivity growth will require a
long-term effort. The tax bill, passed last
year, contained substantial incentives for
investment. This will help. In addition, the
government must be careful not to impose
excessive regulatory burdens on the private
sector. The Administration has established
procedures to coordinate regulatory activities,
to develop a calendar of scheduled regulations,
and generally to improve the regulatory
process. The Congress may wish to examine how
legislation in the regulatory area can be made
less burdensome on the private sector.
Improvements in the regulatory area will be
beneficial both to our fight against inflation
and our emphasis on increased productivity.

-12-

In the long-run productivity improvement will
also be fostered by the increased budget
outlays in support of basic research. The
Administration believes that even in a period
of constrained budget growth the government
must sustain support of basic research as a
long-term investment in the Nation's future.
The President's proposed 1980 budget provides
for a 2 percent increase in real outlays for
this vital category. Moreover, this increase
follows upon even stronger increases which were
budgeted in 1978 and 1979.
Other governmental actions designed both to
reduce inflation and promote productivity
growth are the employment and training programs
for the young, the unskilled and the
disadvantaged, which will equip this segment of
the workforce with the necessary skills for
today's job market. Especially important are
the private sector initiative program and the
targeted jobs tax credit.
As fiscal and economic conditions permit, in
future years consideration will be given to
other measures that the federal government can
take to increase investment, foster research
and development and promote productivity
growth. The most important step we can take to
stimulate investment however, is to insure
stable economic growth and reduced inflation.
Question 8: Crude oil pricing. Does the Administration
economic forecast assume decontrol of domestic
crude oil prices? If so, what will be the
inflationary impact of this action? If not,
how does the President propose to lift domestic
oil prices to world levels, as promised at the
July 1978 Bonn Summit meetings.
Answer: Our inflation forecasts include the impact of
recently announced OPEC price increases for
imported crude oil, but they do not seek to
anticipate the impact of possible domestic
price decontrol scenarios on the inflation
rate. The President has not yet decided upon

-13the methods or timing of price adjustments for
domestic oil. The inflation impacts involved
cannot be predicted with precision and depend
critically on the details of method and timing,
and also on background conditions in domestic
and international oil markets. As an extremely
rough rule of thumb, complete decontrol of
domestic crude oil prices would raise the CPI
by 0.6-to-1.0 percentage point. This one-time
effect would be diffused over several years in
the case of phased decontrol — i.e. raising
the inflation rate by several tenths of a point
each year until world price levels are reached.
The initial inflationary impact is a temporary
phenomenon resulting from a one-time adjustment
of domestic prices to world levels. This
inflationary effect would be offset, perhaps
very substantially, by the consequent reduction
in our oil import bill, which would strenthen
the dollar and reduce price pressures on
international oil markets, both of which
effects are anti-inflationary. In the
long-term, world pricing of domestic oil would
improve the efficiency of our industrial
economy, encourage conservation, increase
domestic energy supplies, strengthen the trade
balance and the dollar, and weaken OPEC's
leverage on oil prices.
Question 9: The outlook for merchandise trade and the
dollar. What are the prospects for
substantially narrowing our merchandise trade
deficit from last year's high level? What is
the outlook for the value of the dollar on
foreign exchange markets this year and next?
How much of the $30 billion "dollar defense
fund" has been used? What will the
Administration do if and when those resources
are depleted? What is the appropriate role of
monetary policy in supporting the dollar?
Answer: Conditions in the foreign exchange market have
clearly improved since November 1. The severe
and persistent disorder which characterized the
markets in October has been overcome. The
dollar has appreciated substantially from its
lows although there have been up and down
movements in rates from day to day.

-14-

The situation is still unsettled, however.
Current uncertainties continue to generate
nervousness. One of the principal sources of
uncertainty in the market, for instance, is the
impact of recent political developments abroad
on oil supplies.
While daily movements in foreign exchange rates
are to be expected as traders react to current
developments, the United States is determined
to prevent a reemergence of disorderly
conditions. We have substantial resources for
intervention — fully adequate — and we will
not hesitate to use them to achieve our
objective. The other participants in the joint
operations — Germany, Switzerland and Japan -have committed their own resources and there is
no quantitative ceiling on the total resources
available.
We do not disclose the amount of our
intervention in the foreign exchange market on
a current basis. We do, however, publish this
information quarterly. The report on "Treasury
and Federal Reserve Foreign Exchange
Operations," which will be released in early
March, will provide information on our
intervention in the November-January period.
Our intervention policy will work if traders
are convinced that our policies to reduce
domestic inflation and reduce our currennt
account deficit are strong enough to do the job
and that we are committed to maintain those
policies as long as needed. We intend to make
sure our policies are strong enough. We intend
to maintain them as long as necessary. In this
context, monetary restraint is an important and
necessary complement to fiscal austerity and
must be maintained until the inflation problem
is brought firmly under control.
I think the outlook for the dollar is
improving. Our goods should be more
competitive both at home and abroad this year.
Our export markets will be growing faster than
our own economy for the first time in five
years.

-15-

Our trade balance has showed marked improvement
since the first quarter of 1978. Export
volumes have risen strongly since March 1978;
growth in non-oil import volume has slowed down
substantially.
In 1979 we expect continued strong export
growth and a very small increase in import
volume. Although the oil price rise will add
about $4 billion to oil imports, the trade
deficit should decline to about $26 to $28
billion for the year as a whole, down from $34
billion in calendar 1978. Owing to our growing
surplus in services, the current account
deficit could drop by about 50 percent from the
roughly $17 billion estimated for 1978.
Question 10: The Administration proposal to reduce
agricultural export credit. How can this
proposed budget cut be justified in light of
our large merchandise trade deficit, prospects
for increased sales of farm products to the
Peoples Republic of China, and the commitment
of the Congress to using export credit to
support farm incomes?
Answer: The reduction in the CCC budget for export
credits is part of the Administration's overall
commitment to reduce the federal budget
deficit. It should not, however, be construed
as being inconsistent with the Administration's
strong commitment to agricultural exports to
support farm income. We expect that private
financing—which after all has always financed
the bulk of agricultural exports—will be
readily available and that agricultural exports
will continue at a high level.
The decision to reduce the amount CCC export
credits was taken in light of several important
factors:
1) The new CCC Non-Commercial Risk Assurance
Program will make possible a shift in
financing of agricultural products from
federal to private sources. We believe the

-16use of the guarantee program will attract
greater private resources towards financing
agricultural exports.
2) The Administration's goal of greater
efficiency in financing agricultural exports
will be enhanced because the $800 million
budgeted for that purpose will be used with
great care. We expect future CCC credits to
be carefully targeted towards sales where
there is a strong indication of additional
exports beyond what the private financial
market will support.
3) The strengthening of export demand for U.S.
agricultural goods in 1980, as the excess of
world supply relative to demand diminishes,
will reduce the need to stimulate exports by
credit inducements.
In any event, the budget proposal may be
reevaluated if warranted by world supply and
demand for agricultural products in FY 1980 and
by the experience to be gained with the CCC
Non-Commerical Risk Assurance Program.
Question 11: Appropriations for the IMF quota increase.
When do we expect Congress to appropriate the
IMF quota increase proposed for calendar year
1979? Why is no provision made for this $5
billion program in the FY 1980 budget or
out-year estimates?
Answer: The members of the IMF have agreed to a 50
percent increase in IMF quotas, from roughly
$50 billion to $75 billion. I consider this
increase very important to the U.S. and to the
world economy, and to a smoothly functioning
monetary system during the years ahead.
The proposed increase in the U.S. quota is 4.2
billion of SDR's—from 8.4 billion to 12.6
billion—an increase of approximately 5.4
billion in dollar terms. The deadline for
consent to the Quota increase is November 1,
1980.

-17The Administration intends to submit
legislation authorizing U.S. acceptance of this
quota increase as soon as possible. We have
not, however, determined a precise timetable.
As you know, Mr. Chairman, during Congressional
consideration last year of U.S. participation
in the IMF Witteveen Facility, questions arose
concerning the budgetary and appropriations
treatment of the U.S. quota in the IMF. The
quota differs in some important respects from
our participation in the Witteveen Facility,
and treatment of the quota raises a number of
complex questions relating to our participation
in the IMF. We intend to consult fully with
Congress on these questions before submitting
authorizing legislation or any budgetary
requests in connection with the proposed
increase in the U.S. quota. We look forward to
working with the Committee in this effort,
looking to prompt development of a specific
legislative request.

INGTON, O.C. 2Q220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
February 8, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY TO START ANTIDUMPING
INVESTIGATION ON CERTAIN STEEL
I-BEAMS FROM BELGIUM
The Treasury Department today said it will start an
antidumping investigation of imports of certain steel I-beams
from Belgium.
Treasury's announcement followed summary investigations
conducted by the U. S. Customs Service after receipt of a
petition filed by the Connors Steel Co. alleging that a firm
in Belgium is dumping certain steel I-beams in the United States.
The petition alleges that imports of certain steel I-beams
are being sold in the United States at "less than fair value."
(Sales at less than fair value generally occur when imported
merchandise is sold in the United States for less than in the
home market.) The Customs Service will investigate the matter
and make a tentative determination by August 9, 19 79.
If sales at less than fair value are determined by Treasury,
the U. S. International Trade Commission will subsequently
decide whether they are injuring or likely to injure a domestic
industry. (Both sales at less than fair value and injury must
be determined before a dumping finding is reached. If dumping
is found, a special antidumping duty equal to the difference
between the price of the merchandise at home or in third countries and the price to the United States is imposed.)
Notice of the start of these investigations will appear in
the Federal Register of February 9, 19 79.
Imports of certain steel I-beams from Belgium in 1978 were
valued at about $5 million.

o

B-1396

0

o

FOR RELEASE AT 4:00 P.M.

February 9, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued February 22, 1979.
This offering will result in a pay-down for the Treasury of about
$ 200 million as the maturing bills are outstanding in the
amount of $6,207 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
November 24, 1978, and to mature
May 24, 1979
(CUSIP No.
912793 Y6 7 ) , originally issued in the amount of $2,904 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
February 22, 1979, and to mature August 23, 1979
(CUSIP No.
912793 2H 8) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing February 22, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,472
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. 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,
Friday, February 16, 1979.
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-1397

-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 Tor 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 bookentry records of Federal Reserve Banks and Branches. 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
must be made or completed at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt on February 22, 1979, in cash
or other immediately available funds or in Treasury bills maturing
February 22, 1979.
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, 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.

toartmentofthtTREASURY
©TON, O.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

February 9, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,801 million of 13-week Treasury bills and for $2,902 million
of 26-week Treasury bills, both series to be issued on February 15, 1979,
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 May 17, 1979

26-week bills
maturing August 16, 1979

Price

Discount
Rate

Investment
Rate 1/

Price

97.669
97.654
97.660

9.222%
9.281%
9.257%

9.57%
9.64%
9.61%

95.283 9.330%
9.346%
95.275
9.342%
95.277

Discount
Rate

Investment
Rate 1/
9.93%
9.95%
9.94%

Tenders at the low price for the 13-week bills were allotted 81%.
Tenders at the low price for the 26-week bills were allotted 18%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Received

Accepted

$
29,810,000
2,271,970,000
19,090,000
57,360,000
17,135,000
24,580,000
85,760,000
32,060,000
14,575,000
31,345,000
9,350,000
195,660,000

$
35,245,000
5,566,735,000
12,480,000
87,060,000
10,715,000
16,260,000
466,400,000
55,375,000
13,790,000
24,065,000
5,505,000
366,845,000

$
15,245,000
2,380,895,000
12,480,000
12,060,000
9,715,000
15,460,000
220,900,000
32,375,000
1,790,000
16,930,000
5,505,000
166,845,000

12,335,000

12,335,000

11,940,000

$4,888,240,000

$2,801,030,000a/ $6,672,415,000

Location

Received

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
29,810,000
4,191,220,000
19,090,000
60,210,000
18,325,000
24,580,000
186,110,000
45,630,000
14,575,000
31,345,000
9,350,000
245,660,000

Treasury
TOTALS

Accepted

a/Includes $373,675,000 noncompetitive tenders from the public.
b/lncludes $177,830,000 noncompetitive tenders from the public.
1/Equivalent coupon-issue yield.

B-1398

11,940,000
$2,902,140,000 W

N6T0N, O.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
February 12, 1979

Contact: Alvin M. Hattal
202/566-8381

INCOME TAX TREATY SIGNED BETWEEN
THE UNITED STATES AND HUNGARY
The Treasury Department today announced the signing of a
treaty between the United States and the People's Republic of
Hungary to avoid the double taxation of income. The treaty was
signed in Washington by Secretary of the Treasury W. Michael
Blumenthal and Minister of Finance of the People's Republic of
Hungary Lajos Faluvegi. The treaty will be submitted to the
U. S. Senate for its advice and consent to ratification.
The proposed treaty will be the first such treaty concluded between the United States and the People's Republic of
Hungary. It is intended to facilitate economic and cultural
relations between the two countries.
The treaty clarifies the rules governing income tax jurisdiction and sets certain limits on the rights of each country
to tax income derived within its territory by residents of the
other country. For example, the treaty provides for exemption
at source of interest and royalties derived by a resident of
the other country. It also limits the tax on dividends paid to
a resident of the other country to 15 percent in general and to
5 percent on dividends paid to a parent corporation. Employees
of U. S. companies will generally not become subject to tax by
Hungary unless they remain there more than six months of the
year, and employees of Hungarian enterprises will be exempt
from U. S. income tax under the same conditions.
The treaty also ensures nondiscriminatory taxation and provides for exchanges of information and administrative cooperation
between the tax authorities of the two countries to avoid double
taxation and prevent fiscal evasion with respect to taxes on
income.
The treaty will enter into force as soon as the parties
have notified each other that their respective constitutional
requirements have been met. The provisions affecting withholding
taxes will then take effect for amounts paid on or after the
first day of the second month after the treaty enters into
force, and the other provisions will take effect as of January 1
of
the year following entry into force.
B-1399
o
0
o

CONVENTION BETWEEN THE GOVERNMENT OF THE
UNITED STATES OF AMERICA AND THE GOVERNMENT
OF THE HUNGARIAN PEOPLE'S REPUBLIC FOR THE
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION
OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

The Government of the United States of America and the Government of
the Hungarian People's Republic, desiring to further expand and
facilitate mutual economic relations, have resolved to conclude a
convention for the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income, and have agreed as
follows:

Article 1
PERSONAL SCOPE

1. This Convention shall apply to persons who are residents of one or
both of the Contracting States, except as otherwise provided in this
Convention.
2.

Notwithstanding any provision of this Convention except paragraph

3 of this Article, a Contracting State may tax its residents (as
determined under Article 4 (Fiscal Domicile)) and citizens (including,
in the case of the United States, former citizens) as if this
Convention had not come into effect.
3.

The provisions of paragraph 2 shall not affect:
a)

the benefits conferred by a Contracting State under
paragraph 2 of Article 15 (Pensions), Articles 20 (Relief
from Double Taxation), 21 (Non-discrimination), and 22
(Mutual Agreement Procedure); and

b)

the benefits conferred by a Contracting State under Articles
16 (Government Service), 17 (Teachers), 18 (Students and
Trainees) and 24 (Effect of Convention on Diplomatic and
Consular Officials, Domestic Laws, and Other Treaties), upon
individuals who are neither citizens of, nor have immigrant
status in, that State.

Article 2
TAXES COVERED

1. This Convention shall apply to taxes on income imposed on behalf
of each Contracting State.
2.

The existing taxes to which this Convention shall apply are:
a)

In the case of the United States, the Federal income taxes
imposed by the Internal Revenue Code and the excise taxes
imposed on insurance premiums paid to foreign insurers and
with respect to private foundations, but excluding the
accumulated earnings tax and the personal holding company
tax •

b)

In the case of the Hungarian People's Republic:
i)

The general income tax,

ii)

The income tax on intellectual activities,

iii) The profit tax,
iv)

The profit tax on economic associations with foreign
participation,

v)
vi)

The enterprises special tax,
The levy on dividends and profit distributions of
commercial companies,

vii)

The profit tax on state-owned enterprises, and

viii) The contribution to communal development, but only to
the extent imposed in respect of income taxes covered by
this Convention.
3.

The Convention shall apply also to any identical or substantially

similar taxes which are imposed by a Contracting State after the date
of signature of this Convention in addition to, or in place of, the

existing taxes.

The competent authorities of the Contracting States

shall notify each other of any changes which have been made in their
respective taxation laws and shall notify each other of any official
published material concerning the application of this Convention,
including explanations, regulations, rulings, or judicial decisions.
4.

For the purpose of Article 21 (Non-discrimination), this

Convention shall also apply to taxes of every kind and description
imposed by a Contracting State or a political subdivision or local
authority thereof.

For the purpose of Article 23 (Exchange of

Information), this Convention shall also apply to taxes of every kind
imposed by a Contracting State.

Article 3
GENERAL DEFINITIONS

1. In this Convention, unless the context otherwise requires:
a)

The term "person" includes an individual, a partnership, a
company or juridical person, an estate, a trust, and any
other body of persons;

b)

The term "company" means any body corporate or any entity
which is treated as a body corporate for tax purposes;

c)

The terms "enterprise of a Contracting State" and
"enterprise of the other Contracting State" mean
respectively an enterprise carried on by a resident of a
Contracting State and an enterprise carried on by a resident
of the other Contracting State;

d)

The term "nationals" means:
i)

All individuals possessing the citizenship of a

Contracting State, and
ii)

All legal persons, partnerships and associations

deriving their status as such from the law in force in a
Contracting State;
e)

The term "international traffic" means any transport by a
ship or aircraft, except where such transport is solely
between places in the other Contracting State;

f)

The term "competent authority" means:
i)

In the case of the United States, the Secretary of the

Treasury or his delegate, and
ii)

In the case of the Hungarian People's Republic, the

Minister of Finance or his delegate;
g)

i)

The term "United States" means the United States of

America, and
ii)

When used in a geographical sense, the term "United

States" does not include Puerto Rico, the Virgin Islands,
Guam, or any other United States possession or territory;
and
h)

The term "Hungarian People's Republic", when used in a
geographical sense, means the territory of the Hungarian
People's Republic.

2.

As regards the application of this Convention by a Contracting

State any term not otherwise defined shall, unless the context
otherwise requires and subject to the provisions of Article 22 (Mutual
Agreement Procedure), have the meaning which it has under the laws of
that Contracting State relating to the taxes which are the subject of
this Convention.

Article 4
FISCAL DOMICILE

1. For purposes of this Convention, the term "resident of a
Contracting State" means any person who, under the law of that State,
is liable to taxation therein by reason of his domicile, residence,
citizenship, place of management, place of incorporation, or any other
criterion of a similar nature; provided, however, that:
a)

this term does not include any person who is liable to tax
in that Contracting State in respect only of income from
sources therein or capital situated in that State; and

b)

in the case of income derived or paid by a partnership,
estate, or trust, this term applies only to the extent that
the income derived by such partnership, estate, or trust is
subject to tax as the income of a resident of the
Contracting State, either in its hands or in the hands of
its partners or beneficiaries.

2.

Where by reason of the provisions of paragraph 1 an individual is

a resident of both Contracting States, then the individual's tax status
shall be determined as follows:
a)

The individual shall be deemed to be a resident of the
Contracting State in which the individual has a permanent
home available to him.

If the individual has a permanent

home available to him in both Contracting States or in
neither Contracting State, the individual shall be deemed to
be a resident of the Contracting State in which the
individual's center of vital interests is located;

b)

If the Contracting State in which the individual's center of
vital interests is located cannot be determined, the
individual shall be deemed to be a resident of that
Contracting State in which the individual has an habitual
abode;

c)

If the individual has an habitual abode in both Contracting
States or in neither of them, the individual shall be deemed
to be a resident of the Contracting State of which the
individual is a national; and

d)

If the individual is a national of both Contracting States
or of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual
agreement.

3.

where by reason of the provisions of paragraph 1 a company is a

resident of both Contracting States, then if it is created or organized
under the laws of a Contracting State or a political subdivision
thereof, it shall be treated as a resident of that State.
4.

Where by reason of the provisions of paragraph 1 a person other

than an individual or a company is a resident of both Contracting
States, the competent authorities of the Contracting States shall by
mutual agreement endeavor to settle the question and to determine the
mode of application of the Convention to such person.
5.

For purposes of this Convention, an individual who is a national

of a Contracting State shall also be deemed to be a resident of that
State if (a) the individual is an employee of that State or an
instrumentality thereof in the other Contracting State or in a third
State; (b) the individual is engaged in the performance of governmental
functions for the first-mentioned State; and (c) the individual is

subjected in the first-mentioned State to the same obligations in
respect of taxes on income as are residents of the first-mentioned
State.

The spouse and minor children residing with the employee end

subject to the requirements of (c) above shall also be deemed to be
residents of the first-mentioned State.

Article 5
PERMANENT ESTABLISHMENT

1. For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business or production through
which the activities of an enterprise are wholly or partly carried on.
2.

The term "permanent establishment" shall include especially:
a)

a place of management;

b)

a branch;

c)

an office;

d)

a factory;

e)

a workshop; and

f)

a mine, an oil or gas well, a quarry, or any other place of
extraction of natural resources.

3.

A building site or construction or installation project, or an

installation or drilling rig or ship used for the exploration or
development of natural resources, shall constitute a permanent
establishment only if it lasts more than 24 months.
4.

Notwithstanding the preceding provisions of this Article, the term

"permanent establishment" shall be deemed not to include:
a)

the use of facilities solely for the purpose of storage,
display or delivery of goods or merchandise belonging to the
enterprise;

b)

the maintenance of a stock of goods or merchandise belonging
to the enterprise solely for the purpose of storage, display
or delivery;

c)

the maintenance of a stock of goods or merchandise belonging
to the enterprise solely for the purpose of processing by
another enterpr ise;

d)

the maintenance of a fixed place of business solely for the
purpose of purchasing goods or merchandise, or for
collecting information, for the enterprise;

e)

the maintenance of a fixed place of business solely for the
purpose of carrying on for the enterprise any other activity
if it has a preparatory or auxiliary character; and

f)

the maintenance of a fixed place of business solely for any
combination of the activities mentioned in subparagraphs a)
to e) of this paragraph.

5.

Notwithstanding the provisions of paragraphs 1 and 2, where a

person - other than an agent of an independent status to whom paragraph
6 applies - is acting on behalf of an enterprise and has, and
habitually exercises in a Contracting State, an authority to conclude
contracts in the name of such enterprise, that enterprise shall be
deemed to have a permanent establishment in respect of any activities
which that person undertakes for the enterprise, unless the activities
of such person are limited to those mentioned in paragraph 4 which, if
exercised at a fixed place of business, would not make this fixed place
of business a permanent establishment under the provisions of that
paragraph.
6.

An enterprise shall not be deemed to have a permanent

establishment in a Contracting State merely because it carries on

business in that State through a broker, general commission agent or
any other agent of an independent status, provided that such persons
are acting in the ordinary course of their business.
7.

The fact that a company which is a resident of a Contracting State

controls or is controlled by a company which is a resident of the other
Contracting State, or which carries on business in that other State
(whether through a permanent establishment or otherwise), shall not of
itself constitute either company a permanent establishment of the
other .

Article 6
INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)

1. Income derived by a resident of a Contracting State from immovable
property (real property) situated in the other Contracting State may be
taxed in that other State.
2.

The term "immovable property" shall have the meaning which it has

under the law of the Contracting State in which the property in
question is situated.

The term shall in any case include property

accessory to immovable property, livestock and equipment used in
agriculture and forestry, rights to which the provisions of general law
respecting landed property apply, usufruct of immovable property and
rights to variable or fixed payments as consideration for the working
of, or the right to work, mineral deposits, sources and other natural
resources; ships, boats and aircraft shall not be regarded as immovable
property.
3.

The provisions of paragraph 1 shall apply to income derived from

the direct use, letting, or use in any other form of immovable
property.

4.

The provisions of paragraphs 1 and 3 shall also apply to the

income from immovable property of an enterprise and to income from
immovable property used for the performance of independent personal
services.

Article 7
BUSINESS PROFITS

1. The business profits of an enterprise of a Contracting State shall
be taxable only in that State unless the enterprise carries on business
in the other Contracting State through a permanent establishment
situated therein.

If the enterprise carries on business as aforesaid,

the business profits of the enterprise may be taxed in that other State
but only so much of them as is attributable to that permanent
establishment.
2.

Subject to the provisions of paragraph 3, where an enterprise of a

Contracting State carries on business in the other Contracting State
through a permanent establishment situated therein, there shall in each
Contracting State be attributed to that permanent establishment the
business profits which it might be expected to make if it were a
distinct and independent enterprise engaged in the same or similar
activities under the same or similar conditions.
3.

In the determination of the business profits of a permanent

establishment, there shall be allowed as deductions those expenses
which are incurred for the purposes of the permanent establishment,
including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other
expenses incurred for the purposes of the enterprise as a whole (or the

part thereof which includes the permanent establishment), whether
incurred in the State in which the permanent establishment is situated
or elsewhere.
4.

No business profits shall be attributed to a permanent

establishment by reason of:
a)

the mere purchase by that permanent establishment of goods
or merchandise for the enterprise, or

b)

the mere delivery to the permanent establishment of goods or
merchandise for its use.

5.

Where business profits include items of income which are dealt

with separately in other Articles of this Convention, then the
provisions of those Articles shall not be affected by the provisions of
this Article.

Article 8
SHIPPING AND AIR TRANSPORT

1. Profits of an enterprise of a Contracting State from the operation
in international traffic of ships or aircraft shall be taxable only in
that State.
2.

For purposes of this Article, profits from the operation of ships

or aircraft in international traffic include profits derived from the
rental on a full or bareboat basis of ships or aircraft operated in
international traffic if such rental profits are incidental to other
profits described in paragraph 1.
3.

Profits of an enterprise of a Contracting State from the use,

maintenance or rental of containers (including trailers and related
equipment for the transport of containers) used for the transport of

goods or merchandise in international traffic ?hall be taxable only in
that State.
4.

The provisions of this Article shall also apply where the

enterprise has an agency in the other State for the transportation of
goods or persons, but only to the extent of activities directly
connected with the business of shipping and aircraft transportation,
including auxiliary activities connected therewith.

Article 9
DIVIDENDS

1. Dividends paid by a company which is a resident of a Contracting
State to a resident of the other Contracting State may be taxed in that
other State.
2.

However, such dividends may be taxed in the Contracting State of

which the company paying the dividends is a resident, and according to
the law of that State, but if the beneficial owner of the dividends is
a resident of the other Contracting State, the tax so charged shall not
exceed:
a)

5 percent of the gross amount of the dividends if the
beneficial owner is a company which owns, directly or
indirectly, at least 10 percent of the voting stock of the
company paying the dividends;

b)

in all other cases, 15 percent of the gross amount of the
dividends.

This paragraph shall not affect the taxation of the company in
respect of the profits out of which the dividends are paid.
3.

The term "dividends" as used in this Article means income from

shares or other rights, not being debt-claims, participating in
profits, as well as income from other corporate rights which is
subjected to the same taxation treatment as income from shares by the
taxation law of the State of which the company making the distribution
is a resident.
4.

The provisions of paragraphs 1 and 2 shall not apply if the

recipient of the dividends, being a resident of a Contracting State,
carries on business in the other Contracting State, of which the
company paying the dividends is a resident, through a permanent
establishment situated therein, or performs in that other State
independent personal services from a fixed base situated therein, and
the holding in respect of which the dividends are paid is effectively
connected with such permanent establishment or fixed base.

In such a

case, the provisions of Article 7 (Business Profits) or Article 13
(Independent Personal Services), as the case may be, shall apply.
5.

Where a company is a resident of a Contracting State, the other

Contracting State may not impose any tax on the dividends paid by the
company, except insofar as
a)

such dividends are paid to a resident of that other State,

b)

the holding in respect of which the dividends are paid is
effectively connected with a permanent establishment or a
fixed base situated in that other State, or

c)

such dividends are paid out of profits attributable to a
permanent establishment which such company had in that other
State, provided that at least 50 percent of such company's
gross income from all sources was attributable to a
permanent establishment which such company had in that other
State.

Where subparagraph c) applies and subparagraphs a) and b) do not apply,
any such tax shall be subject to the limitations of paragraph 2,

Article 10
INTEREST

1. Interest arising in a Contracting State and paid to a resident of
the other Contracting State shall be taxable only in that other State.
2.

The term "interest" as used in this Convention means income from

debt-claims of every kind, whether or not secured by mortgage, and
whether or not carrying a right to participate in the debtor's profits,
and in particular, income from government securities and income from
bonds or debentures, including premiums or prizes attaching to bonds or
debentures.
3.

The provisions of paragraph 1 shall not apply if the person

deriving the interest, being a resident of a Contracting State, carries
on business in the other Contracting State through a permanent
establishment situated therein, or performs in that other State
independent personal services from a fixed base situated therein, and
the debt claim in respect of which the interest is paid is effectively
connected with such permanent establishment or fixed base.

In such a

case, the provisions of Article 7 (Business Profits) or Article 13
(Independent Personal Services), as the case may be, shall apply.

Article 11
ROYALTIES

1. Royalties arising in a Contracting State and paid to a resident of
the other Contracting State shall be taxable only in that other State.
2. The term "royalties" as used in this Article means payments of any
kind received as a consideration for the use of, or the right to use,
any copyright of literary, artistic or scientific work, including
cinematographic films or films or tapes used for radio or television
broadcasting, any patent, trade mark, design or model, plan, secret
formula or process, or other like right or property, or for information
concerning industrial, commercial or scientific experience.
3. The provisions of paragraph 1 shall not apply if the person
deriving the royalties, being a resident of a Contracting State,
carries on business in the other Contracting State in which the
royalties arise through a permanent establishment situated therein, or
performs in that other State independent personal services from a fixed
base situated therein, and the right or property in respect of which
the royalties are paid is effectively connected with such permanent
establishment or fixed base. In such a case the provisions of Article
7 (Business Profits) or Article 13 (Independent Personal Services), as
the case may be, shall apply.

Article 12
CAPITAL GAINS

1. Gains derived by a resident of a Contracting State from the
alienation of immovable property, as defined in paragraph 2 of Article

6 (Immovable Property), situated in the other Contracting State may be
r

taxed in that other State.
2. Gains from the alienation of movable property forming part of the
business property of a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State or of movable
property pertaining to a fixed base available to a resident of a
Contracting State in the other Contracting State for the purpose of
performing independent personal services, including such gains from the
alienation of such a permanent establishment (alone or together with
the whcle enterprise) or of such a fixed base, may be taxed in the
other State. However, gains derived by an enterprise of a Contracting
State from the alienation of ships, aircraft or containers operated by
such enterprise in international traffic shall be taxable only in that
State.
3. Gains from the alienation of any property other than those
mentioned in paragraphs 1 and 2, shall be taxable only in the
Contracting State of which the alienator is a resident.

Article 13
INDEPENDENT PERSONAL SERVICES

1.. Income derived by an individual who is a resident of a Contracting
*e from the performance of personal services in an independent
^r-cicity shali be taxabU- only in that State unless such services are
Pt. r former* in the other Contracting State and
a) the indivioual is present in that other State for a period
or periods aggregating more than 183 days in the taxable
year concerned, or

b)

the individual has a fixed base regularly available to him

in that other State for the purpose of performing his
activities, but only so much of the income as is
attributable to that fixed base.
2. The term "personal services" includes, especially, independent
scientific, literary, artistic, educational or teaching activities as
well as the independent activities of physicians, lawyers, engineers,
architects, dentists, artistes, athletes and accountants.

Article 14
DEPENDENT PERSONAL SERVICES

1. Subject to the provisions of Articles 15 (Pensions) and 16
(Government Service), salaries, wages and other similar remuneration
derived by a resident of a Contracting State in respect of an
employment shall be taxable only in that State unless the employment
exercised in the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in
that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration
derived by a resident of a Contracting State in respect of an
employment exercised in the other Contracting State shall be taxable
only in the first-mentioned State if:
a) the recipient is present in the other State for a period o
periods not exceeding in the aggregate 183 days in the
taxable year concerned, and
b) the remuneration is paid by, or on behalf of, an employer
who is not a resident of the other State, and

c)

the remuneration is riot borne by a permanent establishment

or a fixed base which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article,
remuneration in respect of an employment as a member of the regular
complement of a ship or aircraft operated by an enterprise of a
Contracting State in international traffic may be taxed only in that
Contract ing State.

Article 15
PENSIONS

Subject to the provisions of paragraph 2 of Article 16 (Government
Services),
1. pensions and other similar remuneration beneficially derived
by a resident of a Contracting State in consideration of
past employment shall be taxable only in that State, and
2. social security payments and other public pensions paid by a
Contracting State to an individual who is a resident of the
other Contracting State or a citizen of the United States
shall be taxable only in the first-mentioned Contracting
State.

Article 16
GOVERNMENT SERVICE

1-

a)

Remuneration, other than a pension, paid by a Contracting

State or a political subdivision or a local authority
thereof to any individual in respect of services rendered to

that State or subdivision or local authority thereof shall
be taxable only in that State.
b) However, such remuneration shall be taxable only in the
other Contracting State if the services are rendered in that
State and the .recipient is a resident of that other
Contracting State who:
i) is a national of that State; or
ii) did not become a resident of that State solely for the
purpose of performing the services.
2. a) Any pension paid by, or out of funds created by, a
Contracting State or a political subdivision or a local
authority thereof to any individual in respect of services
rendered to that State or subdivision or local authority
thereof shall be taxable only in that State.
b) However, such pension shall be taxable only in the other
Contracting State if the recipient is a national of and a
resident of that State.
3. The provisions of Articles 13 (Independent Personal Services) , 14
(Dependent Personal Services), and 15 (Pensions), as the case may be,
shall apply to remuneration and pensions in respect of services
rendered in connection with any business carried on by a Contracting
State or a political subdivision or a local authority thereof.

Article 17
TEACHERS

1. Where a resident of one of the Contracting States is invited by
the Government of the other Contracting State, a political subdivision

or a local authority'thereof, or by a university or other recognized
educational institution in that other Contracting State to come to that
other Contracting State for a period not expected to exceed 2 years for
the purpose of teaching or engaging in research, or both, at a
university or other recognized educational institution, and such
resident comes to that other Contracting State primarily for such
purpose, his income from personal services for teaching or research at
such university or educational institution shall be exempt from tax by
that other Contracting State for a period not exceeding 2 years from
the date of his arrival in that other Contracting State.
2.

This Article shall not apply to income from research if such

research is undertaken not in the public interest but primarily for the
private benefit of a specific person or persons.

Article 18
STUDENTS AND TRAINEES

1. Payments which a student, apprentice or business trainee who is,
or was immediately before visiting a Contracting State, a resident of
the other Contracting State and who is present in the first-mentioned
Contracting State for the purpose of his full-time education or
training receives for the purpose of his maintenance, education or
training shall not be taxed in that State provided that such payments
are made to him from sources outside that State.
2.

An individual to whom paragraph 1 applies may elect to be treated

for tax purposes as a resident of the first-mentioned State.

The

election shall apply to all periods during the taxable year of the
election and subsequent taxable years during which the individual

qualifies under paragraph 1, and may not be revoked except with the
consent of the competent authority of that State.

Article 19
ALL OTHER INCOME

Items of income of a resident of a Contracting State

, wherever

arising, not dealt with in the foregoing Articles of thisConvention
shall be taxable only in that State.

Article 20
RELIEF FROM DOUBLE TAXATION

1. In the case of the United States, double taxation shall be avoided
as follows: In accordance with the provisions and subject to the
limitations of the law of the United States (as it may be amended from
time to time without changing the general principle hereof), the United
States shall allow to a resident or citizen of the United States as a
credit against the United States tax on income the appropriate amount
of tax paid to the Hungarian People's Republic; and, in the case of a
United States company owning at least 10 percent of the voting stock of
a company which is a resident of the Hungarian People's Republic from
which it receives dividends in any taxable year, the United States
shall allow as a credit against the United States tax on income the
appropriate amount of income tax paid to the Hungarian People's
Republic by that company with respect to the profits out of which such
dividends are paid. Such appropriate amount shall be based upon the
amount of income tax paid to the Hungarian People's Republic, but the

credit shall not exceed the limitations (for the purpose of limiting
the credit to the United States tax on income from sources outside of
the United States) provided by United States law for the taxable year.
For purposes of applying the United States credit in relation to tax
paid to the Hungarian People's Republic, the taxes referred to in
paragraphs 2 b) and 3 of Article 2 (Taxes Covered) shall be considered
to be income taxes.
2.

In the case of the Hungarian People's Republic, double taxation

shall be avoided as follows:
a)

Where a resident of the Hungarian People's Republic:
i)

derives income which, in accordance with the provisions
of this Convention other than paragraph 2 of Article 1
(Personal Scope), may be taxed in the United States, or

ii)

derives income from sources within the United States
which may be taxed only by reason of paragraph 2 of
Article 1 (Personal Scope),

the Hungarian People's Republic shall, subject to the
provisions of subparagraphs b) and c ) , exempt such income
from tax.
b)

Where a resident of the Hungarian People's Republic derives
items of income which, in accordance with the provisions of
paragraph 2 of Article 9, may be taxed in the United States,
the Hungarian People's Republic shall allow as a deduction
from the tax on the income of that resident an amount equal
to the tax paid in the United States.

Such deduction shall

not, however, exceed that part of the tax, as computed
before the deduction is given, which is attributable to such
items of income derived from the United States.

c)

Where in accordance with any provision of the Convention

income derived by a resident of the Hungarian People's
Republic is exempt fronrtax in the Hungarian People's
Republic, the Hungarian People's Republic may nevertheless,
in calculating the amount of tax on the remaining income of
such resident, take into account the exempted income.

Article 21
NON-DISCRIMINATION

1. The nationals of a Contracting State, whether or not they are
residents of one of the Contracting States, shall not be subjected in
the other State to any taxation or any requirement connected therewith,
which is more burdensome than the taxation and connected requirements
to which nationals of that other State in the same circumstances are or
may be subjected. For purposes of the preceding sentence, nationals
who are subject to tax by a Contracting State on worldwide income are
not in the same circumstances as nationals who are not so subject.
2. The taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less
favorably levied in that other State than the taxation levied on
enterprises of that other State carrying on the same activities. This
Article shall not be construed as obliging a Contracting State to grant
to residents of the other Contracting State any personal allowances,
reliefs and reductions for taxation purposes on account of civil status
or family responsibilities which it grants to its own residents.
3. Interest, royalties and other disbursements paid by an enterprise
of a Contracting State to a resident of the other Contracting State

shall, for the purpose of determining the taxable profits of such
enterprise, be deductible under the same conditions as if they had been
paid to a resident of the first-mentioned State.

Similarly, any debts

of an enterprise of a Contracting State to a resident of the other *
Contracting State shall, for the purpose of determining the taxable
capital of such enterprise, be deductible under the same conditions as
if they had been contracted to a resident of the first-mentioned State.
4.

Enterprises of a Contracting State, the capital of which is wholly

or partly owned or controlled, directly or indirectly, by one or more
residents of the other Contracting State, shall not be subjected in the
first-mentioned Contracting State to any taxation or any requirement
connected therewith which is more burdensome than the taxation and
connected requirements to which other similar enterprises of the
first-mentioned State are or may be subjected.
5.

In this Article the term "taxation" means taxes of every kind and

description imposed by a Contracting State or a political subdivision
or local authority thereof.

Article 22
MUTUAL AGREEMENT PROCEDURE

1. Where a resident or national of a Contracting State considers that
the actions of one or both of the Contracting States result or will
result for it in taxation not in accordance with this Convention, it
may, notwithstanding the remedies provided by the national laws of
those States, present its case to the competent authority of the
Contracting State of which it is a resident or national.

2.

The competent authority shall endeavor, if the objection appears

to it to be justified and if it is not itself able to arrive at an
appropriate solution, to resolve the case by mutual agreement with the
competent authority of the other Contracting State with a view to the
avoidance of taxation not in accordance with the Convention.

Any

agreement reached shall be implemented notwithstanding any time limits
in the national laws of the Contracting States.
3.

The competent authorities of the Contracting States shall endeavor

to resolve by mutual agreement any difficulties or doubts arising as to
the interpretation or application of the Convention.

They may also

consult together for the elimination of double taxation in cases not
provided for in the Convention.
4.

The competent authorities of the Contracting States may

communicate with each other directly for the purpose of reaching an
agreement in the sense of the preceding paragraphs.
5.

The competent authorities of the Contracting States may prescribe

regulations to carry out the purposes of this Convention.

Article 23
EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States shall exchange
such information as is necessary for the carrying out of this
Convention or of the domestic laws of the Contracting States concerning
taxes covered by this Convention insofar as the taxation thereunder is
not contrary to this Convention.

The exchange of information is not

restricted by Article 1 (Personal Scope).

Any information received by

a Contracting State shall be treated as secret in the same manner as

information obtained under the domestic laws of that State and shall be
disclosed only to persons or authorities (including courts and
administrative bodies) involved in the assessment or collection of, the
enforcement or prosecution in respect of, or the determination of
appeals in relation to, the taxes which are the subject of the
Convention.

Such persons or authorities shall use the information only

for such purposes.

These persons or authorities may disclose the

information in public court proceedings or in judicial decisions.
2.

In no case shall the provisions of paragraph 1 be construed so as

to impose on one of the Contracting States the obligation:
a)

to carry out administrative measures at variance with the
laws and administrative practice of that or of the other
Contracting State;

b)

to supply particulars which are not obtainable under the
laws or in the normal course of the administration of that
or of the other Contracting State;

c)

to supply information which would disclose any trade,
business, industrial, commercial or professional secret or
trade process, or information, the disclosure of which would
be contrary to public policy (ordre public).

3.

If information is requested by a Contracting State in accordance

with this Article, the other Contracting State shall obtain the
information to which the request relates in the same manner and to the
same extent as if the tax of the first-mentioned State were the tax of
that other State and were being imposed by that other State.

If

specifically requested by the competent authority of a Contracting
State, the competent authority of the other Contracting State shall
provide information under this Article in the form of depositions of

witnesses and copies of unedited original documents (including books,
documents, statements, records, accounts, or writings), to the same
extent such depositions and documents can be obtained under the laws
and administrative practices of such other State with respect to its
own taxes.

Article 24
EFFECT OF CONVENTION ON DIPLOMATIC AND CONSULAR
OFFICIALS, DOMESTIC LAWS, AND OTHER TREATIES
1. Nothing in this Convention shall affect the taxation privileges of
diplomatic or consular officials under the general rules of
international law or under the provisions of special agreements.
2. This Convention shall not restrict in any manner any exclusion,
exemption, deduction, credit, or other allowance now or hereafter
accorded—
a) by the laws of either Contracting State, or
b) by any other agreement between the Contracting States.

Article 25
ENTRY INTO FORCE

1. This Convention shall be subject to ratification or approval in
accordance with the applicable procedures of the Governments of the
Contracting States and it shall enter into force as soon as the parties
have notified one another that their respective constitutional
requirements have been met.
2. The provisions of this Convention shall have effect:

a)

In respect of tax withheld at the"source, to amounts paid or
credited on or after the first day of the second month next
following the date on which this Convention enters into
force,

b)

In respect of other taxes, to taxable periods beginning on
or after the first day of January next following the date on
which this Convention enters into force.

Article 26
TERMINATION

This Convention shall remain in force until terminated by the
Government of one of the Contracting States.

The Government of either

Contracting State may terminate the Convention at any time after 5
years from the date on which this Convention enters into force provided
that at least 6 months' prior notice of termination has been given
through diplomatic channels.

In such event, the Convention shall cease

to have effect:
1.

In respect of tax withheld at the source, to amounts paid or
credited on or after the first day of January next following
the expiration of the 6 months' period;

2.

In respect of other taxes, to taxable periods beginning on
or after the first day of January next following the
expiration of the 6 months' period.

DONE at Washington in duplicate, both in the English and Hungarian
languages, the two texts having equal authenticity, this 12th day of
February 1979.

FOR THE GOVERNMENT OF FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA:
THE HUNGARIAN PEOPLE'S REPUBLIC:

W. Michael Blumenthal
Secretary of the Treasury

Lajos Faluvegi
Minister of Finance

February 12, 1979

Excellency:
In connection with the Income Tax Convention signed
today, I should like to state our understanding of the
agreement reached by the delegations of the United States of
America and of the Hungarian People's Republic concerning
the application of certain provisions of the Convention:
1. In connection with Article 9, subparagraph 5c), it
is understood that Hungary will not impose a tax in such
cases.
2. Income (other than income from immovable property)
will be taxed in accordance with the provisions of Article 7
and Article 13, rather than in accordance with the
provisions of Article 19, if the person deriving the income,
being a resident of one Contracting State, carries on
business in the other Contracting State through a permanent
establishment situated therein, or performs in that other
State independent personal services from a fixed base
situated therein, and the right or property in respect of
which the income is paid is effectively connected with such
permanent establishment or fixed base.
3. In the case of dealings between an enterprise of
one Contracting State and a related enterprise of the other
Contracting State that involve conditions that differ from
those that would have been made between independent enterprises, each Contracting State may apply its internal law to
distribute, apportion or allocate income, deductions,
His Excellency
W. Michael Blumenthal
Secretary of the Treasury
United States of America

-2credits and allowances between the related enterprises, to
reflect any profits which would, but for those conditions,
have accrued to one of the enterprises. The internal law of
each Contracting State may also be applied to restrict the
exemption of interest provided in paragraph 1 of Article 10
and of royalties provided in paragraph 1 of Article 11 to
the amount of interest and royalties that would have been
agreed upon between unrelated parties in cases where
interest and royalties are paid by an enterprise of one
Contracting State to a related enterprise in the other
Contracting State.
4. It is agreed that each of the Contracting States
shall endeavor to collect on behalf of the other Contracting
State such amounts as may be necessary to ensure that relief
granted by the present Convention from taxation imposed by
such other Contracting State does not enure to the benefit
of persons not entitled thereto. This agreement shall not
impose upon either of the Contracting States the obligation
to carry out administrative measures which are of a
different nature from those used in the collection of its
own tax, or which would be contrary to its sovereignty,
security, or public policy.
I have the honor to propose to you that the present
note and Your Excellency's reply thereto constitute the
agreement of our two Governments on these points.
Accept, Excellency, the assurances of my highest
consideration.
Sincerely yours,

Lajos Faluvegi
Minister of Finance
Hungarian People's Republic

THE SECRETARY OF THE TREASURY
WASHINGTON

February 12, 1979

Excellency:
I have the honor to refer to your letter of today's
date concerning the Income Tax Convention signed today
reading as follows:
In connection with the Income Tax Convention signed
today, I should like to state our understanding of the
agreement reached by the delegations of the United States of
America and of the Hungarian People's Republic concerning
the application of certain provisions of the Convention:
1. In connection with Article 9, subparagraph 5c), it
is understood that Hungary will not impose a tax in such
cases.
2. Income (other than income from immovable property)
will be taxed in accordance with the provisions of Article 7
and Article 13, rather than in accordance with the
provisions of Article 19, if the person deriving the income,
being a resident of one Contracting State, carries on
business in the other Contracting State through a permanent
establishment situated therein, or performs in that other
State independent personal services from a fixed base
situated therein, and the right or property in respect of
which the income is paid is effectively connected with such
permanent establishment or fixed base.
3. In the case of dealings between an enterprise of
one Contracting State and a related enterprise of the other
Contracting State that involve conditions that differ from
those that would have been made between independent
His Excellency
Lajos Faluvegi
Minister of Finance
Hungarian People's Republic

-2enterprises, each Contracting State may apply its internal
law to distribute, apportion or allocate income, deductions,
credits and allowances between the related enterprises, to
reflect any profits which would, but for those conditions,
have accrued to one of the enterprises. The internal law of
each Contracting State may also be applied to restrict the
exemption of interest provided in paragraph 1 of Article 10
and of royalties provided in paragraph 1 of Article 11 to
the amount of interest and royalties that would have been
agreed upon between unrelated parties in cases where
interest and royalties are paid by an enterprise of one
Contracting State to a related enterprise in the other
Contracting State.
4. It is agreed that each of the Contracting States
shall endeavor to collect on behalf of the other Contracting
State such amounts as may be necessary to ensure that relief
granted by the present Convention from taxation imposed by
such other Contracting State does not enure to the benefit
of persons not entitled thereto. This agreement shall not
impose upon either of the Contracting States the obligation
to carry out administrative measures which are of a
different nature from those used in the collection of its
own tax, or which would be contrary to its sovereignty,
security or public policy.
I wish to inform you that I agree with the contents of
your letter.
Accept, Excellency, the assurance of my highest
consideration.
Sincerely yours,

W. Michael Blumenthal

FOR IMMEDIATE RELEASE
February 9, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES WITHHOLDING OF
APPRAISEMENT AND DETERMINATION OF
SALES AT LESS THAN FAIR VALUE WITH
RESPECT TO SUGAR FROM BELGIUM, FRANCE
AND THE FEDERAL REPUBLIC OF GERMANY
The Treasury Department today said it has determined that
sugar imported from Belgium, France, and the Federal Republic
of Germany is being sold in the United States at "less than fair
value." The case is being referred to the U. S. International
Trade Commission, which must decide within 90 days whether a
U. S. industry is being, or is likely to be, injured by these
sales.
If the decision of the Commission is affirmative, dumping
duties will be collected on sales found to be at less than fair
value. (Sales at less than fair value generally take place
when imported merchandise is sold in the United States for less
than in the home market or to third countries.)
Under the Antidumping Act, the Secretary of the Treasury
is required to withhold appraisement when he has reason to believe that sales at less than fair value are occurring. Withholding
of appraisement means that the valuation of imported goods for
Customs duty purposes is suspended. This is to permit the
assessment of any dumping duties as appropriately determined on
those imports.
Appraisement will be withheld for three months on imports
of sugar from Belgium, France, and the Federal Republic of Germany,
beginning on February 12, 1979.
The weighted-average margins of sales at less than fair
value in these cases were 103 percent, 102 percent, and 121 percent for Belgium, France, and the Federal Republic of Germany,
respectively.
Interested persons were offered the opportunity to present
oral and written views before this determination.
Imports of sugar from the three countries during 19 78 were
valued at about $13 million.
Notice of this determination will appear in the Federal
Register of February 12, 19 79.
B-14Q0

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FOR IMMEDIATE RELEASE
February 12, 1979

Contact: Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES SECOND DETERMINATION
IN ANTIDUMPING INVESTIGATION BEGUN AS A
RESULT OF STEEL TRIGGER PRICE MECHANISM
The Treasury Department today announced its final determination that exports of carbon steel plate from Taiwan produced
by China Steel Corp. (China Steel) are being sold at "less than
fair value" in the United States. The case is being referred
to the U. S. International Trade Commission, which must decide
within 90 days whether a U. S. industry is being, or is likely
to be, injured by these sales.
Accordingly, appraisement of shipments will be withheld
and bonds sufficient to cover potential dumping duties of 34
percent will be required of importers as of February 14, 19 79.
If the decision of the International Trade Commission is affirmative, dumping duties will be collected on sales found to be at
less than fair value. (Sales at less than fair value generally
occur when imported merchandise is sold in the United States for
less than in the home market or to third countries.)
This investigation is one of two pending "fast track" investogations begun on the basis of information collected through
the Trigger Price Mechanism (TPM), created to monitor imports
of steel mill products. A tentative determination with respect
to the other investigation, involving carbon steel plate from
Poland produced by Stahlexport Przedieriorstwoa, was published
in the Federal Register on February 5, 19 79. In that investigation the Treasury tentatively determined that sales at less
than fair value were being made. A final determination in that
case is due by May 5, 19 79, although it is anticipated that
such a determination will be made before then.
Both of these "fast track" investigations were initiated
in October 19 78 after evidence had been developed indicating
that the companies were selling significant quantities of carbon
steel plate to the United States at prices significantly less
than the applicable trigger prices, and, accordingly to information developed in administering
the TPM, apparently at less than
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B-1401
fair value.

- 2 -

The investigation conducted to date -indicates that sales
of carbon steel plate from China Steel to the United States were
made at less than fair value with margins as high as 38 percent.
The Antidumping Act requires the Secretary of the Treasury
to withhold appraisement and obtain bonds to cover potential
duties when he has reason to believe that sales at less than
fair value are taking place. Withholding of appraisement means
that valuation for Customs duty purposes of goods imported
after the effective date of the determination is suspended until
completion of the investigation. This is to permit assessment
of any dumping duties that are ultimately imposed on those imports.
Interested parties were offered the opportunity to present
oral and written views before this determination.
Notice of this action will appear in the Federal Register
of February 14, 1979.
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FOR IMMEDIATE RELEASE
February 12, 1979

Contact:

Del Dobbins
202/566-5158

BLACK HISTORY MONTH EXHIBIT
U. S. Treasurer Azie Morton will open a Treasury
Department exhibit featuring traditional African monetary systems at 12:45 today.
The exhibit is being sponsored by Treasury's
Office of the Secretary in recognition of February as
Black History Month.
"African Emblems of Wealth" features cloth, metal
and shell currencies basic to traditional African trade
and commerce. Items on display from East, West and
Central Africa are on loan from the Museum of African
Art in Washington.
Located in the north lobby of the main Treasury
building, the exhibit will run through the month of
February.

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B-1402

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IN6T0N, D.C. 20220

FOR IMMEDIATE'.'RELEASE,

TELEPHONE 506-2041

FEBRUARY 12,

1979

G. R. DICKERSON IS APPOINTED DIRECTOR
OF BUREAU OF ALCOHOL, TOBACCO AND FIREARMS
Secretary of the Treasury W. Michael Blumenthal today
appointed G. R. Dickerson, Deputy Commissioner of U. S. Customs
since 1974, as Director of the Bureau of Alcohol, Tobacco and
Firearms, effective February 19.
Mr. Dickerson joined Customs in 1951 as a junior management
assistant and since then has risen through the ranks.
Secretary Blumenthal said Mr. Dickerson's new appointment
in ATF illustrates the success and flexibility of the Government's
merit system of advancement, which enables a career professional
to reach the highest levels of responsibility. Both Customs and
ATF are agencies in the Treasury Department.
After service in the U. S. Army from 1945 to 1947, Mr.
Dickerson earned a B. A. degree in government from Southern
Methodist University, Dallas, Tex. He has also completed graduate
courses in management at the American University in Washington,
D. C.
After serving in increasingly responsible positions in
Customs, he was promoted in 1964 to Deputy Director of the Division of Inspection and Control in the Office of Operations. In
1967 he was named Assistant Commissioner for Administration. He
became Assistant Commissioner for Operations in 1972.
While Assistant Commissioner for Operations, Mr. Dickerson
was instrumental in the development and expansion of a number of
key programs, including the Tactical Interdiction Concept, the
Treasury Enforcement Communications System (TECS), the Drug
Detector Dog Program, major modernization programs to improve
efficiency and service, and increased international activities
such as expanded exchange and orientation programs with other
Customs services.
Mr. Dickerson has participated extensively in the work of
international organizations such as the International Civil
Aviation Organization, the Intergovernmental Maritime Consultative Organization, the Organization of American States, the
Economic Commission for Europe, and, in particular, the Customs
Cooperation Council.
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- 2 -

He received the Exceptional Service Award in October 1975,
the U. S. Customs Honor Award in 1977, Treasury Department
Superior Performance Awards in 1971 and 1973, and Special Act
or Service Awards in 1965 and 1967.
Mr. Dickerson and his wife, Mary Elizabeth, live in
McLean, Va.

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FOR IMMEDIATE RELEASE
FEBRUARY 13, 1979

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES DM NOTE SALE
The Department of the Treasury today announced that on
Wednesday, February 21, 19 79, it will offer notes denominated in
Deutsche marks in an aggregate amount of approximately DM 2.5
billion. The notes will have maturities of two and one-half and
three and one-half years and will be allocated between those maturities at the discretion of the Treasury.
The notes are being offered exclusively to, and may be owned
only by, residents of the Federal Republic of Germany. The notes
will be registered with the Bundesbank and may be transferred among
German residents up to four times in amounts of DM 250,000 or
multiples thereof.
The offering will be made exclusively in Germany through the
Deutsche Bundesbank (German Central Bank) acting as agent on behalf
of the United States. The notes will be offered at par, and the
interest rates for both the two and one-half and three and onehalf year notes will be announced on February 21, 19 79. Subscriptions
will be received by offices of the Bundesbank until 12:00 noon on
February 22. For each maturity, subscriptions must be for amounts
of DM 250,000 or multiples thereof. Payment for and issuance of
the notes will be on March 1, 19 79. They will not be listed, and
it is not expected that the prices of the notes will be publicly
quoted.
Under the Double Taxation Agreement between the Federal
Republic of Germany and the United States of America, natural persons resident in the Federal Republic of Germany and German companies
within the meaning of this Agreement are not subject to the
withholding tax on interest income payable under U. S. law.
This offering represents the second DM- denominated borrowing
pursuant to the joint Treasury and Federal Reserve Board announcement on November 1, 19 78, concerning measures to strengthen the
dollar.
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IN6T0N, O.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

February 13, 1979

TREASURY TO AUCTION $2,480 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,480
million of 2-year notes to refund approximately the same
amount of notes maturing February 28, 1979. The $2,477
million of maturing notes are those held by the public,
including $388 million currently held 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
$368 million of the maturing securities that may be refunded
by issuing additional amounts of the new notes at the
average price of accepted competitive tenders. Additional
amounts of the new securities may also be issued at the
average price to Federal Reserve Banks, as agents for foreign
and international monetary authorities, to the extent that the
aggregate amount of tenders for such accounts exceeds the
aggregate amount of maturing securities held by them. This
procedural change will not affect the amount of securities
awarded to foreign and international monetary authorities,
although, compared to the previous procedure, it could
potentially reduce the amount of securities awarded competitively to private investors.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.

oOo
B-1405
Attachment

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED FEBRUARY 28, 1979
February 13, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date February 28, 1981
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 5% of face amount
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.

$2,480 million
2-year notes
Series Q-1981
(CUSIP No. 912827 JL 7)
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
August 31, 1979; February 29
and August 31, 1980; and
February 28, 1981
$5,000
Yield auction
None
Noncompetitive bid for
$1,000,000 or less

Acceptable
Wednesday, February 21, 1979,
by 1:30 p.m., EST
Wednesday, February 28, 1979

Monday, February 26, 1979

Friday, February 23, 1979
Monday, March 5, 1979

TRANSCRIPT OF NBC INTERVIEW WITH W . MICHAEL BHJMENTHAL
SECRETARY OF THE TREASURY
ON TODAY SHCW
•Thursday, February 15, 1979

TvM 3 R 0 K A W :
T h e "Jew York T i n e s is r e p o r t inq t h i s m o r n ing that Ab'j Dhabi is r a i s i n g the p r i c e of oil by seven p e r c e n t .
Iranian p r o d u c t i o n , of c o u r s e , has been cut back c o m p l e t e l y .
All
this will have a biq e f f e c t not o n l y on A m e r i c a n i n f l a t i o n , but
also on the A m e r i c a n life s t y l e .
"Will we have to have r a t i o n e d
q a s o l i n e ? , " one of the m a n y q u e s t i o n s t h a t no d o u b t will be
asked this m o r n i n q of T r e a s u r y S e c r e t a r y M i c h a e l B l u m e n t h a l ,
who is s t a n d i n q by with 3ob A b e r n e t h y in W a s h i n g t o n .

303
Blurjjnthal .

A3ER N IETHY:

Good

morning,

The other day Energy Secretary Schlesinqer told
gress that b e c a u s e of the c u t - o f f of
situation p r o s p e c t i v e l y m o r e s e r i o u s
of ' 7 3 - ' 7 4 .
Do you a g r e e with that

Tom.

V/elcome,

Conoil from Iran, we
than the A r a b oil
assessment?

Secretary

face a
embargo

SECRETARY OF THE TREASURY W. MICHAEL BLUMENTHAL: Well,
it's p e r f e c t l y t r u e that we face a p o t e n t i a l l y s e r i o u s s i t u a t i o n .
It's not c r i t i c a l , but it's a s e r i o u s s i t u a t i o n .
And we have to
pay a great deal of a t t e n t i o n to it.
A lot d e p e n d s on what h a p pens in I r a n , what h a p p e n s in o t h e r oil p r o d u c i n g c o u n t r i e s , a n d ,
i m p o r t a n t l y , what we do In our own c o u n t r y .
ABERNETHY: I want to qet to that. Immediately after
Secretary S c h l e s i n g e r said what he did a b o u t the s e r i o u s n e s s of
the Iran c u t - o f f , a lot of p e o p l e a r o u n d the world sold d o l l a r s
and b o u g h t g o l d .
Was it the s i t u a t i o n t h a t c a u s e d t h a t r u n , or
was It w h a t S e c r e t a r y S c h l e s i n q e r s a i d ?

SECRETARY BLUMENTHAL:
It's the situation that Secretary Schleslnger described that caused people to buy gold*
That was about a day's flurry. Actually, t*he dollars 9 doing
wall.
ABERNETHY: There's a report today,.as Tow said, that
some of the OPEC countries are now going to take advantage of
the Iran shutdown to boost up their prices even mora than what
had already been announced; another seven percent perhaps* Anything we can do about that?
SECRETARY BLUMENTHAL: Nothing we can do about It..
When a product is In short supply, the people who are selling It
raise the price. And that's bad. That's going to hurt all of
the economies of the world.
ABERNETHY: The official administration estimate of
the Inflation rate this year has been 7.4Jt. Now oil prices are
going up faster, I think, than had been anticipated. Last month
wholesale prices were up 1.3$ Just for that month. Doesn't It
now look as If prices for '79 will go up more than you'd expected?
SECRETARY BLUMENTHAL: I think really that's very difficult to tell In the month of February. When we're talking about
7.4%, we're predicting a comparison of the last quarter of this
year to the last quarter of the previous year. We're going to
have to wait.
Obviously rising oil prices make It more difficult to
beat inflation. But we're making progress on other fronts a
little better than we thought. So we have a chance.
ABERNETHY: One of your major Jobs Is to defend the
value of the dollar around the world.
If we face big Increases
In oil prices and If we face the possibility of shortages, wouldn't
it make sense right now to do far more than we're doing to conserve?
SECRETARY BLUMENTHAL: It makes a lot of sense to do
more than we're doing, than all of us are doing. The President
referred to that In his press conference the other day.
I think
he's — I wouldn't be at all surprised If he's going to talk about
that and he's going to suggest some things In the future.
ABERNETHY: You know, a speech to the country, or somethin
like that?
SECRETARY BLUMENTHAL: Well, I'm sure that he's going to
have to talk about that more, yes.
ABERNETHY: But would you favor, for Instance, a big new
tax on gasolIne?

3SECRETARY BLUMENTHAL:
I don't like to talk In terns of
new taxes.
I think the price of oil will go up for all kinds of
reasons and should go up so that we conserve more. And there're
many ways In which this can happen. And we're going to have to
finish some studies and make some recommendations to the President before he can make up his mind what he wants to recommend.
ABERNETHY: But It's your feeling that the price
should go up.
SECRETARY BLUMENTHAL: Oh, yes. I think It has to go
up*
ABERNETHY: Secretary, Tom has a question In New York.
BROKAW: Mr. Secretary, under the present conditions,
can you foresee avoiding gas rationing In this country, the shutdown In Iran and the consumption levels being what they are?
SECRETARY BLUMENTHAL: I think I can most certainly
see avoiding rationing, because there're so many unknowns and
there's so much we can do with conservation; there's so much we
can do through a variety of measures In the private sector, as
well as In the business sector, to save fuel. And also we don't
know what the situation in Iran will be like. I don't really
think that rationing Is essential at all.
BROKAW: I want to ask you about the situation In Iran.
Yesterday one of the Energy Department officials was saying that
there had been some Informal signals from Iran that they would
be resuming production before the end of the year. But that's
all very tentative, Isn't It?
SECRETARY BLUMENTHAL: Oh, It's very tentative, because
ths situation Is confused at this point. Nobody knows exactly what
Is going to happen. But certainly for the economy of Iran to develop and to survive, some exporting will be necessary. And I'm
sure that they will be exporting again when things settle down.
ABERNETHY: I want to change the subject, Mr. Secretary.
Years ago you and your family escaped from Nazi Germany and went
to China. . You grew up, I think you've said, In the slums of Shanghai. Now you're the U. S. Secretary of the Treasury, and next
week you become the first American official to go to Shanghai, to
China since recognition. You're even going back to Shanghai, back
to your old neighborhood.
How does that make you feel?
SECRETARY BLUMENTHAL: It makes me feel proud. It makes
we feel excited; excited because we are going to have normal relations with a big and Important country; proud to be representing

-4ny country. And also excited about the prospects for helping President Carter establish that process for the benefit of people
in both countries.
ABERNETHY: There's business to be done, of course.
Are you convinced that the Chinese can pay for all they want to
buy?
SECRETARY BLUMENTHAL: Well, they can't pay for all they
want to buy. They're going to have to ration themselves and go
slowly. I think they can pay for a lot, and it can Increase
from year to year. But it's not all going to happen In one or
two years. They're going to have trouble paying for all of the
goods that they really need.
ABERNETHY:
I uck on your tr i p.

Secretary Blumenthal, many thanks.

Good

fa IS 79
FOR IMMEDIATE RELEASE Contact: Alviri' Mi'Hartal
February 15, 1979
(202)566-8381
TREASURY ANNOUNCES SECOND QUARTER 1979
TRIGGER PRICES
The Treasury Department today announced tha-t the
trigger price bases and extras that were in effect for the
major steel mill products covered by the Trigger Price
Mechanism (TPM) during the first quarter of 1979 will
remain unchanged for the second quarter. TPM freight rates
will increase by $1 and TPM handling on the West Coast
will increase by $2. Second quarter trigger prices will
apply to all shipments exported on or after April 1, 1979.
Trigger prices are based on the full cost of production
of the worldfs most efficient group of steel producers,
the Japanese steel companies. Each quarter the Treasury
Department updates those estimated costs to reflect changes
in these companies1 cost of production. The TPM was designed
to enable Treasury to discharge its responsibilities under
the Antidumping Act rapidly and effectively.
The TPM includes a "flexibility band" of.5 percent to
moderate price fluctuations, particularly those due to exchange rate changes. This band was used in establishing
trigger prices for the first quarter of 1979 at 3 percent
below Treasuryfs estimated total production costs which had
increased by 10 percent because of yen appreciation. Trigger
prices for the second quarter are 1.2 percent above Treasury's
estimated total production costs. The amount over estimated
total production costs results from restoration of 1.2 percent
from the flexibility band.
The second quarter revision in the cost-of-production
estimates are based on a 197 yen/dollar exchange rate
(the average for the period December 11 through February 9);
for the first quarter, a 187 rate (the average for the
period September 4 through November 3) was used.
B-1406

-2Second quarter cost estimates reflect information
from a new and complete submission from Japan's Ministry
of International Trade and Industry (MITI) on the costs
of the six major integrated steel producers and the
change in the yen/dollar exchange rate used.
The average cost of production per net ton of finished
product is estimated to be $34 7.77, 3.9 percent lower than
the first quarter cost estimate and 1.2 percent lower than
the average first quarter trigger price level.
For products produced by the electric furnace
companies, second quarter trigger prices will be decreased
.7 percent or .8 percent, depending on the product.
These prices reflect the yen depreciation and use of
1.2 percent of the flexibiility band. Treasury's estimate
of the production costs of these producers decreased
between 1.9 percent and 2.0 percent.
The Department is issuing appropriate revised pages
for the TPM manual reflecting electric furnace cost changes.

DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
NOTICE
Imported Steel Mill Products Trigger Price Mechanism:
Second Quarter 1979 Revision of Trigger Prices
The Treasury Department hereby announces steel mill
product trigger prices for the second quarter of 1979. These
trigger prices are used by the Treasury Department to monitor
the prices of steel mill product imports for the possible
initiation of dumping investigations under the Antidumping
Act. Each quarter Treasury reviews the cost of Japanese
steel production and revises trigger prices as dictated by
cost changes.
Second quarter trigger base prices and extras for steel
mill products of the integrated steel producers, which account
for 90 percent of U.S. steel mill imports, are unchanged from
their first quarter levels.
The cost estimates for the second quarter, on which
trigger prices are based, are calculated using a 197 yen/dollar
exchange rate. The resulting decrease in Japanese steel
production costs is accompanied by decreases in other cost
factors and increases resulting from the decline in the
five-year capacity utilization of the Japanese integrated
producers.
The TPM included a "flexibility bandM of 5 percent to
moderate price fluctuations, particularly those due to exchange rate changes. This band was used in establishing
trigger prices for the first quarter of 1979 at 3 percent
below Treasury's estimated total production costs which had
increased by 10 percent. 1.2 percent of the amount used in
the last quarter is being restored.
The trigger prices of steel mill products of electric
furnace producers will decrease .8 percent for Group A
products, and .7 percent for Group B and Group C products.
These prices reflect cost decreases of 2.0 percent and 1.9
percent, and the use of 1.2 percent of the flexibility
band.

-2I.

Integrated Producers

Treasury calculated the cost of producing steel in Japan
for the second quarter trigger prices based on a 197 yen/
dollar exchange ratio (the average rate between December 11,
1978, and February 9, 1979) and a recent cost submission by
Japan's Ministry of International Trade and Industry (MITI).
This submission updates the complete cost information on the
six major Japanese steel producers provided by MITI in late
1977 and early 1978 for the original TPM cost calculations.
Treasury has reviewed the MITI submission and has conducted in-depth discussions with MITI representatives to probe
the cost submission and obtain additional data. The MITI data
was further verified through comparison, where possible, with
published information including the financial statements of
the six major Japanese steel firms for the first half of their
1978 fiscal year, April through September 1978, and other
information available to the Department.
Table 1 below shows the resulting average cost per ton
of finished product for integrated producers.
Table 1: Japanese Costs of Production
Estimates: Integrated Steel Producers
(U.S. dollars per ton of finished product)
First Second
$ Quarter
116..20
Quarter
$ 119.
,03
81..70
72.,21
1979
1979
97..75
94.,07
Basic Raw Materials
33..99
28.,65
Other Raw Materials
27,.58
29.,72
27.
.34
Labor
25.,96
26.
,37
25.,12
Other Expenses
(11..34)
(10.•82!
Depreciation
Interest
Profit*/
Yield Credit
Total Cost per MT $ 399.59 $ 383.94
Total Cost per NT
$ 362.51
$ 348 31
*/Profit=.08 (Raw materials + labor + other'expenses)
Tkf.Sl4 decrease in cost Per net ton from costs used
to establish first quarter trigger prices reflects several
changes m cost components, the largest being the depreciation
of the yen relative to the dollar from 187 yln/dollar during
r ^ e ^ ; ? ° n t , ? ^ l m e P e r i ° d r u s e d for the first quarter cost
calculation (the average for September 4 through November 3)
1 dUri
the period used for
SaJ?Iry?lid0
the second '
10J ?
0A?
e
the
for
inilil
aboutI a*}?*
$13 decrease
*' A l o nin
' the
cost
y e n depreciation
estimates. accounted

-3This decrease was partially offset by a decrease in the
capacity utilization average resulting from a roll-over of
the five-year capacity utilization average. The five-year
period now covers 1974-1978; thus 1978, a year of low utilization for the six integrated producers, replaced 1933, a year
of high utilization, in the calculation of the average. This
caused a decrease of approximately five percentage points in
the five-year capacity utilization average and almost a $7
increase in the cost estimate.
Continued conversion to continuous casting allowed the
Japanese industry to improve its ingot-to-product yield; this
improvement produces about a $4 decrease in Japanese steel
production costs. Treasury analysts consider a portion of
the yield rates reported by MITI to represent the production
of secondary material; hence, instead of the 87.5 percent yield
rate reported by MITI, Treasury utilized 83.7 percent. The
difference between those two figures is treated as secondary
?uality material and valued as such in the cost calculations
yield credit).
Changes in the cost of materials and capital — some
increases and some decreases — resulted in a net cost saving
of about $4. This net saving is the result of cost-cutting
measures taken by the integrated producers as well as bargaining with their suppliers. Most of the increase in labor
costs during 1978 was accounted for in Treasury's third
quarter 1978 TPM cost estimate, following the integrated producers1 Spring negotiations with their work force.
II. Electric Furnace Producers
Japan's electric furnace steel producers have no uniform
fiscal year; hence, MITI was unable to provide a similar fresh
data submission for these producers as a whole. However,
Treasury adjusted its estimates of electric furnace production
costs to reflect the depreciation of the yen. Table 2 shows
the second quarter TPM estimates of electric furnace production
costs.
A careful review of other cost components with particular
attention paid to the cost of scrap, which accounts for nearly
50 percent of the production costs of electric furnace products, indicated that no other change is required in our cost
estimates. A scrap cost increase was shown in the third quarter
of 1978 and a raise negotiated in labor wages was shown in
the fourth quarter.

TABLE 2
Japanese Production Costs: Electric Furnace Products
(U.S. dollars per metric ton of finished product)
3/
Group C-'
1st Qtr.
2nd Qtr.
1979
1979
$164.30
$156.74

Group Alst Qtr~!
2nd Qtr.
1979
1979

Group B1st Qtr.
2nd Qtr.
1979
1979

Basic Raw Materials

$165.76

$157.81

$178.22

$169.92

Other Raw Materials

35.76

34.76

42.24

41.08

38.61

37.55

Labor

32.43

30.80

36.92

35.05

25.85

24.56

Other Expenses

12.91

12.25

15.76

14.96

16.27

15.45

Depreciation

7.02

6.67

8.93

8.48

7.19

6.82 ,

Interest

7.89

7.47

11.27

10.69

7.23

6.86

Profit^7

19.75

18.85

21.85

20.88

19.60

18.74

Scrap Credit

(2.98)

(2.83)

(3.36)

(3.19)

(2.94)

(2.79)

Total $/MT

$278.54

$265.78

$311.83

$297.8 7

$276.11

$263.93

Total $/NT

$252.69

$241.11

$282.89

$270.23

$250.48

$239.44

-Group A products are equal angles, unequal angels, channels, and I-beams.
-^Group B products are hot rolled strip from bar mills; merchant quality hot bars; hot
rolled round bars, squares, and round cornered squares; and bar size channels.
2'crotio C products are concrete reinforcing bars, plain and deformed.
4/Profit=.08

(Raw materials

+ labor

+ other

expenses)

-5III.

Other Factors

At Treasury's request, MITI also submitted an update
of the freight and handling costs of shipping steel from
Japan to the United States. TPM freight rates will uniformly
increase $1 for the second quarter, and the West Coast handling charge will increase by $2.
IV. Revision Schedule
MITI requested that trigger prices be revised only semiannually instead of quarterly as is Treasury's current practice.
Treasury does not feel that a change in methodology is warranted
at this time.
V. Replacement Pages
Replacement pages hereby issued for electric furnace
products follow.

FEB 1 5 1979
Date:

3-4
Rev. Feb. 1979
STANDARD CARBON STEEL CHANNELS, ASTM A36
Category AISI 3,9
Tariff Schedule Number (s) 609.8041 O.U/lb.
609.8070

O.U/lb.

Base Price per Metric Ton 1st Qtr. 2nd Qtr.
$276 $274
Charges to CIF Ocean Freight Handling Interest
West Coast $24 $9 $4
Gulf Coast
$27
5
Atlantic Coast
$30
4
Great Lakes
$36
4
Insurance 1% of base price + extras +ocean freight
Extras
Size Extra

5
5
7

3-5
Rev. Feb. 1979

SIZE EXTRAS
($/MT)

1st Quarter

2nd Quarter

CI

13

13

C3

Base

Base

C4

Base

Base

C6

13

13

C8

20

20

CIO

20

20

C12

26

26

CI 5

26

26

SIZE

3-6
Rev. Feb. 1979
UNEQUAL LEG CARBON STEEL ANGLES ASTM A-36

Category AISI 3,9
Tariff Schedule Number (s)

609.8035
609.8050

Base Price per Metric Ton

0. U/lb.
0. U/lb.

1st Quarter

2nd Quarter

$290

Charges to CIF

Ocean Freight

West Coast
Gulf Coast
Atlantic Coast
Great Lakes
Insurance 1% of base price + extras
Extras
Size Extra

$24
$27
$30
$36

+ocean freight

$288
Handling

Interest

$9
5
4
4

$4
5
5
7

3-7
Rev. Feb. 1979

SIZE EXTRAS
($/MT)

1st Quarter

2nd Quarter

3" x 3"

13

13

3-1/2" x3"

13

13

4" x 3"

Base

Base

5" x 3"

Base

Base

6" x 3-1/2"

13

13

6" x 4"

13

13

8" x 4"

13

13

SIZE

3Rev.
EQUAL LEG CARBON STEEL ANGLES ASTM A36

Category AISI

3,9

Tariff Schedule Number (s)

Base Price per Metric Ton

609.8035
609.8050

O.U/lb.
O.U/lb.
2nd Quarter

1st Quarter

$2^

$261
Charges to CIF

Ocean Freight

Handling

West Coast
$24
Gulf Coast
$27
Atlantic Coast
$30
Great Lakes
$36
Insurance 1% of base price + extras +
Extras
Size Extra

Interest

$4
$9
5
5
5
4
6
4
ocean freight

3-9
Rev. Feb. 1979

SIZE EXTRAS
($/MT)

1st Quarter

2nd Quarter

20

20

9

9

2" X 2"

Base

Base

3" X 3"

Base

Base

4" X 4"

Base

Base

5" X 5"

20

20

6" X 6"

32

32

8" X 8"

32

32

SIZE
1" x 1
1- 1/2" x 1-1/2'

3-1
Rev.
STANDARD CARBON STEEL "1" BEAMS ASTM A36

Category AISI

3,9

Tariff Schedule Number (s)

O.U/lb.
O.U/lb.

. 609.8045
609.8090

Base Price per Metric Ton

1st Quarter

$315

$318
Charges to CIF

Ocean Freight

2nd Quarter

Handling

Interest

$9
$24
West Coast
5
$27
Gulf Coast
5
$30
Atlantic Coast
4
$36
Great Lakes
Insurance U of base price + extras + ocean freight
Extras
1.

Size Extra

$4
6
6
7

3-11
Rev. F e b . 1979
SIZE EXTRAS
($/MT)

SIZE

1st Quarter

2nd Quarter

S12 x 31.8 lb./ft

Base

Base

S8 X 18.4 lb./ft

Base

Base

S6 x 12.5 lb./ft

13

13

S4 x 7.7 lb./ft

13

13

M-12" x 11.8 lb./ft

Base

Base

M-10" x 8.0 lb./ft

Base

Base

M-8"

x 6.5 lb./ft

13

13

M-6"

x 4.4 lb./ft

35

35

SIZE EXTRAS JUNIOR BEAMS

8-1
Rev- Feb. 1979

PLAIN AND DEFORMED CARBON STEEL CONCRETE REINFORCING BARS ASTM A615

Category AISI

8

Tariff Schedule Numt>er (s)

608. 4000 7 1/2%
608. 4100 7 1/2%

Base Price per Metric Ton

1st Quarter

2nd Quarter

$257
Charges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes

Ocean Freight
$24
$27
$30
$36

Handling

$255
Interest

$9
5
4
4

Insurance 1% of base price + extras + ocean freight
Extras
1.
2.

Size Extras
Grade Extras

$4
5
5
6

8-2
Rev. Feb. 1979

SIZE AND GRADE EXTRAS
($/MT)
1st Quarter

2nd Quarter

GRADE 40

Extra

Extra

#3

16

16

#4

9

9

#5 THROUGH #10

Base

Base

#11 THROUGH #12

16

16

#3

32

32

#4

26

26

#5 THROUGH #10

18

18

#11 THROUGH #12

32

32

GRADE 60

9-1
Rev. Feb. 1979
HOT ROLLED CARBON STEEL BAR SIZE CHANNEL ASTM A36

Category AISI

9

Tariff Schedule Number (s)

608.8070 - 0.1C per lb.
1st Quarter

Base Price per Metric Ton
Charges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes

$384

2nd Ouarter
$381

Ocean Freight

Handling

Interest

$24

$9

$6

27
30
36

5
4
4
Insurance 1% of base price + extras + ocean freight

Extras
1.

Size Extras

7
7

9-2
Rev. Feb. 1979

SIZE EXTRA
($/MT)

1st Quarter

2nd Quarter

EXTRA

EXTRA

1" x 1/2" x 1/8"

66

66

1-1/4" x 1/2" x 1/8"

40

40

1-1/2" x 1/2" x 1/8"

40

40

2" x 1" x 1/8"

13

13

2" x 1" x 3/16"

BASE

BASE

SIZE

10-3
Rev. Feb. 1979

MERCHANT QUALITY HOT ROLLED CARBON STEEL SQUARES AND
ROUND CORNERED SQUARES ASTM A 36 or AISI 1020

Category AISI

10

Tariff Schedule Number (s) 608.4660-7%

Base Price per Metric Ton

1st Quarter

2nd Ouarter

$320

$318

Charges to CIF

Ocean Freight

Handling

Interest

West Coast
Gulf Coast
Atlantic Coast
Great Lakes

$24

$9

$5

27
5
30
4
36
4
Insurance 1% of base price + extras + ocean freight

Extras
1.

Size Extra

6
6
8

10-4
Rev. Feb..1979

SIZE EXTRAS
($/MT)
1ST Quarter

2nd Ouarter

SIZE

EXTRA

EXTRA

3/8"

40

40

7/16"

26

26

1/2"

20

20

5/8"

7

7

3/4" to 1-3/4"

BASE

BASE

2"

14

14

2-1/4" to 3"

26

26

10-5
Rev. Feb. 1979
MERCHANT QUALITY HOT ROLLED CARBON STEEL ROUND
BAR ASTM A36 or AISI 1020

Category AISI

10

Tariff Schedule Number (s) 608.4540-7%
1st Quarter 2nd Quarter
Base Price per Metric Ton $320 $318
Charges to CIF Ocean Freight Handling Interest
$9 $5West Coast
Gulf Coast
Atlantic Coast
Great Lakes

$24
27
30
36

5
4
4
Insurance 1% of base price + extras + ocean freight
Extras
1. Size Extra

6
6
8

10-6
Rev. Feb. 1979

SIZE EXTRA
($/MT)
1st Quarter 2nd Quarter

DIAMETER

7/16"
1/2" 13 13
5/8" to 1" BASE BASE
1-1/3" to 2" 13 13
2-1/4" to 3" 24 24

EXTRA

EXTRA

40

40

10-7
Rev. Feb. 1979

MERCHANT QUALITY CARBON STEEL FLAT BARS ASTM A36 OR AISI 1020

Category AISI

10

Tariff Schedule Number (s) 608.4620-7%
1st Quarter 2nd Quarter
Base Price per Metric Ton $291 $289
Charges to CIF Ocean Freight Handling Interest
$9 $4West Coast
Gulf Coast
Atlantic Coast
Great Lakes

$24
27
30
36

5
4
4
Insurance 1% of base price + extras + ocean freight
Extras
1.

Size Extra

6
6
7

SIZE EXTRA
1st and 2nd Quarters
(1)

(U.S. $ per Metric Ton)

Flat Bar

1/2" 5/8" 3/4" 1"
Width/
Thickness

1 1/4"

1 1 / 2 " 1-3/4"

2" 2 1/2"

5"

6"

7"

8"

•

*

*

*

B

B

B

B

B

13

B

B

B

B

B

B

B

16

6

B

B

B

B

B

B

B

16

13

13

6

6

6

6

6

6

6

16

13

13

13

6

6

6

6

6

6

6

16

•

k

*

k

6

6

6

6

6

6

6

16

*

*

26

26

26

6

6

6

6

6

6

6

•

•

•

*

*

k

*

*

10

10

10

10

10

' 21

*

*

•

•

•

•

k

•

•

16

16

16

16

16

26

*

*

•

•

•

*

k

*

•

21

21

21

21

21

31

53

39

33

20

16

16

16

16

16

1/4"

46

33

26

13

6

6

6

B

3/8"

•

*

26

13

6

6

6

1/2"

*

•

*

13

6

6

5/8"

•

*

*

26

13

3/4"

*

•

*

26

7/8"

•

•

*

1"

•

•

1 1/8"

*

1 1/4"
1 1/2"

Base

3 1/2' 4"

*

3/16"

B:

3"

*:

Not available

)

•
*

. «

<

**1
(t>
<• o
I—» I

fkpartmentoftheTR[J[$URY j j
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
February 15, 1979

Contact:

Alvin M. Hattal
566-8381

TREASURY DEPARTMENT WTTHHDIDS APPRAISEMENT OF
CONDENSER PAPER FROM FRANCE AND FINIAND
Hie Treasury Department today said it is withholding appraisement on
imports of condenser paper from France and Finland based on a tentative
determination that they are being sold in the Uhited States at less than
fair value. Hie withholding of appraisement will not exceed six months.
A final determination will be issued in .three months.
Utoder the Antidumping Act, the Secretary of the Treasury is required
to withhold appraisement when 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 imported merchandise is sold in the
Uhited States for less than in the heme market or to third countries.)
Withholding of appraisement means that the valuation for Customs
duty purposes of goods imported after the date of the tentative determination is suspended until completion of the investigation. This is to
permit any assessment of dumping duties that are ultimately imposed on
those imports.
Cases in vtfiich a final determination of sales at less than fair
value is issued are referred to the U.S. International Trade Commission
to determine whether an Anerican industry is being or likely to be
injured by such sales. Both sales at less than fair value and injury
must be found to exist before a dumping finding is reached.
Notice of this action will appear in the Federal Register
of February 20, 1979.
Imports of condenser paper frcm France during January-October 1978
were valued at about $1.7 million. Imports frcm Finland in the period
Ftebruary-July 1978 were valued at about $528,000.

* * * • • * * * • * * * • * *

B-1407

FOR IMMEDIATE RELEASE
February 15, 197 9

Contact: Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES PRELIMINARY COUNTERVAILING DUTY
ACTION ON GRAIN-ORIENTED SILICON STEEL FROM ITALY
The Treasury today announced its preliminary determination
that the Government of Italy is not subsidizing exports to
the United States of grain-oriented silicon steel.
This investigation was begun after information was received
on behalf of the American industry. A final decision in this
case will be made as soon as interested parties have an opportunity to comment on the preliminary determination.
Treasury's preliminary investigation found that the product
is produced by Terni, a subsidiary of the Finsider group of
Italian steel companies. Although Italian government funds have
been committed to increase the capital of Finsider, there is no
evidence that these funds benefited Terni or the production or
export of grain-oriented silicon steel.
Notice of this action appeared in the Federal Register
of February 14, 1979.
Imports of this merchandise from Italy during the second
half of 1978 were valued at about $4 million.
*

B-1408

*

*

FOR IMMEDIATE RELEASE
February 16, 1979

Contact: Alvin M. Hattal
566-8381

TREASURY ANNOUNCES FINAL DETERMINATION IN
COUNTERVAILING DUTY INVESTIGATION OF PAPERMAKING
MACHINES AND PARTS FROM FINLAND
The Treasury Department today announced a final
determination that imported papermaking machinery and parts
thereof from Finland are not being subsidized.
The Countervailing Duty Law requires the Secretary of
the Treasury to collect an additional duty equal to the
subsidy on merchandise exported to the United States.
Treasury's investigation found that one Finnish
manufacturer of this merchandise received benefits in
the form of preferential interest rates on commercial
loans as a result of guarantees supplied by the Government
of Finland, but that these benefits were less than 0.02
percent ad valorem. Such benefits are considered de minimis
in size, or too inconsequential to justify consideration as
a subsidy.
Notice of this action will appear in the Federal
Register of February 20, 1979.
Imports of this merchandise from Finland during the
first 10 months of 1978 were valued at about $4-million.

B-1409

N6T0N, OX. 2Q220

TELEPHONE S06-29C!
®K

3u7
LIBRARY
ROOM 5004

FOR IMMEDIATE RELEASE
February 16, 1979

ILQ z3'73

Contact: Ro srt Nipp
1 KLAJUKY DLPA.Vir»cNT
202/566-5328

Secretary Blumenthal to Visit
People's Republic of China and Japan
Secretary of the Treasury W. Michael Blumenthal will
lead a U.S. delegation to the People's Republic of China
to discuss bilateral issues including trade relations and
economic cooperation.
The Secretary and his party depart Washington for
Peking on Friday, February 23, returning Monday, March 5.
In Peking, the Secretary will meet with high level
PRC officials to discuss the settlement of frozen private
claims, trade relations and other issues that must be
addressed to permit normalization of economic and commercial relations. Brief discussions on these topics were
initiated during the visit of Vice Premier Deng to
Washington in January.
Working sessions will be held on the requirements for
a trade agreement; the banking and investment mechanisms
of each country; and the tax treatment of foreign firms
operating in China. Secretary Blumenthal will also participate in the ceremonies marking the opening of the U.S.
Embassy in Peking on March 1.
Following his visit to Peking the Secretary will
visit Shanghai, where he will visit factories and other
commercial enterprises. Secretary Blumenthal will depart
China on March 4 for Tokyo where he will meet with government officials. He will brief Japanese officials on his
visit to China and discuss with them the global economic
and monetary outlook as well as bilateral matters of mutual
interest.
Attached is a list of the delegation travelling with
the Secretary.

B-1410

(over)

SECRETARY BLUMENTHAL'S DELEGATION
Members of Official Delegation
W. Michael Blumenthal, Secretary of the Treasury
Mrs. Blumenthal
Anthony M. Solomon, Under Secretary of the Treasury
for Monetary Affairs
Robert Mundheim, General Counsel of the Treasury
Julius Katz, Assistant Secretary of State
Joseph Laitin, Assistant Secretary of the Treasury
for Public Affairs
Michael Oksenberg, National Security Council
Richard W. Fisher, Executive Assistant to the Secretary
of the Treasury
Scott Hallford, Special Assistant to the Secretary of the
Treasury
Russell Munk, Assistant General Counsel of the Treasury
Mark B. Feldman, Deputy Legal Advisor, Department of State
Emil Sunley, Deputy Assistant Secretary for Tax Policy,
Department of the Treasury
Stanley Marcus, Deputy Assistant Secretary of Commerce
John Renner, Office of the Special Trade Representative
Patricia Haas, International Economist, Office of East-West
Trade, Department of the Treasury
Stan Shapiro, Assistant Director for General Services,
Department of the Treasury
Elizabeth Astudillo, Secretary to the Secretary
of the Treasury
Janice Johnson, Delegation Secretary

garment of theTREASURY
NGTON, D.C. 20220

TELEPHONE 566-2041

February 16, 1979

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,000 million of 13-week Treasury bills and for $3,002 million
of 26-week Treasury bills, both series to be issued on February 22, 1979,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing May 24, 1979
Price

High
Low
Average

97.660
97.646
97.651

26-week bills
maturing August 23, 1979

Discount
Rate

Investment
Rate 1/

Price

9.257%
9.313%
9.293%

9.61%
9.67%
9.65%

95.270 9.356%
95.258
9.380%
9.370%
95.263

Discount
Rate

Investment
Rate 1/
9.96%
9.98%
9-97%

Tenders at the low price for the 13-week bills were allotted 71%.
Tenders at the low price for the 26-week bills were allotted 89%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

Received

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
39,425,000
4,832,965,000
22,115,000
98,830,000
34,695,000
29,025,000
205,255,000
43,980,000
12,935,000
20,625,000
10,180,000
211,830,000

$
39,425,000
2,560^565,000
22,115,000
23,830,000
34,695,000
29,025,000
67,355,000
18,980,000
12,935,000
20,625,000
10,180,000
149,830,000

$
21,925,000
4,957,565,000
7,725,000
20,845,000
15,145,000
19,750,000
183,810,000
43,080,000
11,910,000
29,765,000
5,160,000
265,385,000

$
21,925,000
2,740,700,000
7,725,000
14,845,000
12,145,000
19,750,000
18,810,000
11,080,000
11,910,000
20,155,000
5,160,000
105,385,000

Treasury

10,755,000

10,755,000

12,070,000

12,070,000

TOTALS

$5,572,615,000

$3,000,315,000a/

$5,594,135,000

/Includes $387,470,000 noncompetitive tenders from the public.
/Includes $204,055,000 noncompetitive tenders from the public.
'Equivalent coupon-issue yield.
•1411

Accepted

$ 3,001,660,000W

FOR RELEASE AT 4:00 P.M.

February 22,

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $3,320 million, of 364-day
Treasury bills to be dated March 6, 1979,
and to mature
March 4, 1980
(CUSIP No. 912793 3E 4). This issue will not
provide new cash for the Treasury as the maturing issue is
outstanding in the amount of $3,321 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing March 6, 1979.
The public holds
$1,471 million of the maturing issue and $1,850 million is held
by Federal Reserve Banks for themselves and as agents of foreign
and international monetary authorities. Tenders from Federal
Reserve Banks for themselves and as agents of foreign and international monetary authorities will be accepted at the weighted
average price of accepted competitive tenders. Additional amounts
of the bills may be issued to Federal Reserve Bank's, as agents of
foreign and international monetary authorities, to the extent
that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them.
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. This series of bills
will be issued entirely in book-entry form in a minimum amount of
$10,000 and in any higher $5,Q00 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,
Wednesday, February 28, 1979. 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. 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.
B-1412

-2Banking 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 bookentry records of Federal Reserve Banks and Branches. 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
$500,000 or less without stated price from any one bidder will be
accepted in full at the weightedoaverage price (in three
decimals) of accepted competitive bids.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on March 6, 1979,
in cash or other immediately available
funds or in Treasury bills maturing March 6, 1979.
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 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, 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.

February 21, 1979

FOR RELEASE AT 11:30 A.M.

TREASURY TO AUCTION $2,500 MILLION OF 4-YEAR 1-MONTH NOTES
The Department of the Treasury will auction $2,500
million of 4-year 1-month notes to raise new cash.
Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international
monetary authorities at the average price of accepted
competitive tenders.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

B-1413

(over)

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 4-YEAR 1-MONTH NOTES .
TO BE ISSUED MARCH 5, 1979
February 21, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date March 31, 1983
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 5% of face amount
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.

$2,500 million
4-year 1-month notes
Series D-1983
(CUSIP No. 912827 JM 5)
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
September 30 and March 31 (firs
payment on September 30, 1979)
$1,000
Yield auction
None
Noncompetitive bid for
$1,000,000 or less

Acceptable
Tuesday, February 27, 1979,
by 1:30 p.m., EST
Monday, March 5, 1979

Friday, March 2, 1979

Friday, March 2, 1979
Friday, March 9, 1979

MmentoftheTREASURY
IIN6T0N, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

February 21, 1979

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $2,482 million of
$4,604 million of tenders received from the public for the 2-year
notes, Series Q-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 9.75%^'
Highest yield
Average yield

9.87%
9.85%

The interest rate on the notes will be 9-3/4%. At the 9-3/4% rate,
the above yields result in the following prices:
Low-yield price 100.000
High-yield price
Average-yield price

99.787
99.822

The $2,482 million of accepted tenders includes $488 million of
noncompetitive tenders and $1,584 million of competitive tenders from
private investors, including 87% of the amount of notes bid for at
the high yield. It also includes $410 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 to the $2,482 million of tenders accepted in the
auction process, $368 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 February 28, 1979.

1/

Excepting 3 tenders totaling $30,000

B-1414

FOR IMMEDIATE RELEASE
February 21, 1979

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES INTEREST RATES ON DM NOTES
The Department of the Treasury today announced that
the interest rates on its two and one-half year and three
and one-half year notes denominated in DM are 6.30 percent
and 6.70 percent, respectively. The notes are priced at
par. Interest shall be paid annually.
As announced earlier, the Treasury is offering notes
denominated in DM in an aggregate amount of approximately
DM 2.5 billion. The notes are being offered exclusively
to, and may be owned only by, residents of the Federal
Republic of Germany. Subscriptions will be received by
the German Bundesbank, acting as agent on behalf of
the United States, until 12:00 noon, Frankfurt time, on
Thursday, February 22, 1979.

#

B-1415

#

#

FOR IMMEDIATE RELEASE
February 21, 1979

The U.S. Treasury monthly gold sale in Washington,
D.C. which had been delayed from February 20 because of
snow emergency conditions, is now rescheduled for Thursday,
February 22, at 11:00 a.m., EST.
The amounts to be sold and the terms and conditions
of the Invitation for Bid remain the same, except that
final payment will be due on March 5 and delivery must be
taken by March 19.

#

B-1416

#

#

TOR RELEASE ON DELIVERY
Expected 10-.UU AM
Saturday, February 24, 1979
REMARKS OF
PETER D. EHRENHAFT
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TARIFF AFFAIRS
AT THE HARVARD UNIVERSITY INTERNATIONAL ^ 1
CORPORATIONS. Cambridge, Massachusetts
MMit-inational Enterprises and the Antidumping Law

Those of us working actively in the realm of International
Trade are fond of referring to the GATT and our current set of
trade regulatory institutions as the "rules of the game." In
this symposium we have already heard how the growth of multinational enterprises (MNE's) has not only changed "the rules
of the game," but even the way in which we identify the players.
Firms that were formerly thought of and called themselves
"American" now take a global view: one that can be at once both
more Olympian and more irresponsible than that of the government
with which they identify. With the ability and willingness to
draw upon the world at large for the cheapest inputs and the
best markets, MNE's are in large part responsible for the
dramatic shift in the U.S. trade balance over the last two decade
They are at once among those most frequently invoking our laws
aimed at unfair trade practices and the principal respondents
in our growing caseload. In some proceedings, the question has
been raised whether one part of an MNE selling from abroad can,
within the meaning of the law, be injuring another.
B-1417,

- 2-

Before discussing in greater detail how the growth of
MNE's has affected that corner of U.S. trade policy with
which I am most concerned at Treasury, a few broad brush
settings of the subject seem in order.

Our notions of dumping

have matured in the 21 years since I first wrote about them
in the Columbia Law Review.

Principally we have come increasingly

to recognize the importance of the Antidumping Act (and its.
cousin, the countervailing duty law), as the interfaces between
competing economies.

The number of economies actively partici-

pating in world trade has

increased; their demands for recognition

of appropriate internal goals of development have become more
vocal —

and listened to.

And, paradoxically, as the national

governmental actors have increased in number and advocacy, the
most important private participants in world trade —
have loosened their national identification.

the MNE's —

This is the natural

consequence of such facts as:
—

An MNE may be owned or managed by nationals
of countries other than the one in which
its component of immediate interest is operating;

—

The government of each country with a significant
nexus to the MNE may and does claim rights and
obligations affecting the MNE's operation.

The

application of the U.S. Export Administration
Act to the production in a foreign country and sale
of goods to third countries by a component of an
MNE that derives technology from its related U.S.

- 3-

sources, is perhaps the best illustration
of the problem;
—

MNE's are able to produce, assemble, sell and
service goods from multiple sources, achieving
comparative advantages in their ultimate ability
to make and sell products that are denied to
concerns.limited to a single jurisdiction;

—

MNE's need, use, acquire and sell a variety
Qf currencies in their operations.

Even if

they wanted to, they could not effectively deal in
a single unit of account.

Their management of

multiple currency portfolios contributes meaningfully to the instability of worldwide exchange
rates.
Against this background stands the Antidumping Act, a
small, but important, feature of the trade terrain.

The grand

patriarch of dumping law and lore, Jacob Viner, called dumping
"a problem in international trade," first recognized as such
about a century ago.

The development of legal norms to cope

with the problem paralleled efforts to deal with similar
phenomena emerging in the large domestic, continental-size
market of the United States.

The notion in each situation

was that the free market required protection from the predatory
pricer:

from the producer who sold in the "target" market at

- 4 -

a price lower than what he, himself, established as his normal
or "fair" price in his "usual" market, to the detriment of
competing, local suppliers in the target area. The assumption
was that the local suppliers would eventually be driven out of
business, whereafter the alien would increase his prices. The
bargain available during the period of dumping was — is —
regarded as too transitory to compensate for the local disruption
and possible long term higher pricing presumed to follow the
foreigner's capture of the market.
In its international ramifications, the law assumes the
existence of separate "home" or "third" country and "domestic"
•tya.Fket$ in which, price levels can be independently determined by
the supplier. The assumptions are probably valid in many cases;
the necessary isolation of markets does occur; the freedom to set
prices exists. But in an increasingly interdependent world, with
ever-reduced tariff barriers, with faster and cheaper transport,
with the homogenization of world taste, the model often does not
fit. Particularly in the case of trade involving MNE's, the
separate character of the two relevant markets may be wholly
hlurred. The whole world is their market.
The price comparability exercise critical to a determination
of "dumping" is also more difficult to perform. The intracorporate transfer prices between related parties may not
reflect arms'-length dealings. Our Antidumping Act in fact
presumes they do not, requiring us to undertake an elaborate

- 5 -

investigation and computation based on the first sale by the
MNE's U.S. seller to an unrelated party, and then to work back
through the related company's costs to a foreign export price
that is then compared to the home market price (or other
appropriate comparison point) of the foreign producer.
Even that was not regarded as sufficiently reliable in
the case of the big MNE's by the drafters of the Trade Act of
1974. They added to the Antidumping Act a new §205(d). It
provides that if an MNE has production and sale facilities in
2 or more foreign countries, only one of which is supplying
the U.S. market, the home market prices of the entity actually
Supplying the U.S. are to be disregarded if the second (or third
or fifth) related entity supplying non-U.S. markets is selling the
same goods in those markets at higher prices than those at which
the merchandise is sold to the U.S. by the first. The notion
was that MNE's may use related company what the Senate Finance
Committee characterized as "subsidization" to offset unfairly
low prices to the U.S. It is an interesting notion. However,
to date it has never been invoked. On the other hand, a
number of other related party problems have emerged. They
illustrate the problem of applying the Antidumping Act to
multinational enterprises. They deserve study and perhaps some
new thoughts:

- 6-

(1) Related selling agents.

Section 204 of the Act defining

"exporter's sales price," dates from 1921.
and for many years the only —

It was the first—

recognition that MNE's pose special

problems for an antidumping law.

As already noted, it presumes

the impropriety of using actual transaction prices in a sale by
a foreign producer to its U.S. selling agent for resale. It
requires a determination of the U.S. resale prices, from which
there are deducted the U.S. seller's costs in bringing the
merchandise to the U.S. and to the point of sale.
of such, costs can be a time-consuming exercise.

The determination
It is made

particularly difficult when the goods are not immediately resold
upon Importation but are either held in inventory or are further
processed.

If the goods are fungible, inventory flows are hard

to monitor; if the goods are elaborately worked before resale,
the cost calculations are likely to be inordinately complex
(e.g., imported steel sheet eventually resold in the form of
railroad cars).

Moreover, to ascertain resale and cost data may

involve significant time lags.

The lapse between the U.S. resale

and the date at which the original goods were exported —

which,

under our regulations, §153»579 is the relevant date for making
the comparison with the foreign market value of the goods —

takes

no account of intervening market or currency changes.
A further wrinkle to these provisions, which has caused
significant comment in connection with our so-called Trigger
Price Mechanism for imported steel mill products (with which I

- 7-

assure you are all familiar) derives from the fact ;that in
subtracting the U.S. related party's selling expenses from its
resale prices, in order to reach the figure we compare with
the foreign sales price, no allowance is required for
profits.

As a result, the related party seller is claimed to have

an advantage over unrelated sales agencies who must naturally
earn a profit to survive.

On the other hand, since selling

expenses in the U.S. must be deducted in our calculations to
reach the price to be compared abroad, we also deduct selling
costs incurred in the home market to compute the comparable
foreign market value.

But the deduction abroad is limited by

our regulations, §153.10(b), to the expenses incurred on the
U.S. side.

It is an arbitrary rule but one considered necessary

to put some reasonable cap on the volume of detailed data we are
required to evaluate and verify, particularly as differences in
selling expenses between the two markets are generally not
viewed as proper adjustments to the prices being compared.
(.2) Related buying agents.

The Act has long dealt with the

foreign MNE's forward integration into the U.S. market.

It has

not expressly covered the backward integration of the U.S.
importer.

But it is as feasible for a U.S. buyer to purchase

material for importation through a related foreign agent as it is
for foreign producers to establish U.S. selling arms.

Again,

in the context of our Trigger Price Mechanism we have heard of a
growth of this practice that will require us to investigate
the basis on which the MNE, viewed as a single entity,

- 8 -

has acquired the goods for use in this country.
(3) Related party component suppliers. As MNE's
diversify their production and distribution locations, a new
phenomenon has come to light unforeseen by prior drafters of
legislation or regulations. Plants In country "A" may be
acquiring at dumping prices from related — or unrelated —
companies in country "B" the principal components of products
then produced or assembled for sale to the U.S. and elsewhere.
For example transistors may be sold in country A by a producer in
country B at prices below those charged in B. The buyer of
the transistors in A then produces^ an article in which
transistors are used — such as hand held calculators — that
it can sell at uniformly low prices in its home market and
the U.S. If the calculator producer in "A" were unrelated to
the transistor supplier in "B", it is doubtful that our antidumping
law would reach the imports of calculators. On the other hand,
were the transistor and calculator producers part of a single
MNE, the transactions between them could be collapsed so that an
analysis under §205(b) of the Act might reveal that the
calculators were produced below their cost of production.
A recent proceeding initiated by the Canadian government
with respect to twine from the United States seeks to address
this problem under the countervailing duty law. The Canadian
government contends the production and export of sisal and jute --

9 -

the raw materials from which the U.S. producers of twine
are making their finished product —

are being subsidized by

the governments of the sisal, and jute growers. Quaere
whether dumping of such raw materials might be regarded as a
"private subsidy" within the meaning of a countervailing duty
statute.
(4) Related party absorption of costs of production.
The classical definition of dumping is "injurious price discrimination."

And the history of the U.S. law aimed at its prevention

as well as its text reflect a preference for price tests as
the measure of dumping.

Thus, §202(a) of the Act permits

reference to the "constructed value" of merchandise to determine
the amount of dumping duty to be collected only "in the absence"
of a foreign market value derived from home or third country
prices.

The same preference is expressed in §205(b), defining

"foreign market value" —

but with the new gloss that is

reshaping International thinking on the meaning of "dumping."
Section 205(b), added to our law by the Trade Act of
1974, states that in computing the "foreign market value" of
merchandise for purposes of setting the reference against
which sales to the U.S. are to be measured, sales in the home
market made at prices below the cost of production shall be
disregarded.

If insufficient sales above cost remain to

establish a "foreign market value" for the goods, their "constructed value" is to be used as the reference price.

Section 205(b)

- 10 provides lawyers and accountants with rich opportunities for
debate

on such questions as the time period

within which the subject costs are to be examined (how long,
is it prior to the period of sales examined), and the manner
in which fixed costs are to be allocated to the goods produced
during the period of investigation.

But for present purposes

other issues are of primary interest, namely, the manner in
which parent company, investments in operating companies should
be treated and the appropriate accounting for intra-company
services usual to an MNE for everything from preferential
interest rates on loans based on parent company guarantees
to allocations of global expenses for executive salaries,
insurance, R&D and advertising, legal or accounting services.
It seems well established that the "cost of producing"
the merchandise for the purposes of §205(b) requires a
determination of the full costs —

not just marginal costs.

Moreover, although the legislative history of the section
requires general recognition of the accounting practices of
the individual respondent in determining that firm's "costs",
it also cautions such figures may be misleading and permits
restatement of costs to avoid "distortions."
Based on this caution, domestic petitioners in a number
of recent cases have urged the creation of a charge to an
operating arm of an MNE whose working capital may technically
have been provided in the form of an equity investment by a
parent (or affiliated finance or holding) company, but which

- 11 -

could arguably

be traced to a bank loan to, or other debt

instrument issued by, the parent or other affiliated company.
Or if the operating company itself borrowed money based on
a parent company guarantee we have been urged to value
the guarantee as an added "cost" of producing the merchandise
even though it would not normally appear on the producers
own books.

To date .we have resisted such arguments and

declined to look into the sources of an investor's funds,
whether or not the investor was related to the producing company.
On the other hand when an operating company's books
plainly fail to include appropriate charges for such matters
as accounting, legal and advertising services that are in fact
absorbed on its behalf by a parent or service affiliate, we
have not hesitated to impute an appropriate charge to the
operating firm (generally based on a percentage of sales
methodology).
These are not simply the hidden byways off the highway
of our administration.

These are the streets that will bear

the heavy traffic of future antidumping investigations.
Authorities of the major countries presently applying antidumping measures (the U.S., the European Community, Canada
and Australia) met during 1978 to consider certain "priority
issues" arising in their administration of their antidumping
laws.

High on the list were the problems associated with sales

at below the cost of production.

Each recognized that this

has, indeed, become the critical bellwether of dumping.
this belated realization?

Why

- 12 —

First, as governments everywhere have come

to realize the social and political problems created by
unemployment, they have increasingly adopted measures
to avoid or soften the impact of industrial conditions
that could lead to unemployment.

It is, therefore,

deemed desirable policy to produce goods —
a loss —

even if at

to avoid what may be regarded as even less

tolerable problems associated with unemployment or the
shut down of historically productive facilities. But
the idea of "exporting unemployment" through below cost
sales can hardly be viewed with equanimity by importing
countries.

Not infrequently the conditions that have led

to slack demand and potential unemployment in the exporting country —

changes in the world economy, changes in

consumer tastes, obsolete facilities or technology —
no less keenly felt in the importing country.
latter may —

must —

are

Thus the

protect itself against undue adjust-

ment burdens.
—

Second, the industrialized Northern Hemisphere

has recognized

the desirability of stimulating the

development of the less developed South.

Such develop-

ment has assumed political advantages in the form of
greater stability.

It has assumed humanitarian and

social values in lifting peiple out of subsistence

- 13 -

living.

It has presumed economic values in creating

customers for our products who are able to pay for their
purchases.

Old programs on a bilateral and multinational

basis have proliferated and a variety of other preferences have been accorded the LDC's.

The latter have on

not infrequent occasions used these aids to develop
local industries that produce goods mainly for export.
Export sales are used to acquire foreign exchange needed
to pay for the material and intellectual property that
means "development."

Concommitantly, home market sales

are often discouraged through high local prices. The
automatic application of traditional antidumping measures
in such cases would run counter to the larger development
goal.

Accordingly, a cost analysis may be the only fair

way to establish the propriety of imposing antidumping
measures on LDC imports.
proposed in the GATT —

And so the United States has

so far without acceptance by the

most outspoken of the LDC's.
Third, growing government involvement in the
actual operation of industries has made prices less
reliable indicators of real values. When governments
assume total control of an industry —
entire economy —

or, more, an

the traditional constraints of supply

and demand no longer exert the discipline that any price

-Indiscrimination law must assume exists.

In such situa-

tions a cost analysis would appear the fairest way to
gauge whether comparative advantage In fact lies with
the foreign producer offering products at appealing low
prices.
In a word, the cost-of-production approach to the dumping question seems best able to get to the root question:
producer has true comparative advantage?

Which

If the foreigner, then

it may be appropriate for U.S. industry to accept what can be
painful and expensive problems of adjustment.

If, on the other

hand, the foreigner cannot demonstrate the comparative advantage low prices should reflect, then it must bear the adjustment burdens and not shift them to us.
Obviously, such calculations are not easily made. They
also take time, something we are generally accused of taking
too much of and that we know we are always too short of! But
they are the "stuff" of the future, most particularly in
weighing imports by MNE's.
It has been suggested to us that we adopt a rule of
thumb comparable to that found in the Internal Revenue Code,
under which companies related by at least an 80$ common ownership would be treated as a single entity and separate corporate
organizations would be disregarded.

But the related entities

providing services or goods to the actual exporter may be in

- 15 multiple jurisdictions. The type of audit needed of a conglomerate MNE in order to ascertain the true costs incurred by its
operating subsidiaries could well be excessive for the gain
achieved.

On the other hand, perhaps we need to adopt rules

of thumb that would ordinarily be applied in the absence of
contrary proof.
As we look to the future, what do we see?
Surely no diminution in the role of MNE's in trade nor
their involvement in our cases. But one development that should
help us derives from the concepts of the Customs Valuation Code
that is emerging from the Multilateral Trade Negotiations that
should wind up in the next few weeks.

Under that Code, related

party transaction prices will not presumptively be disregarded;
if reflective of arms' length dealing, they can become the basis
for normal customs duty valuation.

It may be that the trauma

of a dumping case should always render related party transactions
suspect; they don't present the ordinary customs valuation situation.

Nevertheless, if we can believe assertions that the

separate components of many MNE's do, indeed, deal with one
another on arms'length terms, we will have hopefully saved
substantial resources that will unquestionably need to be turned
to the investigations we must foresee.

I say that with neither

the despair of an overworked government bureaucrat nor the
optimism of a practitioner in the field.
*

K

#

For Immediate Release
February 22, 1979

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES SUBSCRIPTIONS RECEIVED FOR DM NOTE SALE
The Department of the Treasury today announced that
it has received approximately DM 5.0 billion in total
subscriptions for its offering of DM 2.5 billion of
2-1/2 year notes and 3-1/2 year notes denominated in
Deutschemarks. Subscriptions received for the 2-1/2 year
notes were DM 2,713 million and for the 3-1/2 year notes
were DM 2,242 million. Allotments between each maturity
will be announced later today.

#

B-1418

#

#

FOR IMMEDIATE RELEASE
February 22, 1979

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES RESULTS OF DM NOTE SALE
The Department of the Treasury today announced that
it is accepting a total of DM 2,502 million in subscriptions
for its issues of two and one-half-year and three and one-halfyear notes denominated in Deutsche marks. A total amount of
DM 4,955 million in subscriptions for these issues was received.
The Treasury accepted DM 1,260 million in subscriptions
for its two and one-half-year notes. Total subscriptions
received for this issue were DM 2,713 million. In the case
of the three and one-half year notes, the Treasury accepted
DM 1,243 million in subscriptions. Total subscriptions
received for this issue were DM 2,242 million. These acceptances
represent allocations of 46 percent of subscriptions for two
and one-half-year notes and 55 percent for the three and onehalf-year maturity. In each of the two maturities, allocations
are being made on a pro rata basis. Individual subscriptions,
however, are being rounded up to the nearest DM 250,000.

B-1419

FOR RELEASE AT 4:00 P.M.

February 20, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued March 1, 1979.
This offering will result-in a pay-down for the Treasury of about
$200
million.as the maturing bills are outstanding in the
amount of $6,209 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
November 30, 1978, and to mature May 31, 1979
(CUSIP No.
912793 Y7 5 ), originally issued in the amount of $2,904 million,
the additional, and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
March 1, 1979,
and to mature August 30, 1979
(CUSIP No.
912793 2J 4).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 1, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,674
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. 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 Debtf Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, February 26, 1979.
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-1420

-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 bookentry records of Federal Reserve Banks and Branches. 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
must be made or completed at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt on March 1, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
March 1, 1979.
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, 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.

kpartmentoftheTREASURY
IINGTON, D.C. 20220

TELEPHONE 566-2041

LIBRARY
FOR IMMEDIATE RELEASE
February 2 3 , 1979

ROOM 5 004
Contact: Robert E. Nipp
,~_ ;2p^/566-5328
TO-

.,-PA..HLNT

TREASURY ANNOUNCES RESULTS^ OF GOLD SALE
The Department of the Treasury announced that
1,500,100 troy ounces of fine gold were sold yesterday
to 13 firms and individuals who bid successfully at a
sealed bid sale. Awards of 1,000,000 troy ounces of gold
in 400 ounce bars whose fine gold content is 99.5 to 99.94
percent were made to 10 successful bidders at prices from
$251.76 to $254.16 per ounce, yielding an average price
of $252.38 per ounce. Bids for this gold were submitted
by 16 bidders for a total amount of 2.0 million ounces
at prices ranging from $240.00 to $254.16 per ounce.
Awards of 500,100 troy ounces of gold in 300 ounce
bars whose fine gold content is 89.9 to 90.1 percent were
made to 6 successful bidders at prices from $250-77 to
$252.76 per ounce, yielding an average price of $251.42
per ounce. Bids for this gold were submitted by 14 bidders
for a total amount of 1.3 million ounces at prices ranging
from $244.20 to $252.76 per ounce.
Gross proceeds from today's sale were $37 8.1 million.
Of the proceeds, $63.3 million will be used to retire Gold
Certificates held by Federal Reserve Banks. The remaining
$314.8 million will be deposited into the Treasury as a
miscellaneous receipt.
The list of the successful bidders and the amount
of gold awarded to each is attached. The General Services
Administration will release details on the individual awards
later.
The current sale was the tenth in a series of monthly
auctions being conducted by the General Services Administration on behalf of the Department of the Treasury. The next
sale, at which 1,500,100 ounces will be offered, will be
held on March 20, 1979. At this sale, 1,000,000 fine troy
ounces will be offered in bars whose fine gold content is
99.50 to 99.94 percent. The minimum bid for these bars will
be for 400 fine troy ounces. A total of 500,100 ounces will
be offered in bars whose fine gold content is 89.9 to 90.1
percent. The minimum bid for these bars will be 300 fine
B-1421
troy ounces. Bids for bars in each fineness category will be
0
evaluated separately.
o

Firm

Fine Troy Ounces

Bank Julius Bar Co. Ltd.
Zurich, Switzerland

14,000

Credit Suisse
Zurich, Switzerland

99,,600

Derby & Co., Ltd.
London Wall, England
Dresdner Bank
Frankfurt, W. Germany
E. F. Hutton & Co.
New York, N.Y.

4,,000
982,,600
99,,900

Gerald Metals, Inc.
New York, N.Y.

9,r600

Gold Standard Corp.
Kansas City, Mo.

400

Johnson Matthey Bankers Ltd.
London, England
Republic National Bank of N.Y.
New York, N.Y.
Sharps Pixley, Inc.
New York, N.Y.
Simmons Refining Co.
Chicago, Illinois

4 ,000
169 ,800
64 ,000
600

Swiss Bank Corp
Zurich, Switzerland

45,200

Valeur White Weld
Geneva, Switzerland

6,400

FOR IMMEDIATE RELEASE
February 23, 1979

CONTACT:

Charles Arnold
566-2041

FOREIGN BANKS MUST REGISTER REPRESENTATIVE OFFICES
The Department of the Treasury today announced that
foreign banks with representative offices in the United States
must register with the Department by March 17 by filing a
brief report on each such office, and thereafter file a report
on any new office on the date it is established.
The regulations, provided for in the International Banking
Act of 1978, will be published in the Federal Register of
February 28, 1979. The information required, which may be
submitted to the Secretary of the Treasury in letter form,
comprises: (a) name and address of the head office; (b) name
and address of the representative office; (c) name of person
in charge of the office, and (d) description of the activities
of the office.
A representative office is defined as one maintained by a
foreign bank which engages in representational functions common
to a banking business such as solicitation of new business,
loan production, liaison between the bank's head office and
correspondent banks in the United States, customer relations,
etc. A foreign bank is defined as one organized under the laws
of a foreign country, a territory of the United States, Puerto
Rico, Guam, America Samoa, or the Virgin Islands.
In addition to being available at Treasury, copies of the
regulations will be obtainable at local Federal Reserve Banks
and branches.

oOOOOo

B-1422

DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
31 CFR Part 123
REGISTRATION OF REPRESENTATIVE
OFFICES OF FOREIGN BANKS
FINAL REGULATION
AGENCY: Department of the Treasury
ACTION: Final Regulation
SUMMARY: Section 10 of the International Banking Act of 1978,
Pub. L. No. 95-369, requires that foreign banks register their
representative offices in the United States with the Secretary
of the Treasury. This Part specifies the information to be
supplied and the steps to be followed in registering such offices.
EFFECTIVE DATE: This part is effective February 28, 1979.

FOR FURTHER INFORMATION CONTACT:
David W. Heleniak
Assistant General Counsel (Domestic Finance)
Department of the Treasury
Washington, D.C. 20220
(202) 566-8625
SUPPLEMENTARY INFORMATION: This Part implements the provisions
of Section 10 of the International Banking Act of 1978 ,
Pub. L. No. 95-369. The regulation establishes registration
requirements with respect to representative offices of foreicn
banks consistent with the requirements of the Act and its
legislative history.

- 2 -

Because the sole purpose of this Part is to implement
recently enacted legislation by establishing a simple registration process to facilitate data collection concerning
certain activities of foreign banks in the United States, the
Secretary for good cause finds that the procedures prescribed by

5 U.S.C.553 relating to notice, public procedure and delayed effectiv
date are unnecessary. Nevertheless, interested persons may
submit written comments to the Assistant General Counsel
(Domestic Finance), Department of the Treasury, Washington,
D.C. 20220. Comments will be reviewed and acted upon in
the same manner as if this Part were in proposed form, but
the Part shall remain in effect until further amendments,
if any, are proposed. This Part does not meet Treasury
criteria for a significant regulation.
DRAFTING INFORMATION: The principal drafter of this part is
Larry A. Mallinger, Attorney, Office of the Comptroller of
the Currency, Washington, D.C. 20219. However, personnel
from other offices of the Treasury Department participated
in developing the regulation, both on matters of substance
and style.

- 3 Accordingly, the Secretary amends 31 CFR by adopting
Part 123 to read as follows :
PART 123 ~ Registration of Representative Offices of
Foreign Banks
Sec
123.1 Scope of Regulation
123.2
Definitions
123.3
Information Required to be Filed
123.4
Subsequent Changes in Information
123.5
Time of Registration
123.6
Effect of State Law
123.7
Additional Information
AUTHORITY: The provisions of this Part 123 are issued pursuant
to Section 10, International Banking Act of 1978/ Pub. L.
No. 95-369 (the "Act").

6123.1

Scope of Regulation

This regulation requires that foreign banks with representative offices in any State of the United States or in
the District of Columbia register with the Secretary of the
Treasury and report the information called for in Sections 12 3.3,
123.4 and 123.7.

- 4 §123.2

Definitions

(a) Representative Office For the purposes of this Part, a representative office shall
be defined as an office of a foreign bank which engages in
representational functions common to a banking business such
as, without limitation, solicitation of new business, loan
production, liaison between the bank's head office and
correspondent banks in the United States, customer relations,
etc.

Branches and agencies of foreign banks are not repre-

sentative offices.
(b) Foreign Bank For the purposes of this Part, a foreign bank shall be defined
as any company organized under the laws of a foreign country,
a territory of the United States, Puerto Rico, Guam, American
Samoa, or the Virgin Islands, which engages in the business of
banking, or any subsidiary or affiliate, organized under such
laws, of any such company.

The term "foreign bank" includes,

without limitation, foreign commercial banks, foreign merchant
banks and other foreign institutions that engage in banking
activities usual in connection with the business of banking
in the countries where such foreign institutions are organized
or operating.

The term "fQr/eicrn bank" does not include cen-

tral banks of foreign countries which are not engaged in a
commercial banking

business

in the United States.

- 5 •123.3

Information Required to be Filed

The information required under this Part must be submitted
in letter form by a foreign bank over the signature of an appropriate
executive officer of the bank to Secretary of the Treasury, Department of the
Treasury, 15th & Pennsylvania Avenue, NW, Washington, D.C. 20220,
attention:

Office of International Banking and Portfolio Investment.

A foreign bank may register more than one representative office
in any letter.

The information required in each letter shall be:

(a)

Name and address of the head office of the foreign bank;

(b)

Name(s) and address (es) of its representative office(s)
in the United States;

(c)

Name of the person(s)

in charge of the representative

office (s); and
(d) Brief description of the activities of the representative
office(s).
§123.4

Subsequent Changes in Information

Any change in the information supplied under Section 123.3
shall be submitted to the Treasury, at the address noted in
Section 3, within 60 days of such change.

- 6 -

§123.5

Time of Registration

Foreign banks must register representative offices under this
Part by March 17, 1979 or the date on which the office is
established, whichever is later.
§123.6 Effect of State Law
Neither the Act nor this Part authorizes the establishment
of any representative office in any State in contravention of
State law.
§123.7 Additional Information
Additional information concerning registered representative
office(s) shall.be furnished from time to
time to the Treasury, at the address noted in Section 123.3, upon
the specific request of the Secretary of the Treasury or his
delegates.

W. Michael Blumenthal
Secretary of the Treasury

FOR IMMEDIATE RELEASE
February 23, 1979

Contact: Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT FINDS RAYON
STAPLE FIBER FROM ITALY IS SOLD
HERE AT LESS THAN FAIR VALUE
The Treasury Department today announced it has
determined that viscose rayon staple fiber imported
from Italy is being sold in the United States at "less
than fair value."
The case is being referred to the U. S. International
Trade Commission, which must decide within 90 days
whether a U. S. industry is being, or is likely to be,
injured by these sales. If the decision of the Commission
is affirmative, dumping duties will be collected on
sales found to be at less than fair value. Appraisement
has been withheld since a tentative decision was issued
on November 16, 19 78.
The weighted average margin of sales at less than
fair value in this case was 18.6 percent, computed on
all sales.
Interested persons were offered the opportunity to
present oral and written views prior to this determination.
(Sales at less than fair value generally occur when
imported merchandise is sold in the United States for
less than in the home market.)
Imports of viscose rayon staple fiber from Italy
during the period November 1977-April 19 78 were valued
at about $49,000.
Notice of this determination appears in the Federal
Register of February 23, 19 79.

o
B-1423

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federal financing bank

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WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

February, 23? 1979

FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank (FFB),
announced the following activity for January 1-31, 1979.
Guaranteed Lending Programs
During January, FFB signed two loan agreements guaranteed
by the Department of Defense (DOD) under the Arms Export
Control Act. On January 5, FFB signed a $35 million loan
agreement with the Government of the Republic of Korea.
Advances made under this agreement will mature June 30, 1987.
On January 26, FFB signed a $70 million loan agreement with
the Government of Greece. Advances made under this agreement
will mature February 1, 1989. Also during January, FFB made
29 advances totalling $135,128,644.71 to 16 governments under
existing DOD-guaranteed loan agreements.
Under notes guaranteed by the Rural Electrification Admin
istration, FFB advanced a total of $76,436,000 to 25 rural
electric and telephone systems.
Pn January 24, FFB purchased a total of $11,355,000 in
debentures issued by 15 small business investment companies.
These debentures are guaranteed by the Small Business Administration, mature in 3, 5, 7 and 10 years, and carry interest
rates of 9. 715%, 9.385%, 9.335%, and 9.305%, respectively.
FFB provided the Western Union Space Communications, Inc.
with the following advances which mature October 1, 1989 and
carry annual interest rates.
Interest
Date
Amount
Rate
9.676
$2,750,000
1/2
9.65%
9,000,000
1/22
9.446
3,000,000
1/24
These advances are part of FFBfs $687 million financing of a
satellite tracking system to be constructed by Western Union
and used by the National Aeronautics and Space Administration,
which guarantees repayment of these advances.
B-1424

VO
VO
LO

- 2During January, FFB purchased the following General
Services Administration Participation Certificates:
Series

Date

K-015
M-041
L-050

1/5
1/11
1/17

Amount
$2,876,960.25
4,537,365.58
1,073,301.54

Maturity

Interest
Rate

7/15/04
7/31/03
11/15/04

9 175%
9 194%
9.208

Department of Transportation-Guaranteed Lending
FFB advanced funds to the following railroads under notes
guaranteed by DOT under Section 511 of the Railroad Revitalization and Regulatory Reform Act:
Interest
Date
Amount
Maturity
Rate
Trustee of Chicago, Rock Island
1/10
$ 938,974.00 12/10/93 9.617% an.
Trustee of The Milwaukee Road
1/12
1,294,105.00
11/15/91 9.605% an.
Chicago § North Western Trans.
1/15
2,019,300.00
3/1/89 9.641% an.
Under Note #17, which matures February 16, 1979, FFB lent
the following amounts to the National Railroad Passenger Corp.
(Amtrak):
Interest
Date
Amount
Rate
1/8
$ 8,500,000.00
9 485%
1/12
10,000,000.00
9 635%
1/15
3,500,000.00
9 685%
1/23
6,000,000.00
9 80
813%
1/25
6,500,000.00
9
On January 30, FFB lent Amtrak $6.5 million at a rate of 9.807%
under Note #18. This note matures March 30 1979.
Agency Issuers
The Tennessee Valley Authority (TVA) sold FFB a $40 million
Note on January 15, a $20 million Note on January 29, and a $90
million Note on January 31. These notes mature April 30, 1979
and carry interest rates of 9.967%, 9.855%, and 9.824%, respectively. Also on January 31, TVA sold FFB a $500 million Series A
Power Bond. This bond will mature February 28, 1989, and carries
an interest rate of 9.296%. Of the total $650 million borrowed,
$490 million retired maturing securities, and $160 million
raised new cash.

- 3 In its weekly short-term FFB borrowings, the Student
Loan Marketing Association (SLMA), a federally-chartered
private corporation which borrows under a Department of
Health, Education and Welfare guarantee, refunded $280 million
in maturing securities. FFB holdings of SLMA notes total
$915 million.
On January 23, FFB purchased a $620 million Certificate
of Beneficial Ownership from the Farmers Home Administration.
This certificate matures January 23, 1984, and carries an
interest rate of 9.595%, on an annual basis.
FFB Holdings
As of January 31, 1979, FFB holdings totalled $52.2
billion. FFB Holdings and Activity Tables are attached.
# 0 #

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
January 31, 1979
Program

January 31. 1979

December 31. 1978

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank

$

5,795.0
6,898.3

$

5,635.0
6,898.3

Net Change
(1/1/79-1/31/79)
$

160.0

-0-

Net Change-FY 1979
(10/1/78-1/31/79)
$

575.0
330.0

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association

2,114.0
345.4

-0-

2,114.0
355.7

-0-

-10.3

-11.4

2,170.0

Agency Assets
Farmers Home Administration
DHEW-Health Maintenance Org. Loans
DHEW-Medical Facility Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration

24,445.0
57.0
163.7
38.0
637.7
105.9

23,825.0
57.0
163.7
38.0
637.7
107.3

620.0

-1.4

-6.3

17.3
53.5
4,384.4
305.8
36.0
38.5

17.5
49.2
4,284.8
297.4
36.0
38.5

-0.2

-0.2
17.7
406.5
35.7

351.3
294.9
4,680.1
279.0
915.0
21.6
177.0

478.2
280.1
4,603.7
267.6
915.0
21.8
177.0

-0-0-0-0-

-0-0-2.2

-0-

Government Guaranteed Loans
DOT-Emergency Rail Services Act
DOT-Title V, RRRR Act
DOD-Foreign Military Sales
General Services Administration
Guam
DHUD-New Communities Admin.
Nat'l. Railroad Passenger Corp.
(AMTRAK)
NASA
Rural Electrification Administration
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
WATA
TOTALS
Federal Financing

$52,154.2*

Bank

- T o t a l s do not add due to

$51,298.5

4.3
99.5

8.5
-0-0-126.9
14.8
76.4
11.4

-0-0.2

-0$

855.8*

February
rounding

-0-0-183.1
58.3
488.6
28.3
170.0
-0.2

-0$4,076.7

1 3 , 1979

FEDERAL FINANCING BANK
January 1979 Activity

BORROWER

•
:
•
: DATE :

AMOUNT
OF ADVANCE

:INTEREST:
: MATURITY : RATE :
•

INTEREST
RATE

(other than s/a)
Department of Defense
Thailand #2
Thailand #3
Spain #1
Spain #2
Haiti #1
Haiti #2
Thailand #3
Peru #2
Panama #2
Tunisia #5
Malaysia #3
Ecuador #2
Haiti #2
Jordan #3
Turkey #2
Tunisia #4
Honduras #2
Tunisia #4
Colombia #2
Israel #6
Israel #7
Liberia #3
Jordan #2
Taiwan #2
Colombia #2
Ecuador #2
Malaysia #3
Thailand #2
Korea #8

1/10
1/10
1/10
1/11
1/15
1/15
1/15
1/15
1/15
1/18
1/19
1/22
1/22
1/22
1/22
1/25
1/26
1/26
1/26
1/29
1/30
1/31

136,098.62
4,826.00
7,130,300.34
2,540,140.00
106,950.00
106,898.00
14,373.00
1,000,000.00
71,511.86
635,161.00
41,103.20
2,399,461.29
384,279.45
163,186.20
3,628,667.60
924,599.55
89,000.00
146,513.00
94,225.00
2,394.89
112,823,322.10
372,464.27
360,026.40
517,205.91
429,516.75
238,547.4994,194.44
338,667.00
335,011.35

6/30/83
9/20/84
6/10/87
9/15/88
3/12/83
3/12/84
9/20/84
4/1/84
3/31/83
6/1/86
3/20/84
8/25/84
3/12/84
12/31/86
10/1/86
10/1/85
10/7/82
10/1/85
9/20/84
1/12/08
12/15/08
6/30/84
11/26/85
12/31/82
9/20/84
8/25/84
3/20/84
6/30/83
12/31/86

9.849%
9.721%
9.577%
9.503%
9.907%
9.784%
9.692%
9.746%
9.868%
9.57%
9.753%
9.736%
9.736%
9.547%
9.56%
9.611%
9.929%
9.615%
9.661%
9.22%
9.214%
9.676%
9.483%
9.655%
9.433%
9.437%
9.437%
9.514%
9.237%

1/23

620,000,000.00

1/23/84

9.375%

2,876,960.25
4,537,365.58
1,073,301.54

7/15/04
7/31/03
11/15/04

9.175%
9.194%
9.208%

8,500,000.00
10,000,000.00
3,500,000.00
6,000,000.00
6,500,000.00
6,500,000.00

2/16/79
2/16/79
2/16/79
2/16/79
2/16/79
3/30/79

9.485%
9.635%
9.685%
9.80%
9.813%
9.807%

1/2
1/2
1/3
1/3
1/3
1/3
1/9

$

Farmers Home Administration
9.595% annually

General Services Administration
Series K-015
Series M-041
Series L-050

1/5
1/11
1/17

National Railroad Passenger Corp. (Amtrak)
Note
Note
Note
Note
Note
Note

#17
#17
#17
#17
#17
#18

1/8
1/12
1/15
1/23
1/25
1/30

Rural Electrification Administration
Big River Electric #58 1/2
Big River Electric #91
Northern Michigan Elect. #101
Allegheny Electric #93
Arkansas Electric #97
Tri-State Gen. § Trans. #79
Tri-State Gen. § Trans. #89
Glacier State Telephone #29
Sierra Telephone #59
Dairyland Power #36

1/2
1/2
1/2
1/2
1/3
1/3
1/4
1/4
1/9

1,697,000.00
512, 000.00
1,936,000.00
2,536,000.00
4,243,000.00
2,504,000.00
6,296,000.00
2,381,000.00
40, 000.00
5,000,000.00

1/2/81 10.155%
1/2/81 10.155%
9.765%
1/2/82
9.159%
12/31/13
9.159%
12/31/13
9.415%
12/31/85
9.415%
12/31/85
1/4/81 10.155%
1/31/81 10.105%
9.168%
12/31/13

10.029% quarterly
10.029%
9.649%
9.056%
9.056%
9.307%
9.307%
10.029%
9.98%
9.065%

FEDERAL FINANCING BANK
January 1979 Activity

BORROWER

Page 2
:
AMOUNT
DATE ! OF ADVANCE

Rural Electrification Administration (cont.)
Wolverine Electric #100 1/10
M § A Electric #111
1/10
Northern Michigan Elect. #101
1/10
Allegheny Electric #93
1/10
Wabash Valley Power #104
1/10
Pacific Northwest Gen. #118
1/10
Golden Valley Electric #81
1/11
Western Illinois Power #99
1/12
Tri-State Gen. 5 Trans. #79
1/12
So. Mississippi Electric #3
1/16
Alabama Electric #26
1/17
Corn Belt Power #55
1/19
East Kentucky Power #73
1/22
Big River Electric #58
1/22
Big River Electric #91 .<,.
1/22
Tri-State Gen. § Trans. #37
1/23
Gulf Telephone #50
1/23
Arizona Electric #60
1/23
So. Mississippi Electric #3
1/24
So. Mississippi Electric #4
1/24
So. Mississippi Electric #90
1/24
Continental Tele, of Missouri #65 1/25
Doniphan Telephone #14
1/26
Hillsborough § Montgomery Tele. #48 1/30
Sierra Telephone #59
1/31
Continental Tele, of Kentucky #115 1/31
Southern Illinois Power #38
1/31
Tri-State Gen. § Trans. #89
1/31
Basin Electric #88
1/31

:
rINTEREST:
INTEREST
: MATURITY : RATE :
RATE
(other than s/a)

$ 1,350,000.00 1/10/81 10.095% 9.971% quarterly
501,000.00
1/10/81 10.095% 9.971%
1,725,000.00
1/10/82
9.782*
9.668%
2,164,000.00
12/31/13
9.176%
9.073%
48,000.00
12/31/13
9.176%
9.073%
1,191,000.00
12/31/13
9.176%
9.073%
297,000.00
1/11/81 10.115%
9.99%
2,407,000.00
1/12/81 10.095% 9.971%
2,399,000.00
12/31/85
9.395%
9.287%
230,000.00
1/19/81 10.085% 9.961%
7,000,000.00
1/17/81 10.095% 9.971%
2,151,000.00
1/19/81 10.095% 9.971%
6,371,000.00
1/22/81 10.085%
9.961%
1,146,000.00
1/22/81 10.085% .9.961%
3,265,000.00
1/22/81 10.085% 9.961%
100,000.00
12/31/85
9.335%
9.229%
365,000.00
12/31/13
9.157%
9.055%
1,666,000.00
12/31/13
9.157%
9.055%
316,000.00
1/26/81 10.025%
9.902%
244,000.00
1/26/81 10.025% 9.902%
680,000.00
1/26/81 10.025% 9.902%
2,490,000.00
12/31/81
9.625%
9.512%
175,000.00
12/31/13
9.04%
8.94%
257,000.00
12/31/13
9.046%
8.946%
265,000.00
1/31/81
9.855%
9.737%
4,000,000.00
1/31/81
9.855%
9.737%
360,000.00
1/31/82
9.355%
9.248%
5,164,000.00
12/31/85
9.135%
9.033%
964,000.00
12/31/13
9.048%
8.948%

Small Business Investment Companies
200,000.00
500,000.00
150,000.00
400,000.00
2,000,000.00
1,000,000.00
2,000,000.00
500,000.00
625,000.00
400,000.00
250,000.00
500,000.00
430,000.00
750,000.00
400,000.00
1,250,000.00

1/1/82
1/1/82
1/1/82
1/1/84
1/1/86
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89
1/1/89

9.715%
9.715%
9.715%
9.385%
9.335%
9.305%
9.305%
9.305%
9.305%
9.305%
9.305%
9.305%
9.305%
9.305%
9.305%
9.305%

1/16
1/23
1/30

55,000,000.00
40,000,000.00
45,000,000.00
70,000,000.00
70,000,000.00

4/3/79
4/10/79
4/17/79
4/24/79
5/1/79

9.874%
9.799%
9.900%
9.769%
9.807%

1/15
1/29
1/31
1/31

40,000,000.00
20,000,000.00
90,000,000.00
500,000,000.00

4/30/79
4/30/79
4/30/79
2/28/89

9.967%
9.855%
9.824%
9.296%

1/24
Enervest, Inc.
1/24
Lloyd Capital Corp.
1/24
Tomlinson Capital Corp.
1/24
Enervest, Inc.
1/24
Charles River Resources, Inc.
1/24
The Christopher SBIC
1/24
jClarion Capital Corp.
1/24
Coastal Capital Corp.
1/24
Commercial Capital, Inc.
1/24
ESIC Capital, Inc.
1/24
First Texas Investment Co.
1/24
Florists' Capital Corp.
1/24
Hanover Capital Corp.
1/24
Intercapco, Inc.
1/24
SBIC of Panama City, Fla.
Inc.1/24
Small Business Invest. Capital,
Student Loan Marketing Association
Note #177
Note #178
Note #179
Note #180
Note #181

1/2
1/9

Tennessee Valley Authority
Note #90
Note #92
Note #91
Power Bond, Series A

FEDERAL FINANCING BANK
January 1979 Activity
Page 3
AMOUNT
BORROWER

MIL

QF APVANCE

:INTEREST: INTEREST
MATURITY : RATE :
RATE
(other than s/a)

938,974.00
1,294,105.00
2,019,300.00

12/10/93
11/15/91
3/1/89

9.396%
9.385%
9.419%

4,208,773.76
5,525,000.00

4/30/79
4/30/79

9.925%
10.105%

2,750,000.00
9,000,000.00
3,000,000.00

10/1/89
10/1/89
10/1/89

9.453%
9.428%
9.233%

Department of Transportation-Section 511
Trustee of Chicago, Rock Island 1/10
Trustee of The Milwaukee Road
1/12
Chicago § North Western Trans.
1/15

9.617% annually
9.605% annually
9.641% annually

united States Railway Association
Note #8 1/3
Note #8

1/8

Western Union Spate Communications, Inc.

ITO5KJ
1/2
1/22
1/24

9.676% annually
9.65% annually
9.446% annually

FOR RELEASE AT 1:45 P.M.
TREASURY OFFERS $4,000

February 23, 1979
MILLION OF 48-DAY TREASURY BILLS

The Department of the Treasury, by this public notice,
invites tenders for approximately $4,000 million of 48-day
Treasury bills to be issued March 2, 1979, representing an
additional amount of bills dated October 19, 1918, maturing
April 19, 1979 (CUSIP No. 912793 X9 2 ) .
Competitive tenders will be received at all Federal
Reserve Banks and Branches up to 12:30 p.m., Eastern Standard
time, Tuesday, February 27, 1979. Noncompetitive tenders
will not be accepted. Tenders will not be received at the
Department of the Treasury, Washington. Wire and telephone
tenders may be received at the discretion of each Federal
Reserve Bank or Branch. Each tender for the issue must be
for a minimum amount of $1,000,000. Tenders over $1,000,000
must be in multiples of $1,000,000. The price on tenders
offered must be expressed on the basis of 100, with not more
than three decimals, e.g., 99.925. Fractions may not be
used.
The bills will be issued on a discount basis under
competitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in
the $10.0,000 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
in a minimum denomination of $10,000 and in any higher
$5,000 multiple> on the records of the Federal Reserve Banks
and Branches.
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.
B-1425

-2No 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.
Those submitting tenders 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. Settlement for accepted tenders in
accordance with the bids must be made or completed at the
Federal Reserve Bank or Branch in cash or other immediately
available funds on Friday, March 2, 1979.
Under 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 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 may be obtained from any Federal Reserve Bank or
Branch.

epanmentoftheTREASURY
\SHINGTON, D.C. 20220

TELEPHONE 566-2041

1

FOR IMMEDIATE RELEASE

•

February 26, 1979

RESULTS OF TREASURYfS WEEKLY BILL AUCTIONS
Tenders for $3,000 million of 13-week Treasury bills and for $3,002 million
of 26-week Treasury bills, both series to be issued on March 1, 1979,
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 M^Y 31, 1979
Price

Discount
Rate

Investment
Rate 1/

97.630
97.604
97.611

9.376%
9.479%
9.451%

9.76%
9.87%
9.84%

26-week bills
maturing August 30, 1979
Price

Discount
Rate

95.199^ 9.496%
95.195
9.504%
95.198
9.498%

Investment
Rate 1/
10.14%
10.15%
10.14%

a/ Excepting 2 tenders totaling $20,000
Tenders at the low price for the 13-week bills were allotted 53%.
Tenders at the low price for the 26-week bills were allotted 100%
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location

Received

Accepted

Received

Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
20,460,000
4,411,505,000
18,990,000
28,095,000
17,585,000
31,260,000
166,370,000
41,455,000
4,750,000
26,765,000
9,645,000
163,470,000

$
20,460,000
2,600,055,000
18,990,000
28,095,000
17,585,000
31,260,000
96,670,000
27,455,000
4,750,000
26,765,000
9,645,000
108,470,000

$
16,730,000
5,241,715,000
57,060,000
65,860,000
10,965,000
21,975,000
348,815,000
46,080,000
2,705,000
16,760,000
11,875,000
351,260,000

$
11,730,000
2,727,455,000
7,060,000
12,760,000
10,965,000
21,975,000
102,420,000
15,080,000
2,705,000
14,755,000
7,875,000
55,260,000

Treasury

10,035,000

10,035,000

11,570,000

11,570,000

TOTALS

$4,950,385,000

$3,000,235,000b/: $6,203,370,000

ill
^/includes $370,275,000 noncompetitive tenders from the public.
•/Includes $198,870,000 noncompetitive tenders from the public.
^/Equivalent coupon-issue yield.

B-1426

$3,001,610,000^

FOR IMMEDIATE RELEASE
February 26, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT WITHDRAWS
PROPOSED FIREARMS REGULATIONS

The Treasury Department today said it is withdrawing
various proposed firearms regulations published in the Federal
Register on March 21, 1978.
These regulations would have required unique serial numbers
stamped on every firearm by manufacturers, and quarterly reports
to the Bureau of Alcohol, Tobacco and Firearms on all sales or
other dispositions of firearms between licensed manufacturers,
importers and dealers. They would not have required reports of
the names or addresses of private citizens who purchase firearms.
These proposals, which generated the most comments from the
public, will not be considered again in the foreseeable future.
ATF will continue to review the other proposals being
withdrawn and consider whether some or all should be proposed
again in the same or modified form. These proposals include requirements that licensees report thefts of firearms, modifications
in procedures for members of the Armed Forces bringing private
firearms into the United States and adjustments in procedures
for transporting National Firearms Act firearms, telephone
reporting by licensees of firearms transactions, and provisions
to reduce the paperwork involved when returning firearms for
repair or replacement.
Last year Congress voted to prohibit the use of appropriated
funds to implement these regulations.
Treasury Assistant Secretary Richard J. Davis announced
the withdrawal of the regulations at an appearance today before
the House Appropriations Subcommittee for Treasury, Postal
Service and General Government. The announcement was filed
today with the Federal Register.
During his testimony Mr. Davis also stated that the Justice
Department has decided not to appeal a recent decision by the
U'. S. District Court in Washington that ATF had statutory
authority to promulgate regulations providing for security requirements for licensed premises. The court ruled on the issue
B-1427
(MORE)

- 2 -

after the Treasury Department rejected a petition submitted by
the National Council to Control Handguns (NCCH) and the NCCH
then sued the Department. Under the court decision, ATF, which
had previously stated it did not have authority to issue such a
regulation, must now consider this issue on its merits. Consideration will be given to whether it
should issue an Advanced
Notice of Proposed Rulemaking on this subject to secure additional
information, particularly as to the cost-benefit of such an
approach, before determining whether to make any proposals in
this subject area.
Assistant Secretary Davis said, at the hearing, that the
Department wanted to give the newly appointed Director of ATF
an opportunity to review all of these matters.
o

0

o

FOR RELEASE ON DELIVERY
February 28, 1979 — 10:00 a.m. EST
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT AND OPERATIONS)
BEFORE THE
SUBCOMMITTEE ON AVIATION OF THE HOUSE
COMMITTEE ON PUBLIC WORKS AND TRANSPORTATION
ON
H.R. 1834
"AN ACT TO COMBAT INTERNATIONAL TERRORISM"
I appreciate the opportunity to appear again before
this Subcommittee in order to discuss the explosive tagging
provisions of H.R. 1834 and other House bills which address
the problems associated with international terrorism.
Accompanying me today are Mr. G. Robert Dickerson, the new
Director of the Bureau of Alcohol, Tobacco, and Firearms, Mr.
John Krogman, Deputy Director, Mr. A. Atley Peterson, also of
BATF, and Dr. Robert Moler of the Aerospace Corporation.
As you know, Mr. Chairman, in the Ninety-Fifth Congress
we presented a detailed statement of the Treasury Department's
reasons for supporting the adoption of explosives tagging
legislation. Rather than repeat all that was said at that
time, I will today present an overview of what the explosives
tagging program is intended to accomplish, why Federal
legislation is needed, and what kind of legislation is most
desirable. As an attorney and former Federal prosecutor, my
primary experience has involved dealing with how to
investigate and prosecute crimes after they have been
committed. But my responsibilities for the protective as well
as the investigative enforcement activities of the Treasury
Department demand a perspective which gives at least equal
weight to the ability of government to prevent criminal
activities, especially those employing violence.
B-1428

- 2 -

Consequently, I have followed closely the development,
under BATF and Aerospace auspices, of capabilities for
introducing into non-military explosives those unique elements
— taggants — which would permit identification and detection
of explosives. Very simply, the explosives tagging system
would work as follows. Identification tagging involves the
insertion of a taggant in an explosive material which would
survive intact after an explosion and be recovered by bomb
scene investigators. The taggant itself would reveal the type
of explosive involved, its manufacturer, and the date and
shift when it was made. From this, the explosive could be
traced through the distribution chain from manufacturers, to
retailers and, in many instances, to the last, or a group of
possible last, legal owners of the explosive. Detection
taggants would emit a vapor which could be detected before the
explosive containing them was detonated; the presence of bombs
could, thus, be detected and lives and property saved.
These techniques, some of which could be implemented
nationally in 1979 if we had the authority, offer law
enforcement and security authorities an opportunity to use
science and technology not only to solve more bombing crimes
but also to prevent their occurrence. In this manner, a
comprehensive explosive tagging program can significantly
enhance the public safety.
Because of the benefits derived from developing
practical tagging capabilities, the Treasury Department and
ATF testified several times during the 95th Congress in
support of the passage of legislation which would provide us
with the necessary authority to require that non-military
explosives which are manufactued or imported in the United
States carry taggants. While that legislation did not reach a
vote in that Congress, its importance has not diminished; and
we continue to support the passsage of tagging legislation
during the 96th Congress. We continue to urge the adoption of
a legislative requirement for explosive tagging because it
will provide us with significant tools in the battle against
terrorists and others who use explosives illegally.
The extent to which tagging will help counter bombing
crimes will be largely influenced by how quickly and how many
forms of explosives are tagged. It is very important,

- 3 -

therefore, that as soon as technology allows, the requirement
that a particular class of explosives be tagged should go into
effect. One class of explosives — dynamites, water gels and
slurries — is ready for identification tagging now; black
powder will be shortly. Tagging for the other types is
expected to be ready at different times throughout the next
three years. Following is a chart reflecting the status of
development for tagging the various categories of explosives.
It describes the dates we expect tagging could begin to be
implemented if legislation is passed in this session and if
sufficient taggants are then available.
IDENTIFICATION TAGGING
— Black Powder, June 1979
— Smokeless Powder, July 1981
— Dynamites, water gels & slurries, June 1979
— Fuse and Detonating Cord, November 1979
— Boosters, March 1980
— Detonators, June 1981 (label method)
October 1981 (double plug method)
DETECTION TAGGING
— Black Powder, October 1980
— Smokeless Powder, October 1980
— Dynamites, water gels & slurries, October 1980
— Fuse and Detonating Cord, October 1980
-- Boosters, January 1981
— Detonators, January 1981 (both single plug methods)
June 1981 (label method)
October 1981 (double plug method)
— Detection Taggant Sensors, April 1981 through
March 1982 (implementation of different devices)
Changes, both positive and negative, from the schedule
projected last summer are due to various factors, including
scientific developments, the lack of legislation, and delays
in securing testing agreements with some manufacturers.
We urge that legislation be passed during this session
which provides the Secretary with the necessary authority to
require tagging of all types of non-military explosives in

- 4. order that we can minimize the delay in getting tagged
explosives into the marketplace and maximize our ability to
apprehend those who use bombs and to save the lives of their
intended victims at the earliest possible time. Elimination
of particular classes of explosives from this legislation
will, we fear, provide a disincentive for the producers of
those explosives to cooperate with the development and testing
of tagging. The passage of comprehensive legislation, on the
other hand, will provide a stimulus which would accelerate the
process by which tagging of all explosives used in crimes
could be accomplished.
The enactment of .tagging legislation in a piece-meal
fashion also will minimize and, likely, defeat the timely
impact on bombing crimes which tagging might have. For
example, if we were to achieve legislative authority that
permits us to institute identification tagging for the
dynamites, water gels and slurries (which are ready for
national identification tagging) but not for other explosives,
we would not be able to respond rapidly to the expected shift
from dynamites to other forms of explosives; and that shift
will receive impetus because of these exclusions. Instead, we
will have to: (1) continue to perfect tagging of those
categories of explosives not ready today, (2) submit
additional legislation to authorize the tagging requirement
for those types, (3) go through additional sets of hearings to
cover again the testimony already given on this, and (4) if
the additional legislation then passes, wait for the taggant
manufacturers and explosive manufacturers to gear up for
production and use of the taggants in these other types of
explosives. This will be a very lengthy process giving
bombers years of immunity from the tagging of what are already
commonly used explosives in bombs such as black and smokeless
powders.
On the other hand, if we have a single, comprehensive
bill — with the requirements that all taggants be safe,
suitable, non-damaging, and available, and with the
discretionary authority to make exemptions or delays when
needed -- the only step remaining once taggants for these
other types of explosives are ready will be to institute the
tagging requirement. This approach will not authorize the
inclusion of taggants before it is safe to do so; tagging will
happen only after tests, participated in by the manufacturers,
have been completed successfully.

- 5 -

Passage of a comprehensive bill is also necessary so
that the manufacturers of taggants and explosives will be
prepared to invest willingly the resources needed to have
production and distribution facilities ready. They will do so
only if they know that there is a legal requirement for
compliance and that the tagging requirement will be
implemented on a certain date. This certainly can only be
achieved through a comprehensive tagging bill.
The Department recognizes that some have urged that
black and smokeless powders be excluded from this program
because they are used lawfully by sportsmen. H.R. 1834 adopts
such an approach. We cannot endorse this exclusion. All
explosives have both lawful and unlawful uses. Black and
smokeless powders are not only used by the law-abiding; they
are also used by the bombers. For example, among all bombings
in 1978 recorded by ATF — including unidentifiables and
incendiaries — black and smokeless powders were used in 18.5
percent of the total bombings. FBI figures for this period
attribute 22.1 percent to the powders. A chart presenting a
statistical analysis of the various explosives used in crime
is attached to my testimony. Together, those powders equal
less than one percent of the commercially available
explosives, yet their frequency of occurrence in bombings is
several magnitudes greater than their proportional
availability.
Given this situation, a program that excludes these
powders is of questionable value. Such an exclusion would
encourage the increased use of powders in bombs; taggant
detectors would have little benefit if they could not detect
the large numbers of black and smokeless powder bombs; and the
cost-benefit of identification tagging would be reduced.
Mr. Chairman, the Treasury Department firmly believes,
however, that the enactment of tagging legislation must assure
that this program proceeds under the most rigorous and
objective standards of research, development and testing. One
measure of precaution that we recommended was incorporated in
some of the legislative proposals in the last Congress and is
repeated in subsection (t) of the explosives taggants
provisions of H.R. 1834 and section 9(b) (10) of H.R.
,

- 6 -

respectively. We therefore fully support the explicit
requirement that authority be created so that the insertion of
taggants in any type of explosive, including the powders, can
be deferred until that type of tagged explosive is found to
have all-around safety, that the taggants would not affect the
performance of the explosive or of a weapon using it, that
they would be available in sufficient quantities to avoid any
interruption in the ordinary course of producing explosives
and that they would be environmentally sound. These
precautions ensure that the lawful user of these materials —
ranging from the shooter to the mining company — is
protected, as is the public, from the bomber. Fortunately the
technology being developed is meeting this challenge. It is,
we are certain, our joint desire to assure that each step of
the program continues to do so.
From Treasury's perspective another vital issue for
tagging has been whether the crimes solved and the deterrence
established are worth the effort and costs of requiring the
taggants. In order to assess this as objectively as possible,
Management Science Associates was asked to study this
question. While acknowledging the difficulty in assessing the
impact of any program before it begins, the study concluded,
and we believe, that the value and cost effectiveness of
identification tagging is clear.
Detection tagging is the part of the tagging program
from which the greatest direct benefits to the public safety
can be expected. With detection taggants added to explosive
materials and with detection devices placed at high target
value locations, we can go beyond solving bombing crimes only
after the destruction has happened and begin, through
pre-detonation discovery, to prevent bombings from occurring.
The MSA study suggests that the cost-benefit of this form of
tagging is less certain than that for identification tagging.
Its analysis makes clear, however, that if one considers just
the high risk, potential targets — airports, planes, public
buildings — then the benefits are clear. In addition, when
one considers what detection tagging can do — save life and
limb — the essentiality of going forward with this program
becomes clearer.

- 7 -

We also do not seek to tag those types of explosives
seldom found in any bombings. We have no desire to impose
burdens on commercial enterprises or private pursuits that do
not have a clear public benefit. For example, we are not
seeking to require the tagging of those smokeless powders
inserted in commercially manufactured, fixed ammunition. Only
powders for sale in bulk quantities should be tagged. We take
this position because there is no measurable public benefit to
achieve by tagging individual rounds of ammunition.
Furthermore, we will not require the tagging of
blasting agents. The greatest portion (80 percent) of the
materials produced for use in commercial blasting is made up
of blasting agents, the most common of which is a mixture of
ammonium nitrate and fuel oil known as ANFO. The components
of ANFO are not explosives until compounded at the blasting
site. Then they nearly always require a booster and detonator
in order to be exploded. Both boosters and detonators are
going to be tagged under this program since they nearly always
occur in criminal use of high explosives. Thus, their tagging
will also provide the tracing mechanism for blasting agents,
and we will not have to undertake the massive and costly job
of requiring that blasting agents themselves be tagged.
Tagging of the boosters and detonators is cheaper, more
readily applicable, and will have a much greater impact on
bombings than tagging of the blasting agents which almost
never are used in crime.
Mr. Chairman, in addition to specific safety pnd other
protections which we have already described, we propose that
an obligation be placed on Treasury and the Bureau of Alcohol,
Tobacco and Firearms to report to the Congress at least
annually on the results of the operating parts of the tagging
program: costs, the incidence of discovery of taggants at
bomb scenes, and the incidence of pre-explosion bomb
detections through taggants. In addition, the status,
including any cost changes, of development which is not yet
completed should be reported each year. Such a report will
enable Congress to continue to evaluate this program. We will
be happy to work with the Subcommittee staff in developing
this and other proposals designed to assure the proper
implementation of this program.

- 8 -

Mr. Chairman, we believe the benefits of tagging are
clear. It will not, of course, provide a panacea, instantly
solving the problem of explosives crime. Identification
tagging will help solve some bombings, not all. Detection
tagging does not mean that all bombs will immediately be
detected. Together, however, they will meaningfully advance
our ability to deal with the bombing problem and deter some
from using this deadly instrument. Those would be major life
saving advances.
That concludes my statement, Mr. Chairman. Director
Dickerson has a brief prepared statement, and we will then be
glad to answer any questions.

Department of the Treasury Statement
February 28, 1979, Subcommittee on
Aviation, House Committee on Public
Works and Transportation

February 26, 1979

Attachment

1978
Crime

Distribution of Explosives in

ATF

FBI
Percent Percent
Number

Known

w/Unknown

Number

Percent
Known

Incendiary 636 39.30 34.60

468 36.10 26.50

Black Powder 196 12.10 10.70

171 13.20 9.70

Smokeless Powder 209 13.00 11.40

157 12.10 8.80

Military

133

8.20

7.20

55 4.20 3.10

Dynamite

173

10.70

9.40

251 19.40 14.20

Other

271

16.70

14.70

194 15.00 11.00

1618

100.00

Subtotals
Unknown
Totals

1296 100.00

219

12.00

1837

100.00

Black & Smokeless
(Shown as percentage
of known)

1767 100.00
25.30

25.10

>

Black & Smokeless
(Percentage
including unknowns)
Black & Smokeless 40.8
(Percentage excluding
incendiaries & unknowns)

471 26.70

22.10

18.50

39.6

Percent
w/Unknown

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
FEBRUARY 28, 1979

TESTIMONY OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEES ON GOVERNMENT AFFAIRS
AND ON BANKING, FINANCE AND URBAN AFFAIRS
Thank you for the opportunity to present the views of
the Administration on S. 332, a proposal to consolidate the
Federal bank regulatory agencies.
For more than forty years, Congress and the Executive
Branch have considered proposals to reorganize the Federal
agencies charged with the regulation of banks. These proposals
have sought to rationalize the complex, and to some extent
overlapping, jurisdictions of the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency and
the Federal Deposit Insurance Corporation. Each of these
agencies is charged with the examination and supervision
of segments of the banking industry, and each has substantial
personnel devoted to similar activities. This structure is
a product of history, and it is doubtful that anyone starting
with a clean slate would design the regulatory system we have
today. Nevertheless, the system has on the whole operated
well. This country has the strongest banking system in the
world. The level of failures in recent years does not call
into question the basic structure of the system.
On the other hand, it is clear that in a few areas the
present system falls short of optimum performance. A frequently mentioned illustration is found in the examination and
supervision of bank holding company systems. Most regulators
agree that holding companies and their bank and nonbank affiliates should be examined in a process that recognizes that
they are a single entity and that transgressions in one part
B-1429

- 2 of a system will inevitably affect other portions. But with
the Comptroller examining the national banks in the group, the
FDIC examining nonmember state banks in the system, and the
Federal Reserve examining state member banks, the holding
company and its nonbank affiliates, a consistent and integrated
result has not always emerged.
Similarly, in recent years the bank regulators have been
hard pressed to keep up with expansion of bank activities abroad
and in highly technical areas such as currency trading and data
processing. Each regulator supervises some banks that pursue
such activities, and thus each must develop an increasingly
sophisticated cadre of examiners. Some have asserted that it
would be easier and more efficient to develop one — rather
than three — specialized examination groups and thus increase
the likelihood that a satisfactory technical level of competence is developed and maintained.
The present system is sometimes uneven in its treatment
of comparable situations and in its response to emerging
problems. From time to time disagreements among the regulators
have frustrated uniform policies and created competitive
inequities.
Thus, there are good reasons to consider reorganization
or consolidation. S. 332 would consolidate the three agencies
under a single five member commission. This is the most
ambitious of the proposed reorganization suggestions. While
in the long-term this may well be the desirable structure,
the Administration does'not recommend implementation of
that solution for a number of reasons.
First, with the recent passage of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 and the
Community Reinvestment Act, the regulators are under considerable pressure to implement a number of important and complex
new requirements. Consolidation would unquestionably interfere
with that process by diverting staff and causing personnel
assignment uncertainties.
Second, in-depth consideration of consolidation legislation may well doom any early passage of legislation solving
the membership problem of the Federal Reserve. Pending proposals deserve early consideration, but as a practical matter
there is every chance that they will be linked to the consolidation issue if that issue is seriously considered, and
chances of early passage would not be enhanced.

- 3 Third, implementation of S. 332 will involve very considerable personnel resource and logistic problems. The integration of three separate agencies can be a traumatic and
disruptive step. Indeed, rationalizing three non-parallel
regional systems will in itself pose very significant problems.
The solutions to these questions should evolve over a substantial period of experimentation with increasing uniformity
of regulation and proceedings among the regulators. Trying
simultaneously to accomplish both substantive uniformity and
structural reorganization could strain the system beyond
prudent limits.
Fourth, S. 332 does not fully address the issues raised
by those who are concerned about the fate of the dual banking
system. This Committee is aware that fears have been expressed
that a monolithic Federal bank regulatory agency would effectively swamp the state regulators. By providing for
Federal funding and certification of qualifying state
regulators, S. 332 would facilitate co-existence. But it
cannot fully answer the assertion that he who controls the
purse strings will also ultimately set the standards.
It has been suggested by some that a preferable intermediate position is a reorganization that would result in two
Federal agencies, one that would examine and supervise national
banks and the other state banks. It is argued that such a
structure would best preserve the integrity of a dual banking
system while reducing a significant portion of the present
duplication. But this proposal necessarily sacrifices some
of the goals of efficiency and effectiveness sought by the
proponents of reorganization. There are also other variations
that would accommodate concerns in this area, but all raise
complex issues that will not be quickly and easily resolved.
How are these competing and sometimes conflicting
interests to be resolved? The proper accommodation is, I
would suggest, most difficult to determine when the steps we
take are large and the impact on existing institutions is
great. If, instead, change takes place in smaller steps, the
result more closely approaches a natural evolution. It was
that kind of evolutionary process that the Administration
had in mind in supporting the creation by the Congress less
than four months ago of the Federal Financial Institutions
Examination Council — Title X of the Financial Institutions
Regulatory and Interest Rate Control Act of 1978. •

- 4 Under the terms of the new law, the Council will be
established on March 10, 1979. Its members will consist of
the Comptroller of the Currency, the Chairman of the Board of
Directors of the Federal Deposit Insurance Corporation, a
Governor of the Board of Governors of the Federal Reserve
designated by the Chairman of the Board of Governors, the
Chairman of the Federal Home Loan Bank Board, and the Chairman
of the National Credit Union Administration.
The law provides the Council with several functions that
are the key to the development of a consistent and effective
regulatory scheme. First, the law directs the Council to
establish uniform principles, standards and report forms for
the examination of financial institutions which shall be applied by the member agencies of the Council. Second, the
Council is to make recommendations for uniformity in other
supervisory matters. If a member agency finds a recommendation
unacceptable, the agency must submit to the Council, within a
time period specified by the Council, a written statement of
reasons that the recommendation is unacceptable. Third, the
law provides that the Council is to develop uniform reporting
systems for the regulated financial entities. Finally, the
Council is to conduct schools for the examiners of the member
agencies. Each of the agency members is to bear one-fifth
of the expenses of the Council. Work on implementing the
provisions of the new law is well advanced and on March 10,
the Council should be fully operative.
In establishing the Council, the Congress has taken a
major step in promoting consistent regulation of financial
institutions. For the first time, we have an institutional
mechanism — with statutory authority — to coordinate the
activities of the regulatory agencies. This is a step that
we should build upon, for it holds the promise of resolving
many of the problems that have been identified in the
regulation of financial institutions today and of providing
the basis for more formal consolidation should that appear
warranted in a few years.
We believe it is entirely appropriate for this Committee
to consider now the form that consolidation of these agencies
should take. We would suggest, however, that enhancement of
the Council is the logical interim step to consolidation —
should it eventually be enacted. It should be integrated
in any plan for ultimate consolidation so that substantive
progress in critical areas is achieved before the necessity

- 5 of accommodating dislocations that come with full consolidation. We would be pleased to provide any assistance we
can to the Committee in this process.
The initial experience in implementing the provisions
of the new law have pointed to some areas where changes in,
or clarification of, the operations of the Council may be
appropriate. Our suggestions may be summarized as follows:
1. It should be made clear that the Council's coordinating
function includes the examination and supervision
of all entities examined by the bank regulatory
agencies, including bank holding companies and
their nonbank affiliates, Edge Act corporations,
agreement corporations and the like.
2. The role of the Federal Home Loan Bank Board and
the National Credit Union Administration should
be changed and the role of the Treasury should be
clarified.
3. The method of financing the Council's operations
should be altered.
The Coordinating Role
The enormous expansion of the bank holding company form
of organization in the last two decades has resulted in many
new activities being conducted by banking groups and of some
functions previously conducted by banks being conducted now
by a holding company or its nonbank affiliates. This in turn
has complicated the responsibilities for examination and supervision and the actual conduct of examinations.
s

The need for coordination of examination and supervision
of these activities and those of other nonbank affiliates is
plain. Indeed, the lack of institutional arrangements to assure coordination has led some to suggest that the administration
of the Bank Holding Company Act, which is presently lodged
exclusively with the Federal Reserve, should be divided and
allocated to the prime regulator of the major banks in each
group. In our view, the Council should promptly undertake to
address the problems in this area before a more drastic legislative solution is enacted.

- 6 That may require clarification of the Council's authority.
Certain provisions of the statute imply that the Council will
be involved in developing uniform reporting systems for bank
holding companies and in making recommendations as to supervisory problems with bank holding companies. On the other
hand, the definition of "financial institution" in the legislation creating the Council includes only depository institutions. To avoid any ambiguity about what the Council is
to do, the Congress may wish to amend the definition so that
bank holding companies, their nonbank subsidiaries, Edge Act
corporations, agreement corporations and any other entities
subject to examination and supervision by the regulators,
are included within the group that must be coordinated.
This change will assure that the Council's coordinating role
is comprehensive and that an important feature of current
financial regulation is fully integrated into a uniform
regulatory
Membership scheme.
The law provides for equal participation by the bank
regulatory agencies and the more specialized savings and
loan and credit union regulatory agencies. Yet most of the
work of the Council will not involve matters where coordination with the thrift institutions is relevant. We would
suggest that the objectives sought to be achieved by including
them in the Council can be better achieved by making the
Administrator of the National Credit Union Administration
and the Chairman of the Federal Home Loan Bank Board advisory
members of the Council. Neither would act as chairperson,
and actions of the Council would not be binding upon their
agencies or the institutions they regulate. In addition,
the Treasury has for many years participated on the regulators1 interagency coordinating committee. It would be
appropriate that the Treasury continue in this role as an
advisory member of the Council.
Financing
It also seems clear that it is not equitable, at least
as the activities of the Council are now envisaged, for the
Federal Home Loan Bank Board and the National Credit
Union Administration to have an equal share of the costs

- 7 and expenses of the Council. Also the resources of the
agencies themselves are vastly different, as reflected in
their budgets and sources of income. The use of Council
facilities such as the examination schools may vary among
the agencies, and some recognition of differences in resource
utilization would seem to be in order.
Accordingly, we recommend that the basic costs of the
Council be paid from the FDIC insurance fund. The FDIC
insurance fund is supported by assessments on all banks
regulated by the Federal banking agencies and it thus would
be an equitable means of sharing the Council's basic costs.
in addition, the Council would charge each agency for the
use of particular services or facilities such as the examination schools. This use charge would more equitably match
costs and benefits. It would also allow the National Credit
Union Administration and the Federal Home Loan Bank Board to
participate in these services or facilities without incurring
costs for the overall operation of the Council. The effect
of these proposed changes will be to provide a more sound
basis for financing the Council and to free the agencies from
internal budgetary concerns that might otherwise impede the
development of the Council and its functions.
*

*

*

Mr. Chairman, that concludes my formal testimony. We
would be pleased to submit proposed legislation to implement
these changes.

FOR IMMEDIATE RELEASE

February 27, 1979

RESULTS OF TREASURY'S 48-DAY BILL AUCTION

Tenders for $4,001 million of 48-day Treasury bills to be issued
on March 2, 1979, and to mature April 19, 1979, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

Price
High
Low
Average -

Investment Rate
(Equivalent Coupon Issue Yield)

Discount Rate

9.93%
10.01%
9.99%

9.645%
9.720%
9.698%

98.714
98.704
98.707

Tenders at the low price were allotted 69%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL

B-1430

Received

Accepted

$
35,000,000
7,648,000,000

$
35,000,000
3,378,050,000

70,000,000
10,000,000
986,000,000
25,000,000
15,000,000
26,000,000
100,000,000
330,000,000

13,450,000
8,450,000
351,250,000

$9,245,000,000

$4,000,650,000

15,000,000
16,000,000
50,000,000
133,450,000

FOR IMMEDIATE RELEASE

February 27, 1979

RESULTS OF AUCTION OF 4-YEAR 1-MONTH TREASURY NOTES
The Department of the Treasury has accepted $2,502 million of
$6,734 million of tenders received from the public for the 4-year
1-month notes, Series D-1983, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 9.33%Highest yield
Average yield

9.36%
9.35%

The interest rate on the notes will be 9-1/4%. At the 9-1/4% rate,
the above yields result in the following prices:
Low-yield price 99.705
High-yield price
Average-yield price

99.605
99.638

The $2,502 million of accepted tenders includes $538 million of
noncompetitive tenders and $1,964 million of competitive tenders from
private investors, including 24% of the amount of notes bid for at
the high yield.
In addition to the $2,502 million of tenders accepted in the
auction process, $ 395 million of tenders were accepted at the average
price from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash.
1/ Excepting three tenders totaling $53,000

B-1431

FOR IMMEDIATE RELEASE
February 28, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY TERMINATES ANTIDUMPING
INVESTIGATION OF CARBON STEEL
PLATE FROM UNITED KINGDOM
The Treasury Department today announced that it
is terminating its antidumping investigation of carbon
steel plate from the United Kingdom.
This investigation, along with investigations of
the same merchandise from Belgium, France, Italy and
the Federal Republic of Germany, were initiated by
Treasury on January 9, 19 79, after receipt of a complaint by Lukens Steel Co. The investigations of
imports from the other four countries will continue.
The termination of the investigation of British
imports was based on information indicating that there
were no sales of this merchandise from the United Kingdom
durina the last half of 19 78, and that shipments (comprising
less than 100 tons) during that time were at prices not
less than fair value. (Sales at "less than fair value"
generally occur when imported merchandise is sold in
the United States for less than in the home market.)
Lukens Steel Co. has stated in a letter to the
Treasury that it does not object to the termination of
this investigation insofar as it relates to steel from
the United Kingdom.
Notice of this action appears in the Federal
Register of February 28, 1979.

o

B-1432

0

o

FOR IMMEDIATE RELEASE
February 28, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT DISCONTINUES
ANTIDUMPING INVESTIGATION OF VISCOSE
RAYON STAPLE FIBER FROM SWEDEN
The Treasury Department today announced that it
has discontinued its investigation of viscose rayon
staple fiber imports from Sweden.
Treasury's determination was based on its finding
that margins of sales at less than fair value were
minimal (i.e., about 0.5 percent), in relation to the
volume of trade involved, and on formal assurances
from the sole exporter that no future sales at less
than fair value will be made to the U. S.
("Sales at less than fair value" generally occur
when imported merchandise is sold in the United States
for less than in the home market.)
Notice of this action appears in the Federal
Register of February 28, 19 79.
Imports of viscose rayon staple fiber from Sweden
were valued at about $2.1-million during calendar year
1977.

o

B-1433

0

o

February 28, 1979

Treasury Statement
The January balance of trade report incorporates a
new system of seasonal adjustments, which results in
substantial shifts in the monthly trade figures,
although it does not affect the annual totals. The
revised trade data show that the improvement in our
overall trade position during the latter half of 1978
was even stronger than indicated under the old system.
The new adjustments result in significantly higher
imports and a larger overall deficit for January than
under the previous system which shows a further drop
in the deficit for January. We continue to expect the
1979 trade balance to show real improvement. The revised figures for the latter half of 1978 support that
expectation.

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $3,320 million of 52-week Treasury bills to be dated
March 6, 1979,
and to mature March 4, 1980,
were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $500,000)
Investment Rate
Price

Discount Rate

High - 90.415 9.480% 10.39%
Low
- 90.401
Average - 90.410

(Equivalent Coupon-Issue Yield)

9.494%
9.485%

10.41%
10.40%

Tenders at the low price were allotted 25%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

$
56,680,000
5,814,170,000
17,565,000
76,210,000
188,515,000
31,450,000
358,865,000
52,385,000
8,430,000
25,695,000
4,955,000
403,065,000

$
25,680,000
3,075,670,000
2,565,000
14,710,000
63,515,000
24,325,000
23,615,000
22,635,000
3,430,000
16,570,000
4,955,000
37,540,000

Treasury

5,140,000

5,140,000

TOTAL

$7,043,125,000

$3,320,350,000

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

The $3,320 million of accepted tenders includes $ 138 million of
noncompetitive tenders from the public and $1,588 million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and
international monetary authorities accepted at the average price.

B-1434

FOR RELEASE ON DELIVERY
EXPECTED AT 10:30 A.M.
March 2, 1979

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
Mr. Chairman and Members of the Committee:
I welcome this opportunity to discuss the Administration's
proposal for a system to control Federal credit programs,
which the President announced in his January Budget Message.
The new system would improve legislative and executive
controls over credit programs and improve our focus on
their overall financing requirements and their impacts on
credit markets.
Under the Administration's proposal, annual limits
on new lending under direct and guaranteed loan programs
would be established in the regular budget and appropriations
process. An overall, annual limit would be proposed in the
President's budget, as well as a limit on each program.
Aggregate ceilings could be set in the Congressional budget
resolutions. Legally binding limitations for each individual
budget account would be set in regular annual appropriation
acts.
The major impact of the new system would be on loan
guarantee programs. Opportunity now exists for review and
control of direct loans in the regular budget and appropriations
process, since most direct loan programs are included in the
budget totals. Loan guarantee programs, however, largely
B-1435

- 2 escape the budget process, since loan guarantees do not result
in budget outlays (except in cases of default or where explicit
subsidy payments are provided).
The new control system would not apply to Governmentsponsored enterprises such as the Federal National Mortgage
Association (FNMA), the Farm Credit System, and the Federal
Home Loan Bank System. These agencies are entirely privatelyowned and are largely self-supporting. Thus, they differ
signficantly from Federal loan guarantee programs which are
administered by Federally owned agencies and are effectively
backed by the credit of the U.S. Treasury. However, even
though the Government-sponsored enterprises would be excluded
from the new Federal credit program control system, their
activities should be taken into account in determining the
overall Federal impact on total credit demands and on the
allocation of credit to particular sectors of the economy.
Growth in Federal Loan Guarantees
Let me turn now to the specific problems of loan
guarantees, which have been the principal focus of the
Congressional committees interested in credit program
controls. The table attached to my statement shows
an estimated $333 billion of guaranteed loans outstanding
at the end of FY 1980, an increase of $37.4 billion from
the 1979 level. Thus, in FY 1980 the net demands on
financial markets to finance Government loan guarantee
programs will total $37.4 billion. As shown in the table,
these demands have increased rapidly in recent years, from
$16.2 billion in FY 1976 to $20.5 billion in FY 1977, $25.1
billion in FY 1978, and an estimated $32.8 billion in
FY 1979.
By comparison, the net demands on financial markets to
finance the Federal budget deficits during this period
have been declining. They fell from $66.4 billion in
FY 1976 to $45.0 billion in FY 1977, $48.8 billion in FY 1978,
and an estimated $37.4 billion in FY 1979 and $29.0 billion
in FY 1980. Thus, while budget deficit financing is expected
to be cut by more than half in this 4-year period, the net
off-budget financing required for loan guarantee programs
will more than double.

- 3 A major reason for the proliferation of guarantees
is the common misconception that they are cheaper and less
risky to the Federal Government th'aa direct loans.
There
is, however, no inherent difference, from the Federal
viewpoint, between the costs and financial market effects
of these two forms of credit.
The argument favoring guarantees relies primarily
on experience with the largest and best known guarantee
program -- the FHA's single family mortgage insurance
program. This successful program, enacted during the
great depression of the 1930's, assured private lenders
that they could safely make long term, low down payment
mortgage loans at reasonable interest rates, thus filling
an important credit gap. Today, the FHA program's
objectives are being achieved increasingly by private
financial institutions without the need for Government
intervention.
Unfortunately, FHA insurance has been the exception.
A review of the programs covered in Special Analysis F of
the Budget belies the argument that most guaranteed loan
programs pose minimal costs to the Federal Government.
Indeed, most involve substantial subsidies to borrowers
and direct costs to the Treasury and, ultimately, the
taxpayer.
Let me enumerate some of these subsidies:
— Principal subsidies. In some cases, the Federal
Government has extended loan guarantees with the expectation
of paying part or all of the principal amount of the loan.
The guaranteed loan is equivalent, therefore, to an outright
grant of taxpayer funds. An extreme case is the public
housing program, involving $15 billion of public housing
note and bond guarantees (debt service contracts) outstanding.
It is unlikely that public housing projects will generate
sufficient revenues to service any of this debt. As a
result, the Federal Government probably will make all
interest and principal payments on this $15 billion.

- 4 -- Interest subsidies. Other guaranteed loan programs
involve direct interest subsidies -- for example, rural
community facilities, and subsidized private housing — in
addition to the subsidy implicit in the guarantee itself.
-- Default costs. Beyond these principal and interest
subsidies, all guaranteed loans obviously involve Federal
assumption of credit risks and thus potential costs to the
Federal taxpayer in the event of unanticipated default.
Let me make a final comparison between direct loans and
guaranteed loans. All loans involve three basic functions —
assuming risk, supplying funds and processing the loan.
Some argue that guarantees involve the Government
only in risk assumption, and that the private sector
supplies the funds and handles the paperwork. Yet another
examination of the types of guarantees outstanding indicates
that certain agencies issuing guarantees perform all three
of these functions.
Specifically, several agencies, including HUD, HEW and
Agriculture, make direct loans but then convert them into
guarantees. In making the direct loans, they assume the
risk, supply the funds and handle the processing. They
then can sell the loans to private parties, however,
continuing to guarantee them. A second example involves
HUD's urban renewal program, which provides direct loan
authority. Here, a commitment to make a direct loan is
treated as a guarantee and sold by borrowers into the market.
Another misconception is that guaranteed loans are
still largely financed by local lending institutions, with
minimal Government involvement, and thus have little net
impact on the securities markets. In fact, the $37.4 billion
net financing requirements for loan guarantees in FY 19 80
will be largely financed directly in the securities markets:
An estimated $11.4 billion will be financed through the
Federal Financing Bank, and thus by the Treasury; $10.5
billion will be financed by GNMA mortgage-backed securities;
$3.1 billion by public housing bonds and notes; and
additional amounts of securities market financing will be
required for certain other guarantee programs such as the
SBA, Farmers Home Administration, and the Maritime Administration.

- 5 Improved Standards For Issuing Guarantees
All of us also should address the need for better
standards under which guarantee authority is provided by
Congress in the first place.
It is clear that program agencies should be given
more specific guidelines on the circumstances under which
guarantees are to be provided and the related terms and
conditions of them. Giving these agencies broad guarantee
authority and then expecting them to resist the inevitable
demands for guarantees unavoidably leads to serious problems
of control over guarantee totals and general misallocation
of our limited credit resources.
Let me discuss the basic circumstances in which
guarantees are issued and make some suggestions for
tightened loan guarantee standards and how they would
help with the broader problem of controlling loan guarantee
programs.
Credit need test. Most loan guarantee programs are
intended to facilitate the flow of credit to borrowers who
are unable to obtain credit in the private market. The
needs of more creditworthy borrowers are expected to be
met in the private market without Federal credit aid. To
achieve this purpose more effectively, and to provide a
built-in control over program growth, enabling legislation
should be more specific on requiring evidence that borrowers
cannot obtain credit from conventional lenders. Specifically,
we think that legislation should require the guarantor
agency to certify that, without the guarantee, borrowers
would be unable to obtain credit on reasonable terms and
conditions.
Coinsurance. In addition, guarantee programs are
often intended to induce private lenders to extend loans
on more favorable terms to marginal borrowers. The borrowers
involved generally can obtain loans on their own, but only
on costly and otherwise disadvantageous terms. In these
cases, 100 percent guarantees don't make sense because
they would lower the interest rate below that paid on
unguaranteed loans to creditworthy borrowers for the same
purposes. Doing so would stimulate a demand for guaranteed
loans by creditworthy borrowers who do not need Federal
credit aid.

- 6 -

To avoid such excessive demand for guarantees, we favor
a much greater use of partial, rather than 100 percent
guarantees. In the future, legislation generally should
limit the guarantees to assume, say, 90 percent of the loan.
Private lenders then would charge a higher rate of interest
commensurate with project risk and with the rates charged
on unguaranteed loans. Such risk-sharing, or coinsurance,
by private lenders would contribute to the development of
more normal borrower-lender relationships, would prompt
lenders to exercise greater surveillance over the loans,
and would stimulate increased conventional lending for the
economic activities involved.
Guarantees of tax-exempt bonds. The Treasury opposes
Federal guarantees of tax-exempt municipal bonds. They
create a class of securities which is stronger than
the Federal Government's own securities. Like Treasury
securities, they would be backed by the full Federal
credit but, unlike Treasuries, they would be exempt from
Federal taxes. In addition, such guarantees would convey
the benefits of both the Federal credit and the tax
exemption to high income taxpayers — the principal
buyers of tax-exempt securities. Also, tax-exempt
guarantees are an ineffective means of delivering Federal
aid to local governments, since much of the benefit goes
to high income investors and since the financing of Federal
programs in the municipal market competes directly with
other State and local bond issues for essential local
public facilities and increases the cost of financing the
facilities. For these reasons, we believe that municipal
bonds should only be guaranteed if they are taxable
securities.
Fixed interest rates. Another example of poor program
structure, which leads to program control problems, involves
loan guarantees where borrowers pay a fixed interest rate,
and the Federal agency pays the difference between that
rate and the market rate. Thus, as interest rates rise,
there is an automatic increase in the Federal subsidy and
in the demands on the Federal budget. The benefits to the
assisted borrower are thus determined by fluctuations
in the market rather than by changes in the borrower's
real needs.

- 7 -

Excessive financing costs. Also to be avoided are
guarantee programs which are financed directly in the
securities markets at disproportionately high costs
because of the small size or poor timing of the issue,
the lack of investor familiarity with the program, or
other special marketing factors. Many of these problems
have been cured by financing such guaranteed obligations
through the FFB.
Equity participation. Many guarantee programs involve
circumstances where borrowers could take equity positions
in the projects being financed, and these guarantee programs
should encourage them to do so. Requiring borrowers to
have such a stake would help avoid excessive demands for
guarantees, help assure more efficient projects, and help
protect the interests of the Federal Government as guarantor.
This could be accomplished by a legislative requirement that
the amount of guaranteed and unguaranteed loans not exceed,
say, 90 percent of the value of the project being financed.
Other loan terms and conditions. Demands for guarantees
will also be excessive if the authorizing legislation does
not contain specific restrictions on such terms and conditions
as maximum maturities, guarantee fees, reasonable assurance of
repayment, and default procedures.
This is not to say that Federal credit assistance
programs should not contain subsidies — indeed, that is
their purpose — but the legislation should be carefully
drafted so that the subsidies provided are by design, not
chance, and are directed at specific needs.
In short, I believe that more effective Congressional
control over loan guarantee programs can be accomplished
by adopting standards which build that control into the
structure of each guarantee program. I recognize that
this is not an easy task, particularly since there are
more than 100 different loan guarantee programs which
fall under the jurisdiction of many different subcommittees
of the Congress.

- 8 In the Executive Branch, the Office of Management and
Budget and the Treasury Department strive to assure a
uniform application of standards in the process of reviewing
proposed guarantee legislation. Within Congress, however,
it may be unrealistic for each interested subcommittee to
develop the intense focus on guarantee standards which
is essential to this improved control. Accordingly,
it may be worthwhile for such a responsibility to be
lodged in one committee of the Congress. Alternatively,
the Congress could take the approach taken in the Federal
Financing Bank Act or the Government Corporation Control
Act and enact omnibus legislation to establish credit
program standards.
I would be happy to answer any questions.

OoO

Net Inc:rea.sc; in Federal and Federally Assisted
Borrowing frcm the E»ublic
(fiscal years; billions of dollars)

Year
1970

Federal borrowing from the public
Other means
Budget : Off-budget
of
deficit : deficit 1/
financing 2/
2.8
2.6

Total
5.4

Federally assisted borrowing from the public
: Sponsored
yy Guaranteed : agency
Deduct to avoid
double
counting 3/
obligations:obligations 4/
6.4

10.7

5.6

Total
11.5

Total Federal and
Federally assisted
borrowing from
the public
16.9

1971

23.0

-

-3.6

19.4

16.1

1.5

3.4

1(1.2

33.7

1972

23.4

-

-3.9

19.4

18.8

5.0

4.6

19.2

38.6

1973

14.8

.1

4.4

19.3

15.2

8.8

- .7

24.7

44.0

1974

4.7

1.4

-3.1

3.0

10.1

14.9

4.0

21.0

24.1

1975

45.2

8.1

-2.4

50.9

16.4

11.9

14.4

13.9

64.7

1976

66.4

7.3

9.2

82.9

16.2

5.3

6.5

15.0

97.9

TQ

13.0

1.8

3.3

18.0

2.7

1.7

3.3

1.1

19.1

1977

45.0

8.7

- .1

53.5

20.5

7.0

2.0

25.5

78.9

1978

48.8

10.3

- .1

59.1

25.1

24.1

13.8

35.4

94.5

1979e

37.4

12.0

-9.4

40.0

32.8

13.3

12.7

33.4

73.4

1980e

29.0

12.0

-2.0

39.0

37.4

16.9

12.4

41.9

80.9

Jet Change
1970-80

353.6

61.6

-5.1

410.0

217.7

121.1

82.0

256.8

666.8

689.9

333.4

146.5

96.4

383.5

1073.4

Outstanding
9/30/80
Office of thei Secretary of the Treasury
Office of Government Financing

February 28f 1979

Source: Special Analysis E of the Fiscal Year 1980 Budget, January 1979.
1/ Deficit of off-budget Federal entities. Consists largely of Federal Financing Bank borrowings to finance off-budget programs
2/ Consists largely of changes in Treasury cash balances.
1/ Consists of borrowing by Treasury and minor amounts by other Federal agencies.
4/ Consists largely of Federal National Mortgage Association and the Federal home loan bank and farm credit systems.
5/ Largely Federal and sponsored agency purchases of guaranteed obligations.
6/ 1976 figure excludes retroactive reclassification of $471 million of Export-Import Dank asset sales to debt.

FOR RELEASE ON DELIVERY
EXPECTED AT 10:30 A.M.
March 2, 1979

STATEMENT OF THE .HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE SENATE COMMITTEE ON BANKING,
HOUSING AND URBAN AFFAIRS
Mr. Chairman and Members of the Committee:
I welcome this opportunity to discuss the Administration's
proposal for a system to control Federal credit programs,
which the President announced in his January Budget Message.
The new system would improve legislative and executive
controls over credit programs and improve our focus on
their overall financing requirements and their impacts on
credit markets.
Under the Administration's proposal, annual limits
on new lending under direct and guaranteed loan programs
would be established in the regular budget and appropriations
process. An overall, annual limit would be proposed in the
President's budget, as well as a limit on each program.
Aggregate ceilings could be set in the Congressional budget
resolutions. Legally binding limitations for each individual
budget account would be set in regular annual appropriation
acts.
The major impact of the new system would be on loan
guarantee programs. Opportunity now exists for review and
control of direct loans in the regular budget and appropriations
process, since most direct loan programs are included in the
budget totals. Loan guarantee programs, however, largely
B-1435

- 2 escape the budget process, since loan guarantees do not result
in budget outlays (except in cases of default or where explicit
subsidy payments are provided).
The new control system would not apply to Governmentsponsored enterprises such as the Federal National Mortgage
Association (FNMA), the Farm Credit System, and the Federal
Home Loan Bank System. These agencies are entirely privatelyowned and are largely self-supporting. Thus, they differ
signficantly from Federal loan guarantee programs which are
administered by Federally owned agencies and are effectively
backed by the credit of the U.S. Treasury. However, even
though the Government-sponsored enterprises would be excluded
from the new Federal credit program control system, their
activities should be taken into account in determining the
overall Federal impact on total credit demands and on the
allocation of credit to particular sectors of the economy.
Growth in Federal Loan Guarantees
Let me turn now to the specific problems of loan
guarantees, which have been the principal focus of the
Congressional committees interested in credit program
controls. The table attached to my statement shows
an estimated $333 billion of guaranteed loans outstanding
at the end of FY 1980, an increase of $37.4 billion from
the 1979 level. Thus, in FY 1980 the net demands on
financial markets to finance Government loan guarantee
programs will total $37.4 billion. As shown in the table,
these demands have increased rapidly in recent years, from
$16.2 billion in FY 1976 to $20.5 billion in FY 1977, $25.1
billion in FY 1978, and an estimated $32.8 billion in
FY 1979.
By comparison, the net demands on financial markets to
finance the Federal budget deficits during this period
have been declining. They fell from $66.4 billion in
FY 1976 to $45.0 billion in FY 1977, $48.8 billion in FY 1978,
and an estimated $37.4 billion in FY 1979 and $29.0 billion
in FY 1980. Thus, while budget deficit financing is expected
to be cut by more than half in this 4-year period, the net
off-budget financing required for loan guarantee programs
will more than double.

- 3 A major reason for the proliferation of guarantees
is the common misconception that they are cheaper and less
risky to the Federal Government thaa direct loans.
There
is, however, no inherent difference, from the Federal
viewpoint, between the costs and financial market effects
of these two forms of credit.
The argument favoring guarantees relies primarily
on experience with the largest and best known guarantee
program -- the FHA's single family mortgage insurance
program. This successful program, enacted during the
great depression of the 1930's, assured private lenders
that they could safely make long term, low down payment
mortgage loans at reasonable interest rates, thus filling
an important credit gap. Today, the FHA program's
objectives are being achieved increasingly by private
financial institutions without the need for Government
intervention.
Unfortunately, FHA insurance has been the exception.
A review of the programs covered in Special Analysis F of
the Budget belies the argument that most guaranteed loan
programs pose minimal costs to the Federal Government.
Indeed, most involve substantial subsidies to borrowers
and direct costs to the Treasury and, ultimately, the
taxpayer.
Let me enumerate some of these subsidies:
— Principal subsidies. In some cases, the Federal
Government has extended loan guarantees with the expectation
of paying part or all of the principal amount of the loan.
The guaranteed loan is equivalent, therefore, to an outright
grant of taxpayer funds. An extreme case is the public
housing program, involving $15 billion of public housing
note and bond guarantees (debt service contracts) outstanding.
It is unlikely that public housing projects will generate
sufficient revenues to service any of this debt. As a
result, the Federal Government probably will make all
interest and principal payments on this $15 billion.

- 4 — Interest subsidies. Other guaranteed loan programs
involve direct interest subsidies -- for example, rural
community facilities, and subsidized private housing — in
addition to the subsidy implicit in the guarantee itself.
— Default costs. Beyond these principal and interest
subsidies, all guaranteed loans obviously involve Federal
assumption of credit risks and thus potential costs to the
Federal taxpayer in the event of unanticipated default.
Let me make a final comparison between direct loans and
guaranteed loans. All loans involve three basic functions -assuming risk, supplying funds and processing the loan.
Some argue that guarantees involve the Government
only in risk assumption, and that the private sector
supplies the funds and handles the paperwork. Yet another
examination of the types of guarantees outstanding indicates
that certain agencies issuing guarantees perform all three
of these functions.
Specifically, several agencies, including HUD, HEW and
Agriculture, make direct loans but then convert them into
guarantees. In making the direct loans, they assume the
risk, supply the funds and handle the processing. They
then can sell the loans to private parties, however,
continuing to guarantee them. A second example involves
HUD's urban renewal program, which provides direct loan
authority. Here, a commitment to make a direct loan is
treated as a guarantee and sold by borrowers into the market.
Another misconception is that guaranteed loans are
still largely financed by local lending institutions, with
minimal Government involvement, and thus have little net
impact on the securities markets. In fact, the $37.4 billion
net financing requirements for loan guarantees in FY 1980
will be largely financed directly in the securities markets:
An estimated $11.4 billion will be financed through the
Federal Financing Bank, and thus by the Treasury; $10.5
billion will be financed by GNMA mortgage-backed securities;
$3.1 billion by public housing bonds and notes; and
additional amounts of securities market financing will be
required for certain other guarantee programs such as the
SBA, Farmers Home Administration, and the Maritime Administration.

- 5 Improved Standards For Issuing Guarantees
All of us also should address the need for better
standards under which guarantee authority is provided by
Congress in the first place.
It is clear that program agencies should be given
more specific guidelines on the circumstances under which
guarantees are to be provided and the related terms and
conditions of them. Giving these agencies broad guarantee
authority and then expecting them to resist the inevitable
demands for guarantees unavoidably leads to serious problems
of control over guarantee totals and general misallocation
of our limited credit resources.
Let me discuss the basic circumstances in which
guarantees are issued and make some suggestions for
tightened loan guarantee standards and how they would
help with the broader problem of controlling loan guarantee
programs.
Credit need test. Most loan guarantee programs are
intended to facilitate the flow of credit to borrowers who
are unable to obtain credit in the private market. The
needs of more creditworthy borrowers are expected to be
met in the private market without Federal credit aid. To
achieve this purpose more effectively, and to provide a
built-in control over program growth, enabling legislation
should be more specific on requiring evidence that borrowers
cannot obtain credit from conventional lenders. Specifically,
we think that legislation should require the guarantor
agency to certify that, without the guarantee, borrowers
would be unable to obtain credit on reasonable terms and
conditions.
Coinsurance. In addition, guarantee programs are
often intended to induce private lenders to extend loans
on more favorable terms to marginal borrowers. The borrowers
involved generally can obtain loans on their own, but only
on costly and otherwise disadvantageous terms. In these
cases, 100 percent guarantees don't make sense because
they would lower the interest rate below that paid on
unguaranteed loans to creditworthy borrowers for the same
purposes. Doing so would stimulate a demand for guaranteed
loans by creditworthy borrowers who do not need Federal
credit aid.

- 6 -

To avoid such excessive demand for guarantees, we favor
a much greater use of partial, rather than 100 percent
guarantees. In the future, legislation generally should
limit the guarantees to assume, say, 90 percent of the loan.
Private lenders then would charge a higher rate of interest
commensurate with project risk and with the rates charged
on unguaranteed loans. Such risk-sharing, or coinsurance,
by private lenders would contribute to the development of
more normal borrower-lender relationships, would prompt
lenders to exercise greater surveillance over the loans,
and would stimulate increased conventional lending for the
economic activities involved.
Guarantees of tax-exempt bonds. The Treasury opposes
Federal guarantees of tax-exempt municipal bonds. They
create a class of securities which is stronger than
the Federal Government's own securities. Like Treasury
securities, they would be backed by the full Federal
credit but, unlike Treasuries, they would be exempt from
Federal taxes. In addition, such guarantees would convey
the benefits of both the Federal credit and the tax
exemption to high income taxpayers -- the principal
buyers of tax-exempt securities. Also, tax-exempt
guarantees are an ineffective means of delivering Federal
aid to local governments, since much of the benefit goes
to high income investors and since the financing of Federal
programs in the municipal market competes directly with
other State and local bond issues for essential local
public facilities and increases the cost of financing the
facilities. For these reasons, we believe that municipal
bonds should only be guaranteed if they are taxable
securities.
Fixed interest rates. Another example of poor program
structure, which leads to program control problems, involves
loan guarantees where borrowers pay a fixed interest rate,
and the Federal agency pays the difference between that
rate and the market rate. Thus, as interest rates rise,
there is an automatic increase in the Federal subsidy and
in the demands on the Federal budget. The benefits to the
assisted borrower are thus determined by fluctuations
in the market rather than by changes in the borrower's
real needs.

- 7 -

Excessive financing costs. Also to be avoided are
guarantee programs which are financed directly in the
securities markets at disproportionately high costs
because of the small size or poor timing of the issue,
the lack of investor familiarity with the program, or
other special marketing factors. Many of these problems
have been cured by financing such guaranteed obligations
through the FFB.
Equity participation. Many guarantee programs involve
circumstances where borrowers could take equity positions
in the projects being financed, and these guarantee programs
should encourage them to do so. Requiring borrowers to
have such a stake would help avoid excessive demands for
guarantees, help assure more efficient projects, and help
protect the interests of the Federal Government as guarantor.
This could be accomplished by a legislative requirement that
the amount of guaranteed and unguaranteed loans not exceed,
say, 90 percent of the value of the project being financed.
Other loan terms and conditions. Demands for guarantees
will also be excessive if the authorizing legislation does
not contain specific restrictions on such terms and conditions
as maximum maturities, guarantee fees, reasonable assurance of
repayment, and default procedures.
This is not to say that Federal credit assistance
programs should not contain subsidies — indeed, that is
their purpose -- but the legislation should be carefully
drafted so that the subsidies provided are by design, not
chance, and are directed at specific needs.
In short, I believe that more effective Congressional
control over loan guarantee programs can be accomplished
by adopting standards which build that control into the
structure of each guarantee program. I recognize that
this is not an easy task, particularly since there are
more than 100 different loan guarantee programs which
fall under the jurisdiction of many different subcommittees
of the Congress.

- 8 In the Executive Branch, the Office of Management and
Budget and the Treasury Department strive to assure a
uniform application of standards in the process of reviewing
proposed guarantee legislation. Within Congress, however,
it may be unrealistic for each interested subcommittee to
develop the intense focus on guarantee standards which
is essential to this improved control. Accordingly,
it may be worthwhile for such a responsibility to be
lodged in one committee of the Congress. Alternatively,
the Congress could take the approach taken in the Federal
Financing Bank Act or the Government Corporation Control
Act and enact omnibus legislation to establish credit
program standards.
I would be happy to answer any questions.

OoO

Net Increase in Federal and Federally Assisted
Borrcwlng from the Public

(fiscal years; billions of dollars)

Year
1970

federal borrowing from the public
Other means
Off-budget
Budyet
of
deficit 1/
deficit
financing ^/
2.8

-

2.6

Total
5.4

yy

Federally assisted borrowing from the public
: Sponsored
Deduct to avoid
Guaranteed : agency
obligations:obligations 4/ double counting sJ
6.4

10.7

5.6

Total
11.5

Total Federal and
Federally assisted
borrowing from
the public
16.9

i

1971

23.0

-

-3.6

19.4

16.1

1.5

3.4

10 .2

33.7

1972

23.4

-

-3.9

19.4

18.8

5.0

4.6

19.2

38.6

1973

14.8

.1

4.4

19.3

15.2

8.8

- .7

24.7

44.0

1974

4.7

1.4

-3.1

3.0

10.1

14.9

4.0

21.0

24.1

1975

45.2

8.1

-2.4

50.9

16.4

11.9

14.4

13.9

64.7

1976

66.4

7.3

9.2

82.9

16.2

5.3

6.5

15.0

97.9

TQ

13.0

1.8

3.3

18.0

2.7

1.7

3.3

1.1

19.1

1977

45.0

8.7

- .1

53.5

20.5

7.0

2.0

25.5

78.9

1978

48.8

10.3

- .1

59.1

25.1

24.1

13.8

35.4

94.5

1979e

37.4

12.0

-9.4

40.0

32.8

13.3

12.7

33.4

73.4

19 80e

29.0

12.0

-2.0

39.0

37.4

16.9

12.4

41.9

80.9

353.6

61.6

-5.1

410.0

217.7

121.1

82.0

256.8

666.8

689.9

333.4

146.5

96.4

383.5

1073.4

Net Change
1070-80
Outstanding
9/30/80

Office of thei Secretary of the Treasury
Office of Government Financing

February 28f 1979

Source: Special Analysis E of the Fiscal Year 1980 Budget, January 1979.
1/ Deficit of off-budget Federal entities. Consists largely of Federal Financing Bank borrowings to finance off-budget programs
2/ Consists largely of changes in Treasury cash balances.
\/ Consists of borrowing by Treasury and minor amounts by other Federal agencies.
4/ Consists largely of Federal National Mortgage Association and the Federal home loan bank and farm credit systems.
5/ Largely Federal and sponsored agency purchases of guaranteed obligations.
6/ 10 7 6 figure excludes retroactive reclassification of $471 million of Export-Import Bank asset sales to debt.

,nin.w^i"i '•' 111 i I

'

HINGT0N.O.C.2C220

!•••••.—•• • i • —

•[

• •!••••• in.r

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
March 1, 1979

U \ J *

• L-l \J

v

J

»

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES REVISIONS
IN CUSTOMS INVOICE REQUIREMENTS
FOR TRIGGER PRICE MECHANISM
The Treasury Department today announced a final rule
amending the regulations requiring the presentation of a completed Special Steel Summary Invoice (SSSI)# Customs Form 5520,
to accompany each importation of steel mill products under the
Treasury's "Trigger Price Mechanism" (TPM). The amendments
were adopted to obtain certain information to improve the
effectiveness of the TPM and to clarify certain existing
requirements.
The new regulations generally implement the proposal published in the Federal Register on October 16, 1978, but they
also reflect modifications to take account of comments received
from the public.
Specific information not previously requested but now to
be required on the SSSI concerns. (1) identification of the
producer, (2) the sales price to the first unrelated U. S.
purchaser in those cases in which the resale by a U. S. seller
related to the foreign exporter is concluded before customs
entry, (3) freight charges incurred after the merchandise is
imported into the United States, (4) commissions paid or
allowed, and (5) name of the importer.
Another change will increase the minimum value of a shipment for which an SSSI must be presented at entry from $2,500
to $10,000 except for importations from contiguous countries,
where the minimum amount will be $5,000.
The principal changes effected by the amendments require
the identification of the producer and, in certain related-party
transactions, the sales price to the first unrelated purchaser
in the United States. In this regard, the proposed amendments
have been modified to take account of comments received.
The proposal to require ex-mill and subsequent sales prices
has been limited considerably. The final rule provides that
when the exporter and importer are related, the importer must
provide the sales price to the first unrelated purchaser in the
United States if the price%is available at the time of entry.
Thus, whenever the resale contract has been concluded before the
B-1436

(MORE)

- 2 time of entry, this information must be provided. Failure to
provide available resale information will constitute an incomplete submission of the SSSI, and the entry will be subject to
rejection by Customs. If the resale price is not known at the
time of entry because, for example, the merchandise is entering
the importer's inventory, the international transaction price
must be at or above the applicable trigger prices to avoid
investigation. All entries committed to inventories must be
adequately recorded to permit audit of resales and may be subject
to additional reporting requirements.
If the foreign exporter and U. S. importer are not related
parties, their international transaction price will continue to
be compared to trigger prices. If the resulting comparison
indicates a sale below the trigger price, the Department will
consider the initiation of an antidumping proceeding.
If, in the course of its monitoring (including audits),
the Department finds that a U. S. consumer of steel is using a
foreign buying agent to avoid a direct sale from the foreign
mill to that consumer so that the related firms, viewed as a
whole, are acquiring steel below applicable trigger prices,
the Department will consider the ex-mill price as the proper
basis for comparison to the trigger price. This is consistent
with prior practice in antidumping cases.
The instructions for completing the SSSI have also been
amended to clarify the existing regulations relating to commissions and freight rates to ensure proper comparisons with
applicable trigger prices. When a foreign seller pays a
commission to an unrelated importer, that commission will be
deducted from the invoice price before the comparison to
trigger prices is made. When a foreign seller pays a commission
to a related importer, if the resale price information is
available at the time of entry, that commission will be disregarded. If the resale price is not known at the time of entry,
the commission will be deducted as though the sale were to an
unrelated importer. Inland freight charges in the United States
must also be specifically identified so that, if borne by the
exporter, they may be deducted from the invoice price to permit
comparison with trigger prices.
To permit adequate distribution of the new forms, the
revised SSSI must be presented at the time of entry for each
shipment of a steel mill product exported on or after May 7.
Notice of this action will appear in the Federal Register of
March 7, 1979.
For further information, contact Frank Brennan, Office of
Operations, U. S. Customs Service, Washington, D. C. 20229,
(202/566-8235) or Michael Gadbaw, Office of the General Counsel,
o
0
o
Department of the Treasury,
Washington,
D. C. 20220, (202/566-2263).

FOR IMMEDIATE RELEASE
March 1, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT ANNOUNCES
COUNTERVAILING DUTY INVESTIGATION
ON IMPORTS OF FERROALLOYS FROM SPAIN
The Treasury Department has started an investigation
into whether imports of ferroalloys from Spain are being
subsidized.
A preliminary determination in this case must be
made by June 12, 1979, and a final determination by
December 12, 1979.
Imports of ferroalloys from Spain during the period
January-September 1978 were valued at about $8-million.
The investigation follows receipt of a petition
alleging that manufacturers and/or exporters of this
merchandise receive benefits from the Government of Spain.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional customs duty
equal to the subsidy paid on merchandise exported to the
United States.
Notice of this investigation will be published in
the Federal Register of March 6, 19 79.

o

B-1437

0

o

FOR IMMEDIATE RELEASE
March 2, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY REQUIRES PAYMENT OF
INTEREST ON BLOCKED ACCOUNTS
The Treasury Department's Office of Foreign Assets
Control today announced that publication of regulations
requiring that bank deposits and certain other funds
blocked under its regulations be held in interest-bearing accounts.
The regulations, published in the Federal Register
of March 2, 1979, are amendments to the Foreign Assets
Control Regulations, the Cuban Assets Control Regulations,
and the Foreign Funds Control Regulations. Affected
parties will have 30 days in which to comply.
The new requirement affects blocked accounts in the
United States of the People's Republic of China, Vietnam, Cambodi^, North Korea, and Cuba, and certain limited
categories of assets that have been in a blocked status
since World War II. Reports on the affected accounts
will be required to be filed within 90 days after the
publication in the Federal Register of a notice of
availability of the reporting form.
The purpose of the amendments is to preserve and
enhance the value of blocked assets. The assets are
being held in blocked status pending possible negotiations
and settlement of claims with the countries involved.
These amendments were prepared in consultation with
the Department of State. They are an administrative
measure applying to all blocked assets and do not represent any change in U. S. foreign policy.
o
B-1438

0

o

FOR RELEASE ON DELIVERY
"''' ": STATEMENT OF PAUL H. TAYLOR
FISCAL ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
DOMESTIC MONETARY POLICY OF THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
MONDAY, MARCH 5, 1979, 8:30 A.M.
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to comment on proposed legislation, H.R. 2281, to ext.end for five years, through
April 30, 1984, 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 95534, approved October 27, 1978, the authority will expire at
the end of next month.
The authority has existed since 1942, and has generally
been extended for two-year periods, although there have been
some lapses in recent years. In the last Congress the Department submitted proposed legislation to extend the directpurchase option,to October 31, 1981. Your Committee, however,
suggested a one-year extension with the view to holding oversight hearings on the authority. While those hearings were

3-ii59

2 conducted on June 27, 1978, the Committee bill was not enacted
into law until the fall—providing the Department, in effect,
with a six-month extension.

The approval of a five-year ex-

tension would provide clear recognition of the noncontroversial
nature of this backstop to the Treasury's cash management
responsibilities•
The primary purpose of the authority, as stated, is to
serve as a backstop for Treasury cash and debt operations,
permitting more effective and efficient management of our
cash and credit reserves and allowing us to target lower than
otherwise required cash balances in our demand accounts with
Federal Reserve banks.
There have been observations made that the authority has
not been used frequently in recent years and therefore the
need for its continuance may have diminished.

We acknowledge

that the lapse of the authority on a number of occasions in
recent years has prompted the Treasury to design cash management bill financing techniques which afford a considerable
shortening of the time needed for raising significant sums of
money.

However, the value of the direct borrowing authority

from the Fed does not rest on the frequency or extensiveness
of its use or on its relation to other Treasury cash and
credit initiatives, but rather rests on its availability as an
emergency backstop for Treasury cash needs, by assuring our
ability to obtain needed funds almost instantaneously in the

- 3 event of any kind of unpredictable or unanticipated financial
emergency, such as unexpected cash drains or unexpected interruption of cash inflows.
The Treasury normally makes allowance in its cash and
debt management planning for relatively minor financial
emergencies.

This is possible only because the Treasury has

adequate recourse to short-term funds through our regular
weekly bill issuances and the aforementioned cash management
bills, which can provide funds to the Treasury in as few as
three days.

As a result of these instruments, from the close

of calendar year 1975 to the present, we have made only a
single use of the direct Fed borrowing option.

(The accom-

panying table shows the instances of actual use since 1942.)
Despite the quick cash-raising techniques developed by Treasury and the related lack of usage of the authority in the past
few years, we are still convinced that we need the .Fed borrowing authority,

which provides for almost instantaneous or

"same day" availability of funds in the case of extreme financial emergencies.
At this point, I would also like to point out that any
borrowing under the Fed authority is subject to the public
debt limit, is promptly reported in the Daily Treasury Statement of cash and debt operations, is also publicly reported
in a weekly Federal Reserve statement, and in the Federal
Reserve Board's Report to the Congress.

- 4 The Subcommittee has requested the Department to comment
on a bill, H.R. 421, which would provide a substitute source
of short-term funds for the Treasury by a modification of the
present authority.

The bill, sponsored by Congressman Hansen,

would amend Section 14 of the Federal Reserve Act to authorize
the Federal Reserve banks to lend securities held in the
Federal Reserve's portfolio of investments to the Secretary
of the Treasury for the' latterfs sale of such obligations in
the market.

The Secretary would be required to repurchase

any such obligations sold in the market and return them to
the Federal Reserve bank within six months of sale date. The
present direct purchase authority would be ..repealed under the
provisions of H.R. 4 21.
The methodology provided in H.R. 421 would be cumbersome
from the standpoint of Treasury's fiscal operations and would
not provide for immediate funding of emergency cash needs since
market sales of such securities in any significant size would
have to be accomplished by early afternoon of any particular
day in order to avoid undue disruption to the market.

This

contrasts to the practice under the current authority of
accomplishing the Fed borrowing at any time prior to the closing of the transcripts of activity in the accounts for the day.

- 5 Thus, the bill would not meet the Treasury's need for a backstop in the form of immediately available funds.
We understand that the intent of H.R. 421 is to assure
that Treasury borrowing activity is subject to market forces.
I would like to reiterate Treasury's past testimony that we
would not attempt, through the direct-purchase option, to
influence credit conditions or otherwise avoid the discipline
of the marketplace.

Our policy has been and continues to be

that our debt obligations should be offered directly in the
market and that purchases of Treasury obligations by the
Federal Reserve should normally be made through that same
market.
H.R. 421 also raises a number of broader questions from
the standpoint of Treasury debt management policy and possible
adverse effects on the market for Treasury securities.

We

would like to submit further comments on these aspects of the
bill, and I expect that the Federal Reserve representatives'
comments on the bill will address the implications for open
market operations.
In conclusion, I would summarize the Treasury positionas favoring a five-year extension of the present authority.
Mr. Chairman, the Department views the authority as a temporary accommodation to be used only under the most unusual

- 6 financial circumstances. We believe that adequate controls
exist for its use, since it is fully disclosed and is subject
to the discretion and control of the Federal Reserve itself;
and that the authority is too important as. a cash management
tool to be permitted to periodically lapse because of erratic
extensions.

Therefore, we urge prompt consideration of H.R.

2281 to assure continuity of this authority through April 30-,
1984.
That concludes my prepared statement, Mr. Chairman.
will be glad to respond to any questions.

Attachment

oOo

I

DIRECT BORROWING FROM FEDERAL RESERVr BANSS
IW± TO DATE"
=
g»«RS
Calendar Days Wj feT Septal* ?Ls ft*""1 ?"*"
_jrear_ t*ed
(HilLons)
^P^rate^
O f * ; . * ed^Ac
1942 19 $ 422 4 1943
48
1,302
4
*
1944
none
1945
9
484
2
1946
none
—
_
1947
none
, —
_
1948
none
—
_
1949
2
220
1
1
1950 2 180 2
2
1951
4
320
2
9
1952
30
811
t
20
1953
29
1,172
. 2
13
1954
15
424
2
1955
none
1956
none
—
„
1957
none
1958
2
207
1
1959
none
—
' . .
1960 none — ' .
1961
none
-_
1962
none
1963
none
-«.
3
1964
none
.3
1965
none
~
«.
6
1966
3
169
1
12
1967
7
153
3
7
1968
8
596
3
1
1969
21
1,102
2
6
1970 none
1
1971
9
610
1
7
1572
1
38
1
1973
10
4S5
3
1574
1
131
J
1975
16
1,042
4
1976
none
—
1977 Federal
4
1
Note:
Reserve2.500
direct purchase authority
expired on
1978 April
none 30, 1978, and
— was renewed through April 30, 1979
1979 bynone
P.L. 95-534. approved Ocotber 27, 1973
urnce or the fiscal Assistant Secretary
March 1, 1979

FOR IMMEDIATE RELEASE

March

5>

19?g

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,900 million of 13-week Treasury bills and for $3,000 million
of 26-week Treasury bills, both series to be issued on March 8, 1979,
*ere 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 n p . 7. 1Q7Q
Price

Discount
Rate

97.642
97.626
97.633

9.328%
9.392%
9.364%

26-week bills
:, maturine Sp.ptemhi?>T

Investment [
:
Rate 1/
Price
9.71%
9.78%
9-75%

Discount
Rate

. 9 5 . 2 4 5 ^ 9.405%
: 95.237
9.421%
• 95.240
9.415%

6,

1Q7Q

Investment
Rate 1/
10.04%
10.06%
10.05%

Excepting 1 tender of $25,000
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

$

$

$

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$

Treasury

13,565,000

13,565,000

$5,065,360,000

$2,900,180,000b/ $5,676,865,000

TOTALS

3,870,000
4,321,775,000
21,335,000
30,850,000
24,840,000
34,690,000
215,630,000
42,510,000
14,185,000
23,880,000
16,510,000
301,720,000

3,870,000
2,528,275,000
21,335,000
29,850,000
24,040,000
34,690,000
72,630,000
17,630,000
14,185,000
21,880,000
16,510,000
101,720,000

24,360,000
4,895,110,000
9,915,000
59,125,000
32,610,000
21,295,000
219,940,000
39,965,000
11,390,000
16,895,000
8,700,000
325,700,000

11,860,000

deludes $ 402,315,000 noncompetitive tenders from the public.
deludes $231,900,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.

1440

13,360,000
2,730,925,000
9,915,000
18,125,000
32,610,000
21,295,000
33,440,000
12,965,000
11,360,000
16,895,000
8,680,000
78,700,000

11,860,000
$3,000,130,000sJ

FOR RELEASE ON DELIVERY
EXPECTED AT 2:00 P.M.
March 6, 1979
STATEMENT BY
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE HOUSE SUBCOMMITTEE ON APPROPRIATIONS
Mr. Chairman and Members of this distinguished Subcommittee:
I am pleased to be here with you to discuss the
Department of the Treasury's budget request for FY 1980. I
will present an overview of that budget for the Secretary who
is unavailable for this hearing. He will appear before this
subcommittee later this month to discuss the state of the
economy and the Administration's economic policy. I will
only briefly touch on those matters here today.
ECONOMIC POLICY
The American economy has enjoyed an unprecedented recovery
of employment and production since the recession of 1974-1975,
but these achievements now stand threatened by inflation.
Unless we assure the integrity of our currency, both at home
and abroad, the economy's forward progress will reach the
dead-end of recession and financial turmoil.
Our fundamental economic problem is inflation. Over the
1970's, inflation has posed a critical threat to economic progress
throughout North America, Europe, and Japan. It has made all
of our other problems much worse. More than once, it has
seriously shaken the international monetary system. Everywhere
it has retarded economic growth and social progress. There
is no one cause for the problem, and we cannot expect to solve
it either quickly or with any single panacea.
In the spring of last year, the President moved the
fight against inflation ahead of all other objectives and
initiated what has become a succession of actions designed to
slow the rate of inflation.

B-1441

- 2 During the spring and summer of 1978, the President worked
with the Congress to reduce the FY 1979 budget deficit to less
than $3 8 billion. In late October, the President set a target
of $30 billion or less for the FY 1980 budget deficit and
announced voluntary wage-price standards, supported by an
innovative plan for real wage insurance to encourage compliance
with the wage standard, along with a new procedure for review
of federal regulations. On November 1, the Federal Reserve
Board tightened credit expansion and the President simultaneously
announced new arrangements with Germany, Japan, and Switzerland
to stabilize and strengthen the dollar in the foreign exchange
markets.
Parts of the program have achieved limited success, but
reversing a decade of creeping inflation requires a long-term
commitment by the entire Federal Government, supported by all
sectors of our economy.
If we show the requisite discipline, we continue to believe
our economy can be successfully steered, without a recession, on
a path of price stability and steadily enlarging prosperity.
A key to the containment and reversal of inflation is the
successful structuring by the Executive Branch and the Congress
of a fiscally responsible budget for 1980. That means slowing
the rate of increase in federal expenditures and that necessarily
means austerity in the Treasury budget even though it is not
among the major segments of the overall budget.
FISCAL YEAR 1980 BUDGET
Since the heads of Treasury bureaus have already testified
in detail on their appropriation requests, I will present an
overview and brief description of our proposed budget for 1980
and also provide as an addendum to this statement summaries of
each bureau's request.
The budget reflects our continued effort to arrive at
resource levels that will permit us to achieve a proper
balance between fulfilling our traditional operating responsibilities, while at the same time facilitating our policy
role in the financial and economic affairs of the nation.
Our policy responsibilities on the domestic and
international side are heavy and growing. The cross-currents
of events affecting the domestic and international economies
have added greatly to our responsibilities in formulating
financial and tax policy. Our participation in the formulation
of broad fiscal policies that have significant affect on the
economy, and in managing the public debt, contribute to this
increased workload.

- 3 _

On the operational side, our principal activities
continue to center on the processing of tax returns, clearing
people and merchandise through Customs, servicing public debt
securities, issuing Government checks and manufacturing coins,
currency and stamps, and carrying out numerous and diverse
law enforcement and regulatory responsibilities. This basic
workload continues to increase and so must our resources, although
we have been able to hold down the size of our increases by
capturing the benefits of productivity improvements. Our
revenue-producing bureaus expect to collect receipts of $467
billion in 1980, compared to $425 billion in 1979. This represents
over 90 percent of the Government's total receipts. We will issue
726 million checks from our disbursing centers which is 24
million more than in 1979. We plan to produce 15 billion coins,
a 15 percent increase over 1979, including 565 million Susan
B. Anthony dollar coins; we will issue, service and redeem
293 million bonds and securities and introduce a new EE and HH
series of savings bonds to replace the existing E and H series;
we will process around 137 million tax returns, a 2 percent
increase over the previous fiscal year; and we will process 300
million or more arriving persons and 4 million formal Customs entries,
increases of 4 percent and 7 percent respectively. In addition
to these increased workload requirements, resources are also
needed for our other high priority objectives, primarily to protect
candidates and nominees during the 1980 Presidential Campaign
and to modestly strengthen and improve a small number of program
areas.
In March of last year, the Department proposed certain
regulations pertaining to firearms. It should be noted that
no funds are being requested in this budget to implement those,
or alternative, regulations. A notice that the proposals have
been withdrawn was recently published in the Federal Register.
Resources Requested
The Department is requesting $3.4 billion for its fiscal
year 1980 operating appropriations. This is a decrease of $456
million from the proposed authorized level for fiscal year 1979
— the original appropriation plus pending supplementals. The
large reduction compared to 1979 is the net of program increases
of $4 5 million, price and other mandatory increases for the
maintenance of current levels of $138 million, and non-recurring
costs and savings of $639 million. The sizable non-recurring
costs result primarily from a one-time payment in 1979 of $543
million to states by the Bureau of Government Financial Operations

"4

~

for social service program claims. Table I shows the appropriation
amounts requested for each bureau and the changes compared to
1979. Table II shows the positions related to the 1980 funding
request. We are asking for 116,717 total positions, a decrease
of 539 compared to 1979. Table III shows the starting point
from which 1980 amounts are more properly compared.
Program Increases for Workload
To meet workload increases, we are requesting an additional
$19.5 million over fiscal year 1979. The Internal Revenue
Service will need $16.2 million of the amount to keep pace
with its normal workload increases. Most of this amount is
for the processing of additional tax returns. No program
increases are proposed for the Service's other principal
functions of audit, collection, taxpayer service and fraud
investigations. This will necessitate a slight overall decrease
in the level of the audit and taxpayer service programs in 1980.
Vie are requesting an additional $1.7 million for the
issuing of an additional 23.8 million checks and the processing
of related claims by the Bureau of Government Financial Operations,
and another $.8 million for the Bureau of the Mint to produce
an additional two billion coins. In addition, we are asking
for an additional $.6 million for program workload increases
within the Office of the Secretary and $.2 million for higher
costs associated with the issuing and redeeming of government
securities by the Bureau of the Public Debt.
Program Improvements
We are requesting an increase of $25.7 million for
program improvements. This represents less than 1 percent
of our proposed authorized level for 1979.
The largest item in this increase is $16 million for
the United States Secret Service to carry out its responsibilities
for the protection of candidates and nominees during the 1980
Presidential Campaign. The preponderance of the funds are
required for the extensive travel of agents, overtime, services
acquired from other agencies and equipment. These funding
resources will enable the Secret Service to begin protective
coverage on March 1, 1980. The Service is also requesting
an additional $.7 million to keep abreast of changes in
technology in order to assure technically secure environments
for their protectees.
The Customs Service is requesting an additional $3.4
million for enforcement and processing programs. In the area
of interdiction, the Service is planning the continued development and acquisition of narcotics vapor detection systems
at a cost of $1 million. These funds would permit additional
development and research on the most potentially useful devices
for a variety of applications that are effective in situations

_ 5_

involving both arriving passengers and containerized cargo.
An additional $.8 million would be used for-development of
enforcement systems technologies that will assist the Service
in the detection of a wide range of contraband. We are also
requesting $.1 million to establish two new ports-of-entry in
1980. Finally, $1.6 million is requested to interface the
Customs mail processing operation at new facilities at the
John F. Kennedy International Airport with those of the
Postal Service, and to provide for a slight increase in
regulatory audit. The funds for the JFK mail facility will
reduce the transshipment time between Customs ports and
postal facilities for international mail, thereby improving
service to the public and reducing costs to Customs as well
as the Postal Service.
The Bureau of Government Financial Operations is
requesting an additional $1.1 million for" the acquisition of
automatic data processing equipment to replace aged and
obsolete computer systems used in their check processing
operations, an additional $.4 million for improved program
management, and $.2 million for the Payment of Government Losses
in Shipment fund.
The Bureau of the Mint request is for an increase of $1.3
million to terminate refining operations at the New York Assay
Office should on-going studies indicate that contracting out
with the private sector is more cost-effective than present
operations, and $.2 million for the purchase of additional
coining presses. The Assay Office studies are expected to be
completed later this spring. We appreciate the many helpful
comments we have received from the Congress, and we will of
course consider them fully. I am pleased to report that as a
result of the study conducted last year by a Treasury Task Force,
productivity is up at the New York Assay Office.
The Bureau of the Public Debt is requesting an
additional $1.5 million for the procurement and promotion
of the new EE and HH series savings bonds. Of this amount,
$.7 million is for the new bond stock which must be printed
and distributed to some 40,000 issuing agents and $.8 million
is for materials to be used in the campaign to introduce the
new bonds.
The Bureau of Alcohol, Tobacco and Firearms is requesting
an additional $.4 million for investigative, technical and
scientific equipment.

- 6 For the International Affairs appropriation, an additional
$.4 million is requested to improve the data gathering
capability and analysis necessary to support Treasury international
policy decisions, and provide for conduct of the Foreign Portfolio
Investment Survey directed by the Congress last year.
Maintenance of Current Operating Levels
The cost of maintaining in fiscal year 1980 the programs
now underway, or expected to be underway in fiscal year 1979,
constitutes the last category of major costs in our 1980 request.
In 1980, these costs reflect a decrease of $501.3 million,
primarily because of the $543 million in non-recurring costs on
payments made in 1979 by the Bureau of Government Financial
Operations to states on social service program claims. Specifically,
the $501.3 million decrease is the net of the following: price
and other mandatory increases, $138.0 million; less non-recurring
cost of one-time payments to states, $543.0 million; less other
non-recurring costs, savings and program reductions, $96.3 million.
Nearly 60 percent of the $138.0 million for price and
other mandatory increases is needed for the full-year
cost of programs and pay increases authorized in 1979, and
for two additional workdays in 1980. The principal
remaining increases reflect the increased cost of printing,
within-grade promotions required by law, support services,
communications, postage, grade-to-grade promotions, and General
Services Administration space rentals.
Program reductions, along with productivity and other
management savings, amount to $56.6 million of the $96.3
million in reductions the Department intends to achieve in 1980
and are reflective in our desire to restrain growth in Federal
expenditures.
This completes my statement on the 1980 budget. I shall
be glad to respond to any questions.

-

Table I

7 -

THE DEPARTMENT OF THE TREASURY
Operating Accounts Appropriations for
Treasury Department for 1979
and Estimated Requirements for 1980
(in millions of dollars)
1979
Proposed
Authorized
Level!./

1980
Budget
Estimate

Increase or Decrease (-)
Compared to 197 9

Regular Operating Appropriations:
Office of the Secretary

$

International Affairs

5.5

31.0

Federal Law Enforcement Training Center
15.0

30.8

$

--2

22.8

17.3

12.7

-2.3

Bureau of Government Financial Operations
Salaries and Expenses
728.3
Government Losses in Shipment
.2
Payments to Guam

191.1
.2

-537.2
.2
-.2

Bureau of Alcohol, Tobacco & Firearms

137.9

139.0

1.1

U.S. Customs Service

442.9

446.9

4.0

46.0

50.6

4.6

171.0

183.4

12.4

142.2

142.9

.7

754.1
780.3
478.7
$2,155.3

773.2
789.7
476.7
$2,182.5

19.1
9.4
-2.0
27.2

140.0

157.0

17.0

$3,873.1

$3,417.0

$-456.1

Bureau of Engraving & Printing
Bureau of the Mint
Bureau of the Public Debt
Internal Revenue Service:
Salaries and Expenses
Taxpayer Service & Returns
Processing
Examinations and Appeals
Investigations and Collections
TOTAL, IRS
U.S. Secret Service
TOTAL, Regular Operating Appropriations

-Includes pay increases authorized by E.O., effective October 1, 1978, and program supplemental for the Bureau of Government Financial Operations, ($9.0); AT&F, ($1.7);
U.S. Customs, ($2.8); Mint, ($2.4); IRS, ($39.5); and Secret Service ($.7); and International Affairs ($5.4). It also includes transfers from the Office of the Secretary
($-1.3) ; and IRS ($-.2) .

Table II

-

8 -

THE DEPARTMENT OF THE TREASURY
Operating Accounts
Comparative Statement of Average Positions
Fiscal Year 1979 and 1980
(Direct Appropriations Only)
Proposed
1979
Authorized
Level

1980
Budget
Estimate

Increase or
Decrease (-)
Compared to 1979

tegular Annual Operating Appropriations:
)ffice of the Secretary

OUJ

/y^i

[nternational Affairs

123(509)y

491

368(-18)

:

297

249

-48

Jureau of Government Financial Operations

2,730

2,750

20

Jureau of Alcohol, Tobacco & Firearms

3,928

3,786

-142

14,027

13,618

-409

Jureau of the Mint

1,667

1,703

36

iureau of the Public Debt

2,639

2,572

-67

4,638
34,576
29,805
18,444
87,463

4,516
35,235
29,551
17,927
87,229

-122
659
-254
-517
-234

3,579

3,525

-54

ederal Law Enforcement Training Center

J.S. Customs Service

internal Revenue Service:
Salaries and Expenses
Taxpayer Service & Returns Processing
Examinations and Appeals
Investigation and Collections
TOTAL, IRS
;

.S. Secret Service

'OTAL, Regular Annual Operating
Appropriations

117,256
(117,642)

Reflects average positions for the full year.
requirements for three months.

116,717

-y

-539
(-925)

The 123 average positions reflect

-

9 -

Table III

THE DEPARTMENT OF THE TREASURY
Derivation of "Proposed Authorized Level for 1979"
(in thousands of dollars)

1979 Appropriation (adjusted by transfers)

$3,730,977

Proposed Supplementals
1. Pay Increase
a) Classified
b) Wage Board

$80,348
179

+

80,527

2. Program Increases:
a) International Affairs - to fund for 3 months
in 1979 the international activities previously paid by the Exchange Stabilization
fund

$ 5,442

b) Government Financial Operations - increased
cost of postage

9,017

c) Alcohol, Tobacco and Firearms - to combat
interstate cigarette smuggling as authorized
by Public Law 95-575

1,700

d) Customs Service - to fund the cost of collecting duties in Virgin Islands which was previously paid by the Virgin Islands

2 ,848

e) Mint - to provide funds to mint the new onedollar coin

2 ,381

f) Internal Revenue Service - to provide funds
to implement the Revenue Act of 1978 and the
Energy Act of 1978
g) Secret Service - to provide for the increase
cost of protective travel
Proposed Authorized Level for 1979

39 ,517

700

+61,605
$3,873,109

- 10 _
Summary Analysis of FY 1980 Estimates
for Operating Bureaus and Offices
Office of the Secretary - $30,850,000
— Net decrease is $178,000 and 9 average positions of employment.
— $560,000 and 9 average positions are needed for increased
workload.
— $858,000 and 1 average position is needed to maintain current
levels of operations — within-grade promotions, annualization
of pay increases, space rental costs, etc.
-- A reduction of $1,595,000 and 18 average positions is_principally
for non-recurring one-time costs and productivity savings.
International Affairs - $22,752,000
~ Net increase is $17,310,000 and 368 average positions of employment.
— $407,000 is required for economic policy.
— $17,627,000 is provided to maintain current levels of operation,
of which $16,948,000 is for full-year funding in 1980 for the
International Affairs activity.
— A reduction of $724,000 is for productivity savings.
Federal Law Enforcement Training Center - $12,670,000 for
——
—
"
~~
~"
Salaries and Expenses
— Net decrease for Salaries and Expenses of $2,330,000 and 48
average positions of employment.
— An increase of $825,000 is for the costs related to maintaining
current levels of operations — within-grade promotions, annualization of pay increases, etc.
— A reduction of $100,000 is for productivity savings.
-- A reduction of $3,055,000 for reduction in student pipeline from
650 to 525.
Bureau of Government Financial Operations - $191,115,000 for^
Salaries and Expenses, $200,000 for Government Losses in Shipment,
-0- for Payments to Guam

- 11 (GFO continued)
-- Net decrease for salaries and expenses is $537,191,000 and an
increase of 20 average positions of employment.
— $1,726,000 and 5 average positions are for added workload in
the check issuance area.
— $1,149,000 is to provide for ADP and capital equipment acquisitions .
— $410,000 and 22 average positions are for improved management
in the bureau.
-- $7,176,000 is required to maintain current staff levels -within-grades, space rental, annualization of postage increases
and full-year costs of programs authorized for part of 1979.
— Reductions of $547,652,000 and 7 average positions for management savings and non-recurring one-time costs, the majority of
which relates to a one-time payment in 1979 for claims.
Bureau of Alcohol, Tobacco and Firearms - $139,000,000
— A net increase of $1,078,000 and a reduction of 142 average
positions of employment.
— $416,000 is required for the replacement of equipment.
— $6,323,000 is for costs to maintain current levels of operations,
which include such items as within-grade promotions, grade to
grade promotions, and increased printing, postage, and space
costs.
-- A reduction of $5,661,000 and 142 average positions for program
reductions and non-recurring costs and savings.
U.S. Customs Service - $446,857,000
— Net increase of $4,000,000 and a reduction of 409 average positions of employment.
— $1,000,000 is for narcotics detection devices used in inspection and control.
— $750,000 and 2 average positions are for enforcement systems
development primarily in the interdiction area.
-- $1,448,000 is for payments to the Postal Service for the new
JFK Mail Facility.

. 12

(Customs continued)
— $239,000 and 10 average positions for new ports of entry
($96,000) and regulatory audit ($143,000)/
— An increase of $13,283,000 and 161 average positions are to
maintain current levels of operation — within-grade promotions,
grade to grade promotions, price increases, annualization of
pay increases, space increases, etc.
— A reduction of $12,720,000 and 582 average positions are for
non-recurring costs and savings, productivity savings, and
program reductions.
Bureau of the Mint - $50,580,000 for Salaries and Expenses
— Net increase for Salaries and Expenses, $4,615,000 and 36
average positions.
— $825,000 and 37 average positions are for increased workload.
— $1,300,000 is for termination of the facility for the refining
of gold.
— $4,349,000 and 6 average positions are required to maintain
current levels of operations — within-grade promotions, annualization of pay increases, FTS costs, etc.
— $200,000 is required for other program increases.
— A reduction of $2,059,000 and 7 average positions is for nonrecurring costs and savings and program reductions.
Bureau of the Public Debt - $183,466,000
— An increase of $12,466,000 and a reduction of 67 average
positions of employment.
— $226,000 is for reimbursement to paying agents for redemptions
and reimbursements to disbursing centers for reissuance of
savings bonds.
— $1,452,000 is to provide for a new savings bond.
— $14,123,000 to maintain current levels of operations, including
such major items as within-grade promotions, annualization of
pay increases, space rental costs, annualization of postage,
and full-year cost of the Treasury Tax and Loan Accounts
($11,289,000).

- 13 (Public Debt continued)
— A reduction of $3,335,000 and 67 average positions for nonrecurring costs, and management savings.
Internal Revenue Service - $2,182,490,000
Salaries and Expenses - $142,908,000
— A net increase of $714,000 and a reduction of 122 average
positions of employment.
— $500,000 is for productivity enhancing investments.
— $2,635,000 and 14 average positions are to maintain current
levels of operations -- within-grade promotions annualization
of pay increases, space rental costs, etc.
-- A reduction of $2,421,000 and 136 average positions covering
non-recurring costs and savings and program reductions.
Taxpayer Service and Returns Processing - $773,160,000
— A net increase of $19,082,000 and 659 average positions of
employment.
— $12,970,000 and 603 average positions are for processing additional tax returns.
— $2,6 86,000 is for productivity enhancing investments to improve
tax administration.
-- $28,818,000 and 393 average positions to maintain current
levels of operation — within-grade promotions, grade to grade
promotions, space rental costs, annualization of pay increases
and programs authorized for part of FY 1979, etc.
— A reduction of $25,392,000 and 337 average positions covering
non-recurring costs and savings and program reductions.
Examinations and Appeals - $789,711,000
— A net increase of $9,381,000 and a reduction of 254 average
positions of employment.
— An increase of $29,342,000 and 197 average positions are to
maintain current levels of operations including such items as
within-grade promotions, grade to grade promotions, annualization of pay increases, etc.

- 14 -

(IRS: Examinations and Appeals continued)
-- A reduction of $19,961,000 and 451 average positions is for
non-recurring costs and savings and program reductions.
Investigation and Collection - $476,711,000
— Net decrease of $2,032,000 and 517 average positions of
employment.
— An increase of $8,797,000 and 28 average positions is to maintain current levels of operations including such items as
within-grade promotions, grade to grade promotions, annualization of pay raises, etc.
— A reduction of $10,829,000 and 545 average positions is for
non-recurring costs and savings and program reductions.
U.S. Secret Service - $157,000,000
— Net increase is $16,972,000 and a reduction of 54 average positions of employment.
— $16,000,000 is required for protection of all major candidates
in the 1980 Presidential election.
-- $659,000 is for technical security equipment.
-- $85,000 is to provide for new ADP equipment.
— $3,812,000 is for those costs required to maintain current
levels of operation — within-grade promotions, grade to grade
promotions, annualization of pay, space rental, etc.
-- A reduction of $3,584,000 and 54 average positions is for
non-recurring equipment costs and program reductions.

FOR IMMEDIATE RELEASE
UPON DELIVERY
EXPECTED AT 10:00 A.M.
TUESDAY, MARCH 6, 1979

STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE COMMITTEE ON BANKING, HOUSING,
AND URBAN AFFAIRS
It is a pleasure for me to testify before this Committee
on U.S. export control policy and the Export Administration
Act. I will focus my comments this morning on the economic
issues involving the potential use of export controls, and
more specifically the question of controls on U.S. technology
exports raised by the Chairman. I will also address the related issue of foreign government intervention into technology
transfer and U.S. policy in this area.
Economic Considerations
Export controls, regardless of the reason for their
imposition, are undesirable on purely economic grounds for
a number of reasons.
As you are well aware, the United States is currently
suffering a substantial deficit in its balance of trade. I
will not discuss the causes of the deficit in detail with
you today. But it is clear that we must act to rectify that
imbalance, and that increasing U.S. exports is the most
constructive way to achieve that goal.
B-1442

- 2 Last September, the President announced a comprehensive
program to encourage U.S. exports.

In his statement, the

President declared that "it is important for this Nation's
economic vitality that both the private sector and the Federal
government place a higher priority on exports".

If we are

to increase exports sufficiently to correct our trade imbalance,
we must evaluate carefully any contemplated export controls.
Political and security goals may, at times, conflict
with purely economic goals.

But we must pay greater attention

to the purely economic drawbacks of controls, especially in
view of our current trade position.

We must never forget

that a strong trade position, a strong dollar and a stable
international monetary system —
dollar —

which requires a stable

are also crucial to the foreign policy and national

security of the United States.
In imposing export controls on a product, we are not
simply losing foreign exchange earnings on that product.
There are cumulative long-range negative repercussions as
well.
First, export restrictions call into question the
reliability of the United States as a supplier of products
to other countries.

Those countries are likely to develop

alternative sources for a controlled product.

They may

also develop alternative sources, or substitutes, for other
products which they import from the controlling country and
which they fear may be subjected to controls as well.

- 3 One clear example is soybeans.

The main effect of the

U.S. controls over soybeans exports in 1974 was not a
reduction of inflation in the United States. It was to
induce Japan to turn to other sources, particularly Brazil,
for soybeans and to invest huge amounts to develop alternatives to U.S. production. Few U.S. policies in recent
memory have represented such folly.
Second, imposition of export controls by one country
can trigger emulation and successive waves of retaliation
by other affected countries, and thus hurt the long-run
economic interests of the country that originally imposed
controls. Even the United States, which produces a wide
range of primary and manufactured products, is dependent
on imports for a number of key products. The U.S. export
controls on soybeans and other products in 1973-74 clearly
added to the legitimacy of such action by those who applied
similar controls to oil and other products soon thereafter.
Widespread use of export controls could in fact parallel
the widespread use of import controls in the 1930's, with
potentially disruptive implications for the world economy.
It is obvious that no one is now contemplating any such
extensive use of export controls, but it is well to remember
that even seemingly small steps in this direction — like
seemingly small steps to apply import controls — can have
very far-reaching consequences for U.S. economic and political
interests.

- 4 We do see one exception to the general rule that export
controls are undesirable on economic grounds. Controls over
either exports or imports can be an appropriate measure if
they are used as a lever to gain access for U.S. products to
foreign markets which are unfairly restricting entry of U.S.
exports. Alternatively, they can be used against countries
which are restricting exports of commodities to the United
States.
Control of Export of Technology
I have dealt so far largely with export controls applied
for reasons of "short supply," but the Chairman has raised a
number of questions concerning the use of such controls vis-a
technology transfer.
The Export Administration Act

of 1969, as amended,

provides specifically for the use of controls on the export
of "goods and technology which would make a significant
contribution to the military potential of any other nation
or nations which would prove detrimental to the national
security of the United States." There has been some concern
expressed that controls should also be placed on the export
of commercial technology in order to maximize U.S. competitiveness in international markets. Proponents argue that
transfer of commercial technology has cost the United States
economy both exports and jobs.
Controls on exports .of commercial technology clearly
would be contrary to our traditional policy of seeking to

- 5 minimize the barriers to the international movement of
goods, services and capital.

But on a more pragmatic

level, I think there are also several considerations which
raise considerable doubts about the utility of any such
restrictions:
(1)

It is justifiable even in principle to restrict

exports of technology if and only if U.S. firms possess
uniquely the technology and all readily substitutable
technologies.

If foreign producers hold equivalent or

substitutable technologies, U.S. exporters will simply lose
business to foreigners.
(2)

Technology is easily replicated and patents provide

only limited protection against such replication.

Therefore,

any control would be effective only for a limited time.
(3)

Private business firms invest in the development

of new technologies only if they expect to earn a return
on this investment.

Multinational firms which perform a high

percentage of total U.S. industrial research and development,
obtain, on average, more than one third of their returns
from the use or sale of the technology in foreign markets.
Restraint on the export of technology would create a clear
disincentive for investment in new technology, with a
consequent loss of potential future benefits to the U.S.
economy and U.S. competitiveness.
(4)

In some cases U.S. firms have begun to license,

sell, or otherwise transfer overseas recently developed

- 6 technologies in advance of competitive development of technologies elsewhere, but we believe these represent only a
tiny minority of all cases of technology transfer.

While it

might in principle be in the national interest to identify
and stop such cases of premature technology transfer, we
doubt whether it would be possible to administer such a
program in a manner which doesn't make the cure worse than
the disease.

While we may be able in theory to identify

certain exports of technology which would not be in the
national interest, to identify such cases in actual practice
is another matter.
(5)

Finally, contrary to what some would have us

believe, U.S. exports of manufactured goods embodying
advanced technologies have consistently exceeded U.S.
imports of similar goods throughout the past decade. (See
Table 1 ) . Although the balance of trade in these goods
declined slightly from 1975 through 1977, the surplus
remained impressively high (at almost $14 billion in 1977)
and we expect that the data for 1978 will show a reversal
of this trend and a still higher surplus.
Indeed, U.S. exports of technology-intensive manufactured goods have been a source of strength in our balance
of payments at a time when the overall picture has often been
less than encouraging.

In response to further economic growth

abroad and recent exchange rate changes, U.S. exports of all

- 7 manufactured goods, including high technology goods, should
grow faster in the coming years than U.S. imports.
U.S. performance in export of technology intensive goods
remains strong because the United States remains by far the
most important performer of industrial research and development
(R&D), exceeding the combined R&D of Japan, West Germany,
Canada, the United Kingdom, and France — whose combined GNP
is slightly more than that of the United States. (See Tables
2 and 3) U.S. research and development expenditures as a
percent of GNP exceed those of all major Western nations
except West Germany, whose proportionate expenditures are
equivalent to ours. While U.S. proportionate expenditures
have declined somewhat since their peak in the early 1960's,
due to the winding down of the U.S. space program, since 1973
they have been fairly constant. (Chart 1)
Chart 1 also shows that expenditures on R&D as a percent
of GNP have risen since the 1960's in West Germany and Japan,
with most of the increase occurring during the late 1960's and
early 1970's. In recent years, proportionate expenditures
on R&D in these two nations have been almost constant, while
in France, Canada, and the United Kingdom, proportionate
expenditures since the middle 1960's have fallen.
Germany, traditionally a major center of scientific and
technological expertise, has actually not fully regained its
pre-World War II position as a performer of R&D. Japan, which

- 8 has been adept at imitating and improving other nations' technologies, has only recently emerged as a true technological
innovator in its own right.
For the future, the United. States undoubtedly will continue
to perform more of the world's research and development than
any other nation or group of nations.

To assure maximum U.S.

competitiveness, our Government should support a continued
high level of R&D as we have been doing: such expenditures
rose by 22 percent during the past two years, and the President
has proposed expenditures for FY 80 which will, in real terms,
remain approximately the same as last year in spite of the
overall tightness of his budget proposals.

Our country

will not, however, totally dominate the development of new
technologies to the degree that it did during the two decades
or so following the Second World War.
The increasing role of other nations in developing new
technology means that they will bear more of the costs of
development than was the case during the 1950's and 1960's,
while the benefits of new technology will continue to be shared
by all nations, including our own.

We believe that this is a

good thing.
In sum, I think there should continue to be a strong
presumption against restricting exports of technology.
Proponents of restrictions carry a heavy burden of demonstrating that it would be in the national interest to do so.

- 9 Foreign Government Intervention
I would now like to address another issue — our concern
about the use of measures by other governments which can have
the effect of encouraging the transfer of technology. Such
measures may take many forms, but they usually combine several
basic features: direct incentives to investors to attract
the transfer in the first place; performance requirements,
which require firms inter alia to transfer technology as a
condition of investing in the country at all; and offsets
in major industrial or military deals. Such measures are
utilized to assure that U.S. or other foreign firms do in fact
contribute to the priority economic and social goals of the
host government. They typically focus upon local job
creation, local value-added, and exports as well as
technology transfer.
In recent years, offset requirements have been most
common in the area of defense procurement, where foreign
governments have used their purchasing power to impose
these requirements on U.S firms seeking to sell to them.
Moreover, their use of offsets is quickly spreading to
the non-defense area. Thus, a foreign government will
frequently require that, for a U.S. firm to do business,
it must agree to transfer technology to the nation by
means of licensing or co-production agreements. Although
inconsistent with the spirit of the GATT and the concept of

-loan open multilateral trade and payments system, these
requirements are rapidly becoming a pervasive feature of
the world economy.
These foreign government measures can result in the
transfer of technology on terms that are unfavorable to our
nation.

Thus a major objective of U.S. policy must be to

achieve multilateral discipline on incentives and other
interventions, both to maintain an open investment environment and to avoid our being forced into the adoption of
emulative countermeasures.

With offshore output by

multinational firms now approaching a value of $1 trillion,
it is anomalous that no major inter-governmental agreements
apply to the international investment process like the
long-standing rules and institutional arrangements which
govern international trade.
Some of the new international arrangements worked out
in the Multilateral Trade Negotiations will, in fact, help
deal with this problem by limiting the use of such incentives
as export and other subsidy practices.

But the development

of disciplines over government policies toward investment
flows per se has become one of our important areas of policy
initiative.

My colleagues in other agencies and I have

recently discussed these problems bilaterally with Canada
and our major European allies, as well as multilaterally
in the OECD.

Our talks with Canada, as an example, have

focused on a case of what we consider to be bad policy:

- 11 a cash grant of $68 million, jointly offered by both the
Canadian federal government and the provincial government
of Ontario, to induce the Ford Motor Company to locate a new
engine plant near Windsor, Ontario. We have also expressed
concern to our other neighboring nation, Mexico, over that
nation's Automobile Decrees, which require all automobile
assemblers there to cover their full foreign exchange costs
through exports and provide them with attractive tax credits
for doing so. These kinds of policies, which are also practiced by many other nations, serve to distort the economically
efficient allocation of resources and can result in the loss
of U.S. export opportunities and U.S. jobs.
At the Bonn Summit last July, we joined the other
participants in emphasizing our willingness to increase
cooperation in the field of foreign private investment
flows among industrialized countries and between industrialized and developing countries. We also stated in the
Summit communique that we will intensify work for further
agreements in the OECD and elsewhere. President Carter has
asked the State Department, in consultation with the
Departments of Defense, Treasury, Commerce, the Office of
the Special Trade Representative, the Council of Economic
Advisors, and the Office of Management and Budget, to consider
multilateral consultations on the adverse impact of defense
offset sales agreements and to seek their reduction through
the formulation of internationally agreed guidelines on the

- 12 terms for future agreements. In view of the increasing
importance of non-defense offsets, especially investment
offsets, we at the Treasury Department believe that guidelines
should also be sought for these.
The basic problem we face in trying to achieve discipline
is that most governments have not yet recognized the need
for international cooperation on investment, even though they
long ago recognized the need for rules on trade and international monetary policy.

In part, this is because direct

investment and technology transfer are relatively new as
major vehicles for international economic exchange, and their
impact has not been as visible as the impact of trade flows
and exchange rate changes.

There are also ambivalent and

conflicting views on the jurisdiction of the different
sovereign states involved in the broad-guaged activities of
multinational companies.
It is apparent, therefore, that the process of developing cooperation in this are, which has already begun, will
be evolutionary in nature. It will involve gradual development
rather than the creation of a complete international investment
regime at a single stroke.

But the need for cooperation is

clear, and we intend to press vigorously to draw international
attention to this area.

- 13 Treasury Responsibilities
Finally, Mr. Chairman, you asked several questions about
the specific role of the Treasury Department vis-a-vis export
controls.
Treasury administers controls with respect to exports
from foreign countries by foreign firms owned or controlled
by U.S. persons or firms.

Such firms are prohibited from

selling any commodities or technology to North Korea, Viet
Nam, Cambodia, or Cuba without a Treasury license.

Treasury

regulations also prohibit the unlicensed sale of strategic
goods to Eastern Europe, the U.S.S.R., and the People's
Republic of China by such firms.

These latter regulations

apply only to strategic goods and not to technology.

They

are obviously an extension of the primary export controls
on U.S.-based firms administered by the Department of
Commerce for national security or foreign policy reasons.
Treasury also participates in interagency bodies which
review export administration and make recommendations on it.
The Secretary of the Treasury is a member of the Export
Administration Review Board.

Treasury is also represented

on the Advisory Committee on Export Policy and on its
Operating Committee, which considers difficult cases and
makes recommendations.
Treasury has collaborated in various interagency
studies seeking to improve licensing procedures and expedite
decisions.

Delays and uncertainty in the issuance of export

- 14 licenses discourage American exporters and handicap them in
competition with foreign exporters. This not only hurts our
balance of payments, but means lost business for American
firms and fewer jobs for American workers. We strongly
believe that Agencies concerned with export administration
should give full weight to the effects on our foreign trade
of export control measures.
And, as I have indicated, Treasury plays an active role
in working out and negotiating a variety of U.S. efforts to
limit governmental intervention in the international trade,
investment and technology transfer areas. We believe strongly
that such an approach should govern both international economic
relations and the policies of the United States itself.

U.S. Trade In Manufactured Goods> Categorized aa
"Technology-Intensive" and "Non-Technology-Intensive"*
1967-1977
$ Billions
Year

Technology-Intensive

Non-Technology-Intensive

Total

Exports

Imports

Balance

Exports

Imports

Balance

Exports

Imports

Balance

1967

8.0

3.1

4.9

12.8

12.7

0.2

20.8

15.8

5.1

1968

9.6

3.9

5.7

14.2

16.7

-2.5

23.8

20.6

3.2

1969

10.7

4.7

6.0

16.1

18.3

-2.2

26.8

23.0

3.8

1970

12.3

5.7

6.6

17.0

20.2

-3.1

29.3

25.9

3.4

1971

13.2

6.6

6.6

17.2

23.8

-6.6

30.4

. 30.4

0.0

1972

14.1

8.5

5.6

19.6

29.3

-9.7

33.7

37.8

-4.1

1973

19.0

10.6

8.4

25.7

34.4

-8.7

44.7

45.0

-0.3

1974

26.6

12.9

13.7

37.0

42.4

-5.4

63.5

55.2

8.3

1975

28.0

12.3

15.7

43.1

38.8

4.3

71.0

51.1

19.9

1976

31.2

17.0

14.2

46.1

47.8

-1.7

77.2

64.8

12.4

1977

33.4

19.6

13.8

47.1

57.7

-10.6

80.5

77.2

3.3

Note:

Negative Balance Figures Indicate that Imports Exceeded Exports

* Source: Regina Vargo updated and expanded figures based on "The Impact of Technological Innovation on
International Trade Patters," U.S. Department of Commerce, Bureau of International Economic Policy and
Research, Monograph ER-2ht December, 1977.

Table 2
Source and Use of R&D Funds in
Six Nations m 1975*

Nation

R&D Funds Provided
%
Amount
($ bil)

RSD Performed
Amount
%
($ bil)

15,787
18,152
1,261
35,200

44.8
51.6
3.6
100.0

24,164
5,397
5,926
35,200

68.6
15.3
16.8
100.0

5,521
3,241

63.0
37.0

5,634
3,128

64.3
35.7

8,762

100.0

8,762

100.0

4,634
4,223

52.3
47.7

5,881
2,976

66.4
33.6

8,857

100.0

8,857

100.0

557
1,145

32.7
67.3

681
1,022

40.0
60.0

1,702

100.0

1,702

100.0

1,847
2,859

39.2
60.8

2,965
1,741

63.0
37.0

4,706

100.0

4,706

100.0

2,510
3,472

42.0
58.0

3,643
2,339

60.9
39.1

5,982

100.0

5,982

100.0

United States
Industry
Government
Other
Total
Japan
Industry
Government
and other
Total
W. Germany
Industry
Government
and other
Total.
Canada
Industry
Government
and other
Total
United Kingdom
Industry
Government
and other
Total
France
Industry
Government
and other
Total

* latest year for which international figures are available
Source:

OECD

Table 3

R&D As a Percent of GNP, 197 5

As a percent of GNP
Total R&D

Industrial R&D

United States

2. 3

1.,6

Japan

2.0

1.,1

West Germany

2.,4

1.,4

Canada

1.,1

0.,4

United Kingdom

2..1

1.,4

France

1..8

1,,1

Source:

National Science Foundation and OECD

Chart

1

Total R&D Expenditures as a Percent of GNP
in Six Nations, 1962-1978*

UNITED STATES

UNITED KINGDOM

WEST
GERMANY
••

.• •

62

T
64

T
66

T
68

—r

r—r
70

"T
72

i

74

T

T
76

•Only U.S. available for 1978. Tline series data for U.K. R&D are very inconplete.
Available information suggests that R&D as a percent of GNP has declined frcm
?.3 percent in the mid-sixties to 2.0-2.1 percent in the seventies.

78

FOR RELEASE AT 4:00 P.M.

March 6, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,000 million, to be issued March 15, 1979.
This offering will result in a pay-down for the Treasury of about
§200
million as the maturing bills are outstanding in the
amount of $6,200 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,000
million, representing an additional amount of bills dated
December 14, 1978/
and to mature June 14, 1979
(CUSIP No.
912793 Y9 1 ) , originally issued in the amount of $2,905 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 3,000 million to be dated
March 15, 1979,
and to mature September 13, 1979 (CUSIP No.
912793 2L 9 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 15, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,577
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. 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, March 12, 1979.
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-1 443

-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 bookentry records of Federal Reserve Banks and Branches. 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
must be made or completed at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt on March 15, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
March 15, 1979.
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, 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 RELEASE AT 4:00 P.M., EST.
March 6, 1979
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT AND OPERATIONS)
AT THE
BOARD OF DIRECTORS MEETING
OF THE WINE INSTITUTE
MONTEREY, CALIFORNIA
MARCH 6, 1979
I appreciate the opportunity to be with you today in
Monterey. With all the intense activities that take place
in Washington— meetings, Congressional hearings, the daily
mini-crisis and the like — people in positions like mine
sometimes begin to develop the misconception, and there is
no doubt that it is a misconception, that the country, or
at least all within our particular responsibilities, will
grind to a halt if we are not personally there at our desk
monitoring all that goes on. As this so-called "self-importance
syndrome" develops, a deadly disease if not diagnosed and understood, we lose sight sometimes, I am afraid, of the benefit to
all in going out into the country, meeting with people, explaining our goals and ideas and gaining a better appreciation of
theirs.
It is with these thoughts in mind that I decided to
accept your kind invitation to address this meeting of the

B-1444

- 2 Wine Institute's Board of Directors.

It is my hope that in

doing so I can provide you with a better idea of our perception
of the regulatory issues involving the wine Industry, and gain
from you increased understanding of your concerns and your
views on these matters. Such an exchange is, I believe,
particularly important where the wine industry is concerned.
I fecognize_ that,_ havingseen a period where_your product was _
totally prohibited, you may view with particular concern even
lesser and very different regulatory actions directed at your
industry.
The past twelve months have certainly been active ones
during which we all have been addressing a wide number of
issues and problems.

It has seen the Bureau of Alcohol,

Tobacco and Firearms (BATF) lose its Director and, just
recently, gain a new one; analyses and studies of BATF's
responsibilities from a structural point of view, in. both
the regulatory and the enforcement areas; the final wine
labeling

rules; consideration of the impact of alcohol con-

sumption on the pregnant woman, and what to do about it; a
new proposal for partial ingredient labeling; efforts to
review and modernize, if appropriate, BATF rules governing
both trade practices and advertising; and a review of the
Federal Alcohol Administration Act itself.

Interest and

activity in many of these areas will continue in the future.
It is my hope today to provide you with an overview of how
we have dealt with some of these issues, and what our thoughts
are about the future.

- 3In an important sense, one of the most significant of
recent events is the appointment of a new Director for the
Bureau, Bob Dickerson. Mr. Dickerson brings to his new
responsibilities long years of experience with the Customs
Service,, where he served most recently as Deputy Commissioner.
The experience he gained there — as a manager responsible
for activities with important commercial aspects -^
will stand him in good stead as Director of BATF, particularly
as he has the assistance of people of the high caliber of
Steve Higgins, the Assistant Director for Regulatory Enforcement, who is with me here today.
Initially, I would like to share with you some of the
general ideas that permeate much of what we do.
First, is our belief that there are two core aspects
of BATF's responsibilities under the FAA Act — those that
involve assuring that competition within the industry is fair
and open and those that assure that consumers of alcoholic
beverages receive appropriate, accurate and non-misleading
information about the products they are purchasing.

Each of

these responsibilities has received and will receive full
attention by the Bureau.

- 4Second, in determining the appropriate way to implement
these responsibilities it is important that we seek to avoid
unnecessary burdens on industry. This involves two things:
trying to find the least expensive way to accomplish regulatory goals and eliminating those regulatory requirements
which no longer serve any useful purpose. The Bureau is,
you should know, developing a formal system to help it
identify regulations which fall into this latter category; and
all its activities will seek to meet the former standard.
Third, regulatory requirements should be as simply and
directly stated as possible so that both the regulated and
the regulator know what is expected. Related to this is
the need to assure that the industry, as well as consumers, in
fact know what the rules are, and that significant concepts
are not lost in informal rulings and advice. It is largely
to work toward these goals — as well as to assure that the
regulations involved are both necessary and responsive to
modern business practices — that BATF has been conducting
reviews under the Administrative Procedures Act of the advertising and trade practice regulations.
Fourth, it is our strong view that destructive competition
among government agencies is bad. I am sorry to report that
in my years as a prosecutor I had occasion to observe the
impact of this kind of competition first-hand — it is not
beneficial to anyone; it wastes effort and resources; it
causes investigations to be more difficult; and it causes a

- 5loss in necessary public confidence. So, too, with the
regulatory world — destructive competition helps no one,
not the regulated, not the consumer, and certainly not the
government agencies involved.
If destructive competition is bad, how are we to avoid
it? As a general matter, we try to do so by coordinating our
efforts with others with whom we share or have similar responsibilities . While uniformity of basic policy is generally desirable, this does not mean that BATF must simply follow the rules
of other agencies, such as the FTC or the FDA. In particular
situations, differences in the alcoholic beverage industry
may justify different results; in others the terms of the FAA
Act may not justify requirements totally consistent with that
decreed by other agencies under their statutory charters. It
is important, however, that we work with these agencies so
that the resulting overall system is as consistent and sensible
as possible.
We recognize that issues relating to the role of the
FDA and ETC in relation to that of BATF in regulating the
alcoholic beverage industry are of particular concern to
many of you. In the past these issues have at times emerged
in the form of competitiveness among these agencies on
particular matters, and proposals to assign some of BATF's
responsibilities to these other agencies. As you know, last
session, legislation was considered by the Congress which
would have transferred much of BATF's labeling responsibilities
to the FDA.

- 6A source of this competition, and of some of these proposals, is a belief held by some that BATF has not given
sufficient priority to its consumer responsibilities and
that these responsibilities are inconsistent with some of
its tax and other functions.
beliefs are soundly based.
are raised.

I do not believe that these

Nonetheless, these arguments

And, it is fair to say that if we are to con-

tinue to argue that BATF, for example, should not lose its
labeling responsibility to FDA, it is important that the
Bureau have the ability and the interest to itself exercise
those labeling responsibilities in a meaningful way that is
fair to both consumer and industry alike. The Bureau, I
believe, is trying to do this.

This is certainly essential

if these arguments for a continued BATF role are to be
persuasive within both the Executive Branch and the Congress.
And, at the same time BATF in working with other regulatory
agencies has, I believe, gone a long way towards building
the kind of constructive, non-competitive

relationship which

can only benefit us all. Credit for this belongs not only to
the Bureau but to these other agencies, particularly the FDA.
This leads to two particular issues I would like briefly
to raise with you —

ingredient labeling and the problems

associated with alcohol consumption during pregnancy.

Comments

about the recently published proposal for partial ingredient
labeling are, of course, governed by the Administrative
Procedure Act.

I would like, however, to describe something

about our approach to this issue.

- 7I recognize that many of those present here have serious
concerns about the ingredient labeling issue and question the
need for any proposal of this type. It is our view, however,
that the notion of ingredient labeling is basically sound,
providing consumers with information they desire to have
so they can have a basis for selecting among products. A
preliminary review of comments at recent hearings conducted
by FDA, FTC and the Agriculture Department appear to support
this.

Before issuing any final rule, however, these materials

will be more completely analyzed.
At the same time, however, any regulatory proposal such
as this must consider the costs involved for the industry
and potentially the public. We have tried to do so. These
proposals have been modified from those made earlier and depart in some respects from certain approaches generally
followed in ingredient labeling.

These include:

deletion of the order of predominance requirement;
elimination of the sodium level requirement;
flexibility as to placement of the list on the bottle;
allowance of shotgun labeling for essential components.
In each of these instances, the principal motivating factor
behind the change was a desire to reduce costs and adjust the
proposals to reflect the realities of your industry.

- 8We also discussed these proposals with the FDA. The
result plainly was not a perfect one from their perspective.
Nonetheless, they have supported it, believing as we do, that
pending the receipt of comments, it reflects a reasonable
balance between consumer and industry needs and concerns.
Over the next months we hope to receive comments from
you on these proposals. Are there other steps that we can
reasonably take that will reduce costs further or are sensible
for other reasons? What will these proposals cost? These are
some of the questions about which we are seeking information.
We are serious about this proposal. At the same time,
let me assure vou that we want vour views and ideas. I
cannot promise you that in the end we will agree on everything.
I can promise that we will try to seriously deal with your
concerns before coming to any final conclusions and that we
will do a full regulatory analysis before deciding whether to
issue any final rule in this area.
Another labeling issue we have recently been dealing with
is the proposal advanced that we should place a label on
alcoholic beverage containers warning people as to the risks
of consumption for the pregnant woman. Dealing with this
issue has been, and remains, difficult. It represents one
of the most troublesome issues we have been facing as we
struggled to understand better the nature of the medical
evidence as well as how to communicate it. We are particularly
concerned because we are not here talking about treating

- 9 disease, we are talking about the potential to avoid the
trauma and tragedy of birth defects. In attempting to determine the
appropriate course of action we solicited public cctnrent, retained
medical experts as well as one on the value of labeling and
other forms of education, and consulted with experts at the
FDA, NIAAA and the National Academy of Sciences.
Based on this analysis, we concluded that there was a
plain need for public education about this problem to alert
people to the risks of serious birth defects for the offspring
of the heavy drinker during pregnancy and to the scientific
uncertainty and differences

—

which our experts reported

as to the impact of lesser or binge drinking.

—

In this instance

we elected not, however, to simply turn to the labeling option.
It seemed to us that we should first try to work with
industry, other private groups and other federal agencies to
mount a meaningful public education campaign, one involving
media efforts, posters and the dissemination of various
materials to the public generally as well as to particular
groups.

We made this choice based on the uncertainties in

the medical evidence and a belief that, if it can be done,
public education may be preferable to what some may consider
to be "just another government warning!1

We intend to monitor

this program as it develops and take polls to measure levels
of public awareness about this issue.

This will help us decide

whether the course we have adopted is sufficient, or whether
we must reconsider labeling or other action.

- 10 I must confess that some have questioned the wisdom of
looking first to voluntary cooperation in this situation.
There are those who believe that we should have adopted a
labeling proposal now. I do not doubt, however, that this
non-regulatory approach can work. First, we have the support
of others in the government, and particularly of the FDA.
This, I believe, reflects the positive relationship which has
developed between the Bureau and FDA.
Most importantly, this program can work because the
alcoholic industry, and particularly the Wine Institute, does
have a tradition of social responsibility.

Given this

attitude we are hopeful that together we can demonstrate
the ability of government and the private sector to work
together without burdensome regulation to perform important
and needed public service.
These then are the ways we look at some of the issues
about which we share a common interest.

I know that sometimes,

we in Washington seem distant and non-responsive. While
various statutes —

such as the Administrative Procedure Act —

limit the amount of informal exchange we can have on some
issues,

I hope you will feel that we do desire as constructive

a relationship as possible; that we do desire to be sure
that decisions are made after full development of the facts;
that we do desire that your needs and concerns are fully understood and not ignored; and that we do desire a BATF which
carries out its responsibilities in a way that serves both
you and the public at large well.

FOR IMMEDIATE RELEASE
EXPECTED AT 11:30 A.M. EST
WEDNESDAY, MARCH 7, 1979
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY FOR
INTERNATIONAL AFFAIRS
BEFORE THE
SYMPOSIA SOCIETY OF AMERICA
WASHINGTON, D.C.
TOWARD FAIRER INTERNATIONAL TRADE
THE NEW SUBSIDY/COUNTERVAILING DUTY CODE
The problem of defining what is fair and unfair in
international trade has been at the root of some of the most
difficult, and contentious, issues in international economic
relations in recent years:
The few accepted international rules we have had
to guide us have been poorly implemented.
Increasing governmental involvement in economic
affairs, in both the industrialized and developing
countries (LDCs), has compounded the critical
importance of finding new ways to define "fairness"
and deal effectively with unfair practices.
Subsidy/countervailing duty problems, in particular,
have threatened to undermine overall international
relations and prevent cooperation in other areas.

B-1445

- 2 The United States therefore made the conclusion of a
code on the use of government subsidies and countervailing
duties its top priority in the Multilateral Trade Negotiations,
and a prerequisite to U.S. adherence to any final package
of agreements.

As a result, the new subsidy/countervailing

duty code which has been negotiated in Geneva offers a very
important step toward better definitions and improved
enforcement against unfair practices in the subsidy area.
Today, I would like to discuss why we consider a subsidy/
CVD code so essential, our objectives in negotiating
such a code, and the principal elements of the code which
has been negotiated.

I will focus on the benefit for the

United States which will derive from the code, and why I
believe that Congressional approval of the code —
of the overall MTN package —

as part

is essential for the United

States.
Subsidy Problems
Subsidies have become an increasingly important tool
of national economic policy in all nations.

They have

long been considered critical to development in the LDCs.
But the tendency to subsidize has also been accelerated in
virtually all industrial nations in recent years as a result
of slow economic growth, high unemployment, and strong import
competition.

- 3 Subsidies are frequently used to help maintain
employment, improve industrial efficiency, and stimulate
research and development.

Unfortunately, they can also

become a means of avoiding necessary adjustment to changing
global trade patterns.
We can't eliminate subsidies entirely. But we can,
and must, seek to set guidelines for the use of subsidies
which adversely impact on international trade.
crucial principle is simple:

The

countries cannot be permitted

to export their own problems to other countries via export
or even "purely domestic" subsidies.

Whether such subsidies

are explicit aids to exports or directed in the first
instance to domestic production, the critical test is
whether they cause or threaten injury to foreign producers
or seriously prejudice the reasonable expectations of
foreign exporters regarding access to domestic markets.
The use of countervailing duties (CVDs) is closely
linked to the problem of subsidies.

By their nature CVDs

are both a tool of economic policy and a political response
to the economic programs of other countries.

Yet if we

cannot agree on which subsidies are "fair" and which are
"unfair", we clearly will not agree on when and how much
in the way of offsetting countervailing duties are legitimate.
Improved discipline on the use of subsidies and
countervailing duties is therefore essential:

mm 4

-

—

to avoid injurious trade distortions;

—

to "de-fuse" potentially explosive trade
problems which threaten overall international
relations; and
to assure more rapid procedures for the
resolution of subsidy/CVD disputes.

Objectives in the MTN
The Trade Act of 1974, the Congressional mandate for
U.S. participation in the Multilateral Trade Negotiations,
urged the President to "take all appropriate and feasible
steps within his power (including the full exercise of the
rights of the United States under international agreements)
to harmonize, reduce, or eliminate barriers to (and other
distortions of) international trade".

The term distortion

specifically includes the use of subsidies (Section 102 a
and g).

The Act also requested the President to update

current international agreements making "any revisions
necessary to define the forms of subsidy to industries
producing products for export and the forms of subsidy
to attract foreign investment which are consistent with an
open, nondiscriminatory, and fair system of international
trade."

(Section 121) .

We have substantially met these requirements of the
Trade Act through the new code.
of this code:

We sought as major components

- 5 A reinforcement of the commitment already accepted
by most industrial countries not to use export subsidies
for industrial products, plus staged expansion of that
commitment to LDCs.
—

New international discipline to guard against the

disguised protection of domestic markets through internal
or production subsidies.
Improved discipline over subsidized competition
in agricultural products in third markets.
Concomitant guidelines on the use of countervailing
duties, which would recognize that such duties should be
applied only when a subsidy threatens or causes injury to
a domestic industry.
Prompt recourse to other countermeasures if specific
commitments regarding the use of subsidies have not been
fulfilled.
Effective implementation of rules on both subsidies
and countervailing duties, and strengthened provisions on
dispute resolution.
Acceptance by advanced developing countries of
increased obligations on subsidies as their industries
become internationally competitive.
The New Code
We have been successful in obtaining new guidelines for
the use of subsidies and countervailing duties in virtually

- 6 all of these areas.

The code spells out specific rights and

obligations for all signatories on both subsidies and CVDs
along a basic two-track mechanism:
—

The principal right under Track I of the code is

the right to countervail any_ foreign subsidized export
which causes injury, to a dome_s_tic_ industry.

This includes

both domestic and export subsidies, on both agricultural
and industrial products, from industrial and, developing
nations alike.

Action by the importing nation, after a

determination of injury, is simple and direct. It is completely
under the control of the importing nation, with no international review required before action can be taken.
The benefits of this provision are multiple:
(1)

Domestic, subsidies are explicitly recognized as counter-

va.ilable subsidies under international law, provided injury
is shown.

In using subsidies to eliminate industrial,

economic, and social disadvantages in specific regions, to
facilitate the restructuring of certain sectors, to sustain
employment and encourage re-training and change in employment,
or to encourage research and development programs, nations
agree to seek to avoid causing serious prejudice to other
nations and to consider possible adverse effects on trade
and existing conditions of world trade, production, and
supply in the product concerned.

- 7 (2) Agriculture obtains the assurance that subsidies of any
kind which, interfere, with our domestic support programs may
be countervailable, and that this aspect of injury will be
given full consideration.
(3)

The introduction of an injury test in U.S. law, which
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was the major objective of our trading partners during the
negotiations.

Our trading partners have been especially

concerned about the use of countervailing duties by the
United States, since for most products (those subject to
ordinary duties), we have no injury requirement in our
domestic law.

We can impose countervailing duties solely

on the basis of an existing foreign government bounty
or grant.

The United States is the only major industrial

nation which imposes CVDs without such an injury requirement.
Though it has been strongly resisted by some in the United
States who like the automaticity of existing procedures, it
has been clear that the fact that the U.S. was not in conformity
with the international rules in this area was costing us much
more than was justified by the economic protection provided
by injury-less CVDs.

In strict trade terms, our unwillingness

to adopt an injury test simply made others unwilling to adopt
meaningful limits on their use of subsidies and other tradedistorting practices.

Moreover, as long as our production,

employment and trade interests are not adversely affected,
we have no reason to object if foreign nations undertake

- 8 to subsidize U.S. consumers through their government
budget —

why should we countervail and rob our consumers

of this benefit?
If U.S. industries are hurt, an injury test will
trigger a just response.

And, for the first time, we will

have the ability to impose provisional measures to protect
an industry against subsidized competition even while investigations are still underway.
The new injury test in the code is itself a

major

improvement over similar standards in domestic and international law.

For the first time, industries seeking relief

will have a clear idea of the standards to be applied
and the specific criteria that will be examined in making
determinations.

The code spells out in detail the procedures

to be followed by domestic authorities, but allows a great
deal of flexibility to weigh only the particular factors
that are affecting the industry under review.

It's not a

tougher or easier standard than we have applied in dumping
cases —

it's clearer and better.

If the subsidized imports are depressing prices, or
preventing sales, profits or full employment in our
industry, we will consider the industry "injured."

But

we will not attribute to the imports other factors that
may be causing injury as well, such as changes in consumer
taste, obsolete facilities or unsubsidized competition.

- 9 —

Under Track II of the code, nations have the right

to hit any proscribed export subsidies without a specific
injury finding.

This both reinforces the discipline of the

code itself against such subsidies, and assures effective
U.S. reaction whenever the rules are breached.
—

Nations also have the right to retaliate against

domestic subsidies which adversely affect their trade through
import substitution.

This is particularly important because

such domestic subsidies can be used to impair GATT tariff
bindings for which we have negotiated reciprocal concessions,
and can become an alternative to tariff protection to restrict
access to domestic markets.

Again, injury does not have to be

shown where basic GATT commitments have been violated.
—

Counteraction can be in the form

of increased import

duties (CVDs) on the product concerned, or can involve
alternative measures in third market or import substitution
cases.

This provision greatly strengthens international

procedures and specifically sanctions for the first time countermeasures against subsidized competition to the third markets.
If, for example, a nation grants export subsidies on steel
or automobiles sold in

a third market which adversely affect

U.S. sales in that market, the imposition of countervailing
duties on U.S. imports may not be relevant. Instead, the
United States would be justified in seeking international
approval for countermeasures against imports from the offending
nation into the United States.

- 10 Similarly, if domestic production subsidies are used
in a manner which impairs a GATT tariff binding, retaliatory
action is warranted on imports of other goods from the
offending nation.

If, for example, the European Community

were to subsidize the production of soybeans (on which we
have a zero-duty tariff binding in the EC), we could request
international review and authorization for U.S. retaliatory
action against a like amount of EC exports to the United
States.
In sum, in cases where injury is shown, the importing
country can act against imports unilaterally —
national mandate is needed.

no inter-

Where commitments are violated,

countermeasures can be taken without showing injury after
sanction by an international body which agrees that the
obligation has been violated.
The principal obligation under the new code is a
commitment not to use export subsidies on industrial or
mineral products.

Although most industrial nations have

accepted a commitment not to use industrial export subsidies
in the past, the addition of mineral products is new as is
the acceptance of commensurate obligations by signatory
developing nations.

The Code also deals with the problem of

the archaic dual-price criteria in the GATT (Article XVI:4)
as a prerequisite for action against export subsidies.

We

have developed an updated list of export subsidy practices

- 11 which are prohibited per se.

As a result, in our view there

will be no need to demonstrate dual-pricing for any item
on the new, updated list.
—

With regard to agricultural export subsidies we

have achieved a major step toward resolving the main problems
in our important agricultural export markets.

The new code

would prohibit the use of agricultural export subsidies which
(a) displace the exports of others or (b) involve material
price undercutting iri a particular market.

These are

tighter criteria than the existing GATT Article 16 provision
that agricultural export subsidies should not result in a
country gaining "more than an equitable share of world trade".
The current Section 301 complaint by Great Plains Wheat,
Inc. against EC export subsidies on wheat to Brazil, Poland,
the Peoples Republic of China, and other markets where the
United States has strong export interests provides a good
example of the way in which this new code provision would
operate.

Great Plains claims that the EC export subsidies

result in both a loss of U.S. traditional exports to particular
markets and a reduction in world wheat prices.
Either result could serve as the basis for an international review and determination of whether countermeasures are
justified.

The code thus provides an important international

sanction for action which we might want to take under domestic
law, but which would violate present international commitments
if we just took action unilaterally.

- 12 APPLICATION TO DEVELOPING COUNTRIES
One of the most important recent developments in the
world trading system is the growing role and importance of
a number of advanced developing countries (ADCs), mainly
in Latin America and the Far East.

A select group of these

countries 1/ have increased their share of world trade
dramatically, from 5.1% in 1970 to 8.6% in 1977.

One of our

major objectives in the MTN has thus been to engage these
countries much more effectively in both the functioning
and the management of the GATT system, including importantly
the subsidy/CVD code.
Developing countries which join the code can fulfill the
general obligation to refrain from the use of industrial
and mineral export subsidies by assuming obligations regarding
the use of these subsidies commensurate with their competitive
needs.

This provision specifically recognizes that export

subsidies are an integral part of many development programs,
but that they become less necessary as nations develop.

The

requirement is designed to encourage the phase-out of export
subsidies as nations become more advanced, and hence have
less need for such practices. Nations which accept these
responsibilities under the code receive an assurance that,
as their subsidies are phased out, their exports will not
be countervailed unless injury is shown.

1/ Hong Kong, Singapore, Korea, Taiwan, Brazil and Mexico

- 13 Brazil, for example, has already announced the phase-out
of its major export subsidies over a period of approximately
four and a half years within the context of the code.
Reductions in its export incentives

began in January, and

will continue at quarterly intervals.

This is a significant

contribution to improved discipline in the subsidies area,
since Brazil has for some years maintained perhaps the
largest subsidy program of any major trading country.

It

is particularly significant for the United States, since
Brazil is our eighth largest trading partner.

We regard

the Brazilian action as a statesmanlike assumption of the
increased responsibilities attaching to its sharply increased
role in the world economy, and enormously important in
assuring cordial U.S.-Brazilian economic and overall relations
in the years ahead.
Brazil's adherence to the code offers real benefits
to U.S. industry, which has long been concerned about the
very high level of subsidization offered by Brazil to competing industries exporting to our market.

Brazilian federal

and state export subsidies on such products as textiles,
leather products, automobile radios, high carbon ferrochromium
and ferromanganese, steel wire rods, steel sheet and plate,
non-alloy steel bars and sheets, stainless steel bars, guns,
furniture, and resistors, have averaged 25 percent of the value
of the product, or more, in recent years.

U.S. industries

- 14 producing these products should experience more equitable
competition from Brazil in these and other industrial products
in the years ahead.
Beyond Brazil, we expect other advanced developing
nations to undertake similar phase-out commitments, tailored
to their own situation, and negotiations are actively underway
with a number of them.

These phase-out commitments become

an obligation under the code.

Violation of the obligation

permits countermeasures under Track II, following international review and agreement, without a finding of injury.
It should be noted that nations which do not accept
the obligations of the code, whether industrial or developing,
will not receive its benefits.

In particular, the United

States does not intend to apply the injury test to subsidized
exports from those nations that fail to sign the code and
assume appropriate obligations.

In the absence of such

obligations, we would countervail subsidized imports without
an injury determination as in the past.

It is extremely

important to get as broad participation as possible in the
MTN code —

and we believe the benefit of recourse to an

injury test in the U.S. is a real incentive for accession
to it.
DISPUTE SETTLEMENT
International dispute resolution provisions have been
tightened considerably under the code.

One of the major

- 15 accomplishments of the subsidies code is in fact the development of dispute settlement provisions with sufficient teeth
to ensure that the new rules translate into effective international discipline. The Code provides for prompt and
expeditious review of international disputes.

Cases will

be heard and acted upon in a matter of months, not years
as with some recent GATT cases. Disputes should normally
be resolved within 150 days.
As in all international disputes, bilateral resolution
should be first sought through conciliation procedures.
If the matter is not resolved within 30 days, however, the
Code recognizes the right of any signatory to have a panel
of objective experts review the case.

Such panels would be

charged with reporting to the Committee of Signatories its
findings concerning the rights and obligations of the
signatories party to the dispute.

The Committee (by its

nature a more political body than a panel) would then review
the findings, issue recommendations, and authorize countermeasures as appropriate.
What particularly distinguishes these procedures from
past GATT practice is the elimination of procedural roadblocks
which often have hamstrung international actions.

No longer

will months go by arguing whether it is appropriate to call
a panel to review a dispute, and many more months selecting
its members.

The Chairman of the Committee shall have 30

- .16 days to constitute a panel, and once constituted that panel
will have to produce its report within 60 days.

The Committee

in turn will have only 30 days to review the panel findings
and make its recommendations.

Anyone familiar with the GATT

knows that these changes will shift international procedures
from a crawl to a sprint.
What does this mean?

It means that international rules

that rely on multilateral surveillance can work.

It means

that governments can get results from international bodies
in a time frame that is responsive to the needs of their
domestic constituents.

It means the new discipline on subsi-

dies and CVDs will be enforced.
I know there are some who will argue that no matter
how good the new international rules are, they will not be
effectively implemented in domestic law.

They cite years of

frustration with domestic procedures.
Probably the most basic concern in the past was that
CVD cases dragged on with no effective remedies available
when they were really needed.

The Trade Act of 1974 made

significant strides in setting deadlines for preliminary
and final determinations, and providing judicial review
of all such decisions.

U.S. procedures now provide

unparalleled opportunities for private parties to initiate
and participate in proceedings leading to the imposition
of CVDs and to obtain judicial review of administrative
decisions.

- 17 As a result of implementing the MTN Code, we will adopt
the first genuine overhaul of our countervailing duty law
in 80 years.

Consistent with our international commitments

we should now have a law that provides, first, for prompt
consideration of the twin tests of subsidy and injury; second,
for provisional measures within four months of the filing
of a petition —

cutting by two-thirds the time now usually

taken before the law "bites;" third, an expanded and much
more transparent procedure allowing all interested parties
to participate and review information collected; fourth,
assured periodic review to update the basis on which CVDs
are collected; and, fifth, a system under which we can quickly
accept undertakings from foreign governments or exporters
to end the injurious effects of subsidies to achieve the
aims of the law without going through all of its elaborate
procedures.
In particular, much tighter deadlines for the
conclusion of investigations will be incorporated in U.S.
law.

Normally, cases will be resolved in less than the

one-year period now prescribed in the Trade Act.

Con-

clusion of CVD investigations will be facilitated by the
improved notification and consultation procedures in the
code.

Information on subsidy practices will be more

readily available from foreign governments, who will have
an incentive to supply all relevant data at the start of

- 18 a case lest their exports be subject to provisional
measures while the investigation continues.

Information

will also be available to interested private parties to
ensure the transparency of procedures and the accuracy
of the data supplied.

Standards for claims of confidenti-

ality will be tightened and non-confidential summaries will
be required if confidential information is used.
In addition we will expand upon existing procedures
to provide detailed and comprehensive determinations of
the nature and amount of foreign subsidy practices.
Administrative rules will be developed on the calculation
of margins of net subsidies, including the use of offsets.
Foreign undertakings to offset the adverse effects of
subsidies will be primarily limited to agreements among
governments so they can be enforced and properly monitored.
We believe such undertakings can provide a valuable channel
for quick relief for domestic industries, and it is
important that the Administration maintain the discretion
to enter into such arrangements.

Retroactive counter-

measures will be available to ensure that such undertakings are not violated.

All in all, the new procedures

will provide for the open and expeditious resolution of
subsidy complaints.
There has also been concern about what practices were
considered bounties or grants under our CVD law.

The new

- 19 code clarifies this matter and plainly recognizes that all
subsidies, both export and domestic, are liable to CVD action,
depending on the effects of the subsidized goods on international
trade.
Finally, a word about the past waiver of CVDs.

The

Congress included authority in the Trade Act to waive
CVDs under three strict conditions to facilitate negotiation
of the MTN subsidies code while still guarding the interests
of affected domestic industries.
We believe that the waiver has served its purpose:
In almost every case, we have gotten substantial
reductions in the amount of the subsidy.
The waiver has allowed the

MTN negotiations to continue

on agriculture, enabling us to gain new and important concessions
for U.S. agricultural exports.
The waiver has provided a bridge to facilitate acceptance by several developing countries of increased responsibilities
in the world trading system.

For example, the Brazilian commit-

ment to phase out its major export subsidies completely was
clearly promoted by our unwillingness to waive on several
specific products early in this Administration and our
willingness to do so, under proper conditions, in the
textile case last November.

Uruguay, in return for a

waiver on particular products, likewise agreed to phase
out all of its export subsidies over a four-year period.

- 20 We don't foresee the need for waiver authority once the
MTN Code is implemented in U.S. law. The injury test should
set the standard for the imposition of CVDs. We strongly
believe, however, that the old authority should be extended
in order to avoid disruptions during the transitional period
until the MTN code is approved. We are gratified that the
House has acted so expeditiously to do so, and we hope
that the Senate will do so shortly.
CONTINUING PROBLEMS
The new subsidy/countervailing duties code will not solve
all of the international problems regarding the use of subsidies.
Export credits and investment incentives are two major areas
which the new code does not address firmly. The United
States is seriously concerned about the potential for friction
in both of these areas in the future, if positive steps
toward improved cooperation are not achieved soon. These
issues are being dealt with in other fora.
We had hoped that the International Arrangement on
Official Export Credits, which was concluded by 22 countries
plus the European Community in early 1978, would form the
basis for cooperation among the major trading nations to curb
excessive competition in the use of official export credits.
It is a significant agreement, but further action is necessary
to restrain aggressive government financing practices and
reduce the element of subsidy in official export credit
financing.

- 21 At the direction of both the President and the Congress,
we negotiated throughout the latter part of last year
in an effort to expand the scope and tighten the terms of
the Arrangement.

We have seen no real progress to date,

however, and now find the only realistic alternative is
to meet foreign official export credit financing through
aggressive action by our own Export-Import Bank.

While we

hope there will be improved international cooperation in
this crucial area, we cannot and will not permit unfair
financing of exports by foreign official export credit
agencies to deprive U.S. exporters of sales.
Problems in the investment area are becoming more serious
as well.

There is no system of international rules for invest-

ment similar to those for trade in the GATT, as now enhanced
by the subsidy/CVD code.

We have been addressing investment

problems in a number of international fora and will
continue to pursue the resolution of especially difficult
problems both multilaterally and bilaterally.
We have had particular problems with government intervention in the investment process.

This takes many forms,

but it usually combines two basic features:

incentives to

attract the investment in the first place and performance
requirements, including offset requirements, to assure that
the U.S. firm contributes to the priority economic and
social goals of the host government.

These performance

- 22 requirements typically focus upon local job creation, minimum
local value-added, and technology transfer.
In recent years, offset requirements have been most
common in the area of defense procurement but they are
quickly spreading to the non-defense area as well.

Foreign

governments frequently require that, for a U.S. firm to do
business with the government, it must agree to transfer
technology to the nation by means of licensing or co-production agreements.

Although inconsistent with the spirit

of the GATT and the concept of an open multilateral trade
and payments system, these requirements are rapidly becoming
a pervasive feature of the world economy.
A major objective of U.S. policy must be to achieve
multilateral discipline on such incentives and other interventions, both to maintain an open investment environment
and to avoid our being forced into the adoption of emulative
countermeasures.

With offshore output by multinational firms

now approaching a value of $1 trillion, it is anomalous that
no such disciplines now apply to the international investment
process.
CONCLUSION
The subsidy/CVD code has therefore not solved all
the problems of defining and assuring "fair international
trade."

But it marks a major step in the direction of

doing so, and offers the United States a number of new
specific benefits:

- 23 (1)

We have a much stronger prohibition of industrial

export subsidies, complemented by an updated list of prohibited
export subsidy practices. This new list includes such
practices as export inflation insurance, exchange risk
guarantees, and duty drawbacks in addition to items carried
over from the previous GATT list.
(2) Explicit recognition that countries must accept
responsibility for the trade effects of their domestic subsidy
programs, and express commitments that they will avoid granting
such subsidies that adversely affect the trade interests
of other countries.
(3) Domestic subsidies which impair GATT tariff bindings
through import substitution are subject to countermeasures
as a violation of GATT commitments. Such subsidies may include,
but are not limited to, regional development grants, research
and development grants, government provision of infrastructure
services, and government financing of commercial enterprises,
including provision of loans and guarantees on non-commercial
terms.
(4) Export subsidies on industrial products to third
markets are subject to countermeasures, as are export
subsidies on agricultural products which displace the
exports of others or involve material price undercutting in
a particular market.

- 24 (5) The code permits for the first time the use of
provisional measures before the application of countervailing duties. Provisional measures may be applied
after a preliminary subsidy determination, for a period of
up to four months.
(6) Developing countries for the first time are agreeing
to phase out the use of export subsidies as part of their
obligations, commensurate with their competitive needs, under
the new code. This is especially important to a number of
U.S. industries which face import competition from highly
subsidized exports from Brazil, and from other developing
nations which we expect to join the code.
(7) We have an improved framework for conducting
domestic countervailing duty investigations. U.S. industries
will have a clearer idea of what is required to prove injury,
more certainty in proceedings, and consistency in application
of the injury test.
(8) New procedures should shorten somewhat the time
required for investigation and application of final countervailing duties.
(9) Finally, tight deadlines (a maximum of 150 days) on
the dispute resolution process assure prompt international
review of subsidies which violate code or other GATT commitments.
These are substantial benefits for the United States.
Our agreement in return, to adopt an injury test in our

- 25 domestic law, is a fair deal and makes sense for U.S.
producers and consumers alike.

We are convinced that

the code provides a much more effective basis for the
resolution of international subsidy problems then has existed
in the past, or could possibly exist in the future without
the code.

It is an essential component of the package

of agreements we have achieved as part of the Multilateral
Trade Negotiations to deal with the major trade problems
of the 1980s.

STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE FINANCIAL ANALYSTS FEDERATION
NEW YORK CITY, NEW YORK
The Outlook for the U.S. Balance of Payments
The U.S. balance of payments position has undergone
substantial changes in recent years. It moved from what
was then regarded as a sizable deficit in 1971-72 to a huge
surplus in 1975 and then into even larger deficits in 1977-78.
These movements have to an important extent reflected the
rapid changes which have been occurring in the global economy
in recent years, and point to the need for both the United
States and the world economy as a whole to adjust more
effectively to these changes.
Some of the developments which have had a strong impact
on U.S. and world payments positions have been short-term in
nature, such as the short supply of world grain supplies in
1973-74. Others have been of a more fundamental structural
nature and will be with us for some time to come. These

B-1446

- 2 changes —

generally slower world growth rates, reduced

rates of productivity growth, higher inflation rates, higher
oil prices, increased competition in manufactured goods
from the advanced developing nations —

will require longer

term adjustment strategies in both the United States and
other nations in order to assure continued stability for
the international monetary system and world economy as we
move into the 1980s.
After reviewing briefly the short-term outlook for the
U.S. balance of payments and the firm measures which the
Administration undertook last fall to return order to the
foreign exchange markets,

I will focus the bulk of my

comments today on the longer-term structural issues that
face the world economy and suggest some of the problems we
need to begin acting on now to adjust to them.
The Outlook for 1979
As you know, the U.S. current account position moved
from a $18 1/2 billion surplus in 1975 to an estimated
$16 1/2 billion deficit in 1978, due in large part to the
sharp deterioration of our trade balance from a $9 billion
surplus to a $34 billion deficit during this period.

Much

of this change has reflected:
1.

the dramatic increase in world oil prices, and our
increase in demand for imported oil;

- 3 2.

differential growth rates among the major
economies (with the U.S. growing more rapidly
than its principal trading partners in sharp
contrast to the experience of the earlier postwar
period); and

3.

changes in price competitiveness during 1975-76
as a result of higher U.S. inflation and appreciation
of the dollar.

Since early last year, we have been seeing a sizable
and steady reversal of the deterioration in the U.S. external
position as growth differentials narrowed and U.S. exports
became more competitive due to the real exchange rate changes
of 1977/78.

The disruption in Iranian oil production will

of course have an impact on U.S. and global developments,
to an extent which is still difficult to determine.

But the

short-term outlook for both the United States and the world
is basically encouraging.

We are clearly moving in the right

direction.
Already in 1978, the U.S. current account deficit
declined sharply from an annual rate of over $30 billion
in the first quarter to a rate of $11-1/2 billion in the
second half of the year.
continue to strengthen.

In 1979, the current account should
We continue to expect a current account

deficit for the year at roughly one-half the 1978 level
something like $8-9 billion. This reflects:

—

- 4 A $25-26 billion gain in non-agricultural exports,
(excluding gold), compared with a probable increase of
about $16 billion in non-petroleum imports, and thus
an improvement of $9-10 billion in those parts of our
trade position which most accurately indicate the
competitive position of the United States in the world
economy;
—

An additional $3-4 billion of gold auction effects;
Further improvement of $2-3 billion in our sizable

surplus on services transactions, which totaled an
estimated $22-1/2 billion last year;
—

A rise in agricultural exports of about $1

billion (as compared to a $6 billion increase in
our agricultural exports in 1978); and
—

An offsetting increase of at least $8 billion

in our oil import bill, based on continued growth
in oil consumption and the December oil price
increases.*

*(The 5 percent reduction in consumption called for by our
recent agreement in the International Energy Agency is equal
to a 10 percent reduction in U.S. imports, and potential
import savings of $5 billion.)

- 5 The U.S. balance on non-agricultural exports and nonoil imports should show steady gains throughout 1979.
We expect a positive gain by the fourth quarter of $8-1/2
billion (annual rate) as compared to the fourth quarter of
1978, after a gain of $8 billion from the fourth quarter
of 1977 to the fourth quarter of last year.

There has

thus been substantial progress in those parts of our trade
which perhaps best reflect underlying U.S. competitiveness
in the world economy.
In volume terms, we expect non-agricultural exports
(excluding gold) to grow about 11 percent this year over
last, in contrast to an increase of less than 1 percent
in non-petroleum import volume.

Average unit values on

both sides are projected to increase about 11-12 percent.
Our invisibles estimates include a rounded $1 billion
allowance for possible first-year effects of Iran's
recent cancellation of military sales orders.

Also, our

non-agricultural export projection includes a rounded
$1 billion allowance for reduced non-military sales to
Iran.
Our estimate of a $50 billion oil import bill this
year, made after OPEC announced its pricing schedule for
1979 in mid-December, would not necessarily be increased
if further increases in OPEC oil prices were offset by volume
effects of the Iranian shortfall and by U.S. conservation
efforts.

Increased U.S. sales to OPEC countries financed by

- 6 their own higher earnings could also help offset any higher
oil bill.

Nevertheless, it is of course possible that the

oil bill might rise by a few billion dollars and we are
watching this situation on a daily basis.
Short Term Policy Response
The strong U.S. recovery in employment and production since the recession of 1974-75, through which twelve
million new jobs have been created, has not been matched
by equivalent success in maintaining the value of our
currency at home and abroad.

Much of the sharp deterioration

of the dollar last fall was due to a lack of confidence
in our ability to bring inflation under control.

The

acceleration in domestic inflation served to weaken the
dollar on the foreign exchange markets, and this in turn
raised the domestic price level even further —

as the

cost of imported goods rose and provided an umbrella for
domestic price increases.

Hence the Administration and

Federal Reserve have adopted a comprehensive program to
support the dollar and to impose greater monetary restraint
domestically:
We submitted a tight fiscal 1980 budget, with
an anticipated deficit of under $30 billion —

barely

more than 1 percent of GNP, as compared with deficits
currently averaging about 4-1/2 percent of GNP in the
other major industrial countries.

- 7 Tight monetary policy is complementing fiscal
restraint, as evidenced by a further pronounced rise
in interest rates and a sharp slowdown in the growth
of the principal monetary aggregates.
These measures of demand restraint are being
supplemented importantly by wage and price standards,
which are gaining a broad measure of support and
compliance on the part of the American people.
We have adopted a program of gold sales to the
private market as a means of helping to reduce the
trade deficit and in response to the adverse
psychological atmosphere in the foreign exchange
market which has undermined international monetary
stability.
Once these actions addressing the fundamentals were
decided or in place, it became feasible to announce on
November 1 a program of coordinated intervention in support
of the dollar together with Germany, Japan, and Switzerland
The U.S. has mobilized most of the $30 billion in foreign
exchange resources being used to finance our share of this
effort —

partly through use of U.S. reserves and partly by

borrowing, including the issuance of foreign curency
denominated securities.
The United States is fully committed to achieving
the fundamental economic conditions required for a strong

- 8 and stable dollar.

The situation in the foreign exchange

market has clearly improved since our November actions.
The severe and persistent disorders of October have been
overcome.

The dollar has appreciated substantially from

its lows, although there have been up and down movements
in rates from day to day.
The oil price increases and uncertainties about the
oil supplies are the principal cause of current uncertainties
but the foreign exchange market has been taking these
uncertainties in stride.

I believe that the market now

realizes that the United States is determined to prevent
a re-emergence of disorderly conditions which led to the
November measures.

We will not hesitate to use the

substantial resources at our disposal for this purpose.
I believe we will see increased stability as our determination to persevere becomes more evident, as indeed we have
now for almost three months, and as the outcome for 1979
becomes still clearer in the minds of market participants.
Longer Term Issues
For the medium and longer term, however, a number
of more far-reaching problems face the global economy.
Many countries, including the United States, are in need
of substantial structural change.

We need to take

advantage of the current breathing space to begin
addressing these problems decisively.

- 9 In the case of the United States, three problems
are particularly important: high energy imports, our need
to expand U.S. exports, and low productivity growth.
I would like to turn to a discussion of these problems
and what the United States is doing about them currently
— and what both the government and private industry must
do in the future to implement needed structural changes.
Ener£y
First, we must drastically cut our use of energy.
The Iranian situation is again bringing home to American
consumers the urgent need for action in this area.
It is clear that the sharp rise in U.S. energy consumption,
combined with declines in our domestic production, provided
a major portion of the economic underpinning for the massive
price increases levied by OPEC in 1971-1974. It is equally
clear that the drastic rise in U.S. payments for oil imports
— from less than $5 billion in 1972 to $45 billion in 1977
and $50 billion or more in 1979 — is the largest single
cause of our current account deficit, which in turn has been
a source of instability in international financial markets.
The implementation of the first part of the Administration's energy program, after substantial delay in securing
Congressional passage, has already promised to help reduce
1979 energy imports from levels they would otherwise have
attained. The expected savings is in the area of 500,000

- 10 barrels a day or $2 billion in the U.S. import bill.
A number of additional energy measures are either in effect
or under review in efforts to further reduce U.S. energy
consumption:
(1)

The mileage of the U.S. new car fleet has already

improved by 5 miles per gallon since 1974, and further
improvement of 2 miles per gallon during the next two years
is expected.
(2)

We are planning to boost the capacity of the

Alaskan pipeline by 200,000 barrels a day in 1980.
(3)

We are considering appropriate means to raise the

domestic price of oil to world levels as we agreed at the
recent Bonn Summit.
(4)

By 1985 we intend to increase our coal production

by two thirds.
(5)

For the longer term we are looking into expansion

of nuclear and solar use.
(6)

In the past, each 1 percent growth in U.S. GNP

has generated an equivalent 1 percent growth in U.S. demand
for energy.

We have already made some progress in reducing

this rate of energy growth and hope to achieve a 0.8 percent
increase in domestic energy demand for each 1 percent growth
in GNP.
Joint international efforts to help restrain energy
consumption are also an important complement to further
action at home.

The International Energy Agency governing

- 11 -

board in fact agreed on March 2 to a 5 percent reduction in
oil consumption in all member countries in light of current
supply disruptions.

This is a good start, though much more

of course remains to be done to meet our overall need for
energy conservation.
Export Expansion
Second, the United States must become much more exportoriented.
—

In times past, exports did not seem to matter much

either to the individual firm, or to the country as a whole.

As a result, neither our private sector nor the U.S. Government
tried very hard to expand U.S. exports.

Now exports have become

critical to both:
Until a few years ago, the United States accounted
for over 50 percent of the world economy; now, the
market in the rest of the world is bigger than the U.S.
market for virtually every industry.
The share of exports in our Gross National Product has
already doubled since the early 1960s, and exports now
contribute more to the GNP than does private capital
investment.
One of every eight jobs in our manufacturing sector
produces for export, as does one of every three acres
of U.S. farm land.

Our future prosperity at home is

closely tied to our success in boosting sales abroad.

- 12 —

A healthy and expanding export sector is essential

for the long-run stability of our external accounts
and thus of the dollar.

Indeed, increased U.S. exports

are by far the most constructive response to our
trade balance and dollar problems.
Although we earn a lot from foreign investments, we
won't have enough to pay for the imports we need and want
unless we can achieve substantial export growth —

one

which more nearly parallels the percentage growth in U.S.
imports.

This particular structural change —

the need

to increase the share of production going to exports and
import competition —

requires policy measures on a number

of fronts:
We must keep inflation under control.

This is

obviously important to every American consumer but
also to avoid losses in U.S. price competitiveness for
products sold abroad and for those which compete with
imports.
We must maintain international monetary arrangements which avoid jeopardizing the competitive position
of any individual country, as occurred for the United
States in the final years of the Bretton Woods system
of fixed parities.
—

We must avoid protectionist trade policies, at home

and abroad, which would shrink our overseas markets just
when we need their maximum expansion and indeed, as

- 13 in the Multilateral Trade Negotiations now coming to a
conclusion in Geneva, further reduce trade barriers
abroad to improve the competitive opportunities for
U.S. firms.
—

We must provide full U.S. Government support for

the export efforts of American firms, as through the
Export-Import Bank in the area of export finance,
whenever necessary to support their full competitiveness in world markets.
Most importantly, we need to foster a greater
export consciousness on the part of American business.
In September 1978 President Carter announced a number
of new measures designed to stimulate increased U.S. exports
as part of a new national export policy.

The President

has expressed his commitment to this effort as a matter of
high national priority.

The program will significantly

increase U.S. Government support for U.S. exporters through
direct stimulus to exports and action to reduce both
psychological and real barriers to U.S. exports.

The new

measures include:
A proposed $500 million increase in the Eximbank's
direct loan authority for FY 1980 to help improve the
Bank's competitiveness and flexibility in terms of
interest rates, length of loans, and percentage of
transaction financed.

- 14 Loan guarantees of up to $100 million by the Small
Business Administration to help small exporters.
—

An additional $20 million for Commerce and State

export development programs.
—

Careful review by Executive departments and

independent regulatory agencies of the posssible adverse
effects on our trade balance of major administrative and
regulatory actions, including the use of export controls
for foreign policy purposes.
As the President noted in his export policy message,
"We can and will continue to administer the laws and
policies affecting the international business community
firmly and fairly, but we can also discharge that responsibility with a greater sensitivity to the importance
of exports than has been the case in the past."

Since

September the Federal Government has made decisions in
a number of cases which reflect this commitment to
increase U.S. exports and to carefully weigh the impact
on U.S. trade of potential controls on exports for foreign
policy reasons.
We have, for example, authorized the export of $280
million of flat-bed trucks and commercial aircraft to
Libya since September, and over $200 million in technical data
and equipment for exploration and production of petroleum
and natural gas in the Soviet Union since the imposition of

- 15 special controls in August 1978. The Export-Import Bank has
also issued a letter of interest in financing $270 million
worth of hydroturbines to Argentina.

Each of these cases

involved both foreign policy and economic considerations
of some importance, and might not have resulted in U.S.
export sales under previous Administration guidelines.
Productivity Growth
U.S. output per manhour in the manufacturing industries
increased only about 25 percent between 1970 and 1976, while
Japanese productivity grew by more than 50 percent, and German,
French and Italian productivity grew by more than 35 percent.
Last year, American manufacturing productivity grew by only
0.8 percent.
Many factors determine the rate of growth of labor
productivity.

One of the most important of these is the

rate at which we expand our capital base.

The stock of

productive capital per worker increased every year in the
post-war period up to 1974.

Since then, the process of

capital accumulation has come to a complete halt.
There are many reasons for this:

declining real profit

margins, uncertainties about energy costs and availabilities,
excessive regulation.

We have taken steps to remove these

roadblocks.
A successful anti-inflation program will help restore
after-tax real profits.

A stronger dollar will enhance the

environment for portfolio investment.

The tax legislation

- 16 of 1978 will assist investment through a cut in the corporate
rate, a reduction in capital gains taxation, and an improved
investment tax credit —

resulting in a net reduction of $7

billion in taxes on income derived from capital investment.
The energy legislation enacted by the last Congress will
eliminate some of the uncertainties about supplies of energy,
particularly natural gas.
Finally, investment should benefit from our efforts
to get control of the unnecessary preempting of resources
by regulatory authorities.

The Carter Administration is the

first Administration ever to institute an internal program
for a cost-benefit assessment of individual regulations.
The costs are staggering.

We intend to pare them down.

Responsibilities of Others
We need to do more, both within the government and in
cooperation with private industry in order to improve our
payments position over the longer term.

But the United

States, clearly, has begun to move on all three fronts
where major structural adjustment is needed: energy, export
promotion, productivity growth.
Other nations must also do their part.

Japan is

perhaps the best example of a nation which also needs to
make major structural adjustments from the surplus side of
the external accounts.

The need holds true for many other

nations as well, but let's look at the Japanese case to
illustrate the point.

- 17 First, Japan can no longer rely on export-led growth.
Such a strategy was viable when Japan was a small factor
in the world economy, and hay have been necessary when
balance of payments constraints represented the major
limitation on Japanese economic expansion.
Now, however, Japan is simply too big to rely so
heavily on the world market—particularly in light of the
slower growth of the world economy as a whole, and the
global payments imbalances triggered by the rise in energy
prices.

World trade is also growing more slowly, and

excessive emphasis on export-led growth promises future
friction in trade (and potential monetary instability as
well).

We can no longer all expect to pull ourselves up

by someone else's bootstraps.
Japan's domestic needs are huge, and are widely
recognized in Japan.

The balance of payments and the

level of reserves are no longer a constraint on Japanese
economic activity.

It thus appears feasible for Japan

to begin this particular structural change.
Second, Japan needs to integrate imports —
ularly of manufactured goods —
life.

partic-

more fully into its economic

The share of manufactures in Japanese imports today

is much lower than in any other industrialized country.
This phenomenon too derives from conditions which may
have been justified, and even necessary, in the past.

As

with export-led growth, however, Japan has simply become too
big to maintain an import composition so significantly different

- 18 from the other major countries.

Fortunately, as also with

export-led growth, Japan can well afford to adjust its policies
and performance in this area.

As the United States must adopt

and maintain an effective program of export promotion,
Japan must adopt and implement an effective program of
import promotion.
Conclusion
It is obviously too soon to know the response of
either, or both, of our countries to the enormously
complicated process by which structural change of a
politically sensitive nature can be brought about.
It may turn out that Americans will always consume more
energy per capita than citizens of other countries, and
that Japanese will always be a bit more effective competitors
in international trade.

But both have made a meaningful

start toward the essential international norm.

Other

nations must do so as well.
We do know that the costs of failure to proceed
down these paths would be very high.

All countries would

suffer grievously from the impact of inevitable global
instabilities if we cannot find ways to move, steadily and
decisively, toward a new equilibrium.
To date, however, we have only a start.
changes may take years to complete.
to move as fast as we can.

The needed

It is thus imperative

The rewards of success will be

great, and the penalties of failure extremely high.

FOR IMMEDIATE RELEASE
EXPECTED AT 10 A.M. EST
FRIDAY, MARCH 9, 1979
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
TASK FORCE ON NATIONAL SECURITY AND INTERNATIONAL AFFAIRS
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
Mr. Chairman. I am very happy to testify before
this Committee on the budgetary effects of our FY 1980
appropriations request for the multilateral development
banks.
Our participation in these banks is a particularly
cost-effective means of extending U.S. assistance to
poor countries and poor people around the world. This is
because they enable us to share the burden of providing
foreign economic assistance with other countries, and because
the banks leverage their limited paid-in capital subscriptions by borrowings in private capital markets based on our
callable capital subscriptions and those of other countries.
Other countries now contribute $3 to the banks for each
dollar which we ourselves make available. Twenty years ago,

B-1447

- 2 at the time that the Inter-American Development Bank and
the World Bank's International Development Association
were being formed, the United States contributed
three-quarters of all economic assistance, 35 percent
of all contributions to the MDBs and 50 percent of their
concessional funds.

We have reduced the U.S. share in virtually

every negotiation for replenishing the MDBs, and we will
continue to do so.
In addition, the capital structure of the banks permits
them to leverage their relatively small amounts of paid-in
capital by borrowing in private capital markets.

Indeed,

nine dollars are raised in the private capital markets for
each dollar which is paid into the banks with public funds.
In the case of the World Bank, cumulative U.S. paid-in subscriptions of $884 million since the Bank's establishment
in 1946 have supported gross lending of more than $45 billion
—

giving us leverage of more than 50:1 from our budgetary

contributions.
It is thus clear that the multilateral development banks
operate in a manner which is highly advantageous to the
United States from a financial point of view.

All these

financial and economic benefits would help justify the program,
however, only if the banks succeed in their fundamental
purpose —

stimulating economic growth in poorer countries

and helping poor people throughout the world.

- 3 With respect to reaching the poor, all of the banks are
showing considerable progress. The World Bank has established
ambitious goals and achieved significant successes
in reaching the rural poor — increasing productivity and
raising incomes through the use of improved seeds and
fertilizers, and the application of modern agricultural
methods. They have also set ambitious goals for themselves
in reaching the urban poor — providing sites and
services for low income housing, promoting employment
through labor-intensive practices in a number of
industries and looking for innovative ways to encourage
establishment of artisan and cottage industries.
In the Inter-American Development Bank, agreement was
reached last December that half of all lending for the next
four years will benefit low income groups. In addition, the Bank's
concessional resources are to be targeted on the poorest
countries in the hemisphere and at low income groups. In
the Asian Development Bank, new agricultural sector priorities
include expansion of rural employment opportunities,
extension of programs to benefit rural women, and improvement
in rural infrastructure such as feeder roads facilitating
farmers' access to inputs and enabling them to get their
production to market.
The multilateral development banks, of course, are extremely
effective in a wide range of operations. Over the years, they

- 4 have developed important skills in project design,
sector and country programming, macro-economic policy leverage
and infrastructure support. We want the banks to continue
these programs, along with their new emphasis on reaching
the poor directly, in ways which will promote both productivity
and equity, throughout the developing world — a large number
of countries of great and growing economic, political, security
and humanitarian interest to the United States.
This year the President has requested overall budgetary
authority of $3.6 billion for the banks. The request
consists of two parts: the first is $1,842 million for
paid-in capital subscriptions and for contributions to the
concessional windows of the banks, amounts which will eventually
result in budget expenditures. In addition, there is $1,782
million for callable capital subscriptions to the banks
which serve as backing for their borrowings in the private
capital markets and which are virtually certain never to
result in actual budget expenditures.
In terms of budgetary authority, this year's request
for the banks is slightly more than last year's request
of $3.5 billion and substantially more than the actual
appropriation of $2.5 billion for FY 1979. However, leaving
aside the amounts for callable capital, which will not produce
budget outlays, the request will result in expenditures
of $286 million or 13 percent less than the expenditures

-5called for in last year's request.

Compared to the expenditures

from last year's actual appropriation, expenditures resulting
from this year's request will be up by $211 million or
approximately 13 percent.
The actual outlays during FY 1980 that will result from
this year's request are limited to approximately $150 million.
Although we must make our subscriptions on schedule
in order to bring the burden-sharing agreements into effect
and enable the banks to enter into loan commitments,
U.S. funds are paid to the banks from the Treasury only
as they are needed to meet disbursement requirements under actual
loans or on the basis of an agreed drawdown schedule. This process
is spread over a period of many years with relatively small
pay-outs taking place in the first one or two years following
approval of individual loans.
My final point concerns the financial and economic
benefits that flow to the United States as a result of our
participation in the banks.

These benefits derive from

project related procurement of goods and services financed
through bank loans, bank administrative expenses in the United
States, net interest paid to U.S. holders of bank bonds, and LDC
growth due to bank financed development projects which has
helped stimulate the fastest growing market for U.S. exports.
Our studies show that U.S. real GNP increased between
$1.2 billion and $1.8 billion annually over the 1972-1977

-6period as a direct result of U.S. exports of goods and
services to markets created by MDB financed projects.

This

means that every dollar we paid into the MDBs generated
between $2.40 and $3.40 in real economic growth annually
over the most recent period for which data are available.
This growth in turn led to the creation of between
53,000 and 103,000 American jobs in each of those years.
The impact on U.S. GNP and job creation is still greater
when one takes account of the indirect effects of the
banks in promoting faster growth in the recipient countries
and the banks' administrative expenditures, including direct
employment of Americans, in the U.S. economy.
From the overall balance of payments perspective,
direct accumulated receipts by all segments of the U.S.
economy as a result of our participation in the MDBs have
exceeded outflows by $2.4 billion over the life of banks
up to the middle of 1978.

The indirect effects of faster

LDC growth would add further to this total as well.
This net figure of $2.4 billion encompasses U.S. merchandise
and services exports due to LDC procurement through MDB loans,
administrative expenses of the MDBs in the United States,
U.S. contributions and subscriptions to the MDBs and net
MDB portfolio capital flows into the U.S. capital market.
The multilateral development banks are thus not giveaway
programs.

From any angle we wish to examine their impact

—

-7on the budget, the balance of payments, the overall economy
the results are strongly positive.

—

The banks produce these

financial and economic benefits while helping us achieve
important foreign policy objectives of economic growth,
stability, security and avoidance of conflict in the developing
regions of the world.

We hope the Committee will include

the full request in its FY 80 budget proposals.

FOR RELEASE ON DELIVERY
March 8, 1979
10:00 A.M.

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE H.U.D.-INDEPENDENT AGENCIES SUBCOMMITTEE
OF THE SENATE COMMITTEE ON APPROPRIATIONS
Mr. Chairman and Members of this Distinguished Subcommittee:
I am pleased to present the Administration's initial
budget request for the National Consumer Cooperative Bank.
The National Consumer Cooperative Bank Act was signed
into law by the President on August 20, 1978. The Act
establishes a bank to make sound loans at market rates of
interest to cooperatives in a variety of fields. It also
creates an Office of Self-Help Development and Technical
Assistance within the Bank to extend capital advances and
to make management and technical assistance available to
cooperatives with special needs.
Last September the Administration established an Interagency Task Force, which I chair, to expedite implementation
of the Act. The Task Force held 19 public meetings on the

B-1448

- 2 Bank in Washington and around the nation.

At these meetings,

people who are members of cooperatives or who are interested
in forming cooperatives voiced deep interest in the Bank.
The Bank
The Bank is modeled on the highly successful Banks for
Cooperatives, which make credit available to agricultural
cooperatives. It was established to satisfy the unmet credit
needs of other cooperatives, particularly consumer cooperatives.
The Bank represents an effort by Congress and the Administration to achieve increased growth and stability for cooperatives in order to secure lower consumer prices, enhanced
power for consumers in the market place, and a fair share
in the benefits of cooperatives for low income people. The
request that I present today will allow the Bank to begin
moving toward these goals.
Like the Banks for Cooperatives, the Bank will initially
be financed with a government investment that will be redeemed
over time. And like them, it is intended to operate on a
sound and self-sustaining financial basis.
The Bank's Self-Help Development Office will be separate
from its lending operation. It's Self-Help Development Fund
will make capital advances, or soft loans, to cooperatives
which cannot secure adequate financing from hard loan sources.
These capital advances will help satisfy cooperatives' need

for equity and junior debt*. The advances will increase
cooperatives1^fahahfelal"Soundness and will help them qualify
for conventional loans'from the Bank and other sources.
This is particularly" important for new cooperatives and
for cooperatives serving low- income people. The Office's
technical assistance'prdgram will offer management and
technical assistance 'to cooperatives, including low-income
credit unions that are riot eligible to become borrowers.
Budget Summary
: —

. . ~#—*-

-

- ,

"*

\

••

Our budget request can be summarized as follows. For
FY 1979, we seek a $40 million appropriation for capitalizing
the Bank (purchasing its Class A stock).; $10 million for
capitalizing the Self-Help Development Fund; and $2 million
each for the Bank's administrative expenses and of the SelfHelp Office, which include the expenses of its technical
assistance program. For FY 1980, we seek an additional
$60 million for Class A stock, $20 million for the Self-Help
•

'

#

'

•

•

•

•

«

.

• "

•

•

•

•

Fund, $2,459 million for the Bank's expenses, and $6,441
million for the expenses of the Self-Help Office.
Capitalizing the Bank" «-*-<- . .
The' mbderate dapital investment1 that we have requested
is necessary: to 'establish the Bank as a sound, independent
entity capable'of*generating sufficient earnings from its
nation-wide business to repay the government's investment

- 4 over a reasonable length of time. Our PY 1979 request for
funds for purchasing Class A stock is significantly below
the $100 million authorized by Congres3 for that year.
However, our fiscal year 1979 and 1980 requests together
should satisfy the Bank's capital needs in those years and
firmly establish it a$ a self-sufficient, independent entity.
The Bank's Class A stock is preferred stock yielding
cumulative dividends.

The dividend rate will be determined

by the Secretary of the Treasury, who will take into consideration the market rate for Treasury securities of comparable maturity.

Until October 1, 1990, however, dividends

are limited to 25% of the Bankfs net income.
The government's investment will be repaid out of the
Bank's retained earnings and the proceeds of required purchases of stock by cooperative borrowers.

As I noted before,

the model for this procedure is the highly successful Banks
for Cooperatives in the Farm Credit System.

The statute

requires that the Bank retire the Class A stock as soon as
possible consistent with the Act's purposes.

Jt also requires

that the proceeds of all sales of Class B and C stock after
October 1, 1990 be used for this purpose.
Until all the Class A stock is redeemed, the President
of the United States will appoint at least six members of
the Bank's thirteen member board of directors.

Thereafter,

- 5 he will appoint only one. I expect that after its initial
organizational phase, the Bank will place a high priority
on retiring the Class A stock.

In this way the Bank will

be independent arid wholly controlled by cooperatives as
soon as possible.
Lending Policies
The Bank's objective is to make sound loans at market
rates of interest.

The statute requires that every loan

be fully repayable in accordance with its terms and conditions.

It also requires that as long as the Bank is making

loans from government capital, it must charge interest rates
that are at least equal to rates prevailing in the local area
for loans from other sources for similar purposes and maturities.
The loan program will thus be a hard loan program.
By the end of FY 1980, the Bank should have nearly
$100 million in loans outstanding if the requested appropriations are granted.

This would constitute a significant step

toward meeting the needs of cooperatives for conventional
credit.

Among the types of cooperatives assisted would be

food coops, housing coops, low-income agricultural coops,
energy coops, health care coops and handicraft coops.

By

statutory mandate, the Bank must use its best efforts to
see that 35% of the total goes to cooperatives serving lowincome people.

Low-income people will thus share substantially

- 6 in the benefits from increased growth in-cooperatives. In
order to assure that existing small businesses are not unfairly
harmed, the Bank will assess the impact of its loans on small
business.
The Bank is authorized to leverage its resources by borrowing in the credit markets. However, we assume that the
Bank will do no borrowing in fiscal years 1979 or 1980. We
also assume that the Bank will implement its guarantee program
on no more than a demonstration basis in those years. We feel
that the lack of a substantial track record would make it
difficult for the Bank to sell debt on advantageous terms in
these years. Sound business practice would thus lead it to
look solely to its equity capital as a source of funds. We
therefore ask that the Bank's authority to make or guarantee
loans be limited to $40 million in FY 1979 and $100 million
in FY 1980. The requested ceiling will allow the Bank to lend
its capital while keeping a reasonable reserve for losses
and for continuity of operations into FY 1981.
Salaries and Expenses of the Bank
The statute authorizes funds for the Bank's administrative
expenses. Our request would chiefly cover the costs of establishing and operating the Bank's direct loan program. Such
costs include hiring and training personnel, designing and
implementing loan procedures, acquiring and remodeling office
space, and the like.

- 7 Let me stress here that our request for administrative
expenses reflects assumptions about the Bank's structure upon
which its Board of Directors will ultimately decide. We
have assumed, for example, that the Bank and its Self-Help
Office will share many overhead services in order to secure
cost efficiencies and that the bulk of these shared services
(performed by roughly fifty full-time employees) would best
be located in the Bank proper. We have also assumed that
the Bank and the Self-Help Office will each maintain a separate
field staff of credit analysts.
The bank will have no funds at all until it receives a
FY 1979 appropriation. I therefore urge that you expedite
treatment of the FY 1979 request.
Capitalizing the Self-Help Development Fund
The Self-Help Development Fund is designed to promote
the growth and development of cooperatives that cannot obtain
sufficient funds from other sources, particularly cooperatives
that serve low-income people. The Fund's capital advances
are well suited for achieving this objective. They will
satisfy the need of many cooperatives for capital infusions
that are subordinated to ordinary debt.
The statute requires that applicants present an acceptable
plan for replacing capital advances with equity within thirty
years. It also requires that advances bear interest at a

- 8 rate determined by the Bank's Board of Directors. All
interest income and repayments of principal will be redeposited in the Fund's capital account. The requested capital
appropriations will enable the Fund to assist cooperatives
on a significant scale in fiscal years 1979 and 1980.
Salaries and Expenses of the Self-Help Office and the Technical
Assistance Program
Our request for the expenses of this Office is separate
from our request for the expenses of the rest of the Bank. It
covers the cost of setting up and operating both the Office's
capital advance program and its technical assistance program.
It also covers the Office's share of the cost of services
provided to it by the Bank.
The Office's technical assistance program will aid cooperatives with special needs, particularly those serving low-income
people. For many cooperatives, technical assistance is the
most important type of aid. Such assistance could include
training in management, bookkeeping, financial planning, contracting, serving on a board of directors, and membership
education. It could also include training in skills relevant
to a cooperative's particular line of business, such as produce
buying for food cooperatives, retail marketing for retail
cooperatives, or health care management for health care cooperatives. In many cases the Office may recover all or part
of the cost of assistance by charging fees.

- 9 Personnel
Let us turn briefly to the question of personnel. We
believe that the Bank will be able to operate effectively
and economically in fiscal years 1979 and 1980 with the
authority to hire 166 full-time employees. We have assumed
that roughly 101 of these employees will work under the
direction of the Bank's president and that roughly 65 will
work under the direction of the Self-Help Office's Director.
We have further assumed that roughly fifty of the employees
working for the President and roughly eight of the employees
working for the Director will perform services for the entire
Bank on a shared-cost basis.
This arrangement would help secure the cost savings
sought by Congress in consolidating the Office within the Bank.
I suggest, however, that the Bank should have discretion to
modify this structure within the overall personnel limit of
166 full-time employees.
* * *

Thank you, Mr. Chairman and members of the Subcommittee
for your attention. I will be happy to answer any questions
you may have.

For Release Upon Delivery
Expected at 10:00 a.m. E.S.T.
Statement of
Donald C. Lubick
Assistant Secretary of Treasury for Tax Policy
Before the
Senate Committee on Finance
Subcommittee on Taxation and Debt Management
March 12, 1979
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear again before this Subcommittee
to discuss the important income tax question of the appropriate tax treatment of appreciated property passing at
death.
The Tax Policy Question
Before the Tax Reform Act of 1976 the basis of property
acquired from a decedent was its estate tax fair market
value. This rule is commonly called "step-up" in basis.
The effect of step-up is to forgive forever the collection
of any income tax on appreciation that has accrued in
property held by an individual at death.
The enactment of carryover basis by section 2005 of the
Tax Reform Act of 1976 has prompted volumes of comment that
obscure the basic income tax issue carryover basis was
designed to address. It is appropriate, therefore, to begin
by identifying this issue.
To us the issue is not the workability of the 1976
carryover rules — we shall later in our statement elaborate
changes that will solve the technical problems under the
1976 Act. The issue is instead whether income tax liability
on gains accrued by a decedent at his death are to be entirely and irrevocably forgiven. The defenders of the pre1976 step-up rule must make a case to justify going back to
B-1449

- 2 that result, other than simply that it existed before 1976.
The Administration is committed to the principle that income
tax on appreciation accrued at death should not be forgiven.
Forgiveness is Unsound Income Tax Policy
As a matter of income tax policy step-up is unsound for
at least four reasons.
1. Horizontal and vertical inequity. Step-up discriminates arbitrarily among taxpayers and creates significant horizontal and vertical inequities. This can be
illustrated by a simple example.
Let us start by assuming that no estate tax is imposed
on the transfer of property at death. Further, assume that
on the same day two taxpayers, A and B, each bought shares
of stock in the same corporation for $10,000. A and B
decide to sell when the stock is worth $110,000. Each would
pay a capital gains tax of 25 percent on any recognized
capital gain. A goes into his broker's office and sells his
shares. He walks out into the street and meets his friend B
who is about to go into the broker's office to sell his
shares. They engage in animated conversation about what
each will do with his net after-tax proceeds of $85,000 and
fail to observe a speeding vehicle which strikes and kills
them both.
A sold his stock before he died.-- He realized a
capital gain of $100,000 upon which an income tax of $25,000
is due. His heir is left with $85,000 after the tax is
paid.
Compare B, who has died before he could sell his shares.
The shares pass to his heir with a new basis of $110,000.
B's heir can immediately sell the shares for that price and
pocket the entire $110,000.
Accidental, untimely death has caused A's heir to
receive $85,000 and B's heir to receive $110,000. The
result gives an unjustifiable advantage to B's heir.
Some assert that the income tax problem so glaringly
highlighted by the example does not really exist because the
1/

For purposes of illustration the technical question of
when a sale of stock is complete is ignored.

- 3appreciation in the shares owned by B is subject to estate
tax. If this assertion is true, the net amount received
after payment of both income and estate tax should be the
same for A's heir and B's heir.
To test the assertion, assume that the shares or their
proceeds in the estates of A and B are both taxed at a 30
percent bracket. A's estate after payment of income tax has
assets of $85,000. After the further payment of $25,500 in
estate tax, A's heir receives $59,500. On the other hand,
B's estate has assets of $110,000. When the shares of stock
are sold to pay B's estate tax liability of $33,000, B's
heir receives $77,000, $17,500 more than that of A. The
combined income and estate tax burden on B's heir is reduced
by about 35 percent from the burden on A's heir.
This example demonstrates two basic facts. First, the
estate tax and the income tax are two separate tax systems.
The estate tax applies to the transfer of property, the
income tax to the receipt of income. The estate tax is not
a surrogate for the income tax. It applies to wealth accumulated after payment of income tax as well as to wealth
that was not subject to income tax.
Second, the example demonstrates the disparate income
tax treatment which can occur solely due to the timing of
capital gain recognition. Thus, step-up permits those who
are able to accumulate wealth in the form of unrealized
appreciation to pass on that wealth free of income tax.
Those who have recognized capital gains, as well as salaried
individuals, can pass on only that which is left after
income tax has been paid. Only the wealthiest of American
taxpayers are in a position to live comfortably solely on
dividends, rents and interest derived from appreciating
assets they are rarely forced to sell. No policy justifies
granting this segment of society an income tax advantage
over the vast majority who are not in this enviable and
privileged position.
^his is not an extreme or hypothetical situation. Any
tax practitioner can recite from his own experience instance
after instance of advice by him to his clients to retain
assets that would otherwise be sold primarily to secure
forgiveness of income tax at death.

- 4 Several recent court decisions demonstrate the magnitude
of the problem. In Estate of David Smith,£J the Court found
the value of scrap metal owned by the decedent to be $2.7
million. Its basis was almost zero. Under step-up, virtually $2.7 in appreciation passed to the decedent's heirs
free of income tax. In Estate of Henry,i/ the taxpayer made
gifts of marketable corporate stocks totalling $6.7 million
with a basis of $115,000. The untaxed appreciation was
almost $6.6 million. In Owen v. Commissioner,^/ the taxpayer gave marketable American Express Company stock worth
$5.2 million with a basis of $1,200. Virtually the entire
$5.2 million passed free of income tax. In Bradford v.
Commissioner,^ property worth $2 million with a basis of
$283,000 was the subject of the gift. Over $1.8 million of
appreciation passed income tax free. In Johnson v.
Commissioner,-/ the property given was worth $500,000; its
basis was $10,800. Almost $490,000 of appreciation passed
income tax free.
This phenomenon is not restricted solely to those with
inherited wealth. As noted in a recent article in Fortune
magazine, "there are dozens — perhaps even hundreds — of
individuals who have amassed fortunes of $50 million or more
in privately held companies."-/ As the article shows, the
initial investment in these enormously successful enterprises is nominal when compared to their current worth.
The impact of forgiveness of income tax at death is
more significant as estate size increases. Table 1 demonstrates how estimated appreciation rises as a percentage of
the gross estate as estates increase in size.

2/

57 T.C. 650 (1972), Aff'd 510 F.2d 479 (2d Cir. 1975).
cert, denied 423 U.S. 827

3/ 69 T.C. 665 (1978)
4/ T.C.M. 1978-51
5/ 70 T.C. 584 (1978)
6/ 495 F.2d 1079 (6th Cir. 1979)
7/ "In Search of the Elusive Big
February 12, 1979, 12.

Rich", Fortune

- 5 -

Table 1
Appreciation as a Percent of Gross Estate by Sixe of
Gross Estate
(1979 Levels)

Size of
gross estate

($000)
Under 175

Appreciation excluding
Appreciation including
personal residence
personal residence
Gross
As a
As a
:
Average
estate
percent
percent :Average
Amount
Amount
per
of gross
of gross : per
return
estate
estate : return
(... $ millions
)(.. % ..)( dollars )( $mil. ) (.. % ..)(dollars)

$25,183

$4,386

17.4%

$18,000

$3,242

12.9%

$13,300

19.2 35,900 479

14.6 27,200

1,800

19.9 48,200 1,375

15.2 36,800

9,215

2,013

21.8 83,000 1,609

17.5 66,300

500 - 1,000

9,774

2,280

23.3 158,500 1,888

19.3 131,300

1,000 - 2,000

7,082

1,739

24.6 335,100 1,459

20.6 281,110

2,000 - 3,000

3,179

821

25.8 622,400 722

22.7 547,400

3,000 - 5,000

3,101

812

26.2 990,203 708

22.8 863,400

5,000 - 10,000

3,057

833

27.2 1,876,100 752

24.6 1,693,700

3,365

1,153

34.3 7,161,500 1,114

33.1 6,919,300

21.6%

17.5%

175 -

200

3,291

633

200 -

300

9,037

300 -

500

10,000 and over
Total

$76,284

$16,470

Office of the Secretary of the Treasury
Office of Tax Analysis

$47,700

$13,347

March 8, 1979

$38,600

- 6In fact, over 75 percent of appreciation is found in
estates of over $175,000, which comprise less than 4 percent
of decedents dying annually.
2. Revenue loss. Steo-up results in a significant
revenue loss. Under step-up, an estimated $20 billion in
accrued appreciation passes untaxed annually. The income
tax on this $20 billion is not just foregone in the year of
a decedent's death. It is permanently and irrevocably forgiven.
3. Economic distortions. Step-up also creates serious
adverse economic effects. The opportunity entirely to avoid
income tax on appreciated assets by holding those assets
until death distorts capital mobility by inducing individuals
to retain assets solely to obtain this benefit. The inducement to hold assets to avoid the payment of income tax
is referred to as "lock-in".
It is almost impossible to quantify the amount of
wealth that is "locked-in". This is because "lock-in" is a
negative phenomenon. It occurs when sales otherwise dictated by sound investment strategies do not occur. Of
course, the decision not to sell may involve other considerations which cannot be separated from tax-induced
"lock-in". Nonetheless, to the extent the income tax system
can be said to cause "lock-in", step-up is a major source of
that "lock-in". Those whose estate planning takes step-up
into account, and plainly this includes many elderly taxpayers and most taxpayers with large accumulations of
unrealized appreciation, will inevitably find their decision
whether to hold or sell affected by this provision.
Congress in 1978 relied upon revenue from higher sales
volume to justify increasing the capital gains exclusion
to 60 percent. The "lock-in" effect of step-up will undermine the goal of the reduced capital gains rates enacted by
the Revenue Act of 1978. The purpose of the reduced capital
gains rate was to unlock capital in the form of unrealized
appreciation in assets that were not being sold because of
the allegedly excessive tax burden imposed on the sales
proceeds. This goal will not be met if taxpayers have the
opportunity to avoid tax entirely by holding appreciated
property until death.
"Lock-in" can best be reduced by treating death as a
recognition event. If unrealized appreciation were taxed at
the current long-term capital gains rates, a significant
amount of the "lock-in" effect would be eliminated.

- 7As to "lock-in", carryover basis is a second best
approach. It somewhat reduces the "lock-in" effect for
investors concerned with estate planning, since complete
forgiveness is eliminated. However, if the property continues to appreciate in value, the capital gains tax would
be greater when the heirs consider selling, and then their
"lock-in" would be somewhat increased. ^hus, "lock-in"
would be decreased for some but increased for others. The
net effect on aggregate "lock-in" cannot be determined
fairly.
4. Disparate basis treatment for lifetime gifts and
accrued but unpaid income items.
Carryover basis for
property acquired by lifetime gift has been the law since
1921. Similar treatment has existed since 1942 even in the
case of property passing at death that consists of compensation, pension benefits and unpaid installment obligations
from the disposition of property. Yet, most property
acquired by gift at death received a new basis. Lifetime
and deathtime transfers should be treated similarly for
income tax basis purposes.
The Shortcomings of Forgiveness are Not Newly Recognized
The case against forgiveness on the grounds of inequity,
revenue loss, adverse economic effects and structural inconsistency is overwhelming. It is not surprising that these
deficiencies have long been recognized and that a number of
responsible proposals to cure the problem were suggested
prior to the 1976 Act.
In 1963, while proposing that the gain on the transfer
of a decedent's assets at death be subject to income tax at
that time, Secretary Dillon stated:
The prospect of eventual tax-free transfer of accrued
gains with a stepped-up basis equal to the new market
value ... distorts investment choices and frequently
results in complete immobility of investments of older
persons .... The reduction in capital gains rates
alone would not effectively deal with the lock-in
problem. Without this broader, more equal capital
gains tax base, there would be noRiustification for
8/ Hearings
President's
1963rates.-/
Tax Message Before the House
loweringcn
capital
gains tax
Comm. on Ways and Means, 88th Cong., 2d Sess., 49 (1963).

- 8 While President Kennedy's 1963 proposal was not adopted, the
House Ways and Means Committee did at one point tentatively
adopt carryover basis as a solution.
The 1969 Treasury Department Tax Reform Studies and
Proposals also included a proposal to subject to income taxation the appreciation in the value of assets transferred at
death.2/ The proposal was addressed to the following
deficiencies of step-up:
[I]nequality in the income tax treatment of people who
accumulate their estates out of currently taxable
income as compared to those who accumulate estates by
means of unrealized capital gains.
At least $15 billion a year of capital gains fallfing]
completely outside the income tax system.
[U]ndesirable economic effects because of the resulting
"lock-in" effect. 11/
By 1976, Congress was prepared to address the issue.
Forgiveness was repealed and carryover basis was substituted,
effective for estates of decendents dying after 1976. The
reasons for change were:
Present law [step-up] results in an unwarranted discrimination against those persons who sell their
property prior to death as compared with those whose
property is not sold until after death. Where a person
sells appreciated property before death, the resulting
gain is subject to the income tax. However, if the
sale of the property can be postponed until after the
owner's death, all of the appreciation occurring before
death will not be subject to the income tax.
This discrimination against sales occurring before
death creates a substantial "lock-in" effect. Persons
in their later years who might otherwise sell property
are effectively prevented from doing so because they
realize that the appreciation in that asset will be
taxed as income if they sell before death, but will not
be subject to income tax if they hold the asset until
9/
10/

U.S. Dept. of Treasury, Tax Reform Studies and Proposals,
81st Cong., 1st Sess., 28, 42, 107-111, 331-340 (1969).
Ibid, at 331.

- 9their death. The effect of this "lock-in" effect is
often to distort allocation of capital between competing sources.±1/
A problem of substantial magnitude existed under stepup, the problem had long been recognized and it was resolved
in an acceptable manner through the enactment of the carryover basis concept. Technical problems with the statutory
provisions that have surfaced since enactment should not
obscure this achievement.
The Arguments For Step-Up Forgiveness
The 1976 repeal of step-up prompted a large volume of
comment. It is important to examine carefully the substance
of this comment to identify legitimate questions.
1. Death is a "tax loophole". The assertion has been
made that those who favor repeal of step-up view death as a
"tax loophole." The issue is whether property which passes
at death should be treated the same as property which passes
inter vivos. It is not true that the repeal of step-up
discriminates against people who hold property until death.
Deferral of taxation aside, it simply places those individuals
on an equal income tax footing with those who have not
accumulated wealth in the form of unrealized appreciation
and held it until death.
2. Repeal of step-up will result in a new tax. Some
assert that the repeal of step-up constitutes a new tax.
This is untrue. There is no new tax imposed if step-up is
repealed; rather certain property on which deferred income
tax was forgiven now becomes subject to that tax. This is
not a semantic point. As the Chairman of this Subcommittee
stated in a recent address before the New York State Bar
Association, "tax laws should apply equally to all taxpayers." When they do not, they should be changed. Forgiveness results in taxpayers who have sold property before
death being treated differently than those who did not. The
result is unequal application of the laws.
3. The expectancies of those who relied on step-up
must be protected. It is alleged that the repeal of step-up
11/ House Committee on Ways and Means Report, Estate and
Gift Tax Reform"ACt of 1976, H. Rep. No. 94-1380, 94th
Cong., 2d Sess., 36-37 (1976).

- 10 dashed the expectations of those who relied on that provision in making investment decisions. The answer to real,
and not imagined, difficulties regarding expectations that
should be protected lies in appropriate transition rules.
The original carryover basis provision in H.R. 14844 contained no transition relief. To protect legitimate expectations, the transition rule, known as the "fresh start"
adjustment, was added by the Conference Committee. If that
provision does not achieve its intended purpose, it is
appropriate to reexamine it and make necessary modifications. But it is totally inappropriate to retain step-up
forgiveness because the transition rule may require adjustment.
4. Repeal of step-up results in tax on inflation
gains only. Some assert that step-up should be retained
because much of the appreciation that would be subject to
tax under an alternative system is attributable to inflation. The amount of appreciation involved in the gifts of
property noted in the cases cited earlier demonstrate that
this is not the case. There is no way that inflation can
account for increases in value of that magnitude. But even
if it were true, the simple example of A and B provides a
total response. Each was equally affected by inflation and
yet the heirs of each receive different amounts. While the
effects of inflation are a matter to which the Administration is devoting considerable attention, it is neutral in
this context.
5. Death is an inappropriate time to impose income tax.
Some of the comment over repeal of step-up has as its core
the notion that it is inappropriate to treat the involuntary
event of death as an income tax recognition event. This
argument does not lead to the conclusion that forgiveness is
correct. Rather, if accepted, it would lead one to adopt
carryover basis. This is because under a carryover basis
system no income tax is imposed until an appreciated asset
is sold. Moreover, the argument ignores the fact that death
is one of the few times an accounting of wealth is made for
tax purposes.
6. Repeal of step-up is unnecessary because unrealized
appreciation is subject to estate tax. As I noted earlier,
some assert that it is not necessary to subject unrealized
appreciation to income tax because that unrealized appreciation is included in the decedent's estate and is subject to
estate tax. This argument is rebutted by the simple example
of A and B, one of whom sold his assets before death and the
other who did not.

-lilt has been suggested that, to the extent the argument
against step-up forgiveness involves concern over the
revenue loss attributable to the $20 billion dollars of
unrealized appreciation passing untaxed annually, the
solution is simply to raise estate tax rates. However,
there is nothing like the uniformity in the ratio of appreciable assets to estate size, between taxpayers having
the same estate size, that would be required before consideration could be given to substituting an estate tax
increase for repeal of step-up.
A simple increase in estate tax will not result in
fairness for income tax purposes between estates of the same
size.
If it is believed that carryover results in too great
an overall tax burden, it would be fairer to lower estate
tax rates for all estates than to forgive income tax liability.
If the Subcommittee desires, we would be happy to work with
it to analyze this question. But the question of overall
tax burden cannot be permitted to obscure the basic issue
forgiveness raises: the equitable income tax treatment of
those who have realized gain prior to death as opposed to
those who have not.
7. Carryover basis or subjecting unrealized
appreciation to graduated income tax rates at death is
regressive. The Committee may hear testimony that the 1976
carryover basis provision is regressive by estate size.
A basis adjustment is made to account for the fact that
estate tax has been paid on property that has been valued
without taking into account the contingent income tax
liability on unrealized appreciation. Because of this basis
adjustment the increase in overall tax for a given amount of
appreciation will decline as the size of the estate increases.
This is said to be regressive.
It is, of course, true that for estates in the 70
percent bracket, forgiveness of income tax only lets the
heirs keep 30 cents for each dollar of income tax that is
avoided while in the 40 percent estate tax bracket the
advantage of step-up forgiveness is 60 cents on the dollar.
Carryover merely eliminates the advantage to the extent it
exists. There is no more regressivity here than in the
allowance of a deduction for administration expenses that is
worth 70 cents on the dollar to a very large estate and
nothing to a very small estate. Yet the deduction is
necessary to measure the estate transferred. The adjustment

- 12 simply assures that the estate tax applies to the correct
transfer tax base, the gross estate less the amount of
accrued income tax liability.
8. Any system other than step-up cannot work because
proof of basis problems are insurmountable. This Subcommittee
Has previously received testimony and submissions to the
effect that no system which relies upon the need to determine
the basis of assets transferred at death can possibly work.
The assertion is that either taxpayers do not keep adequate
records of the acquisition cost of assets during their lives
or if they do, those records somehow disappear at death.
This problem did not deter Congress when it first
enacted the income tax. The basis of property held on
March ], 1913 was its value on that date or historical cost
and the income tax system managed to work. The Canadians
adopted a similar basis rule when they first treated gifts
and deathtime transfers as recognition events. Their system
has not posed significant basis determination questions.
Both Canadian government authorities and private practitioners inform us. that the issue of proof of basis has not
even been a matter of public discussion. Moreover, carryover of basis has not caused significant difficulties for
property transferred by gift or items of income in respect
of a decedent passing at death. These carryover provisions
have existed since 1921 and 1942 respectively. Nonetheless,
we understand that the American Bankers Association, and
perhaps others, will submit a number of actual cases in
which, during the period carryover basis appeared to be in
effect, executors had difficulty determining the basis of
assets. We look forward to examining this report so that we
can determine independently the scope of this problem and
suggest appropriate solutions.
Notwithstanding the data which may be submitted,
several fundamental points are relevant. First is the
necessity of recordkeeping to provide for the case of a
lifetime sale or other disposition of property. Second is
the question of the types of assets for which it is reasonable to assume taxpayers retain cost records. Third is the
standard to which taxpayers who acquired assets prior to the
effective date of any new system should be held. Once these
three issues have been examined it is possible to design a
system which takes into account legitimate record keeping
problems.

- 13 Under our income tax system (and for gift tax reporting
purposes), an individual who acquires property should retain
cost basis information. That information will be relevant
if that property is sold or given away. Even under step-up
forgiveness, records were unnecessary only if a taxpayer
knew with absolute certainty that the particular asset would
be held until death. Since most taxpayers pay for assets
they acquire, and all taxpayers are interested in reducing
tax on sale, it is in their interest to retain or obtain
cost records. Otherwise secondary evidence will be needed
to establish some basis or the entire sale price will be
taxable.
We believe most taxpayers recognize this and do retain
cost records for most assets. Whether those records are
readily accessible or in a form which could be understood by
others is a different question and one to be examined in the
context of transition relief. However, it is simply not
true that the vast majority of taxpayers of this country
fail to keep records as to the acquisition cost of the vast
majority of assets they acquire, especially investment
assets held by the wealthiest 2 percent of taxpayers.
The proposition that record keeping problems should
control whether tax is imposed on an otherwise clearly
taxable event would, if carried to its logical extreme, mean
that only "easily measurable" income should be taxed. It
also implies that the determination whether income is
"easily measurable" rests entirely with the taxpayer. Thus,
the taxpayer can, in his own discretion, control whether
sufficient records exist to determine his income tax liability.
If he fails to maintain records, income becomes hard to
measure and hard to measure income is not subject to tax.
Forgetfulness should not be blessed with forgiveness.
Records regarding the acquisition cost of closely held
corporation stock may be difficult to find but should be
capable of reconstruction. In the case of partnerships and
subchapter S corporations past income tax returns will
provide basis information. For those who are engaged in
sole proprietorships, past income tax returns will show the
basis of depreciable assets.
If acquisition cost records do not exist with regard to
investment real estate, it is usually possible to recreate
or estimate basis by a number of methods. For example, many
deeds state the purchase price of real estate. Transfer tax

- 14 stamps or local property tax assessments may also provide
guidance. The basis of marketable securities can be estimated by reference to market quotations on or about the
acquisition date.
We recognize, however, that record keeping problems do
exist with regard to certain types of assets and that it is
necessary to address these problems in designing appropriate
relief. For example, many taxpayers may fail to retain
records of the cost of items of tangible personal property
such as furniture, clothing, collections of nominal value
and the like. Many taxpayers also fail to keep accurate
records with regard to improvements to personal residences.
Problems with records for property acquired prior to
the effective date of the repeal of step-up must be distinguished from problems which may occur thereafter. Congress
must assume that any justification for failure to keep
records disappears once taxpayers are on notice that assets
acquired after the effective date are subject to the new
statute. Step-up cannot be retained just because there are
fears that taxpayers will not keep records.
Therefore, the record keeping problem the Subcommittee
should focus upon is that of basis information for assets
acquired prior to the effective date of the repeal of stepup. Our experience under the income tax when originally
enacted and the recent experience of the Canadians indicate
that this should not be a serious problem. Moreover, the
problems that do exist should be alleviated by the "fresh
start" concept adopted in 1976.
Under this approach, the basis of property in the hands
of an heir is the greater of historical cost or value on
December 31, 1976. Two rules exist to determine value on
December 31, 1976. If the property was a marketable security,
the value is the market quotation. The December 31, 1976
value of all other property is determined by pro-rating
appreciation from the date of acquisition to the date of
death on a daily basis and adding to the acquisition cost
that portion of the appreciation attributable to the holding
period prior to December 31, 1976. However, under the 1976
rules, the fresh start adjustment is available only for
purposes of determining gain. Thus, historical cost is
also important because it is the only, basis upon which a
loss may be recognized.

- 15 Under this system of transition relief records play an
important role. However, a few simple changes should
resolve the record keeping problem for the vast majority of
taxpayers. For example, consider the following. The
present $10,000 personal and household effects exclusion
would be increased to $50,000, property subject to the
exclusion would be expanded to include tangible personal
property which was a capital asset in the hands of the
taxpayer, and excluded assets would be determined in ascending order of value as reported on the decedent's estate
tax return. The basis of property acquired prior to the
effective date would continue to be the greater of acquisition cost or the fresh start value but the fresh start value
would be available for determining both gain and loss.
Fresh start value for marketable securities would be the
market quotation on the relevant valuation date. Certain
classes of property the value of which will not increase
after the valuation date (such as notes or selected types of
preferred stock) would be treated like marketable securities
for this purpose. All other property would have the fresh
start value determined by use of a generous formula starting
with estate tax value and assuming annual appreciation of
6 percent, subject to a minimum in any case of 25 percent of
estate tax value. That is, the fresh start value would be
determined by dividing estate tax value by a number from a
table which would contain the appropriate discount rate.
The discount back formula would replace the present time
apportionment method.
In this system, historical cost is relevant only if it
exceeds fresh start value. It is not needed to determine
fresh start value as is presently the case.
It is true that historical cost may exceed fresh start
value and executors may still feel pressured to find historical cost. In the case of almost all property, however,
it should be possible for the executor to make an educated
judgment as to the likelihood of historical cost exceeding
fresh start value. Where that is probable, we also believe
satisfactory information to recreate basis will exist.
However, if the Congress feels that finding historical cost,
even after taking into account this generous fresh start
relief, is still a burden it could simply say that the basis
of assets acquired prior to the effective date will be equal
to the fresh start value.
A solution such as that set forth above should eliminate
proof of basis problems for the bulk of the examples which

- 16 will be presented to the Subcommittee for assets acquired
prior to the effective date. As for assets acquired after
the effective date, taxpayers are put on notice of the need
to retain basis records. Special relief is provided for
household effects and the like.
In short, we believe the proof of basis issue is a red
herring. We agree with the Special Tax Counsel to the Trust
Division of the American Bankers Association, Richard B.
Covey, who stated in a recent article that objections to
carryover basis on the ground that proof of basis problems
were so severe as to merit a return to step-up were "premature, at least until a reasonable trial period has
passed."12/
9. Carryover basis delays the probate of estates,
inordinately increases the cost of estate administration and
presents irreconcilable fiduciary conflicts. The allegation
is made that carryover basis, solely by introducing a new
concept to be taken into account during estate administration, frustrates efforts of the probate bar to simplify
the administration of estates. It is true that any departure from step-up introduces additional complexity.
However, if the proposals we suggest are adopted this
complexity will not exist for 98 percent of the estates
coming into existence annually. The question is whether
carryover basis unduly affects and delays administration of
the estates of the remaining 2 percent.
If our proposals are adopted, much of the anticipated
difficulty and cost of administration of carryover basis is
eliminated. The aggregate cost of compliance will be
insignificant compared to the revenue it generates and the
increased income tax equity it produces.
It is also alleged that carryover basis improperly
intrudes in estate administration by creating an entirely
new set of considerations to be taken into account in distributing assets to various beneficiaries. While by no
means certain under applicable state law, it is possible
that a fiduciary may have to take income tax basis into
account in making distributions.
If this is an assertion that fiduciaries are incapable
of administering estates when they must take tax consequences
into account, it is a curious one. Estate planning and
administration is replete with tax considerations. The tax
literature abounds with learned discussions of various
minimization techniques. Entire books have been written on
12/ Covey and Hastings, "Cleaning up Carryover Basis," 31 T n e
Tax Lawyer 615, 695 (1978).

- 17 subjects such as the marital deduction. Law schools devote
entire courses to estate planning and administration. Many
wealthy taxpayers, who also happen to be those who would be
affected by the repeal of step-up, often pay substantial
legal fees to tailor estate plans to minimize taxation.
If this argument is premised on the fact that property
with bases different from estate tax value cannot be dealt
with by fiduciaries, it is also rather curious. The real
world is complicated for those administering large estates.
Fiduciaries must already make choices which have both tax
consequences and affect the net amounts received by beneficiaries and they are not clamoring to have these elections
eliminated. For example, fiduciaries must decide whether to
file a joint or separate income tax return for the year of
the decedent's death; whether to claim expenses as estate or
income tax deductions; whether to elect the alternate
valuation date; whether to elect special use valuation;
whether to elect to pay estate tax in installments; whether
to distribute property in cash or in kind; whether to
receive retirement benefits in other than a lump sum; the
choice of a fiscal year; whether to accumulate or distribute
estate income; which assets to sell and how to reinvest the
sales proceeds; when to settle claims and when to terminate
administration. Carryover basis considerations do not
materially add to these decisions. Indeed, in the more
sophisticated estate plans, decisions with regard to the
administration of formula marital deduction clauses make the
alleged carryover basis problems pale in significance.
The Choices
I have previously stated that the Administration is
committed to the principle that income tax on appreciation
in assets held at death should not be forgiven. The choices
as to how to tax this appreciation are two: treat death as
a recognition event for income tax purposes or provide that
the decedent's basis carries over to his estate and heirs.
There are a number of principles that should be applied
in making this choice. First, the system should be as
simple as possible consistent with the principle that
similarly situated taxpayers should be treated similarly.
Second, the system should intrude as little as possible in
the estate administration process. Third, where the system
may produce hardships, such as liquidity problems, those
issues should be identified and dealt with in a fair manner.
Fourth, the treatment of lifetime and deathtime transfers
should be the same.

- 18 Any system without step-up forgiveness is more complicated than a system with step-up. There is no question
that forgiveness is simple. There is no need to determine
basis and so long as an individual does not sell an asset,
inaccurate or nonexistent records present no problems.
However, this argument proves too much. Nontaxation is
always the simplest system and an argument as to simplicity
can be made with regard to almost any taxing provision, including deductions or credits.
There is much to be said in favor of treating the
transfer of property at death as an income tax recognition
event. It achieves parity between taxpayers who sold
property before death and those who did not, with those who
held assets until death still retaining the advantage of tax
deferral on unrealized appreciation. Such a system could
be more simple than carryover basis because accounts would
finally be settled at death. Alleged fiduciary problems
encountered in taking into account potential income tax
liability in connection with the distribution of property to
various beneficiaries would be eliminated. The distortions
of "lock-in" would be lessened. Finally, basis adjustments
to account for estate tax attributable to unrealized appreciation would be eliminated.
The Treasury Department believes that treating a
transfer at death as a recognition event is an entirely
acceptable solution to the step-up problem. We have devoted
considerable time over the last several months on the development of alternatives to implement such a system, including
an examination of the two forms of "Additional Estate Tax"
until recently favored by the American Bankers Association.
If the Subcommittee indicates an interest in pursuing this
course, we would be willing to supply these materials when
we have completed our work on them.
I have also indicated that, in concept, carryover basis
represents an acceptable solution to the forgiveness problem.
However, we agree experience has shown that the 1976 Act
statutory structure could be improved.
Recognizing this, Treasury has made a major effort to
meet with interested professional groups and individuals to
learn of their specific concerns and their suggestions for
change. We have received valuable assistance from the
American Institute of Certified Public Accountants, the
Trusts and Estates Law Section of the New York State Bar

- 19 Association and individual members of the Special Carryover
Basis Committee of the Tax Section of the American Bar
Association, to name just a few. .This hearing, we hope,
will provide another opportunity for the public to suggest
to the Subcommittee and Treasury their proposals for modifications.
At this time I should like to examine the complaints
regarding the operation of the 1976 carryover basis provision
that have been registered with the Subcommittee in prior
hearings, and propose solutions to them. I shall divide my
discussion of these problems into three areas, the basic
statutory provision, the transition relief afforded by the
fresh start adjustment and liquidity issues.
1. The Basic Statutory Provision
a. The provision is overbroad because it applies
to the estates of many decedents who are not required to
file estate tax returns. We recommend that in general,
carryover basis would apply only to those estates for which
estate tax returns are required. The basis for assets held
by estates not required to file Federal estate tax returns
would be determined under step-up. Executors of nonfiling
estates would not, therefore, be concerned with the basis of
any property included in the estate except, as under present
law, items of income in respect to the decedent. This
change would eliminate approximately 98 percent of decedents
dying annually from the operation of carryover basis.
It has been alleged that this change is purely a
political expedient and that subjecting only 2 percent of
decedent's estates to carryover basis violates the principle
that the tax laws should apply equally to all taxpayers.
Carryover basis will indeed apply to a small segment of
decedents dying annually, but that small segment is the
segment that owns more than 75 percent of all appreciated
assets.
An increase in the minimum basis from $60,000 to
$175,000 necessarily accompanies this proposal. Thus, the
minimum basis assures that equality of tax benefit is given
to large estates as well as small. Moreover, we believe the
allocation of the minimum basis should be changed so that it
does not depend upon a formula. Rather, the minimum basis
would be allocated in the discretion of the executor first
to capital assets and then, if any minimum basis remains, to
assets which would produce ordinary income in whole or part
when sold by the estate or heir.

- 20 The change in the allocation method will provide some
measure of liquidity relief in those instances where the
executor must sell assets to meet estate liabilities. It
also eliminates the necessity to recompute the allocation of
the entire minimum basis if there is an audit adjustment to
the value of the property in the estate.
Minimum basis would be calculated prior to the death
tax basis adjustment. This reverses the order of computation
under the present provision. The minimum basis will therefore
constitute a floor to which the death tax adjustment can be
added rather than a cap as is presently the case.
k* The amount of the "personal and household
effects" exclusion is too small and the term is ambiguous.
The present exclusion would be increased to $50,000. To
eliminate definitional ambiguity and relieve executors of
the task of choosing excluded assets, the exclusion would be
available to all items of tangible personal property that
were section 1221 capital assets of the decedent. Assets
subject to the exclusion would be selected in ascending
order of value as shown on the decedent's estate tax return.
In addition to eliminating questions of fiduciary choice,
this expanded exclusion will solve the proof of basis
problem for many of those who own collections.
c. The present death tax adjustments are unduly
complicated, are computed by reference to an incorrect rate
and require recomputation for all assets if the value of one
asset is changed on audit. A simplified single death tax
adjustment would replace the three separate but interdependent
adjustments required under present law. A percentage number
would be taken from the estate tax rate table and applied to
each item of appreciated property subject to estate tax.
The percentage to be applied would be the highest tax rate
to which the estate is subject before any credits are
applied, except that if an estate does not have at least
$50,000 of property subject to tax in that bracket the next
lower rate would apply.
To illustrate, a taxable estate of $400,000 will be in
the 34 percent bracket. Each item of appreciated property
used to fund a taxable bequest would receive a basis increase
equal to 34 percent of the appreciation in that property.
The total federal estate tax payable on a $400,000 estate,
after subtracting the $47,000 unified credit, is $74,800, or
approximately 19 percent of the total estate. Yet, in this
case, the adjustment would be 34 percent. Under the 1976
Act provision, the 19 percent average tax rate would have
been used.

- 21 Where an estate is nontaxable because of the unified
credit, an adjustment, based upon the estate tax rate
schedule would nonetheless be allowed. The allowance of an
adjustment in this case permits an ample adjustment for any
state death taxes.
No adjustment would be made where the decedent's estate
was not required to file a federal estate tax return. In
that case step-up will apply.
The move to a single death tax adjustment, computed at
the highest marginal estate tax rate, has been uniformly
applauded as a major simplification by all with whom we have
consulted. Indeed, Mr. Covey, has commented:
. . . The Treasury approach ... is commendable and a
major step towards simplifying the complex and defective section 1023(c) and (e) adjustments. When
combined with the proposed $175,000 minimum basis and
with a computation of minimum basis before rather than
after the adjustment for estate tax on appreciation, a
fair overall result is achieved even though no direct
adjustment is given for state death tax. In effect an
adjustment is given for state and foreign death taxes
in amounts equal to the section 2011 or 2014 (or
treaty) credits because thejmarginal federal estate tax
rate is a precredit rate.—'
The proposal has been criticized, however, on the
ground that it does not permit a basis adjustment for state
death taxes that exceed the amount allowed as a federal
credit. It is true that state death taxes in excess of the
federal credit do not result in an additional basis increase.
However, one would question whether it is appropriate to
give a federal tax adjustment for state taxes in excess of
the credit amount. Rather, if a state's death taxes are too
high, the problem should be resolved by the state. Moreover,
the adjustment is computed at the highest applicable marginal
federal estate tax rate, and therefore may result in an
over-compensation because much of the estate has been
subject to tax at rates less than the highest marginal rate.
In addition, the adjustment is available without regard to
13/
Covey and
Hastings, "Cleaning
the amount
of depreciated
property Up
in Carryover
the estate.Basis", 31
The Tax Lawyer 615, 647 (1978).

- 22 The most recent commentary of the American Bankers
Association makes much of the failure to adjust for state
death taxes. However, Mr. Covey makes the argument in
opposition eloquently when he states, using New York as an
example, that:
The understatement of the basis increase for the New
York estate tax on appreciation will most frequently
occur when all of the appreciation is taxed in only one
rate bracket for federal purposes. To illustrate, for
a taxable estate in excess of $10 million with all
appreciation taxed in the top rate bracket, the basis
increase on the Treasury approach is $7 0 for each $100
of appreciation while under an exact method the increase would be $75 for each $100 of appreciation. If,
however, the appreciation was taxed in two or more
federal rate brackets, the federal basis increase under
the Treasury approach would be overstated when compared
with the result of an exact method. This point can be
seen by taking estates of various sizes which are all
appreciation. In such a case, the Treasury approach
would exceed the basis increase under an exact method
until the taxable estate exceeds $60,000,000. (Emphasis
added).11/
Mr. Covey goes on to state:
Major simplification would be achieved under the
Treasury approach because the basis increase would in
most cases not be "suspended." A change in the increase would be required only if as a result of the
audit of the federal estate., tax return the estate is
moved up in a rate bracket.—'
While this adjustment is generous in most cases, this
generosity does not significantly affect horizontal equity,
achieves a fair result and is consistent with the principle
that complexity should be avoided where it is possible to
achieve a comparable result in a simple manner.
d. It is unnecessarily time consuming to require
the death tax adjustment to be computed separately for every
asset included in the decedent's estate. Since the death
tax adjustment is a single percentage, it is simple.
14/

Ibid., 647-648.

15/ Ibid., 648.

- 23 Moreover, the executor would be permitted to elect to
average the basis of similar items of property acquired at
different times. For example, the basis of mutual fund
dividend reinvestment shares or shares of stock of the same
corporation acquired at different times could, at the
executor's election, be averaged. The simplified single
death tax adjustment would then be applied to the average
basis rather than the actual basis of each share. This
proposal would also simplify executors' decisions regarding
the distribution of appreciated assets. All similar property
would have the same basis and inherent gain would be the
same.
e. Special rules are needed for personal residences.
We propose two changes. First, if unused, the $100,000
personal residence gain exclusion would be available to the
decedent's executor on an elective basis as a positive basis
adjustment, without regard to the decedent's age but with
the consent of a surviving spouse required. This would
coordinate the 1978 Revenue Act changes with the carryover
basis system. Second, an annual addition to basis (for
example, $250), would be permitted for personal residences
acquired after the effective date of the statute to account
for improvements, unless a larger amount could be substantiated
in any year. This would mitigate the record keeping problem
for minor home expenditures.
f. The present reporting requirements are unduly
burdensome. If the foregoing proposals are adopted, basis
information reporting would be required only from executors
of the less than 2 percent of estates subject to carryover
basis. Penalties would be assessed pursuant to a negligence
standard only.
g. The basis of carryover basis property remains
uncertain until that property is disposed of in a transaction
in which basis becomes relevant. A procedure would be
created pursuant to which executors could achieve a final
determination of basis, binding upon both the executor and
the Internal Revenue Service, at the time of audit of the
decedent's estate tax return. A number of the groups with
whom we have consulted have suggested that such a procedure
is essential to resolve basis uncertainties and simplify the
long-term administration of carryover basis.
2. Transition Relief
a. The fresh start rule applicable to nonmarketable property poses insurmountable proof of basis problems.
This question was addressed earlier. To reiterate, the

- 24 discount back rule of the Revenue Act of 1978 would be
applied at a rate of 6 percent to determine the fresh start
basis for all property held on December 31, 1976 other than
marketable bonds and securities. The application of this
formula could in no event result in a basis less than 25
percent of estate tax value. The present formula which
apportions appreciation ratably on a day-to-day basis would
be abandoned.
Historical cost would be important only if it exceeded
the fresh start value. If this is deemed to impose undue
burdens on executors, the discount back formula could be the
sole method.
b. The fresh start adjustment unfairly discriminates against nonmarketable property, because its fresh
start basis can never exceed estate tax value. It is true
that the fresh start value of nonmarketable property cannot
exceed estate tax value.
One solution is to provide a "national appraisal date"
and permit the appraised value of property on that date to
be its fresh start value. Congress specifically rejected
this alternative in 1976 and we think it was wise so to do.
Even if one believes in the veracity of appraisals, it is
questionable whether all taxpayers should be put to the
expense of obtaining such appraisals when it is not clear
that the appraised property will be held until death. Moreover, in the real world, even contemporaneous appraisals are
the subject of substantial dispute. It is, therefore,
reasonable to anticipate administrative problems when the
validity of an appraisal is examined many years in the
future. These facts lead to the conclusion that the appraisal
technique is not appropriate. The discount back formula is
a reasonable alternative.
Certain types of nonmarketable property would be
treated as if they were marketable securities for purposes
of this fresh start rule. There are assets, the value of
which will not change substantially from the fresh start
date to the date of death. It is unfair to subject these
assets to fresh start value determination under a discount
back formula. Therefore, we propose that nonconvertible,
nonparticipating preferred stock be given fresh start value
equal to its redemption price on the fresh start date.

- 25 In addition, the Secretary would be granted regulatory
authority to devise alternatives to the discount back formula
for assets which will not substantially appreciate in value
after the fresh start date, such as nonmarketable notes, and
assets the value of which could be readily ascertained as of
December 31, 1976 by a method other than appraisal. An
example of the latter is property subject, on the fresh
start date, to a binding buy-sell agreement that has the
effect of fixing estate tax value. The fresh start value
would be determined by reference to the formula set forth in
the agreement.
c. The fresh start basis should be available
for purposes of both gain and loss. Treasury agrees. This
change would eliminate the need to retain records of separate
bases for "fresh start" property.
d. The fresh start adjustment should be calculated by reference to estate tax value. Again, Treasury
agrees. Executors would not be required to establish date
of death value as a computation base where the estate tax
alternate valuation date is elected.
3• Liquidity Issues
Carryover basis itself does not cause liquidity problems.
No tax is due in a carryover basis system until carryover
basis property is sold. No family farm faces a tax liability
from carryover basis until the farmland is sold. If liquidity
problems exist, they arise because of the estate tax.
A large portion of the appreciated property held by
estates is comprised of marketable securities and investment
real estate. In the case of marketable securities there can
be no liquidity problem. In the case of investment real
estate, the estate tax will be imposed on the value of the
property net of indebtedness. To the extent investment real
estate is subject to estate tax, the net equity in the
property should be sufficient to secure a loan sufficient to
pay the estate tax.
Problems may exist where the investment property does
not generate sufficient income to service a loan. We would
be sympathetic to proposals to provide additional liquidity
relief in these situations where there is demonstrated need.
Closely-held business interests and farms, which
represent only 7 percent of the value of assets reported on
estate tax returns, pose a somewhat different problem. In

- 26 the case of farms, special use valuation significantly
reduces includible value for estate tax purposes. Liberal
estate tax deferral provisions provide an opportunity to
spread the payment of estate tax over 10 or 15 years for
qualifying farms and small businesses. Finally, section 303
provides an opportunity to have closely-held stock redeemed
at reduced capital gains rates. The combination of these
provisions provides a significant measure of relief. However,
we are willing to explore additional liquidity relief solutions for farms and closely-held businesses that will reduce
or defer the payment of income tax on assets sold to pay
estate tax.
Conclusion
The basic issue before this Subcommittee is the fairness of an income tax system which forgives income tax on
appreciated assets passing at death. Forgiveness is unsound
income tax policy. Those who would return to step-up should
justify that step. They cannot be allowed to use technical
complexity as a rationale. Technical problems can be solved.
It is the Administration's firm position that unrealized
appreciation in property held at death cannot be permitted
to escape income taxation. Either carryover basis or treating
death as an income tax recognition event is acceptable.
We look forward to hearing the testimony of those
individuals who will appear before you and to reading the
written submissions of the others. We hope you will permit
us to respond for the record to the testimony you will hear
today and next week. To that end I ask that you hold the
hearing record open for an additional two weeks to enable us
to prepare that response.

FOR IMMEDIATE RELEASE
EXPECTED AT 9:30 A.M. EST
MONDAY, MARCH 12, 1979

.

STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
Mr. Chairman. I am pleased to appear before you
today to present the Administration's proposals for
authorization of U.S. participation in replenishments
of resources for the Inter-American Development Bank,
the Asian Development Fund and the African Development
Fund.
The authorization requests for these three institutions total $4,019 million, including $2,543 million
for callable capital subscriptions which do not entail
budgetary outlays and $1,476 million for paid-in capital
subscriptions and concessional funding which will
eventually lead to budgetary outlays. They cover
the U.S. share of the financing necessary to sustain
lending operations of the institutions during the
period 1979-1982. These requests require annual appropriations over a three to four year period beginning
next year and provision has been made for the first
of these appropriations in the FY 1980 Budget.
B-1450

.'FMH^

•

- 2 -

Prior to concluding the negotiations on these three
replenishment agreements, the Administration consulted
actively with the Congress regarding U.S. objectives,
and positions on all the key issues.
In the House, we were able to participate
in formal hearings last April prior to the final negotiating
sessions for the replenishments of the Asian Development
Fund and the African Development Fund and, in December,
just before the final negotiations for the increase
in resources of the Inter-American Development Bank.
These consultations were very helpful to us in carrying
out and completing the negotiations. We hope they have
laid the foundation for a common view between the
Administration and Congress on these replenishments.
U.S. POLICY TOWARDS THE MULTILATERAL DEVELOPMENT BANKS
Before discussing the details of the individual
replenishment proposals, I would like to set out the
policy perspectives within which we view U.S. participation in the multilateral development banks.
We think that this participation is particularly important
for the conduct of U.S. relations with both developed
and developing countries. In discussing each

•

- 3 -

of the replenishment proposals, I would like to
relate our participation to specific countries and to
the achievement of specific foreign policy objectives on
a regional basis.
However, our relationships with the developing
countries must be considered more broadly.

They encompass

major political, security, economic and humanitarian
concerns.

Indeed, U.S. support for economic growth

and development in poorer countries is directly linked
to meeting these fundamental concerns. Maintenance
of the U.S. commitment to a constructive and cooperative
program of international economic assistance is essential
if we are to continue to provide that support on an
effective basis.
The primary objective of U.S. foreign policy is to
promote peace, prosperity, and cooperation among nations
because the existence of these conditions in other countries
contributes to the well-being of the United States itself.
All of our foreign policy programs, including those
for the multilateral development banks, have been designed
to contribute to these objectives.
The more than one hundred developing nations contain
the great majority of the world's population.

They differ

greatly among themselves in terms of culture, history,
political systems and the level of economic development

- 4 -

that they have attained.

Nevertheless, they all share

one major aspiration: economic growth and development
and material improvement in the lives of their people.
The less developed countries have moved to the
forefront of world affairs.

They are increasingly active

in international political and economic organizations, and
they have become much more effective in pursuing their
national and regional interests. For several reasons,
collectively, and in some cases, individually, they
have assumed a much greater importance in U.S. foreign
policy and national security considerations:
—

They are an important source of raw materials which

are critical to the economies of the United States and other
industrial countries.
—

They occupy strategic geographical positions.

—

They are growing users of atomic energy for

peaceful purposes and a number of them have the capability
for developing nuclear weapons.
—

They have military capabilities which can be

used to initiate military conflicts affecting U.S.
interests and having the potential of escalating into
great-power confrontation.
—

Their growing populations and aspirations place

greater demands on the earth's resources and environment.

•

- 5 -

Negotiations toward the solutions to these problems
are complex and difficult, requiring a balancing of
interests and a sensitivity to the requirements of
developing countries. In implementing non-proliferation
policy, for example, it is necessary to recognize
that less developed countries have a legitimate and expanding
requirement for energy. In order to combat international
terrorism effectively, we must be able to count on
the support of less developed countries in multilateral
organizations such as the United Nations and in dealing
directly with individual situations as they may arise.
The Law of the Sea Conference now going on under the
auspices of the United Nations requires the cooperation
of less developed countries on a number of issues if
we are to reach agreement and still protect interests
of the United States relating to navigation, marine
research, protection of the environment and exploration
and exploitation of deep seabed mineral resources.
In the context of these competing and conflicting
interests on major international issues, the multilateral
development banks provide the United States with a
practical and effective way to work cooperatively with
developing countries to help them meet their most basic
aspirations.
Another major objective of U.S. policy is to
encourage the integration of the developing countries

.- 6 into the international economic system. The United
States was instrumental in the establishment of this
system shortly after the end of World War II, and
we have worked hard to maintain its effectiveness.
The system is based on the principles of free flows
of trade and investment, and it has well served the
United States and the world. Its continuation is necessary
for our own progress and, we believe, for fulfilling the
aspirations of the developing countries.
The multilateral development banks are an integral
part of the international economic system. By responding
to the developing countries' capital needs, they give
those countries a stake in participating in and contributing to the continued growth and health of that system.
Through their assistance to the economic and social
progress of the developing countries, the banks foster
a structure of cooperation between developing and
developed countries characterized by mutual responsibilities and joint contributions to the health of
the international economic and political system.
The continued economic growth and vitality of the
developing countries is necessary if we are to have a
sound and healthy American economy,

in today's

economically interdependent world, the prosperity of
each nation depends on the prosperity of others.

- 7 -

In 1977, non-oil developing countries bought $24.5
billion worth of U.S. merchandise — 30 percent of our
total exports. In the agriculture sector, these exports
amounted to $6.7 billion, and included wheat, rice and
cotton. In the same year, our imports from these countries
totalled $36 billion, one fourth of total imports.
Our reliance on the developing countries for supplies
of raw materials is striking, and includes tin, natural
rubber, bauxite, manganese and other raw materials.
These raw materials are necessary and, in some instances,
vital to the health and progress of our economy. Indeed,
we improve our economic prospects by encouraging and
assisting rapid and equitable economic growth in the
developing countries.
Over the longer run, the health of the U.S. economy
will depend to a considerable degree on the reliable growth
in supply of the products we need from the LDCs and LDC
markets for our exports, as well as the flow of investment
between us. One of the most effective means through which
we can promote the growth and stability of the developing
countries are the multilateral development banks.
DEVELOPMENT EFFECTIVENESS
The multilateral development banks have become the
leading institutions in the field of international
economic development. They raise resources for both

- 8 concessional and near market lending operations from
many donor countries.

As a consequence, they are able

to operate on a significant scale and across the range
of economic sectors.

They are today the primary source

of official development assistance.

Their loan commit-

ments in 1979 are expected to reach $12.5 billion, and
their disbursements last year amounted to more than
$5.5 billion.
This level of lending gives the MDBs important
influence in recipient countries.

Because of their

apolitical character, and the fact that they operate on
the basis of economic and financial criteria, the banks
are able to encourage, in their continuous policy dialogue
with borrowers, the adoption of appropriate economic
policies so as to ensure good use of our money.
They do this by analyzing individual projects in the
context of both the recipient's development program and
priorities and trends in the world economy, selecting
for funding only the soundest projects which are proposed.
They also assist in the diversification of developing
countries' economies by providing additional capital
to sectors requiring it. Their policy advice is generally
consistent with U.S. views and stresses the importance
of market forces and an open international economic
system.

- 9 Economic development is not only a matter of providing
external capital. Although resources themselves are
obviously required, economic development is primarily
a matter of adopting sound economic policies and assisting
in the establishment of effective public and private
institutions in the developing countries.
In conjunction with their financial assistance, the
banks strengthen local institutions and provide training
for local officials through extensive programs of technical
assistance.

Within the economic systems which developing

countries have chosen for themselves, the banks stress
the role of market forces in the effective allocation
of resources, the development of outward looking trading
economies and the spreading of development resources
to poorer people.

The competence and international character

of the staffs of the banks have established their reputation
for rigorous and detailed appraisal of project
proposals and programs.

Therefore, their advice is often

much more effective than that of individual bilateral
donors, where political sensitivities may be involved.
The banks have also shown themselves able to respond
to changing circumstances and new developmental
initiatives.

For example, they are now targeting a more

- 10 substantial proportion of their assistance to projects
which directly reach the poor —

responding to needs for

broadening the growth process, helping to satisfy basic
human needs, and working toward better distribution of
income,

increased agricultural productivity and reduced

rates of unemployment.
In response to our desire that they assist in
increasing the productivity of the poor, the banks are
placing increasing emphasis on employment creating projects,
in connection with their efforts in both the agriculture
and rural development sector and in urban-oriented industrialization efforts.

Creation of additional jobs in the

countryside can slow migration from rural to urban areas.
Additional jobs in urban areas can ease pressures to
emigrate to other countries.
Another high priority that we strongly support is the
expansion of bank lending for energy development.

In

response to a request made at the Bonn Summit meeting,
the World Bank has proposed a program to help solve the
growing energy problems of developing countries and proposed
an expanded lending program to do this.

The United States

has strongly endorsed the general provisions of that program,
including Bank financing for geological and geophysical
surveys and exploratory drilling, and an acceleration in
lending for projects to develop and produce gas and oil.

- 11 -

Over the next few years, the Inter-American Development
Bank will be devoting a large proportion of its lending
to developing hydroelectric and geothermal potential
in Latin America, and the Asian Development Bank has
also embarked on a large lending program to finance the
production of primary energy fuels. These MDB funds,
moreover, will facilitate additional private investment
in this critical area, thus helping to meet urgent
requirements in the developing countries, and improving
the oil supply and demand balance for the world as a
whole.
Finally, the banks also contribute to the efficient
use of scarce development assistance coming from many
sources through their leadership and participation
in the consultative groups and consortia which coordinate
bilateral assistance efforts on behalf of numerous
countries.
COST EFFECTIVENESS
The MDBs are a particularly cost-effective mechanism
for providing economic assistance because they permit
us to share the burden for providing this assistance

- 12 -

with other countries, and because they can mobilize private
capital through bond offerings and cofinancing. What
was once a predominantly U.S. foreign economic assistance
effort has been transformed today into a much more broadly
shared one. The overall U.S. share of subscriptions and
contributions to the MDBs has shown a declining trend
as the shares of other participating countries have increased.
This reflects the growth and economic strength of other
countries and their increased capacity to provide more
resources for development. These include industrialized
countries such as Germany amd Japan, OPEC nations, and
some of the relatively more advanced developing countries
such as Mexico and Brazil, who have increased their convertible
currency contributions to the replenishment of the Inter-American
Development Bank, to which I will turn in a few moments.
Participation in a multilateral framework means that
the interests of donor countries are collectively represented.
No one country can dictate the policies of the multilateral
development banks. Because we share the same view of the
objectives of the banks with most other member governments,
however, and because we play a major role in each of the
banks, their operations and policies have responded to
our policy priorities.

The two policy areas I just cited

lending to the poor and energy development —

—

come to mind.

- 13 -

LEVERAGE FROM PRIVATE CAPITAL
The banks rely on the callable capital subscriptions
of their members as backing for their bond issues in private
capital markets, and use these borrowed funds for their
harder term operations. Because of their solid record
of financing economically sound and feasible projects,
the MDBs have been able to increase the leverage of
their callable capital to the point where only one out
of every ten dollars of capital subscriptions is in
fact paid-in. In the recent IDB replenishment, this
level dropped to seven and one half percent. In the case
of the World Bank, for example, the United States has paid
in $884 million to capital which has supported, through
burden-sharing and leverage, over $45 billion in gross
lending. Thus, each dollar the U.S. subscribed has
generated some $50 in Bank lending.
The banks also engage in co-financing operations with the
private commercial banks. These have involved the purchase
of shares in individuals MDB loans as well as complementary
financing arrangements for MDB financed projects. These
operations are very desirable, not only for their resource
mobilization effect, but particularly because they provide
a mechanism for the introduction of commercial bank

- 14 -

lending in the developing countries for development projects.
Some of these countries have not yet established a firm international credit standing, and the involvement of the private
commercial banks will permit these countries to enter the
world financial system, paving the way for future decreases
in reliance on official assistance to meet external capital
requirements.
BENEFITS TO THE UNITED STATES
The operations of the MDBs provide substantial direct and
indirect benefits to the U.S. economy, substantially above our
contributions. These benefits stem from project related procurement of goods and services, bank administrative expenses in
the United States, net interest paid to U.S. holders of bank
bonds, and faster LDC growth resulting in the most rapidly
growing market for U.S. exports.

The total value of U.S.

procurement alone since the inception of the banks has
been over $8.3 billion, which exceeds U.S. subscriptions
and contributions paid into the banks by $2.1 billion.
Increased financing to the developing countries
permits them to increase their imports of investment
goods from the United States and other developed countries
directly.

As a result of their increased investment, the

developing countries are able to improve their living standards
more rapidly, providing a growing market for the United States

- 15 -

and other exporters.

This investment also helps developing

countries produce raw materials the United States must import
in order to prosper.
From the time of the banks' inception in 1946 to the
middle of 1978, direct accumulated receipts by all segments
of the U.S. economy have exceeded outflows to the MDBs by
$2.4 billion.

In addition, an econometric analysis which

we have made shows that real GNP increased annually between
$1.2 billion and $1.8 billion as a result of exports of
U.S. goods and services to markets directly created by MDB
financed projects in developing countries. This means
that every U.S. dollar paid into the MDBs generated between
$2.39 and $3.38 in real U.S. economic growth annually
over the period.
U.S. participation in the multilateral development
banks is not motivated primarily by these kinds of
benefits.

However, it is clearly a mistake to view

our contributions to the banks as giveaways or economic
losses to the United States.
LATIN AMERICA
The bulk of the financing contained in the proposal
before you today is to replenish the capital and concesssional

- 16 -

windows of the IDB for the four-year period 1979-82.
Our approach to this replenishment was based on the
twin realities of Latin America's position in the
world economy for the 1980s: impressive overall economic
progress in most countries, but continued great needs in
most of them. I would like to describe briefly the
situation of Latin America as we see it, as a backdrop
against which to outline the replenishment packages.
During the past decade, Latin America's rate of economic
progress has outstripped that of other developing regions:
— Between 1965 and 1977, the gross domestic product
of the region more than doubled in real terms to
nearly $400 billion. This represents an annual
growth rate of 6.1 percent — compared with 5.1
percent for all developing countries, and about
3.9 percent for the developed countries.
— During 1973-1977, the region grew at an average
annual rate of nearly 5 percent compared with
only 2 percent for the OECD countries. It maintained
impressive growth even through the world recession,
cushioning the impact of the recession on the
industrialized countries — particularly the
United States.

- 17 -

—

Latin American exports to the U.S. have tripled
since 1965, reaching $25 billion in 1977.

—

Real per capita GNP in the region has increased by
more than half since 1965.

It now stands at $1100,

as compared with a per capita GNP of $450 for the
rest of the developing countries.
As a result, Latin America has become an increasingly
significant participant in the world economy, as a trading
partner and as a region with great investment experience
and potential. Based on its sustained and substantial
economic growth of the past two decades, Latin America
has made the transition to a region with a global role
of its own which is increasingly self sufficient. Individual
Latin American countries have become advanced developing
countries (ADCs) with a vital stake in the future of the
world economy, in the successful operation of the international
trade and monetary systems, in ensuring adequate rates of
production and demand, and in assisting the poorest countries
of the world in eradicating extreme poverty.
Mexico is one example of how a country which is
critically important to the United States benefits from
MDB activities.

- 18 Its importance to the United States stems primarily from
geographical proximity to this country and the influence
which this proximity can have on the political, economic,
social, environmental and security aspects of American society.
U.S. relations with Mexico are governed by two fundamental
U.S. policy objectives:
— Political stability and economic growth in a Mexico
which is friendly to the United States.
— Control of migration flows which could have potentially
disruptive effects for the United States.
In addition, development of Mexico's hydrocarbon
resources will increase the free world's supply of oil
and provide Mexico with the revenue to increase domestic
employment, thus reducing migration pressures on the United
States. Finally, cooperation between our two countries is
necessary for narcotics control and other border issues
including sanitation, pollution control, and law enforcement.
Mexico does not receive concessional lending from
the IDB. It has become, in fact, a donor to the FSO. It
continues, however, to receive substantial amounts of
market rate financing from the MDBs. In its most recent
fiscal year, Inter-American Development Bank loans to
Mexico totalled $238 million. President Carter, during

- 19 -

his recent trip to Mexico, visited an integrated rural
development project which is being financed jointly by the
World Bank and the IDB.

The purpose of this project is to

increase incomes and employment opportunities for poor
people in rural areas of the country.

In addition to the

financial intermediary role which the multilateral development banks play in Mexico, they are also able to provide
advice on investment plans which may help Mexico to use
its petroleum revenues most effectively to attack unemployment
and under-employment and redress social and economic
imbalances.
Brazil is another example. It is important to the
United States simply by the weight of its size and strategic
position.

Brazil is the world's seventh most populous

nation, with the tenth largest economy. Its endowment
of natural resources and agricultural capacity rivals
that of the United States. Brazil's industrial growth
over the past decade has transformed the country into
a major exporter of manufactured goods, especially
to other developing nations.
The U.S. and Brazil share major global interests:
the maintenance of Western security, a healthy world
economy, the avoidance of North-South confrontation, and
Brazil's successful completion of the transition to

- 20 -

developed country status along with peaceful evolution
toward a more equitable and politically open,
pluralistic society, setting an example for other
developing countries. Brazil's challenge for the future
will be to maintain adequate growth to create the estimated
1.3 million jobs needed each year to keep pace with
rising population, while devoting more resources and
attention to improving the productivity and well-being
of its poor. The multilateral development banks play
a financial intermediary role in Brazil as they do in
Mexico.

In calendar year 1978, the IDB made loans to

Brazil totaling more than $282 million. Like Mexico,
Brazil is a donor to the convertible currency resources
of the concessional lending fund of the IDB and has
agreed not to borrow from those funds.
However, Latin America is not a homogeneous region.
The varying levels of development and domestic resources
in the individual countries cover a wide spectrum. And
the progress of recent years has left enormous economic
and social gaps through the hemisphere.
Latin America contains some of the poorest and least
developed areas in the world.

For example, the level

of protein intake in Haiti is the lowest in the world,

- 21 -

and its caloric intake is next to the lowest. Infant
mortality rates throughout the region are three times
as high as those in the United States. Forty percent
of primary school-age children and sixty percent of
secondary school age children do not attend classes.
Population increases outpaced agricultural growth in
1975 and 1976 although a moderate improvement occurred
in 1977. The labor force is increasing at a rate of
2.8 percent a year, exacerbating an already difficult
unemployment problem. Although the growth in average
per capita income in the region has been remarkable,
there are now more people, perhaps as many as 150
million, living in absolute poverty than there were a
decade ago.
Notwithstanding the progress that has been made by
the region as a whole, there are countries which have
not shared in Latin America's overall progress and which
continue to need substantial amounts of concessional
resources.

These countries have little access to private

capital markets and a limited ability to assume debt
at market rates.

Their per capita incomes remain low

by Latin American and global standards as well.
Thus substantial development challenges remain in Latin

- 22 -

America.

Continuing self-help and structural change is

crucial to development, but Latin America also requires a
continuing flow of external financial resources to sustain
the momentum of its economic and social development.
The United States has a keen interest in fostering
the development and ensuring the stability of Latin
America and the Caribbean.

In economic terms, the

importance of the region to the United States is obvious
by the large flow of goods and services, technology
and capital in both directions.

In 1977, our exports to

the Latin American region nearly reached the $20 billion
mark, more than our exports to Japan and almost as much
as those to the European Common Market. This export
volume is projected to grow by 10 to 15 percent per
year.
Since 1960 U.S. direct investment in Latin America and
the Caribbean has doubled with a restructuring of that
investment away from enclave investments in mining and
petroleum toward manufacturing, trading and finance.

These

investments now exceed $20 billion, approximately two-thirds
of all U.S. investment in the developing world.

In 1977,

Latin America and the Caribbean provided the following
shares of U.S. mineral imports:

petroleum, 26 percent;

- 23 iron ore, 23 percent; bauxite, 88 percent; copper, 40
percent. In addition, we obtain about 50 percent of our
sugar imports, 80 percent of our bananas, and 70 percent
of our coffee from Latin America*
THE INTER-AMERICAN DEVELOPMENT BANK
With U.S. support, the IDB has contributed significantly
to the economic development of the region. In its nineteen
year history the IDB has proven itself an innovative leader,
continually finding new ways to strengthen the development
impact of its activities, through its project financing and
through its technical assistance in developing planning and
programming. By December of 1978, the IDB had provided
$13.0 billion of assistance from its own resources of which
$7.1 billion came from capital and $5.9 billion from the
FSO. For the IDB to continue to play its important role
in assisting Latin America's development efforts, the
resources of both the Bank's capital and the Bank's
concessional window, the Fund for Special Operations
(FSO) must be increased as their current convertible
currency loan commitment authority will be depleted
by mid-1979.
Economic development is the highest priority objective
of almost every one of the countries of Latin America.
Our participation in the IDB in support of the region's

- 24 -

development efforts is a key element in our efforts to win
their cooperation on matters of common concern such as narcotics,
migration, and obtaining needed energy and raw materials.
The IDB also provides an institutional setting where we can
encourage the advanced developing countries to undertake a
larger part of the responsibility for the functioning of
the international economic system. The increased contributions of these countries in this replenishment demonstrate
their recognition of their increased strength and responsibility
as participants in the system.
This increased responsibility will bring great benefits
to the region. Greater involvement in management of the
international economic system by the countries of the region
will assure them of a larger voice in its future development,
making them less dependent on decisions taken by others
and more capable of determining the future of their economic
relations with the rest of the world.
In essence, full Latin American participation serves
to prevent other countries from making decisions that do
not fully take account of Latin American interests. And
because of the joint gains to Latin America and to us of
a free, liberal international economic system, we both
stand to benefit from the process of shared participation
and responsibility.

- 25 -

The U.S. approach to the IDB replenishment negotiations
had the following objectives:
to focus lending on the poorer countries in
the region and to the poor people in all recipient countries;
to increase burden-sharing by both developed and
developing member countries;
to reduce the paid-in portion of the United States
and other donors subscriptions, consistent with maintaining
the financial soundness of the bank.
With respect to the first objective, these replenishment
negotiations significantly restructure the lending program
of the IDB for the 1979-1982 period. In response to
the economic realities of Latin America the number of
countries which will tap the FSO for convertible currency
loans will be reduced. Several borrowers have progressed sufficiently that they no longer need to turn
to the FSO at all as a source of external capital. In
addition to the five countries which had already volunteered
not to borrow convertible currencies from the FSO during
the last replenishment period, 1976-1978 (Argentina,
Brazil, Mexico, Trinidad and Tobago and Venezuela), Chile
and Uruguay will now no longer do so. IDB lending for the
Bahamas and perhaps one other Caribbean country might
also now be wholly from capital resources.

- 26 -

As as result, the annual size of the FSO lending program
can now be smaller than during the last replenishment.
We believe this to be a most appropriate step in the evolution
of development finance whereby, as countries make economic
progress and no longer need concessional resources, they
can graduate to harder lending terms and the level of
concessional assistance they receive can fall. The FSO
replenishment will allow for $468 million in convertible
currency loans per year, down from an average level for
the 1976-1978 replenishment of $540 million per year.
In addition, these concessional funds will be concentrated even more on the poorest and least developed
countries in the hemisphere. During 1979-80, the initial
years of this replenishment, at least 75 percent of convertible FSO resources would go to them. During the second
half of the replenishment period, this minimum allocation
would increase to 80 percent.
Because of their broad access to private capital
markets, and their own recognition of the greater needs
of their poorer neighbors, the largest and more prosperous
Latin countries —

Argentina, Brazil and Mexico —

will

restrict their capital borrowing to present levels. They
will thereby reduce their percentage share of total IDB

- 27 capital lending although retaining sizable amounts in
absolute terms. The Bank will help them adjust to this
change by assisting in arranging an increased amount
of cofinancing for their IDB projects, improving still
further their access to private capital. As has been
the case since 1975, Venezuela and Trinidad and Tobago
will not borrow at all from the Bank during this
replenishment period.
These constructive steps by the more advanced
developing countries of Latin America will permit the middle
level and poorer countries to attain substantial annual increases in their real rate of total borrowing from the
Bank.

This will in turn to help cushion their move from

the concessional funds of the FSO to the harder lending
terms of the capital window, and round out the three-step
approach which recognizes the economic maturing of the region:
(a) fewer borrowers from the concessional FSO's convertible
currencies, (b) more capital lending for the countries shifting
from the FSO to the capital window made possible by (c) increased
reliance on private sector borrowing by the most advanced
countries of the Hemisphere.
This replenishment also involves agreement to target IDB
lending to poorer people in

recipient countries.

Those

countries, outside the group of poorest and least developed,

- 28 who retain some access to FSO resources have agreed to
limit their FSO borrowing wholly to those projects which.
directly benefit their poor people. As far as the Bank's
total resources are concerned, it has been agreed that
50 percent of 1979-1982 lending will benefit low-income
groups, primarily through the creation of productive
employment opportunities in the rural and urban areas.
The IDB replenishment proposal before you also contains
major advances in terms of burden-sharing by non-regional
countries and advanced developing member countries.
The non-regional members of the Bank will contribute
a share of the capital increase (11 percent) which is two and
one half times larger than their current share of 4.4 percent.
In addition, the non-regional members will contribute 30
percent of the FSO replenishment, the high level which they
had agreed to as part of their entry into the IDB.
The subscriptions of the Latin American members (except
Venezuela) to paid-in capital will be two-thirds in convertible
currency —

an increase from the 50 percent previously sub-

scribed in convertible currency by these members.

As in the

1976-1978 replenishment, Venezuela will make its paid-in
subscriptions entirely in convertible currency.
In continuation of the practice instituted during the
1976-78 replenishment, Venezuela and Trinidad and Tobago have
again agreed to make all their contributions to the FSO in

- 29 convertible currency. Moreover, as an indication of their
growing financial and

economic strength, Argentina, Brazil

and Mexico have agreed to increase the freely usable portion
of their FSO contributions from 25 percent to 75 percent

~

raising the level of resources fully by the FSO
by $191 million.
As a result of these contributions and those of the
non-regional countries, the U.S. share of convertible FSO
resources has dropped from 57 percent in the last replenishment to 45 percent in the proposed replenishment.
As a result of these changes in the Bank's lending
program and in the burden-sharing arrangements, this
replenishment (in comparison to the previous replenishment)
allows a reduction in the contribution paid in by the
United States. To fulfill the proposed lending program of
the IDB, the increase in capital resources for 1979-82
amounts to $7,969 million of which 7.5 percent or $598 million
would be paid-in.

The United States share of this increase

would be $2,749 million —

34.5 percent of the total

—

comprising $2,543 million of callable capital and $206 million
of paid-in capital.

For the FSO, the increase proposed for

1979-82 would amount to $1,750 million of which the United
States share would be 40 percent of the total or $700
million.

The U.S. shares are those called for in the Sense

of the Congress Resolution in the FY 1979 Foreign Assistance

- 30 Appropriations Act, and they have been accepted by the Bank's
other members as appropriate levels of U.S. participation.
Also, under this replenishment only seven and one half
percent of the capital will be paid-in, down from the typical
10 percent paid in during previous replenishments. Thus
the annual U.S. subscription of $862.3 million involves
$635.8 million of callable capital - which does not entail
any budget outlay. The paid-in portion of the U.S. subscription
would be $51.5 million annually.
The U.S. contribution to the FSO will decline
absolutely from $200 million a year to $175 million a year.
This is a twelve and one half percent reduction.
While the budget outlay commitments for the 1976-78
replenishment, as negotiated, were $240 million per year,
the proposed 1979-82 replenishment would result in annual
budget outlays of only $226.5 million •— an absolute reduction
of $13.5 million. The reduction in real terms is, of course,
much more substantial. For both capital and concessional
funds, the budgetary outlays would as always be spread
over a number of years because drawdowns are made only as
needed to cover actual disbursements by the Bank or on the
basis of an agreed schedule.

-31The Administration strongly recommends this replenishment
proposal.

The increase in the Bank's resources will provide

funds to support projects which build on the major economic
successes of the past decade in Latin America, and continue
the development momentum which will lead one day to the
establishment of dynamic economies able to finance their
own continued development.
United States participation in the proposed increase
in resources would constitute a positive and concrete
expression of United States interest in, and concern for,
the development of Latin America and the Caribbean.

A

continuing flow of resources through the IDB will help the
region to further improve its economic situation and that
of the millions of Latin Americans who still live in poverty.
It is a cooperative effort in which the more advanced
Latin American countries are joining the industrial countries
in providing a part of the convertible currency resources
for IDB lending to the poorest countries in the region.
ASIA
As recent weeks have shown, conflict and instability remain problems in Asia, and are of continuing
concern to the United States. From the standpoint of
security, a strategic balance now exists in the region.

- 32 It is clearly in our interest that this balance be maintained.

Our policies are designed to preserve balance and

stability in the region, prevent expansion of existing conflicts
and maintain our commitments to our friends and allies.

Our

policies obviously do not entail a return to our earlier deep
involvement in the internal affairs of the region.
We have concentrated instead on the development of
long term sustainable policies that emphasize national
self-reliance, supplemented by continued U.S. support.

In

this regard, we have been especially encouraged by the
emergence of the Association of Southeast Asian Nations
(ASEAN) which is a successful example of the regional
economic cooperation we believe will contribute to stability
in the area.

We continue to place high priority on the region.

We cannot afford to do otherwise.
Viewed in this light, U.S. participation in the
Asian Development Bank offers an effective way to
demonstrate continued U.S. concern in the area and its
stability and to show our willingness to provide financial
support for the economic aspirations of its people.
Indeed, Asia contains the overwhelming majority of the
world's poorest people.

On the basis of strategic con-

siderations alone, it is in our interest to support effective
actions to improve the conditions of their lives and to
promote greater stability in the area.
Thailand is one example of how the work of the Asian
Development Bank can advance U.S. foreign policy objectives

- 33 in individual countries. Thailand has a central position
in southeast Asia, and it has maintained a close relationship
with the United States. It is in our national interest
to support the stability and independence of Thailand
because it is a key element of regional progress and balance
in southeast Asia. We also have other important interests
in Thailand. For example, Thailand's cooperation is essential
if we are to have an effective narcotics suppression program.
It has also provided a country of first refuge for Indo-Chinese
refugees. Thailand is important as an expanding market
for U.S. exports including cotton, tobacco, machinery,
fertilizers, iron, and steel. It is also a reliable supplier
of critical raw material imports such as tin, tungsten
and rubber.
Economically, Thailand has grown at a rate matched
by few developing countries. From 1960 to 1976, GNP
growth averaged 7.6 percent a year. A high and rising
level of investment has been maintained, exceeding 20
percent of GNP and largely financed by domestic savings.
Per capita income doubled over the 1960-1976 period.
Inflation has been kept under control by conservative
fiscal policies, although price pressures have recently
intensified.
In the past, economic policies have tended to favor
Bangkok, other urban areas and the relatively better off
farmers of the central plains. A large proportion of

- 34 the rural population, particularly in the northeast, has
not shared equitably in the benefits of economic growth.
The present government in Thailand is beginning to
reorient economic policy in favor of these elements
of the rural population.

The Prime Minister has declared

1979 the "Year of the Farmer" and has stated his
government's intention to direct far greater resources
to rural areas.

The revised Five-Year Development Plan

for 1977-1981 calls for external borrowing of about $1
billion per year to finance rural and infrastructure
development to bring services and improved agricultural
technology to the rural poor.
For 1979, the proposed borrowing program includes
$324 million from the ADB.

Under the proposed ADF

replenishment, Thailand will become eligible for concessional
financing of projects addressing the needs of its poor
citizens. It is in our interest that the flow of financing
continue to Thailand. Our participation in the Asian
Development Bank and Fund will help assure that the country
will be able to sustain its growth and carry out needed
changes in its overall economic policies.
A second example is Pakistan.

The turmoil in

neighboring countries underscores U.S. interest in the
security and stability of this Persian Gulf rim nation.

- 35 Pakistan suffers from political instability, a
growing sense of isolation and recently economic stagnation. The most important contribution the United States can
make to Pakistan's stability and long-term development is to
assist in putting its economic house in order and, thereby,
induce stability while political problems are resolved.
Pakistan is a poor agricultural country and its best
prospects for growth lie in that sector of the economy.
With one of the world's largest irrigation systems, Pakistan
could become a major exporter of agricultural commodities
while meeting the food requirements of its own population.
It has a well-developed infrastructure in terms of railroads
and roads, and there is sound industrial base upon which to
expand. The ADF can, and is, helping Pakistan to develop
this potential. Its assistance, totalling $290 million
at the end of 1978, has been focused on the improvement of
agriculture through the support of irrigation projects, the
production of fertilizer inputs, of power for rural electrification, and cement for use in civil works in agriculture.
THE ASIAN DEVELOPMENT FUND
Recently, there has been a significant increase
in cooperation among the nations of Asia. This is
exemplified by the efforts of the ASEAN to work together
among themselves and with the rest of Asia and the
industrialized world in an effort to increase regional
regional stability and prosperity. The Asian

- 36 Development Bank and Fund, as visible, technically
qualified, moderate and respected regional institutions
both aid and are aided by this move to increased regional
self-reliance.

Our participation in the Bank and Fund

constitutes a clear, demonstrable statement of our interest
in the region and associate the United States with the
region's goals and aspirations.
The Asian Development Fund (ADF) 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 and
poorer developing member countries in Asia.
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, and several
of them are of central importance to U.S. foreign policy.
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,
under the proposed replenishment, the Fund will resume modest
amounts of lending for basic human needs projects in
Indonesia, the Philippines and Thailand. India has
voluntarily refrained from receiving funds from the
ADF, relying instead on IDA as its principal source
of concessional aid.

- 37 Our goal in the replenishment negotiations was to
ensure that substantial resources were provided for the
ADF's activities, and that these resources should be more
sharply focused on the poor. We were able to achieve an
agreement that agricultural investment and rural development
programs would continue to be the primary lending sectors
of the ADF, and that these projects would increasingly
focus on benefitting the poorer segments of the population.
We also achieved a resumption of lending to "marginally
eligible" countries — Thailand, the Philippines and
Indonesia — for projects which meet basic human needs.
The U.S. share of the total replenishment of $2.15
billion for the 1979-1982 period amounts to $445 million.
This represents a substantial degree of burden-sharing.
This is 20.69 percent of the total, below the level
suggested by the Congress (22.24 percent) in the FY 79
Foreign Assistance Appropriations Act and consistent with
the Sense of the Congress provision in Public Law 95-118.
This share will require annual appropriations for the 1979-1982
period of $111 million. Authorization of the proposed
U.S. contribution is required in 1979, and appropriation
of the first tranche in FY 80 to prevent ADF commitments
ceasing in December 1979.

- 38 -

AFRICA
We are proposing an increase in U. S. contributions
to the African Development Fund.

The African continent

has assumed a much greater foreign policy importance for
the United States which stems from the following factors:
—

Africa is a growing locus of power both politically

and economically.
—

It commands vital economic resources which are

essential to the United States and the industrialized
nations of the West.
—

It occupies a strategically important geographic

position.
—

It continues to experience instability and political

and military weakness which could draw in larger, non-African
powers for the resolution of local wars and pose risks
for elevating and broadening regional conflicts.
—

It has acute problems of poverty and economic under-

development which have the potential to cause growing
resentment against the United States and other developed
countries.
In addition, African countries now play a prominent
role in international politics and in the conduct of world
diplomacy. By themselves, they comprise almost one-third
of the membership of the United Nations. Together with

- 39 -

other developing countries, they account for two-thirds
of the membership of that organization. We need the cooperation of African countries to resolve the kinds of
international problems which I have already mentioned.
At the same time, Africa continues to have problems of
instability and violence. Insurrection and rebellion
have occurred in certain countries. These conflicts have
been caused by a number of factors including ethnic
unrest, secessionist ambitions, and religious differences.
They all provide opportunities for non-African intervention and exploitation. Further, the persistence
of racial injustice in southern Africa threatens the
stability of the area.
In terms of the individual countries, Nigeria is
the largest U.S. trading partner on the continent. Annual
U.S. exports to that country currently exceed $1 billion,
and Nigeria supplies us with almost 20 percent of our petroleum
imports. After Saudi Arabia, it is our second largest
source of foreign crude oil. Nigeria has taken a constructive
leadership role and consistently opposed outside intervention
in African conflicts.

- 40 -

In both economic and humanitarian terms, Africa represents
the world's greatest development challenge. It is the
least developed continent, containing two-thirds of the
world's 30 poorest nations and some of the world's most
deprived and disadvantaged people. More than a third of
its nations have a per capita income of $200 or less.
In most countries of the region the numbers of individuals
living in absolute poverty amount to more than one-third
of the population. Seventy five percent of Africa's population
is engaged in subsistence agriculture. Life expectancies
in Africa average 43 years —

10 years less than those

in other developing countries and 30 years less than those
in the United States.

Less than 20 percent of the population

of sub-Saharan Africa has access to safe drinking water.
Growth rates in Sub-Saharan Africa remain well below
those in other developing regions.

Per capita incomes

expanded at a rate of less than 2 percent per annum in
1960-75.

Although a large percentage of African labor

works in the agriculture sector, agricultural production has also grown slowly, increasing at an annual
rate of about 1.5 percent since 1960.

This rate of growth

has not been sufficient to keep up with the increase in
population.

- 41 -

THE AFRICAN DEVELOPMENT FUND
The African Development Fund (AFDF) represents an
important means to help these countries break out of the
vicious cycle of poverty. It 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 Fund makes concessional loans to the poorest
countries in Africa. Except under the most unusual circumstances, loans are not granted to countries with 1976
per capita GNP above $550. Absolute priority is given
to nations with per capita GNP below $280. The African
Development Fund has concentrated its efforts on those
most in need: in 1977, 64 percent of its lending went
to countries with a per capita income of less than $280.
In that same year, loans targeted to assisting the poor
accounted for approximately 60 percent of total lending.
In the replenishment negotiations, it was agreed
that the Fund's efforts to reach the poor should be
continued and intensified. During 1979-1981, 80 percent
of the Fund's resources will be lent to the poorest countries — with a per capita GNP below $280. With respect
to sectors, it was agreed the AFDF would focus particular

- 42 attention on projects aimed at meeting basic food and
health requirements and at increasing the effective
utilization of human resources through training in such
areas as agriculture. The AFDF is reaching those whom
the United States believes should receive top priority for
development assistance.
The AFDF donors agreed to a second replenishment
which will permit the African Development Fund to expand
its efforts to aid Africa's poor in the 1979-1981 period.
The U.S. contribution of $125 million to the second replenishment would be 17.5 percent of the total of $713.5 million
of pledged resources.

This U.S. share represents an increase

in our position in the Fund.

Recently, our share of

Fund resources has been under 6 percent —
to Norway.

which was equal

We believe that a much more substantial

U.S. share in this institution is consistent with both
our objectives of increased burdensharing and the high
priority placed on strengthening U.S. relations with the
countries of Africa. The resulting 17.5 percent is still
substantially less than our share in any of the other MDB
windows.

It is consistent with the Sense of the Congress

Resolution, and we believe it is essential to demonstrate
our interest in assisting growth and development in Africa.
We believe that the African Development Fund is an
increasingly effective regional institution which can
help to address the enormous problems of poverty and

- 43 -

underdevelopment which exist on that continent.

It is the

kind of cooperative organization that we want to encourage
because it provides us with a practical way to assist
African development without unwarranted and direct involvement
in the affairs of individual countries.
I would like to mention briefly the opening of membership in the African Development Bank (AFDB) to non-regional
members. This Bank is unique among the MDBs in that its
membership has been drawn entirely from regional developing
nations since its establishment in 1964. It has no members
from the ranks of the industrial countries. As a result,
its subscribed capital after 15-years is currently only
$957 million and its cumulative loans total $620 million.
In order to strengthen the Bank's resource base and lending
program, negotiations have now been undertaken, pursuant
to a 1978 authorization by the African Governors, to begin
the participation of non-regional members in the Bank.
The Administration strongly supports the efforts
of the African Development Bank to expand its base of
resources. We have participated constructively in discussions
with other non-African countries considering membership,
and are now envisaging a U.S. capital subscription on the
order of $360 to $400 million (to be contributed over a five
year period FY 81-85) which would also represent a U.S. share

- 44 of about 17-18 percent. This would provide us with our
own Executive Director at the Bank, and make us the largest
single shareholder in it. We will be consulting with
you on details of U.S. participation in the Bank, looking
toward the submission of legislation on it next year.
Africa's critical importance to the management of
international political and economic affairs is now
well-established.

Our proposed support for this

replenishment of the African Development Fund as well as
our prospective entry into the African Development Bank
itself, reflect the strong commitment which the Administration
and Congress share in supporting the aspirations of African
peoples for a better life.
CONCLUSION
The Administration strongly supports the proposed
replenishments I have presented to you today. The
unfinished business of development represents a serious
challenge to the economic and political stability
which we and other nations require if growth and prosperity
are to be sustained.
In my remarks today, I have emphasized the
important foreign policy interests that we have in
the developing activities of the world. We will have
more success in asking these countries to share our

- 45 -

goals for a better and safer world if we are willing
to help them achieve their goals of better and safer
lives for their own people.

Our participation in the

MDBs and the overall levels of our foreign assistance
are judged as a signal of the seriousness of our response
to their problems.

This basic reciprocity lies at the

heart of U.S. relations with the developing countries.
The multilateral development banks provide a practical
and effective way for us to collaborate with developing
countries and to help them meet their most basic aspirations.
They are also a forum for cooperation with industrialized
countries.

I mentioned earlier the increased role which

these countries are playing in the banks, by shouldering
larger shares of the costs of their activities. We participate
with these countries in discussions within the banks on all
issues of development policy and alternative approaches
to the use of development assistance funds.

We have

recognized for many years that cooperation with other
industrial countries is key to the well-being of the
United States.

Our collaboration with them on these

- 46 -

development questions positively affects our overall
relationships with these countries and our dealings
with them in other fora.
For all of these reasons, we strongly support
continued U.S. participation in the multilateral
development banks. The proposals which are before
you today deal only with the regional banks,
which play a special role in the international economic
system. Their operations reflect the assessments made
by regional members of their own needs and they have an
expertise and understanding of local conditions and
problems. The regional development banks serve as
useful complements to the global programs of the
World Bank Group. Most importantly, U.S. support
for these Banks manifests our interest in the
development and progress of the respective regions
and thus has particular political as well as
economic significance.

partmentoftheTREASURY
H6T0N, O.C. 20220

TELEPHONE 56*2041

For Release on Delivery
Expected at T0:0U a.m."
March 12, 1979
STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON REVENUE SHARING,
INTERGOVERNMENTAL REVENUE IMPACT, AND ECONOMIC PROBLEMS
SENATE FINANCE COMMITTEE
Mr. Chairman and Members of this distinguished Subcommittee:
I appear before you today to discuss the Intergovernmental
Fiscal Assistance Amendments of 1979, which the President submitted to Congress last week. Through 1980, this two-tiered
legislation would provide targeted fiscal assistance to fiscally
distressed local governments and a stand-by fiscal assistance
program for State and local governments.
Concerning the first tier, we recommend targeted fiscal
assistance expenditures of $250 million in 1979 and $150 million
in 1980. This compares to $1.3 billion spent last year under
a similar, predecessor program. We do not project any outlays
under the program's stand-by tier. It would only operate if
national quarterly unemployment reached 6.5 percent in 1979 or
1980, and the Administration forecasts a maximum rate of 6.2
percent over that period.
My testimony will cover three major areas:
A brief review of the history of this legislation.
Targeted fiscal assistance—why a need
exists for further assistance on a limited
basis, and how we propose to provide it.
Stand-by Fiscal Assistance—the importance of having
such a program in place and the details of our
proposal.

B-1951

- 2 A Brief History
Three years ago, during the deepest U.S. recession since
the 1930's, many urban and rural communities were experiencing
severe fiscal distress. The recession had weakened their
revenue bases at the same time that their unemployment and
service costs rose sharply. Many localities began to experience
widening budget deficits and some were threatened with insolvency.
In 1976, Congress enacted the Antirecession Fiscal Assistance (ARFA) program—frequently called countercyclical revenue
sharing—to provide emergency fiscal assistance to these distressed
States and local governments. President Carter then proposed in
1977 that this program be extended, and Congress agreed.
Over a nine-quarter period, therefore, approximately $3 billion of such antirecession funds was distributed to an average of
approximately 18,000 recipient governments. We think these expenditures were effective in avoiding excessive layoffs of essential
workers, reductions in vital services and counterproductive
tax increases.
Essentially, the ARFA program distributed $125 million per
quarter when the national unemployment rate (seasonally adjusted)
reached 6 percent for a calendar quarter. It also allocated
an additional $30 million for each one-tenth of one percent
in excess of this 6 percent level. Eligible States received
one-third of total disbursements and eligible local governments
received two-thirds. A government became eligible if its own
unemployment rate was 4.5 percent or more, and the individual
allocations basically were determined by the excess of a
recipient's unemployment over this 4.5 percent base level.
The ARFA program targeted its funds effectively to
those State and local governments which needed them most.
In 1978, two-thirds of the total disbursements were distributed
to recipients whose unemployment rates were 8 percent or more.
The ARFA program was reauthorized only through 1978 and,
in May of last year, the Administration proposed a similar,
successor program to operate through 1980. After careful study,
we had determined that a series of local governments continued
to experience severe fiscal distress. Indeed, we provided a
formal study to Congress on this subject.
Last Fall, the Senate Finance Committee reported out a
Dill, which we supported and the full Senate passed, which
would have continued Federal fiscal assistance to these governments. Unfortunately, this legislation failed in the House

- 3 on the final day of the 95th Congress. ARFA funds were thus
cut off to all recipients on September 30 of last year.
Need For Targeted Fiscal Assistance Program
The Administration's judgment is that these funds—$1.3
billion last year—should have been phased out gradually,
not terminated in one step. Accordingly, we have proposed
the much reduced outlay levels of $250 million in 1979 and
$150 million in 1980. This phase-down would be consistent
with the fiscal recovery of many localities and the related
pattern of annual reductions in ARFA funding since the 1976
peak of the State and local fiscal crisis.
There is a need for continuation of fiscal assistance,
however, because certain urban and rural localities around
the country remain fiscally strained and need more time to
recover. They cannot eliminate their dependence on antirecession funds without experiencing severe budget dislocations and
related layoffs, service cutbacks and tax increases.
Let me illustrate the importance of the previous ARFA
program to certain particularly strained areas. In 1978,
Treasury published a Report on the Fiscal Impact of the (Carter)
Economic Stimulus Package on 48 Large Urban Governments. It
concluded that a number of these governments were in a serious
state of fiscal distress. Our latest statistics indicate some
improvement but the underlying problem continues in certain
areas.
Their local tax rates are at legal or economic limits, and
tax revenues thus cannot be increased meaningfully in the immediate
future. Despite efforts to cut their budgets, these governments
are experiencing inflationary pressures which are driving local
expenditures higher. Additional research has demonstrated
that this same combination of stagnant revenues and inflationdriven expenditures is also afflicting many rural governments.
Treasury's study also showed that the more seriously strained
local governments received a proportionately greater share of
ARFA payments and that such governments could not easily offset
the loss of such payments. For example, last year, the ten
most severely strained of our largest municipalities were
receiving ARFA funds representing between approximately 2 percent
and 7.5 percent of their so-called "own-source" revenues.
Theoretically, these governments could raise taxes or cut expenses
to replace them. Unfortunately, neither of these alternatives is
readily available to distressed local governments. This is why
the Administration is recommending a phasedown of fiscal
assistance over the next two years.

- 4 A second basic illustration of the need for targeted fiscal
assistance involves the combined effects of underlying fiscal
distress plus last year's funding cut-off on a series of particularly hard-hit areas. Examples include the following:
— Detroit budgeted $19 million of anticipated 1979 ARFA
receipts and the program's termination was a major
contributing factor in the layoff of 350 employees
and other budget reductions.
— St. Louis anticipated $6.5 million in 1979 ARFA
funds and now must close a budget deficit of approximately half that amount.
New Orleans had to enact three new revenue measures
which equalled approximately 15 percent of its 1979
budget.
— After having already reduced its work force by 1,300
employees, primarily through lay-offs, Philadelphia
had to cut another $14 million from its 1979 budget
due to that amount of shortfall in anticipated 1979
ARFA receipts.
— Newark laid off 450 employees in the immediate
wake of the program's termination, including 200
police officers.
-- El Paso reduced its workforce by five percent.
-- Pittsburgh was forced to increase both its city
income tax and its property tax.
-- Hidalgo County, Texas had to reduce its already
small workforce by layoffs and attrition.
How The Targeted Fiscal Assistance Program Would Work
Let me turn now to a brief discussion of the program's
major features.
This program would authorize the expenditure of $400
million as follows:
— $250 million in FY 1979 for approximately 1231 local
governments with unemployment rates of 6.5 percent or
more for the six-month period of April through September,
1978,
— $150 million in FY 1980 for somewhat fewer governments
based on the unemployment rates for the first 6 months
of 1979.

- 5Tne share of each local government would be determined by its
excess unemployment above 4.5 percent multiplied by its general
revenue sharing allocation—this is the previous (ARFA) approach.
Payments would be made annually, and as soon as possible in the
case of the 1979 allocations. One-half of one percent of the
total funds requested would be distributed on a population basis
to the Commonwealth of Puerto Rico, Guam, American Samoa, and
the Virgin Islands.
Distributional Effects
By any reasonable measure, the program's funds will be
highly targeted according to need. Only 1,231 local governments
would receive funds in 1979, based on the most recent unemployment
data. This compares to the 39,000 recipients of General Revenue
Sharing funds and the 17,000 average recipients of 1978 ARFA
funds.
In addition, 70 percent of 1979 funds will be distributed
to localities currently experiencing unemployment rates of 8
percent or more. The 10 "highest strain" cities would receive
34 percent of the total 1979 funds.
Small communities also get a fair share of program funds.
Approximately 45 percent of the eligible areas have populations
below 25,000 people. In addition, half of the eligibles are
counties, not cities.
Role of the States
State governments are not eligible for targeted fiscal
assistance, although they would fully participate in the standby
fiscal assistance program. Studies indicate that, as a group,
State governments are not fiscally strained today. Indeed,
fifteen States provided for personal income tax relief in
1978, through either reduced rates or exemptions, credits,
or deductions. Major State revenue sources—sales and income
taxes—have been more responsive to improvements in the national
economy than the principal local revenue source—property taxes.
Accordingly, as the economy has improved over the past 50
months, State revenues have increased at a faster rate than
local revenues.
Use of Unemployment Rates
Concerning eligibility, we have selected local unemployment rates as the proxy for fiscal distress. We have found
the unemployment-based antirecession formula to be effective
in targeting funds to places with serious economic and fiscal
problems. For example, the ten "highest fiscal strain" cities
receive substantially higher per capita allocations than less
strained cities.

- 6 We selected average unemployment rates of 6.5 percent
or more for determination of local eligibility. Unemployment
over the past year has hovered around 6 percent and a rate of
one-half percent above this level produces considerable targeting .
Administrative Issues
Our legislation includes two important provisions relating
to administration of the Targeted Fiscal Assistance program.
The first involves a per capita income limitation such that
eligible recipients must have per capita incomes of less than
150 percent of the national average. This requirement avoids
rewarding particular places where, despite high unemployment,
considerable taxable wealth may be found.
Second, we have included a $20,000 minimum annual payment
test for eligibility. This "de minimis" test means that when a
recipient's potential allocation falls below that amount, either
in FY 1979 or in FY 1980, that locality is not eligible and the
funds are redistributed among those whose allocation is above
$20,000.
The expired ARFA program provided that a government could
receive as little as $100 per quarter. We find that minimum
payment simply too low. The minimum should be large enough to
sustain one or perhaps two jobs.
Stand-by Fiscal Assistance Program
Let me turn to the second-tier of this legislation—
the stand-Dy fiscal assistance program for State and local
governments. This program is similar to the 1976-1978 ARFA
program except that it would only operate when the national
quarterly unemployment rate reaches 6.5 percent or more,
instead of 6 percent, and the eligibility requirement for
recipients would be raised from 4.5 percent unemployment
to 5 percent.
The current Administration economic forecast does not
anticipate that national unemployment rates will reach 6.5
percent or more through 1980. Thus, we do not project any
budgetary outlays under this stand-by portion of the program.
Should an economic downturn occur in 1980, however,
we want State and local governments to have the assurance
of Federal assistance to help them avoid precipitous layoffs,
service curtailment, sudden reductions in procurement and
capital outlays, or tax increases. We also think it important
to avoid past mistakes of having a countercyclical program
that triggered on too late in the recession and triggered
off too late into tne recovery.

- 7 How the Stand-by Program Would Work
Our proposal builds on what we have used in the past.
It is intended to be relatively simple and easily understood.
For example, the allocation approach of unemployment data
combined with the general revenue sharing formula is widely
understood. This approach—using unemployment, tax effort,
population, and income data—reflects a legislative consensus
on fairness. In addition, this approach has broad support
because it is simple and inexpensive from an administrative
viewpoint.
The program would operate only if quarterly national
unemployment rises to 6.5 percent or higher in 1979 or 1980.
At that point, it would distribute $125 million per quarter
plus an additional $25 million for each one-tenth of one
percent by which national unemployment exceeds 6.5 percent.
Individual State and local governments with quarterly unemployment rates of 5 percent or more would be eligible. Approximately one-third of the funds would be distributed to State
governments and two-thirds to local governments.
The maximum amount of funds to be distributed under
this stand-by program, should it operate, would not exceed
an annual allocation of $1 billion and no funds are to be
paid after September 30, 1980. This means that the last
calendar quarter for which national unemployment data will
affect payments would be the quarter ending March 31, 1980.
We have included a payment adjustment provision
linking the first tier of the bill to this stand-by tier.
To avoid windfall funding, if the stand-by tier is triggered,
allocations to local governments in any fiscal year under
this second tier would be reduced by the amount of payments
they would receive under the first tier in that year.
The stand-by program includes the same per capita income
test and equivalent minimum quarterly payment tests, as in the
Targeted Fiscal Assistance tier.
Conclusion
The Intergovernmental Fiscal Assistance Amendments of
1979 constitute an important aspect of the President's
domestic program. It is a balanced two-tiered program that
addresses the immediate needs of a limited number of fiscally
strained local communities as well as the prospective needs
of State and local governments as they face economic uncertainty
A minimum amount of expenditure can have considerable impact
without jeopardizing the budgetary and fiscal goals of this

- 8Administration. A stand-by program offers the prospect of
providing a sensible fiscal insurance program for State and
local governments in the event of future excessive unemployment.
We have purposely designed this program to bridge the
time remaining until the expiration of General Revenue
Sharing in 1980. The expenditure of $400 million in FY 1979
and 1980 phases down the amount of funds received by the
most fiscally distressed communities while stand-by fiscal
assistance assures a timely response to economic downturn.
The proposed legislation will expire on September 30, 1980,
together with GRS. This will facilitate a 1980 Executive
Branch and Congressional review of the entire issue of
Federal fiscal assistance to State and local governments.
I appreciate the opportunity to present the Administration's program for fiscal assistance. I look forward to
working with you and other members of Congress toward implementing the program.

o 0o

FOR RELEASE UPON DELIVERY
Expected at 10 A.M.
Tuesday, March 13, 1979

STATEMENT OF DONALD C. LUBICK
ASSISTANT SECRETARY FOR TAX POLICY
DEPARTMENT OF THE TREASURY
BEFORE THE COMMERCE, CONSUMER AND
MONETARY AFFAIRS SUBCOMMITTEE
OF THE COMMITTEE ON GOVERNMENT OPERATIONS
WASHINGTON, D.C. rMarch 14, 1978]
Mr. Chairman and Members of this distinguished Subcommittee:
I welcome this opportunity to appear before you to
report to you how Treasury and the Department of Energy
interact to formulate the tax aspects of national energy
policy and the extent to which the Department of Energy
participates in the promulgation of tax regulations and
rulings which implement energy-related tax provisions. This
subject is of great concern to the Treasury Department. It
touches upon issues that are basic to our tax system, such as
the fairness of tax burdens, as well as the manner by which
we go about financing Federal expenditure programs.
In order to examine the issues before the Committee, let
me begin by discussing two sets of distinctions which are
basic to the involvement of Federal agencies in tax policy.
(1) First, we must separate those provisions of
the tax law which are a part of the structure through
which revenues are raised, from those provisions which
B-1452

-2modify that structure as a means of implementing Federal
intervention in particular markets. For example, the
investment tax credit represents the payment of a
Federal grant through the tax system as do provisions
permitting financing through tax exempt bonds. Other
intervention devices include rapid amortization and
expensing of capital expenditures. The latter are
income measurement rules which deviate from normal tax
accounting rules.
(2) Second, we must distinguish formulation of tax
policy through the legislative process (what the law
ought to be) and the administrative implementation of
tax legislation through regulations and rulings (how
existing law is to be interpreted).
(1) Distinction Between Tax Structures and Tax
Subsidies.
Agencies with substantive outlay programs, as opposed to
agencies having fiscal and monetary policy responsibilities,
such as Treasury, the Council of Economic Advisors and the
Office of Management and Budget, should not be expected to
have significant involvement in the promulgation of general
tax policy; that is, in issues involving the appropriate
level of aggregate tax revenues; the rates of personal and
corporate taxes, the taxation of capital gains, the degree of
progressivity of the tax system, the manner of taxing foreign
source income, and other matters affecting the basic
structure of the tax system. These issues involve policy
considerations that transcend effects on particular sectors
of the economy.
In developing or responding to general tax proposals,
as, for example, the proposals relating to the levels of the
taxation of capital gains, the Treasury Department must
examine such factors as the effect on revenues, the fairness
of tax burden distribution, the short-run impact on aggregate
demand, the long-run impact on the race of economic growth,
the effect on allocation of economic resources, and the ease
of taxpayer compliance and IRS administration. Treasury does
consider the special concerns of other government agencies
(including DOE) and private organizations as it explores
these basic tax policy issues. But the weight to be accorded
industry-specific effects of general tax proposals is
necessarily limited; the potential impact on a particular
industry is only one factor that must be weighed in the
balance .

-3-

In contrast to this set of general tax policy issues are
modifications of the tax system which constitute specific
interventions in an industry or market. Such interventions
include the imposition of excises to adjust market prices as
well as the use of tax preferences to subsidize specific
economic activities. An obvious example is the Energy Tax
Act of 1978. With respect to this set of focused tax
matters, agencies with substantive program responsibilities
have an obvious and important obligation of involvement.
It is important to bear in mind, however, that the
objectives of programatic tax measures are indistinguishable
from objectives which might be achieved by regulatory or
expenditure programs that can be administered by the agency
having substantive responsibilities in the subject area. Tax
programs represent one of many choices available to the
Federal government for financing desirable conduct. Among
the more obvious alternatives are cash grant and loan programs. Thus, the agency having substantive responsiblity for
a program bears a double burden. It must first establish
that any Federal program is needed.
Should the money be spent? What will the program
accomplish? What are the specific details of the program?
Who gets the government money and why? Is the program openended or does it have a cap? What assurances are there that
the money will be spent for the proper purpose?
These are questions which must be faced as squarely when
a tax expenditure proposal is under consideration as when a
direct expenditure program is being studied. Tax subsidies
invoke spending money in the same way as direct expenditures
and have the same deficit effect as direct expenditures. The
tax system represents only a means of delivering a Federal
subsidy. Yet, frequently agencies and the Congress don't
submit tax proposals to the same degree of scrutiny as they
insist is required for direct expenditure programs.
If an agency is able to justify a Federal expenditure
and has worked out the details of the program, it should next
provide persuasive reasons why the administration of the program requires the use of the tax system and why nontax
options have been rejected. In doing so the agency must
recognize that one of the consequences of using the tax
system to intervene in private markets is the relinquishment
of administrative control by the agency with normal responsibility in the substantive area. This consideration is

-4insufficiently weighed by many executive agencies eager to
promote programs executed through tax excises or subsidies.
While agencies are grateful to be relieved of budgetary and
administrative responsibilities, they may be discomfited by
the concomitant loss of administrative control.
There are also the following considerations at stake
here:
Creating new tax initiatives—whether deductions,
credits or tax-exempt financing— is an increasingly
popular way to spend federal money without appearing to
create new "programs" that spend money and without
incurring the discipline of annual appropriations and
associated executive and Congressional budgetary
scrutiny. Normally, once a tax subsidy is in the Code
it is all but impossible to repeal or terminate it, even
though the justification for its initial inclusion is no
longer compel1ing.
Tax subsidies are almost invariably a less
cost-efficient way to attack the problems they were
created to solve than is programmatic spending.
Tax subsidies invariably generate great complexities
in tax filings and administration.
Tax subsidies impose substantial burdens upon the
Treasury and the IRS whose employees are diverted from
their primary goal of tax administration. For example,
during the planning and legislative phases of the Energy
Act members of the Tax Policy Staff at Treasury were
required to become energy experts. Now that the Act is
effective this burden has been shifted to the IRS which
must become an energy administrator in addition to
dealing with other special programs which are carried
out as tax expenditures. This process is wasteful
because expertise in energy matter already exists in DOE
and is costly because the expertise, once developed in
both agencies, is duplicated.
Another troublesome aspect of the use of tax subsidies in lieu of direct expenditures is that almost
without exception they are offered in tax exempt form.
Since the value of a tax subsidy to the recipient is the
amount of tax foregone, the same nominal amount of subsidy produces greater benefits at higher marginal tax

-5brackets. As a result, the magnitude of tax subsidy
programs is understated since analysts tend to look at
budget impact (tax revenues foregone) rather than the
amount which a taxpayer would otherwise be required to
finance on his own in pre-tax dollars.
-- Tax subsidies are useful only to those who have
income taxes to pay and hence can benefit from the
subsidies. Those who don't pay taxes—individuals below
exemption and zero bracket amount levels or otherwise
insufficient tax liabilities; corporations with no net
earnings (perhaps because they are just starting up);
non-profit organizations, states and local governments-receive no assistance. In order to reach these groups a
tax subsidy program must be supplemented by a direct
grant program. This in fact was was done in the Energy
Act. The regulatory weatherization program provides
conservation assistance for low-income individuals and
certain tax exempt organizations while the residential
tax credit assists individuals who are taxpayers. If a
tax subsidy is to cover these excluded groups it must be
"refundable". A refundable tax credit is virtually
indistinguishable from a direct spending program. The
question then to ask is why use a bifurcated program-tax credit plus direct spending—rather than a single
direct spending program.
One reason often given in support of tax subsidies
is that when the tax system is used bureaucrats and red
tape are not involved. However, an IRS agent is a bureaucrat and the Tax Code and the regulations which interpret it have their own share of red tape. What this
means, of course, is that which bureaucrat should administer the program and how much red tape must be present
are matters of program design. Ideally, the bureaucrat
should be the one having substantive knowledge of the
subsidized market and the "red tape" should be designed
to assure efficiency of the program.
If an agency is able to demonstrate that non-tax subsidies would be ineffective and specific tax subsidies are
justified, close cooperation between Treasury and that agency
is critical. In the case of energy tax incentives, for
example, consultation between the Treasury and the Department
of Energy should begin in the initial stages of energy tax
policy development and must continue until a final policy
decision is made. DOE has the data resources and expertise

-6by which to gauge the impact of a tax subsidy proposal on
energy policy. Treasury has the information for assessing
impact of that proposal on the progressivity of rates, the
possibility for unintended tax sheltering effects, problems
of taxpayer compliance and IRS administration, interaction
with other tax provisions, and efficiency of the program.
(2) Distinction Between Formulation of Tax Policy
Through Legislation and Administrative Implementation of that
Policy Through Regulations and Rulings.
The Internal Revenue Code imposes on the Secretary of
the Treasury (or his delegate) the legal responsibility to
write regulations implementing the provisions of the Code, to
issue rulings that interpret the application of the tax laws
to particular circumstances, to prescribe procedures by which
taxpayers may discharge their obligations under the tax laws,
to enforce the tax laws, and so on. Treasury, and more
particularly, the IRS, cannot share this responsibility. The
reason for this is obvious. Public confidence in the
administration of the tax laws can only be maintained if the
public perceives that tax obligations are imposed and tax
benefits are dispensed even-handedly and in accordance with
Congressional mandate and not in accordance with determinations by the Treasury or IRS of what is "good" conduct to be
rewarded and "bad" conduct to be penalized.
We have noted the obligation of executive agencies to
participate in the development of tax legislation proposals
specific to their regularly assigned program responsibilities. Limited participation in the promulgation of regulations to interpret such tax legislation is also commonly
sought by the Treasury. In any event, proposed regulations
are generally published for public comment, and hearings
scheduled to elicit views from all interested parties.
Although ultimate responsibility for promulgating regulations
must rest with Treasury, we take these comments into account
in issuing the final regulations.
After the statute has been enacted and regulations
published, application of the law to particular taxpayers is
a matter to be resolved between the IRS and those taxpayers.
At that point, all tax provisions, regardless of the reasons
for their inclusion in the Code, are indistinguishable. It
is improper for other agencies to intervene with comments
about substantive policy or political implications of IRS
administration of the tax laws insofar as individual
taxpayers are concerned.

-7Having explained generally how the tax laws and their
administration interact with the programs of other agencies,
let me turn to our particular experience in the energy area.
The Treasury Department and the Department of Energy have
consulted concerning the energy tax proposals which formed
the basis for the Energy Tax Act of 1978 and continued to do
so during the two-year period in which the legislation was
pending in the Congress. We continue to consult with DOE
regarding new tax initiatives which are under study by that
agency. As to all those new initiatives we have requested
that DOE consider non-tax options as a means of accomplishing
the same objectives.
Insofar as the promulgation of tax regulations implementing the Energy Tax Act are concerned, we have consulted
with DOE in the course of drafting of the regulations,
regarding a wide range of issues. DOE's comments have been
solicited as the regulations have been developed, and this
consultation will continue up until the time when the
regulations are finalized. We also anticipate receiving
DOE's advice on technical matters such as performance and
quality standards of energy equipment as the need for such
advice arises. However, ultimately responsiblity in promulgating the regulations rests with the Treasury Department.
As I noted earlier, after the statute has been enacted
and regulations published, the Department of Energy will have
a minimal role to play in further administration of the tax
law. For example, the residential credit provisions of the
Act authorize the Secretary of the Treasury, at his discretion, to add additional items to the list of items eligible for the credit. We anticipate that DOE will be consulted in this regard. However, as I noted earlier, this
loss of administrative control is one of the consequences of
implementing a subsidy program through the tax system.
Internal Revenue Service rulings concerning eligibilty
of taxpayers for energy credits will be issued without DOE
participation. These rulings involve the application of the
whole body of tax law to taxpayers having certain property
rights and contractual arrangements. If IRS administration
is to be even handed, it cannot base its rulings on considerations of current energy policy or, for that matter, housing
policy, trade policy, environmental policy, and so on. Once
measures are incorporated in the tax laws, their application
and interpretation are constrained by the legal and traditional institutions of tax administration. These constraints

-8are necessary in order to assure that there are no charges of
partiality, favoritism or undue influence in the administration of the tax laws.
In order to formulate and implement energy tax policy,
the Treasury Department Tax Policy Office has assigned two
lawyers and two economists to the task of analyzing energy
tax matters. The lawyers, in addition, provide policy
guidance to IRS staff having the responsibility for drafting
regulations, printing forms and giving guidance to the
public. The IRS staff have DOE contacts in various areas of
expertise and consultations, both formal and informal, take
place concerning various problems as they arise. Similarly,
DOE staff contact Treasury with respect to questions or
problems which need to be resolved.
(3) The Foreign Tax Credit
The Committee has also asked that I focus on the foreign
tax credit as an example of where energy policy and tax
policy may intersect. You have also inquired about the
standards used in making payments creditable by way of a tax
treaty.
I will begin my response with a brief explanation of the
foreign tax credit. The United States taxes the worldwide
income of U.S. persons, and, because of that, grants a
foreign tax credit for foreign income taxes and taxes paid
"in lieu of" income taxes. The foreign tax credit applies
not just to oil companies but to all U. S. taxpayers, whatever the nature of the business, wherever they earn foreign
source income.
The purpose of the credit is to avoid double taxation
of income. The credit is not an incentive for an industry to
earn foreign income, much less to relocate overseas. It is
an attempt to make tax law neutral in the choice of domestic
and foreign investment. The foreign tax credit simply recognizes that while the United States always maintains the right
to tax the foreign-source income of U.S. persons, the country
where income arises has the right to the initial tax on that
income. U.S. persons earning such income might be subject to
excessive income taxation if the U.S. tax burden were added
to whatever burden exists in the source country. Such a
double income tax would place U.S. persons at a competitive
disadvantage. Thus, the foreign income tax burden is allowed
to offset U.S. tax liability.

-9Aside from special statutory limitations on the amount
of foreign oil related taxes that can be used as a credit in
the U.S., the foreign tax credit rules and principles
applicable to the oil industry are the same as those applied
to all other industries and taxpayers. The Code draws no
distinctions among lines of business for determining what
qualifies as a creditable income tax. The Code does not
provide that energy policy or other non-tax policy considerations such as foreign policy should play a role in
deciding whether an oil payment is creditable.
The case where the foreign tax credit may operate as an
incentive in the oil and gas area is where a taxpayer erroneously obtains a credit for a cost of goods sold such as a
royalty or excise tax by having the payment disguised as an
"income tax." In such a case a de facto preference exists
for the foreign operation as compared to U.S. oil operations.
The IRS and Treasury have expended considerable effort to
assure that royalties and excise taxes are not being claimed
as creditable income taxes. We are in the process of developing regulations that we expect will cover, among other
issues, both the royalty-tax and the excise tax issues.
Also, the IRS, in 1978, revoked two rulings that relate to
this question: Rev. Rul. 55-296 involving Saudi Arabia and
Rev. Rul. 68-552 involving Libya. Neither the substance of
these rulings nor the Indonesian rulings which this
Committee refers to (Rev. Rul. 76-215 and Rev. Rul. 73-222)
were based on any energy policy considerations.
It must be remembered that under U.S. tax law as it
stands today every foreign country is entitled to impose a
creditable income tax. The principal question in the oil and
gas area is whether the country decides to levy a tax and
levies it in a manner that meets U.S. standards of an income
tax or whether it, as owner of a mineral, decides to take a
share of revenues by way of profit-sharing royalty or excise
tax. In answering this question the IRS looks to both the
form and the substance of the payment.
In summary, the foreign tax credit is a broadly
applicable and important element of U.S. tax policy.
Consistent with a general policy of equity and fairness the
same principles apply to all taxpayers in determining whether
their payments qualify for the foreign tax credit. Energy
policy is not a factor that is taken into account.

-10You have inquired about the use of tax treaties to
provide companies with foreign oil tax credits that would not
be otherwise allowable.
The overall purpose of a tax treaty is to avoid double
taxation of income. Measures are generally taken to assure
that double taxation does not occur and that it is mitigated
when it does occur. A tax treaty defines areas where either
the source country or the residence country will have the
right to tax income. Where both countries retain the right
to tax, double taxation is avoided in the U.S. by means of a
credit of the foreign tax against U.S. tax. As a general
rule U.S. tax treaties contain provisions designed to
guarantee the creditability of the foreign taxes covered by
the treaty. Frequently, these provisions operate
independently of the statutory rules.
A further consideration in crediting foreign taxes by
treaty is that a tax treaty is a forum in which to resolve
issues and disputes between the taxing jurisdictions.
Foreign tax credit issues are contentious and may interfere
with otherwise satisfactory relations between tax authorities. Moreover, foreign tax credit issues are complex and
many close and difficult questions arise which must be
resolved in order to decide whether under the Internal
Revenue Code a given payment is creditable. Reasonable men
can and do differ on whether specific foreign tax credit
decisions are "right." On the other hand, as I have stated,
any foreign country can impose a creditable tax if it follows
the proper structure. Under these circumstances and in order
to fulfill the other purposes of a tax treaty, the Treasury
is prepared to resolve foreign tax credit issues by negotiation.
In the case of the pending tax treaty between the United
States and the United Kingdom, a credit is allowed for the
United Kingdom Petroleum Revenue Tax ("PRT"). At the time of
the negotiation of the treaty the IRS was of the view that
the PRT was not a creditable income tax. Revenue Ruling
78-424 formally takes the position that the PRT is not
creditable. The Senate has ratified the provisions of the
U.K. treaty dealing with the PRT and we have undertaken to
change the relevant treaty provisions to ensure that the
credits allowed by treaty will apply only to oil and gas
income from the United Kingdom.

-11Treasury's decision to credit the PRT by treaty was
based on the above-mentioned tax policy grounds, not on any
perception of what U.S. international energy policy is or
should be. The Treasury is not utilizing or advocating the
use of tax treaties to foster or promote U.S. energy policy.
Of course we are aware that assuring a credit by treaty might
have a positive effect on the development or prosperity of
business activity in a treaty country. The grant of the PRT
credit in the U.K. treaty might well have avoided drilling
delays or even stimulated companies to enter that market.
It is difficult to assess the importance and effect of a
treaty credit in these terms, however. A company takes into
account many factors before beginning oil operations in a
given place and the foreign tax credit is but one of those
factors. Moreover, while a company is not worse off if a
payment is creditable rather than noncreditable it is not
necessarily the case that a company is better off if it
receives a credit for an otherwise noncreditable payment.
For example, an oil company that is already in an excess
credit position under Code section 907 does not receive a
benefit by having more of its payments made creditable by
treaty. Also, if a foreign tax credit is not available for a
given payment a company may have other means to make itself
whole. For example, if a credit is disallowed a company
might be able to maintain its after tax profit position by
either negotiating a lower purchase price with the foreign
sovereign or by passing on to consumers the additional cost
of doing business.
There are problems in the suggestion that the tax treaty
credit mechanism be utilized to encourage the development of
energy resources in certain countries. First and foremost,
it is not clear what criteria would or should be used in
selecting such countries. These criteria would have to be
developed.
A second issue to consider is that a tax treaty is a
comprehensive arrangement. A wide range of issues is
considered, and concessions are made by both countries. They
are generally without regard to the type of industry. If too
much pressure is put on one industry because of ancillary
considerations — no matter how valid — it may be that there
would be problems in avoiding double taxation with respect to
other types of taxpayers. It may be that energy policy
considerations pursued with respect to a given country would
prejudice Treasury's ability to obtain tax benefits with
respect to other activities in that country.

-12A basic problem with the possible utility of a tax
treaty as an instrument of energy policy is that the U.S. tax
treaty network covers very few developing countries and oil
exploration is occuring in many such countries. U.S. tax
policy considerations — such as the refusal to give tax
sparing — have dissuaded many developing countries from
entering into treaties with the U.S. It is unlikely that a
policy of granting foreign tax credits for otherwise noncreditable oil company payments would significantly alter
this state of affairs.
Further, the negotiation and ratification of tax
treaties takes considerable time — from two to five years in
many cases (and sometimes longer). Energy policy makers will
have to consider whether under these circumstances a tax
treaty is a viable vehicle for their purposes.
Finally, there is the possibility that tax and energy
policies will be in conflict. For example, the tax policy of
assuring that business profits are taxed on a net basis,
after deduction of significant expenses, could conflict with
an energy policy that would credit payments by treaty even if
imposed on gross business income or even if the payments are
not taxes at all (e.g. , royalties). Any such conflicts would
have to be resolved.
In summary, although the tax treaty network could theoretically be used to further energy policy goals, there are a
number of difficult problems which raise doubts about the
practical utility and effectiveness of such an approach.

QepartmentoftheWtASUffl ] |j|
WASHINGTON, O.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

March 12, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,000 million of 13-week Treasury bills and for $3,002 million
of 26-week Treasury bills, both series to be issued on March 15, 1979,
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
June 14, 1979

26-week bills
maturing September 13

Price

Discount
Rate

Investment
Rate 1/

Price

Discount
Rate

97.620
97.600
97.605

9.415%
9.495%
9.475%

9.81%
9.89%
9.87%

95.238 9.419%
95.207
9.481%
95.219
9.457%

1979

Investment
Rate 1/
10.06%
10.12%
10.10%

Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted 98%
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location

Received

Accepted

Received

Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
30,275,000
4,561,730,000
31,645,000
27,930,000
24,290,000
26,835,000
216,050,000
46,860,000
7,255,000
33,885,000
14,845,000
224,865,000

$

$
21,760,000
4,408,620,000
12,405,000
39,180,000
27,405,000
20,715,000
157,900,000
38,650,000
3,430,000
26,925,000
6,695,000
215,625,000

$
21,760,000
2,645,220,000
12,405,000
38,980,000
27,385,000
20,715,000
52,900,000
19,650,000
3,430,000
26,925,000
6,695,000
110,025,000

Treasury

13,515,000

15,560,000

15,560,000^

$4,994,870,000

$3,001,650,000b,

TOTALS

$5,259,980,000

30,275,000
2,550,530,000
31,645,000
27,930,000
24,290,000
26,835,000
91,050,000
28,420,000
7,255,000
33,885,000
14,845,000
119,865,000
13,515,000

$3,000,340,000a/

i/lncludes $411,120,000 noncompetitive tenders from the public.
^Includes $231,050,000 noncompetitive tenders from the public.
I/Equivalent coupon-issue yield.

3*1453

DATE: March 12, 1979

TODAY:

13-WEEK

2 6-WEEK

?. ¥ir7>

?,YS7/n

LAST WEEK:
i

9,«// r /..

HIGHEST SINCE:

f-^-7-f1. f. t.n
Z - Z6-"7 /
LOWEST SINCE:

9, V ? ? >a

FOR RELEASE AT 4:00 P.M.

March 13, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,900 million, to be issued March 22, 1979.
This offering will result in a pay-down for the Treasury of about
$200
million as the maturing bills are outstanding in the
amount of $6,115 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,900
million, representing an additional amount of bills dated
December 21, 1978, and to mature June 21, 1979
(CUSIP No.
912793 Z2 5), originally issued in the amount of $2,906 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,000 million to be dated
March 22, 1979,
and to mature September 20, 1979 (CUSIP No.
912793 2M 7 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 22, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,520
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. 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, March 19, 1979.
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-1454

-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 bookentry records of Federal Reserve Banks and Branches. 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
must be made or completed at the Federal Reserve Bank or Branch
or at the Bureau of the Public Debt on March 22, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
March 22, 1979.
Cash adjustments will be made for difference
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, 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 1:00 P.M., EST
WEDNESDAY, MARCH 14, 1979
STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
Mr. Chairman. I am very pleased to appear before
this Subcommittee to present the Administration's appropriations request for the multilateral development banks.
With your permission, I propose to submit a comprehensive
statement for the record and to introduce the discussion
today by summarizing the principal points. I will lay out
the budgetary requests, explain why we believe they are
necessary and cost effective, and then report to you briefly
on developments during the year on issues where you have
expressed some concern.
This year we are requesting budget authority of $3.6
billion for the development banks. This consists of two
parts: $1,842 million for paid-in capital subscriptions and
for contributions to the concessional windows of the banks,
which will eventually result in expenditures; and $1,782
million for callable capital subscriptions to the banks,
which will not result in actual expenditures.
B-1455

- 2 The request breaks down as follows:
— $1,026 million for U.S. subscriptions to the World
Bank's capital. Ten percent of this amount, or $102.6 million
would be paid-in. With this subscription, and those of other
member countries, the Bank is able to borrow on private
markets and relend the funds for development assistance
projects at market rates of interest. The Bank has never had
a default on its loans and earns money each year.
— $1/092 million for U.S. contributions to the fourth
and fifth replenishments of the International Development
Association. IDA is the concessional loan facility of the
World Bank. It lends money only to the poorest countries of
the world. Of this total, $800 million is for this year's
installment to IDA V, and $292 million is needed to complete
the final installment of the U.S. contribution to the fourth
replenishment, which was negotiated by the previous
Administration. This year's total IDA request is $166 million
less than what Congress actually appropriated for this
institution last year.
— $33.4 million for the third and final installment of
U.S. contributions to the International Finance Corporation,
the World Bank affiliate that encourages the growth of productive private enterprise in developing countries.
— $687 million for the first installment of the U.S.
subscription to the capital of the Inter-American Development
Bank. Of this amount, 7.5 percent or $51.5 million is

- 3 paid-in.

The Bank is a primary source of development

lending in the hemisphere and the United States is its
leading shareholder.
—

$325 million for U.S. contributions to the Fund for

Special Operations of the IDB, the Bank's soft loan window.
$175 million is for the first of four annual installments
to the new replenishment, each of which calls for
a lower U.S. contribution than was pledged to the
previous replenishment.

The remaining $150 million is for

the final part of our contribution to the prior replenishment, which was negotiated by the previous Administration.
—

$248 million for subscriptions to the capital of

the Asian Development Bank.

Ten percent, or $24.8 million

of this subscription will be paid-in.

This Bank has estab-

lished an excellent record and Japan has taken the lead
in providing for its financing.

Furthermore, European

members have increased their proportionate share in
providing funds.
—

$171 million for U.S. contributions to the Asian

Development Fund, the soft loan window of the Asian
Development Bank.

$111 million is for the first install-

ment of our contribution to the new replenishment and $60
million is for the final installment of our contribution
to the present replenishment, which was negotiated in 1975.
—

$42 million for the first of three annual install-

ments to the African Development Fund.

This request will

- 4 enable the United States to provide a reasonable share of
funding for concessional lending to the poorest African
countries.

It reflects our objective of taking a more active

role in encouraging economic and social development in Africa.
This request of $3.6 billion in budgetary authority for
the multilateral development banks is slightly more than
last year's request of $3.5 billion.

However, putting

aside callable capital, the request would result in expenditures that would be $286 million less than the expenditures
which would have resulted from last year's request.
Compared to last year's appropriation, expenditures
resulting from this year's request would be up by $211
million, or 13 percent.

This increase is the result

of unfunded requests from prior years, which account
for almost $500 million in expenditures (deriving from
almost $1 billion of total budget authority).

If we could

clear up these unfunded amounts, the budgetary outlook for
U.S. contributions to the multilateral development banks
over the next few years would result in a fairly constant
level of expenditures in nominal terms and a reduction
in real terms.
This is the story on the level and breakdown of
our budget request for FY 1980.

It is a substantial sum.

Let me tell you why I believe it is necessary and why
it would be well spent.

- 5 First, helping the developing countries through participation in the banks advances important U.S. foreign
policy and security interests.

Our interests require

the successful social and economic development of these
countries.

Many of these interests are shared by other

industrial countries, and most importantly by many
developing countries as well.

These shared interests

are the foundation for effective multilateral cooperation
through the banks.
The United States has a great deal at stake in these
countries.

As recent events have clearly demonstrated, some

occupy strategic geographic positions, and possibilities
exist for unrest and conflict, which could carry dangers for
many countries, including the United States.

Furthermore,

we need the cooperation of the developing world if we are to
achieve such objectives as: halting the proliferation of
nuclear weapons, limiting conventional armaments, combatting
international terrorism, suppressing international drug traffic,
controlling illegal migration, promoting human rights and
protecting the global environment.
Our economic interests in the developing world are large
and growing.

As a group, these countries were a market for

30 percent of our exports in 1977, including $6.7 billion
in agricultural commodities.

They were the source for 24

percent of our imports in 1977, including tin, bauxite, rubber, manganese, and other critically needed raw materials.

To

ignore the developing countries is to ignore our own interests.

- 6 Second, we derive significant economic and financial
benefits from the activities of the multilateral banks,
which more than offset the budgetary burden of our contributions. In short we earn a good return on our investment.
These direct financial and economic benefits include
contracts awarded to U.S. firms resulting from development
projects financed by the banks, the purchase of other
goods and services in this country derived from bank
activities, and interest paid to U.S. holders of bank
bonds. On a cumulative basis, the banks have returned
in these kinds of benefits substantially more than the
amounts which have been paid in by the U.S. Government.
Thus our contributions to the banks have not been a problem
for the balance of payments or a source of trouble for the
dollar. Indeed, they have provided benefits"for the U.S.
economy in terms of jobs and our economic growth.
Looked at more broadly, the multilateral development
banks have played a very constructive role in sustaining
a smoothly functioning and growing world economy which
in turn has helped our trade and employment. They
are a central part of the system for economic cooperation
which the United States worked hard to establish after

- 7 -

World War II and which we must continue to support
strongly today. We live in an economically interdependent
world, and we need to encourage and extend international
cooperation on development, as well as trade and finance,
if we are to deal successfully with our own economic
problems.
Third, the banks have been effective instruments for
promoting economic and social development and thus are
contributing to a more tolerable world environment for
this and coming generations.
Essentially these institutions apply banking
principles to the achievement of development purposes.
In this they are unique instruments in the annals of
economic change, and they work. The projects they finance
are soundly conceived, carefully supervised and well executed.
Of course there have been exceptions, but they are comparatively few and the average quality has been high indeed.
One of the principal U.S. objectives in the banks is
to encourage and expand the use of resources to assist
the poor — not to finance a welfare program, but to raise
productivity and increase employment opportunities. This
requires the financing of the right mixture of projects
to enlarge basic infrastructure, raise agricultural
productivity, provide the basis for expanded employment in

- 8 -

urban areas and provide the foundation for the extension
of essential social services.
The World Bank has been a leader in the effort to
reach the poor, and progress is continuing.

During the

Bank's last fiscal year, 31 IDA projects amounting to
$867 million were approved for rural development lending
alone, with benefits going mostly to small farmers, tenants,
and landless laborers.

Emphasis is being placed on helping

the urban poor through projects which provide sites
and services for housing and through the encouragement
of labor intensive industries.
In the Inter-American Development Bank, the recently
negotiated replenishment agreement explicitly provides
that 50 percent of all Bank lending —
concessional —

conventional and

will benefit low income groups.

In addition,

the agreement requires that concessional resources from the
Fund for Special Operations be effectively targeted at the
poorest countries and the poorest people of the hemisphere.
While we have devoted a great deal of effort to
encourage movement in this direction, we recognize that the
banks must maintain a balanced approach to growth and
development.

Lending for transportation, communications

and electric power will continue to have high priority.
Infrastructure and basic needs projects depend on each
other.

- 9 We strongly support and give high priority to
the expansion of Bank lending for energy development.
In response to a request made at the Bonn Summit Meeting,
the World Bank explored new approaches to help solve the
growing energy problems of developing countries and
proposed an expanded lending program to do this. The
United States has endorsed the general provisions of
that program, including Bank financing for geological
and geophysical surveys and exploratory drilling, and
an acceleration in lending for projects to develop and
produce gas and oil. By 1983, the World Bank Group
expects to be lending $1.5 billion a year for this
program, which would amount to more than 10 percent
of its total lending. Over the next few years, the
Inter-American Development Bank will be devoting a large
proportion of its lending to help finance hydroelectric,
geothermal and other aspects of energy development in Latin
America, and the Asian Development Bank has also embarked
on a large lending program to finance the production of
primary energy fuels. These Bank funds, moreover, will
facilitate additional private investment in this critical
area, thus helping to meet urgent requirements in the
developing countries, and improving the oil supply and demand
balance for the world as a whole.

- 10 -

Fourth, the Banks are an unusually effective means
for sharing the development assistance burden among the
better-off countries.
Currently the United States provides one-fourth of
the total funding requirements for these institutions,
while other countries provide three-fourths.

In contrast,

the United States, twenty-five years ago, provided
about two-thirds of total foreign economic assistance.
Countries that once received assistance are now major
sources of assistance, and this encouraging process
continues today.
Consequently, our participation in the multilateral
development banks has proven to be increasingly cost
effective.

Our foreign assistance dollar is stretched

much further; it has greater impact and does more good
for us and the developing countries as a result of our
participation in the banks.

These substantial benefits,

however, require that the United States contribute its fair
share of total resources.

For example, if we do not contribute

$800 million to this year's installment for IDA V, other
countries' shares would not become available for commitment
and IDA lending would have to stop. In the case of the
remaining U.S. share of IDA IV, funds are needed to meet

- 11 -

disbursement requirements on past commitments.
Under the replenishment arrangements in the InterAmerican Development Bank, the Asian Development Fund
and the African Development Fund, other countries
may reduce their contributions if we do not provide
ours in full.
Direct budgetary costs are even more greatly
reduced by the banks' extensive use of callable capital
for subscribing to new shares.
is not paid in to the banks.

This type of capital
In the case of the United

States, it never leaves the Treasury Department and
does not result in any budgetary outlay.

These

subscriptions, however, serve as backing that enables
the banks to borrow in the world's private
capital markets.

Callable capital would result

in a budgetary outlay only in the event it were needed
to cover a bank default on an obligation to bondholders.
Such a call has never taken place in the past.

In view

of the banks' excellent financial record, their paid-in
capital, and their large reserves from past earnings, the
possibility of a call taking place in the future is remote.
Under typical capital replenishment arrangements,

-12nine out of ten dollars for conventional lending are
raised by the banks in this way, enabling us to achieve
very large budgetary savings without restricting the flow
of needed resources to developing countries.

In the case

of the World Bank, total U.S. paid-in capital contributions of $884 million have generated more than $45 billion
of lending, a leverage factor of 50 to 1.

Moreover, the

value of our shares is not only still intact, but it has
been increased as a result of past earnings.
In the next subscription to the Inter-American
Development Bank, the paid-in portion will be reduced
from 10 percent to 7-1/2 percent.

This will provide

additional leverage in the use of U.S. budgetary expenditures to help finance this Bank.

It is our intention

to seek further reductions in the paid-in portions of
future capital subscriptions of other banks, consonant
with their growing financial strength.
Have domestic social programs suffered as a result
of our foreign assistance program?

I do not believe so.

Only one-fourth of one percent of our Gross National
Product goes for foreign economic assistance, including
our participation in the multilateral development banks.
This figure has declined in recent years and is now lower
than the corresponding GNP shares for twelve of the

-13seventeen countries in the Development Assistance Committee
of the OECD.
On the other hand, U.S. budgetary expenditures for
domestic social programs have risen rapidly over the past
decade.

In 1965, expenditures for these programs amounted

to $6 for each dollar of foreign aid.
had risen to $18 and by 1979 to $46.

By 1969, this multiple
Funding for foreign

economic assistance has not taken place at the expense of
domestic social priorities. The question is not whether the
United States can afford to fund foreign assistance programs,
but rather can we afford not to.

The answer clearly is no.

I turn now to report to you briefly on several matters
on which the Congress has expressed special interest or concern.
Encouraging capital saving technology.

There is

a growing emphasis in the banks on encouraging the use of
capital saving technologies.

Use of such technologies is

stimulated in the first instance by efforts to induce
developing countries to adopt more realistic exchange rates
and interest rates, thus eliminating an artificial premium
on the use of capital rather than labor.

What can be

done on the individual project level has to be adapted
to the differing circumstances in individual countries.
In many cases these technologies are closely linked to
the success of projects which are designed to benefit the

-14poor directly. One example is a recently approved IDB
loan to El Salvador for community development in the
economically deprived northwest region of the country.
Its objective is to increase incomes and improve living
conditions for 144,000 people in 300 small rural communities through self-help construction of small scale public
works.
$80.

The cost per beneficiary is not expected to exceed

Another example is an IDA credit to Upper Volta

which is directed at rural and urban artisans and small
scale entrepreneurs to encourage production of bricks,
farm implements, wooden utensils, and pottery.

The

average cost per job is estimated to be less than $200.
Human Rights.

We have sought to encourage greater

regard for human rights in bilateral discussions with other
countries, and in our actions in the multilateral banks. We
have consulted with other member countries on human rights
problems, and we have opposed, by voting against or abstaining
on 50 loans to 15 countries.
We have also taken steps to implement the provision of
last year's Appropriations Act which calls upon the Administration to seek adoption of human rights amendments to the banks'
charters.

In order to generate support for such amendments,

we have consulted with countries that share our human rights
concerns.

Thus far, their reaction to this proposal has

been negative.

They believe that the introduction of such

- 15 amendments would be divisive, and that such amendments would
not obtain the broad support required for their adoption. We
are undertaking additional consultations to pursue this
approach and to achieve the objectives of the legislation.
I would like to stress that the human rights provisions in current law are being carried out conscientiously.
I see no need for change in the legislation.

Indeed, as

I have stated in the past, legislation prohibiting the use of
U.S. contributions to the banks for loans to specific countries
would mean that the contributions would have to be rejected
by the institutions.

This would jeopardize our continued

participation in the banks at the expense of our human rights
concerns and at enormous cost to our other foreign policy
objectives.
Salaries.

A great deal of work has been done in

constructing a rational and objective system for determining
World Bank and IMF salaries.

A set of recommendations

to this end has been made by a Joint Committee of these
two institutions after one and a half years of study, which
included the employment of professional compensation
firms.

These proposals are now being considered by

the Boards of the two institutions, and we are working
with other member governments to resolve this issue.
Accountability.

We have greatly increased the flow

of information to the Congress on the activities of the
banks, and we have encouraged greater public dissemination

- 16 -

of bank documents.

During the past year, the General

Accounting Office completed studies of evaluation and
review units within the banks and generally found them
to be effective.
Commodity Issues.

Current law requires that the

United States oppose use of MDB funds for the production
of any commodity for export if it is in surplus on world
markets and if substantial injury would be caused to U.S.
producers of the same, similar or competing products.
It also provides that the President shall initiate
international consultations to develop standards governing
the allocation of development assistance for production
of commodities in surplus on world markets where increased
exports would cause substantial harm to other producers.
As a matter of fact, the banks have been making
very few loans that could fall under these provisions.
This is understandable because the banks themselves
believe that loans to finance commodities in prospective
world surplus would be a wasteful use of development
assistance resources.

To carry out the legislative

requirements, we have established criteria to determine
the economic impact of commodity loans on the world
markets.

No loan proposals thus far this year have

required special action.

We have also raised

- 17 -

internationally the question of establishing standards
governing the use of development assistance resources
for commodity loans and will report to you further on
this matter.
I do not believe additional legislative action on
commodity issues is warranted.

In particular, legislation

to prohibit the use of U.S. appropriations to the banks
to finance specific commodity projects would, as in the
case of country restrictions, not be legally acceptable
to the banks.

Such a provision in U.S. law would seriously

damage U.S. interests.
I would like to conclude, Mr. Chairman, by asking
that we step back for a moment and consider these institutions
from still another vantage point.

The evidence shows that

they are one of the great success stories of the entire
post-war period, stretching from Bretton Woods to the
present.

Even now they are continuing to improve on this

impressive record.

They give us good value for our money,

their net impact on the budget is small, and they bring
substantial economic and political benefits.

I ask for

your support in making it possible for this good work to
continue.

FOR IMMEDIATE RELEASE
EXPECTED AT 1:00 P.M., EST
WEDNESDAY, MARCH 14, 1979
STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
Mr. Chairman. I am very pleased to appear before
this Subcommittee to present the Administration's appropriations request for the multilateral development banks.
In my statement, I will lay out the elements of the request,
explain why we believe they are necessary and cost effective,
and then report to you in more detail on the reasons for our
participation in the banks and on several issues about
which you have expressed particular interest or concern.
This year we are requesting budget authority of $3.6
billion for the development banks. This consists of two
parts: $1,842 million for paid-in capital subscriptions and
for contributions to the concessional windows of the banks,
which will eventually result in expenditures; and $1,782
million for callable capital subscriptions to the banks,
which will not result in actual expenditures.
The request breaks down as follows:
— $1,026 million for U.S. subscriptions to the
World Bank's capital. Ten percent of this amount, or
$102.6 million would be paid-in. With this subscription,
and those of other member countries, the Bank is able
to borrow on private markets and relend the funds
for development assistance projects at market rates
of interest. The Bank has never had a default on
its loans and earns money each year.
B-1456

- 2-

" $1/092 million for U.S. contributions to the fourth
and fifth replenishments of the International Development
Association. IDA is the concessional loan facility of the
World Bank. It lends money only to the poorest countries
of the world. Of this total, $800 million is for this
year's installment to IDA V, and $292 million is needed
to complete the final installment of U.S. contribution to
the fourth replenishment, which was negotiated by the
previous Administration. This year's total IDA
request is $166 million less than what Congress actually
appropriated for this institution last year.
— $33.4 million for the third and final installment
of U.S. contributions to the International Finance
Corporation, the World Bank affiliate that encourages
the growth of productive private enterprise in developing
countries.
— $687 million for the first installment of the U.S.
subscription to the capital of the Inter-American Development
Bank. Of this amount, 7.5 percent or $51.5 million is
paid-in. The Bank is a primary source of development
lending in the hemisphere and the United States is its
leading shareholder.
— $325 million for U.S. contributions to the Fund for
Special Operations of the IDB, the Bank's soft loan window.
$175 million is for the first of four annual installments
to the new replenishment, each of which calls for
a lower U.S. contribution than was pledged to the
previous replenishment. The remaining $150 million is for
the final part of our contribution to the prior replenishment, which was negotiated by the previous Administration.
— $248 million for subscriptions to the capital of
the Asian Development Bank. Ten percent, or $24.8 million
of this subscription will be paid-in. This bank has established an excellent record and Japan has taken the lead
in providing for its financing. Furthermore, European
members have increased their proportionate share in
providing funds.
— $171 million for U.S. contributions to the Asian
Development Fund, the soft loan window of the Asian
Development Bank. $111 million is for the first installment of our contribution to the new replenishment and $60
million is for the final installment of our contribution
to the present replenishment, which was negotiated in 1975.

- 3-

"" $4g million for the first of three annual installments to the African Development FuncT This request will
enable the United States to provide a reasonable share of
funding for concessional lending to the poorest African
countries. It reflects our objective of taking a more active
role in encouraging economic and social development in Africa

aside callable capital, the request would result in expenditures that would be $286 million less than the expenditures
called for in last year's request.
Compared to last year's appropriation, expenditures
resulting from this year's request would be up by $211
million, or 13 percent. This increase is the result
of unfunded requests from prior years, which account
for almost $500 million in expenditures (deriving from
almost $1 billion of total budget authority). If we could
clear up these unfunded amounts, the budgetary outlook for
U.S. contributions to the multilateral development banks
over the next few years would show a fairly constant
level of expenditures in nominal terms and a reduction
in real terms.
This is the story on the level and breakdown of
our budget request for FY 1980. It is a substantial sum.
Let me tell you why I believe it is necessary and why
it would be well spent.
First, helping the developing countries through participation in the banks advances important U.S. foreign
policy and security interests. Our interests require
the successful social and economic development of these
countries. Many of these interests are shared by other
industrial countries, and most importantly by many
developing countries as well. These shared interests
are the foundation for effective multilateral cooperation
through the banks.
The U.S. has a great deal at stake in these countries.
Some occupy strategic geographic positions and possibilities
exist for unrest and conflict, which could carry dangers
for many countries, including the United States. Furthermore, we need the cooperation of the developing world if
we are to achieve such objectives as: halting the

- L-

proliferation of nuclear weapons, limiting conventional
armaments, combatting international terrorism, suppressing
international drug traffic, controlling illegal migration,
promoting human rights and protecting the global environment.
Our economic interests in the developing world are large
and growing. As a group, these countries were a market for
30 percent of our exports in 1977, including $6.7 billion
in agricultural commodities. They were the source for
24 percent of our imports in 1977, including tin, bauxite
rubber, manganese and other critically needed raw materials.
Second, we derive significant economic and financial
benefits from the activities of the multilateral banks,
which more than offset the budgetary burden of our contributions. In short we earn a good return on our investment.
These direct financial and economic benefits include
contracts awarded to U.S. firms resulting from development
projects financed by the banks, the purchase of other
goods and services in this country derived from bank
activities, and interest paid to U.S. holders of bank
bonds. On a cumulative basis, the banks have returned
in these kinds of benefits substantially more than the
amounts which have been paid in by the U.S. Government.
Thus our contributions to the banks have not been a problem
for the balance of payments or a source of trouble for the
dollar. Indeed, they have provided benefits for the U.S.
economy in terms of jobs and our economic growth.
Looked at more broadly, the multilateral development
banks have played a very constructive role in sustaining
a smoothly functioning and growing world economy which
in turn has helped our trade and employment. They
are a central part of the system for economic cooperation
which the United States worked hard to establish after
World War II and which we must continue to support
strongly today. We live in an economically interdependent
world, and we need to encourage and extend international
cooperation on development, as well as trade and finance,
if we are to deal successfully with our own economic
problems.
Third, the banks have been effective instruments for
promoting economic and social development and thus are
contributing to a more tolerable world environment for
this and coming generations.

- 5 -

Essentially these institutions apply banking
principles to the achievement of development purposes.
In this they are unique instruments in the annals of
economic change, and they work. The projects they finance
are soundly conceived, carefully supervised and well executed
Of course there have been exceptions, but they are comparatively few and the average quality has been high indeed.
One of the principal U.S. objectives in the banks is
to encourage and expand the use of resources to assist
the poor — not to finance a welfare program, but to raise
productivity and increase employment opportunities. This
requires the financing of the right mixture of projects
to enlarge basic infrastructure, raise agricultural
productivity, provide the basis for wider employment in
urban areas and provide the foundation for expanding
essential social services.
The World Bank has been a leader in the effort to
reach the poor and progress is continuing. During the
Bank's last fiscal year, 31 IDA projects amounting to
$867 million were approved for rural development lending
alone, with benefits going mostly to small farmers, tenants,
and landless laborers. Emphasis is being placed on helping
the urban poor through projects which provide sites
and services for housing and through the encouragement
of labor intensive industries.
In the Inter-American Development Bank, the recently
negotiated replenishment agreement explicitly provides
that 50 percent of all Bank lending — conventional and
concessional — will go to low income groups. In addition,
the agreement requires that concessional resources from the
Fund for Special Operations be effectively targeted at the
poorest countries and the poorest people of the hemisphere.
While we have devoted a great deal of effort to
encourage movement in this direction, we recognize that the
banks must maintain a balanced approach to growth and
development. Lending for transportation, communications
and electric power will continue to have high priority.
Infrastructure and basic needs projects depend on each
other.
Another high priority that we strongly support is
the expansion of Bank lending for energy development.
In response to a request made at the Bonn Summit Meeting,
the World Bank explored new approaches to help solve the

- 6 -

growing energy problems of developing countries and
proposed an expanded lending program to do this. The
United States has endorsed the general provisions of
that program, including Bank financing for geological
and geophysical surveys and exploratory drilling, and
an acceleration in lending for projects to develop and
produce gas and oil. By 1983, the World Bank Group
expects to be lending $1.5 billion a year for this
program, which would amount to more than 10 percent
of its total lending. Over the next few years, the
Inter-American Development Bank will be devoting a large
proportion of its lending to develop geothermal and
hydroelectric potential in Latin America, and the Asian
Development Bank has also embarked on a large lending
program to finance the production of primary energy
fuels. These Bank funds, moreover, will facilitate
additional private investment in this critical area,
thus helping to meet urgent requirements in the developing
countries, and improving the oil supply and demand balance
for the world as a whole.
Fourth, the Banks are an unusually effective means
for sharing the development assistance burden among the
better-off countries .
Currently the United States provides one-fourth of
the total funding requirements for these institutions,
while other countries provide three-fourths. In contrast,
the United States, twenty-five years ago, provided
about two-thirds of total foreign economic assistance.
Countries that once received assistance are now major
sources of assistance and this encouraging process
continues today.
Consequently, our participation in the multilateral
development banks has proven to be increasingly cost
effective, providing a multiplier effect to the use of
our development assistance appropriations. This
substantial benefit, however, requires that the United
States contribute its fair share of total resources.
For example, if we do not contribute $800 million
to this year's installment for IDA V, other countries'
shares would not become available for commitment and
IDA lending would have to stop. In the case of the remaining U.S. share of IDA IV, funds are needed to meet
disbursement requirements on past commitments.
Under the replenishment arrangements in the InterAmerican Development Bank, the Asian Development Fund

- 7and the African Development Fund, other countries
may reduce their contributions if we do not provide
ours in full.
Direct budgetary costs are even more greatly
reduced by the banks' extensive use of callable
capital for subscribing to new shares. This type
of capital is not paid in to the banks. In the case
of the U.S., it never leaves the Treasury Department
and does not result in any budgetary outlay. These
subscriptions, however, serve as backing that enables
the banks to borrow in the world's private
capital markets. Callable capital would result
in a budgetary outlay only in the event it were needed
to cover a bank default on an obligation to bondholders.
Such a call has never taken place in the past. In view
of the banks' excellent financial record, their paid-in
capital, and their large reserves from past earnings, the
possibility of a call taking place in the future is remote.
Under typical capital replenishment arrangements,
nine out of ten dollars for conventional lending are
raised by the banks in this way, enabling us to achieve
very large budgetary savings without restricting the flow
of needed resources to developing countries. In the case
of the World Bank, total U.S. paid-in capital contributions of $884 million have generated more than $45 billion
of lending, a leverage factor of 50 to 1. Moreover, the
value of our shares is not only still intact, but it has
been increased as a result of past earnings.
In the next subscription to the Inter-American
Development Bank, the paid-in portion will be reduced
from 10 percent to 7-1/2 percent. This will provide
additional leverage in the use of U.S. budgetary expenditures to help finance this Bank. It is our intention
to seek further reductions in the paid-in portions of
future capital subscriptions of other banks, consonant
with their growing financial strengthHave domestic social programs suffered as a result
of our foreign assistance program? I do not believe so.
Only one-fourth of one percent of our Gross National
Product goes for foreign economic assistance, including
our participation in the multilateral development banks.
This figure has declined in recent years and is now lower
than the corresponding GNP shares for twelve of the
seventeen countries in the Development Assistance Committee
of the OECD.

- 8-

On the other hand, U.S. budgetary expenditures for
domestic social programs have risen rapidly over the
past decade. In 1965, expenditures for these programs
amounted to $6 for each dollar of foreign aid. By 1969,
this multiple had risen to $18 and by 1979 to $46. It is
clear from these figures that funding for foreign economic
assistance has not taken place at the expense of domestic
social priorities.
In justifying the appropriations request I have
emphasized four factors which constitute the rationale
for continued U.S. participation in the banks: foreign
policy and national security considerations, economic
and financial benefits, the overall effectiveness of the
banks in lending to promote growth and reach the poor,
and the cost effectiveness of our subscriptions
and contributions. At this time, I would like to
discuss each of these matters in more detail and then
report to you further on several other issues including
use of capital saving technologies, salaries, human
rights, accountability, and commodities.
FOREIGN POLICY AND NATIONAL SECURITY CONSIDERATIONS
The more than one hundred developing nations
contain the great majority of the world's population.
They differ greatly among themselves in terms of culture,
history, political systems and the level of economic
development that they have attained. Nevertheless,
they all share one major aspiration: economic growth
and development and material improvement in the lives
of their people.
The less developed countries have moved to the
forefront of world affairs. They are increasingly active
in international political and economic organizations and
more effective in pursuing their national and regional
interests. Collectively, and in some cases individually,
they have assumed a much greater importance in U.S.
foreign policy and national security considerations:
— They are an important source of raw materials which
are critical to the economies of the United States and other
industrial countries.
— They occupy strategic geographical positions.

- 9 -

— They are growing users of atomic energy for
peaceful purposes and a number of them have the
capability for developing nuclear weapons.
— They have military capabilities which can be
used to initiate military conflicts affecting U.S.
interests and having the potential of escalating
into great-power confrontation.
— Their growing populations and aspirations
place greater demands on the earth's resources and
environment on which we too must depend.
Negotiations toward the solutions to these problems
are complex and difficult, requiring a balancing of
interests and a sensitivity to the requirements of
developing countries. In implementing non-proliferation
policy, for example, it is necessary to recognize that
less developed countries have a legitimate and expanding
requirement for energy. In this particular respect,
the IBRD Report on Energy and the recommendations
it contained for project financing in this sector,
have been very helpful. In order to combat international
terrorism effectively, we must be able to count
on the support of less developed countries in multilater
organizations such as the U.N. and in dealing directly
with individual situations as they may arise. The
Law of the Sea Conference now going on under the
auspices of the United Nations requires the cooperation
of less developed countries on a number of issues
if we are to reach agreement and still protect interests
of the United States relating to navigation, marine
research, protection of the environment and exploration
and exploitation of deep seabed mineral resources.
In this general context of competing and conflicting interests on major international issues, the
multilateral development banks provide the United
States with a practical and effective way to work
cooperatively with developing countries to help
them meet their most basic aspirations. However, our
relationships with less developed countries are also
important on an individual basis. The following four
examples illustrate how multilateral development bank
activity contributes to the achievement of U.S. policy
objectives in specific countries.

- 10 -

Thailand
Thailand has a central position in southeast Asia
and has maintained a close relationship with the United
States. It is in our national interest to support the
stability and independence of Thailand because it is a
key element of regional progress and balance in southeast
Asia. Thailand's cooperation is essential if we are to
have an effective narcotics suppression program. It has
also provided a country of first refuge for Indo-Chinese
refugees. Thailand is important as an expanding
market for U.S. exports including cotton, tobacco,
machinery, fertilizers, iron, and steel. It is also
a reliable supplier of critical raw material imports
such as tin, tungsten and rubber.
Economically, Thailand has grown at a rate matched
by few developing countries. From 1960 to 1976, GNP
growth averaged 7.6 percent a year. A high and rising
level of investment has been maintained, exceeding 20
percent of GNP and largely financed by domestic savings.
Per capita income doubled over the 1960-1976 period.
Inflation has been kept under control by conservative
fiscal policies, although price pressures have recently
intensified.
In the past, economic policies have tended to favor
Bangkok, other urban areas and the relatively better off
farmers of the central plains. A large proportion of
the rural population, particularly in the northeast, has
not shared equitably in the benefits of economic growth.
Failure to remedy the growing disparity has fostered
insurgency and hindered political stability.
The present government in Thailand is beginning to
reorient economic policy more in favor of these
elements of the rural population. The Prime Minister
has declared 1979 the "Year of the Farmer" and has
stated his government's intention to direct far greater
resources to rural areas. The revised Five-Year Development Plan for 1977-1981 calls for external borrowing of
about $1 billion per year to finance rural and infrastructure development to bring services and improved
agricultural technology to the rural poor.
For 1979, the proposed borrowing program includes
$314 million from the IBRD and $324 million from the
ADB. It is in our interest that the flow of financing

- 11 continue to Thailand. Our participation in the
banks will help assure that the country will be
able to sustain its growth and carry out
needed changes in its overall economic oolicies.
Mexico
Mexico provides another example of how a country
which is critically important to the United States
benefits from multilateral development bank activities.
Mexico's importance to the U.S. stems primarily
from its geographical proximity to this country, and
the influence which this proximity can have on the
political, economic, social, environmental and security
aspects of American society. Two fundamental U.S.
policy objectives which flow from this basic fact
of life are:
— Political stability and economic growth in .
a Mexico which is friendly to the United States.
— Control of migration which if not controlled,
has potentially disruptive effects for the United
States.
In addition, the development of Mexico's
hydrocarbon resources will increase the free world's
supply of oil and provide Mexico with the revenue
to increase domestic employment, thus reducing migration
pressures on the United States. Finally, cooperation
between our two countries is necessary for narcotics
control and other border issues including sanitation,
pollution control, and law enforcement.
Mexico does not receive concessional lending
from either the IBRD or the IDB. It has become, in
fact, a donor to the Fund for Special Operations of the
IDB. It continues, however, to receive substantial
amounts of market rate financing from the banks.
In their most recent fiscal years, World Bank loans to
Mexico amounted to $469 million while those of the
Inter-American Development Bank were $238 million.
President Carter, during a recent trip to Mexico,
visited an integrated rural development project which
is being financed jointly by the banks. The purpose

- 12 "
of the project is to increase incomes and employment
opportunities for poor people in rural areas of the
country. The banks thus play a very useful financial
intermediary role in Mexico, and they provide a
source of advice on investment plans which may help
Mexico to use petroleum revenues most effectively
to solve unemployment and under-employment and redress
social and economic imbalances.
Tanzania
Tanzania is one of the world's poorest countries.
However, it has taken a prominent position in regional
and international organizations and is recognized as a
leader in Africa and in the Non-Aligned Movement.
President Nyerere is Chairman of the Front Line States
and U.S. officials have worked with him concerning
very sensitive problems relating to Rhodesia and Namibia
President Nyerere and his government have advanced
a national development strategy which emphasizes "self
reliance". Their philosophy has entailed the organization of the rural population into "ujamaa" villages,
and attempting to provide education and other
services on a limited but equitable basis. The World
Bank has worked closely with Tanzania in devising
and implementing its rural development strategy which
is aimed at reaching the poor and helping to meet basic
human needs. On a cumulative basis, it has committed
$605 million to Tanzania, including $353 million
on concessional terms.
ECONOMIC AND FINANCIAL BENEFITS
U.S. participation in the multilateral development
banks is a long-term investment in the future of the^
developing world. Although the most important benefits
to the United States are long-term, we clearly derive
short-term benefits as well.
Increased financing to the developing countries
permits them to increase their imports of investment
goods from the United States and other developed countries directly. As a result of the increased investment,
the developing countries are able to improve their
living standards more rapidly, providing a growing
market for the United States and other exporters.

13 "

This investment also helps developing countries
produce raw materials the United States must import
in order to prosper.
Exports to developing countries resulting
directly from multilateral development bank loans
and from the more rapid expansion of living standards
are a growing source of demand for U.S. goods and
services. This provides jobs, income, profits, and
tax revenue in the United States.
From the time of the banks' inception in 1946 to
the middle of 1978, direct accumulated receipts by
all segments of the U.S. economy have exceeded outflows to the MDBs by $2.4 billion. In addition, an
econometric analysis which we have made shows that
real GNP increased annually between $1.2 billion and
$1.8 billion as a result of exports of U.S. goods
and services to markets directly created by MDB
financed projects in developing countries. This
means that every U.S. dollar paid into the MDBs
generated between $2.39 and $3.38 in real U.S.
economic growth annually over the period.
U.S. participation in the multilateral development banks is not motivated primarily by these kinds
of benefits. But it is a mistake to view outlays to
the multilateral development banks as an economic
loss to the United States.
A large proportion of the direct economic and
financial benefits that have accrued to the United
States have been in the form of contracts awarded
to U.S. firms for loan projects financed by the banks
overseas. As a general matter, our cumulative procurement
shares from the banks have been in line with our share
of contributions: 25 percent in the World Bank, 50
percent in the Inter-American Development Bank and
8 percent in the Asian Development Bank.
In the case of the Asian Development Bank, procurement has been less than the level of our expectations.
Consequently, we established an inter-agency working
group to study the reasons for the disparity and to
take appropriate actions. The working group, consisting
of representatives from Treasury, Commerce and the
State Department's East Asia and Economic Bureaus,
took the following actions:

- 14 — Distributed a questionnaire to 300 U.S.
consulting firms eliciting information on
weaknesses in the system for providing
information about upcoming contracts
— Conducted a bid-by-bid review of the award
of 1500 contracts let by the Asian Development
Bank. The review indicated that U.S. firms bid
on 300 of these contracts, a bid rate of 20
percent, and that they won 100 of the contract
awards for which they had bid, an award rate of
33 percent.
— Arranged for a meeting of regional economic
and commercial counselors which is to take
place in Manila to be built around the theme
of increasing U.S. ADB procurement.
— Promoted a series of ADB staff visits to
U.S. Chambers of Commerce, mainly on the
west coast, to advise U.S. firms of procurement
opportunities in the ADB.
— Sought additional opportunities for U.S. Government officials to talk to business groups about
ADB activities. A Treasury official in recent
months has briefed both business and trade
groups in Georgia and Michigan on ADB
procurement.
— Persuaded ADB Management to provide copies
of the Monthly Operations Report directly to
interested businesses on a subscription basis.
— Persuaded ADB management to publish all
procurement notices in "Development Forum,"
published monthly by the U.N. as well as in
the individual trade publications.
— Established pilot programs for Economic and
Commercial Counselors to monitor the preparation of specific project proposals.
As a result of the study, we have assured ourselves
that the lending procedures of the ADB are fair to U.S.
suppliers and that there is no institutional bias within
the Bank which limits the success of U.S. suppliers.
We see the problem as one of encouraging U.S. suppliers
to bid more aggressively. Our role in solving this
problem is making sure that potential U.S. suppliers
have enough information as early as possible.

- 15 -

A system has been established within the office of
the U.S. Director at the ADB to increase the flow of information to U.S. suppliers. Prior to Board consideration
of each loan, a cable incorporating procurement information
is sent to the U.S. Economic or Commercial Counselor in
the recipient country and to the Commerce Department in
Washington for dissemination to U.S. firms, including
publication in Commerce Department periodicals such as
Business America. We look forward to seeing improvement
in U.S. procurement from ADB-financed projects as a result
of the effort we are now making and as a result of
currency realignments which should make American exports
generally more competitive.
Within the Inter-American Development Bank,
we are now pursuing a parallel program to increase U.S.
procurement. A team of Commerce Department officials
has consulted with the U.S. Executive Director and arrangements are being made for establishing a reporting system
to advise U.S. Embassy economic counselors in Latin
America of upcoming bank contracts similar to that which
has been established for the Asian Development Bank. In
recent months, the U.S. Alternate Executive Director
of the IDB has participated in a number of meetings
to advise U.S. businesses of procurement opportunities
in Latin America through the Inter-American Development
Bank and to assist U.S. businessmen in doing business
through the bank.
A number of other actions have been taken which
should be helpful in promoting U.S. procurement in the
banks. A brochure outlining procurement opportunities
and procedures and practices in all the banks has recently
been revised and reissued. The banks themselves have prepared
and provided detailed information on their lending activities
and procurement eligibility requirements. This material
is available directly from the banks or through the U.S.
Executive Directors' offices. The Monthly Operations
Report is now available on a subscription basis
from the ADB as it has been for some time from
the World Bank Group and we are hopeful that the InterAmerican Development Bank will provide this material
on a similar basis in the near future. The offices of
the U.S. Executive Directors in all of the banks are
extremely active in assisting U.S. businessmen and we
have encouraged them to do more in this regard.

- 16 '
In the World Bank Group, recent examples of contracts
awarded to U.S. firms include: $4.6 million to Ingersoll

from the Inter-American Development Bank include:
$1.1 million to the Robins Company for equipment in
Brazil and $2.0 million to the R.J.L. Hoste^Company
for construction in Guatemala. Smaller firms also
benefit from awards of contracts for bank-financed
projects.
REACHING THE POOR
The World Development Report, released by the
World Bank last August, estimated that more than 800
million people of the developing world continue to
live in conditions of absolute poverty — that they
are inadequately sheltered, malnourished, illiterate
and diseased, with infant mortality rates in low income
countries running far in excess of 100 for every thousand
live births and life expectancies estimated at less
than 44 years.
The very impressive growth rates of less developed
countries in the last 25 years have not resulted in
commensurate improvement in the lives of the absolutely
poor. There has been increasing concern that much
greater efforts must be made by the multilateral development banks and by other development assistance agencies
to reach these people more directly and to involve them
more productively in the development process. This
Administration supports greater efforts by all the
development assistance organizations to reach the
poor in recipient countries. We have urged the World
Bank and the regional development banks to take
a number of actions to improve appraisal, implementation and evaluation of projects designed to reach
the poor.

- 17 "
At the same time we recognize that a great deal
of progress has already been made. During the Annual
Meeting of the World Bank Group in Nairobi in 1973,
a number of objectives were established to change
the Bank's lending practices over the following five
year period: lending in the agricultural sector was
to be increased by 40 percent and a minimum of 70
percent of all agricultural loans were to benefit
small farmers. Both of these goals have been met
and surpassed. Agricultural lending in the five year
period 1974-78 was up 145 percent over the preceding
five year period. Of 363 agricultural projects approved
by the Bank in 1974-78, 75 percent contained a component
explicitly directed at assisting small farmers. In
more than 200 of these 363 projects, over half
of the direct beneficiaries were expected to be
members of the rural poor. Bank experts now
estimate that as a result of these loans the incomes
of over 10 million rural families will at least
double.
The World Bank has also established a set of
goals for addressing the problems of the urban poor
and a number of projects have already been approved
to provide sites and services for urban housing and
to create additional employment opportunities. For
the period 1976-80, the Bank intends to finance 50
urban projects and by 1981 to substantially increase
the proportion of its lending through industrial
development finance institutions which directly
benefits the urban poor. Additional emphasis is being
placed on labor intensive industries and finding ways
to encourage artisan and cottage industries. The use
of labor intensive methods and practices has been
mandated where appropriate in the implementation of
Bank projects and encouraged throughout the construction
industries of recipient countries.
In spite of the progress that has been made
and that which is programmed, there is no disagreement
that the problems of absolute poverty will be with
us far into the future. Indeed the World Bank
itself estimates that it would take a massive
effort to reduce the number of people in absolute
poverty to the level of 400 million by the year
2000. We are convinced, however, that much more
can be done to raise the productivity of poor people
to increase their incomes and to provide them
with improved access to public services.

- 18 ~
We have worked along two basic tracks to
promote this result. We have sought basic changes
in the policies of the banks to ensure that they
will devote an increasing share of their loans to
help the poor directly. In the recently negotiated
replenishment of the Inter-American Development Bank,
for example, it was agreed that one-half
of all lending over the next four years benefit
low income groups in recipient countries. It
was also agreed that the concessional resources
of the FSO should be better targeted toward poor
people and poor countries. In the first and second
years of the replenishment, 75 percent of these
scarce concessional foreign exchange resources
must go to the poorest countries in the
hemisphere. In the third and fourth years,
this figure must be increased to 80 percent.
Any of the remaining FSO funds which go to other
countries must be used only for projects which
demonstrably benefit low income groups.
To assure that these results are
achieved, the Board of Governors of the Bank has
directed that the Board of Executive Directors
prepare and submit by this June a report which will
define precisely the groups which are to be
benefitted with these resources. In addition,
it should be noted that Bank management has already
taken a number of steps to improve its capacity
to reach low income groups. A clear statement
of the intended beneficiaries of each project,
the justification for the use of FSO resources
and a description of land tenancy, in the case
of agricultural loans, is now required in all loan
documents. The Bank has also established a Small
Project Financing Program which will enable it
to respond to the needs of low income groups on
a pilot basis and in innovative ways outside the
regular lending program constraints.
In the Asian Development Bank, we took a very
active role in seeing that the Bank's Board of
Directors adopted an Agricultural Sector Paper
based on the results of the Second Agricultural
Survey which was carried out last year at Bank
initiative and expense. Among other things, the
paper provides the following guidance for future
lending in agriculture: improved design of projects

" 19 "
to assure more rural employment opportunities,
concentration on rural infrastructure including
feeder road networks; better support facilities
for rural credit programs and improved arrangements
for providing inputs and for marketing production;
establishment and upgrading of extension services
for rural women; strengthening small scale enterprises
and better provision for health, nutrition and
family planning assistance. In addition, it calls
for more of an orientation toward helping to meet
basic human needs of the rural poor, encourages
the participation of the under-employed in bank-financed
projects, and requires that projects emphasize
cost-reduction through calculations of project-cost
per beneficiary.
The banks have proceeded along three lines
toward the objective of further benefitting the
poor.
First, the banks are using their considerable
aid leverage to promote policy changes in the
borrowing countries to improve the lot of the poor.
As part of this approach, much greater effort is
currently being made to involve the poor themselves
in the planning and implementation of development
projects. Examples of these efforts exist in all
the multilateral development banks.
In February 1978, the International Development
Association approved an $8.5 million credit to Cameroon
for integrated rural development in the economically
deprived eastern province of the country. This loan,
which is to provide assistance through a provincial
development organization (ZAPI), places particular
importance on getting the full cooperation and participation of local farmers in all aspects of the
project. ZAPI itself has set a long-term objective
of eventually enabling the farmers to take charge
of local development actions and has adopted a
strategy aimed at creating a farmer controlled and
operated cooperative structure. To this end, a
system of farmer committees has been established
to organize village marketing and to oversee
disbursement and recovery of credits as well as to
provide the farmers with a mechanism for influencing
policy, planning and coordination of rural development activities in the province.

20
In September 1978, the Asian Development Bank made
a loan of $18 million to Indonesia for an irrigation
project. This loan also emphasizes the need for active
involvement of farmers through local irrigation associa
tions which are called Subaks. These organizations
are traditional in some rural areas of Indonesia and
include in their membership all cultivators who own,
sharecrop or rent land receiving water from a single
source. Each member of the Subak has an equal vote
and the leadership is democratically elected by
majority vote or consensus. The ADB loan agreement
specifically requires that the Subaks be directly
involved in the allocation of water between Subaks
and in the settlement of inter-Subak water rights
disputes.
A third example of involvement by the poor is
an IDB loan of $13.2 million to El Salvador for
community development. This loan, which was approved
in November 1978, has been designed to benefit
low income groups in the northwestern region of the
country. It includes a sub-program of credits for
production purposes to individuals or cooperative
organizations and a sub-program of small scale public
works such as school repairs and construction of
feeder roads, bridges, community halls, public baths,
washrooms and latrines. A central element of the
project is the provision for beneficiary participation in setting priorities for the small scale public
works and for giving the beneficiaries the opportunity
to work on the implementation of these works.
Second, the multilateral development banks have
shifted the sectoral composition of their lending
activity to favor projects which directly meet the
needs of the poor. For example, World Bank Group
lending for rural development increased over sevenfold from FY 1973 to FY 1978 from $247 million
to $1,728 million. Similar sectoral changes are
occuring in the regional banks as well.
In the Asian Development Bank, for the year 1977,
the percentage share of agricultural projects was
29 percent, up from 26 percent in 1976. In 1978 more
than 53 percent of the bank's concessional lending to
the poorest countries of the region was for agricultural purposes. In the IDB at the end of 1977,
bank lending going directly for agricultural

- 21

purposes accounted for 23 percent of the total
loan portfolio. In 1978, there was an increased
concentration on approval of integrated rural
development projects which are mandated to rise in
the period 1979-1982 since, under the upcoming
replenishment, between 30 and 35 percent of bank
lending has been expressly designated for rural
development projects. A further 10 to 15 percent
is targeted for urban development projects.
Third, the MDBs are changing the emphasis of
their more traditional projects to assure that their
benefits are shared by the rural and urban poor. In
the design of water supply, electrification and road
projects, for example, the benefits accruing to poorer
groups have been considerably expanded.
Two specific recent examples come to mind.
An IDB loan of $12.2 million to Ecuador for a rural
water supply system has been aimed at several communities in El Oro province where 90 percent of the
population have incomes less than the national
average income. An ADB loan of $24.0 million to
the Philippines has been designed to support construction of secondary and feeder roads in the island
of Mindanao, a particularly disadvantaged area of the
country. It has been estimated that, in addition
to net value added through incremental agricultural
production and user cost savings, the project will
also benefit 42,000 families with a population of
270,000 in the area of influence through improved
availability of governmental social and administrative services, a favorable effect on school enrollments and greater access to health services.
An important problem is how best to develop
a capacity to discover "who actually benefits"
from MDB projects. Considerable effort has been
made by the banks in the last several years to
improve the data gathering procedures and statistical
analysis capabilities of the borrowing countries.
This effort is a vital ingredient of the banks'
programs to know whether they are in fact better
reaching the poor, and how to assure that they will
do so in the future. These statistical and analytical

- 22 "
techniques are now receiving greater attention, along
with shifts in sectoral priorities and redesign of
traditional projects.
There is substantial evidence that the multilateral development banks have made considerable
progress in recent years in better reaching the poor.
The most recent statistics for IDA indicated
that during FY 1978 50 agricultural projects amounting
to $1,341 million were approved, accounting for
nearly 58 percent of total IDA lending. Of these
projects, 31 amounting to $867 million were for
rural development lending in which a majority of
the direct benefits go to small farmers, tenants and
landless laborers. Approximately 6.6 million rural
families are expected to benefit directly from these
50 agricultural and rural development loans and of
those families, two-thirds or 4.4 million, are either
absolutely poor or in the lower third of the income
levels for their particular countries. In addition
to the direct beneficiaries, the World Bank staff
estimated that 13 million other farm families
should benefit from the projects through advances
such as improved research, storage, seed supply,
and marketing facilities as well as from
increased employment opportunities or from the
provision of health and education services or improved transportation and other rural infrastructure.
These efforts to reach the poor are essential.
At the same time, we believe that the multilateral
development banks must also continue to pursue a
multiplicity of goals if they are to be effective
catalysts for development. The banks must preserve
their recognized strengths in project design,
sectoral and country programming, macro-policy
leverage and infrastructure support. We would
not want them to abandon these programs.
Infrastructure projects are still key in many less
developed countries because they provide the necessary
economic context for other assistance programs, includi
those to benefit directly the poor. For example, feede
roads serving small farmers in isolated parts of Africa
must lead eventually to a principal road if inputs are
get in and production is to get out. Adequate port fac
ties are needed if fertilizers and other inputs from ab

" 23 "

are to reach these smallholders and if their coffee or
cocoa or other production is to have an export market.
The smallholders themselves recognize that an
improved transportation infrastructure is essential
to reduce the disparities between farmgate and
market prices. Indeed, the success of projects
designed to meet basic human needs are often dependent
upon these kinds of infrastructure projects. Hydroelectric power projects provide another example of
projects which are critical if less developed countries are to meet expanding energy requirements
and reduce their reliance on expensive imported
fuels. The banks must combine projects such
as these with the new emphasis on reaching the
poor throughout the developing world in ways which
EFFECTIVENESS
OF THE BANKS
promote both THE
productivity
and equity.
The banks are very effective in promoting
the economic growth and development of recipient
countries. They raise resources for both concessional
and near market lending operations from many donor
countries. As a consequence, they are able to operate
on a significant scale and across the range of economic
sectors. Supported by a well qualified and experienced
staff from more than 100 member countries, they have
established a reputation for rigorous and detailed
appraisal of project proposals and programs. The volume
and range of their operations, and the expertise they can
bring to bear, enable them to play a unique role in
promoting economic growth and development. They have
a capability and impact which is greater than that
which any individual donor country can muster.
The multilateral development banks have become
the leading institutions in the field of international
economic development. They are now the largest source
of official assistance to developing areas, last year
making commitments for approximately $11 billion for
over 400 projects in recipient countries. Actual disbursements exceeded $5.5 billion. This level of lending
gives the banks important influence in recipient countries.
Because of their apolitical character, and the fact
that they operate on the basis of economic and
financial criteria, the banks are able to encourage
the adoption of appropriate economic policies.

- 24 They finance programs of technical assistance,
to strengthen local institutions and provide training
for local officials. They encourage coordination of the
resource flow to developing countries and promote cooperation among official lenders by chairing aid coordination
groups for particular countries. They also support
research and development organizations, particularly
in agriculture, and sponsor seminars and research on
developmental problems, making the results available
to interested individuals and groups.
In its most recent fiscal year, the World Bank
Group approved total loans and investments amounting to
$8,749.1 million. Of that amount, $6,097 million were
for loans on near market terms, $2,313 million were for
loans on concessional terms and $338.4 million were for
investments by the International Finance Corporation.
Disbursements from the Bank and IDA made during the
year were $3,849 million. Technical assistance operations financed by the Bank included two loans amounting
to $20.3 million and components of 151 other operations
which amounted to an additional $230 million.
The Bank also maintained a leading role in the
organization and operations of various aid coordination
mechanisms. Under the auspices of the Bank, the Caribbean
Group for Cooperation in Economic Development was established and held its first meeting in 1978. Formal meetings
of ten other aid coordinating groups were held under
Bank auspices during the year including groups for
Bangladesh, Bolivia, Burma, Egypt, India, Nepal,
Pakistan, Philippines, Sri Lanka, and Zambia. In
addition the Bank participated in a meeting of the InterGovernmental Group on Indonesia and hosted a meeting
of donor agencies to discuss improving cofinancing and
coordination of operations in the population sector.
In order to promote better inter-agency coordination, the Bank also entered into a formal agreement with
the recently established International Fund for
Agricultural Development (IFAD) on a working arrangement
between the two organizations. The Inter-American Development Bank and the Asian Development Bank have entered
into similar agreements with IFAD.
In addition, the World Bank became a co-sponsor
for Research and Training in Tropical Diseases and IDA
agreed to administer the Special Action Account of $385
million for the European Economic Community to provide

-25 -

quick-disbursing assistance to the poorest developing
countries. A number of ongoing programs and relationships
were maintained with various U.N. agencies including the
Food and Agriculture Organization, the World Health Organization, United Nations Industrial Development Organization,
the International Labor Organization and the United
Nations Education, Scientific and Cultural Organization.
During 1978, the World Bank also continued its
support for eleven international agricultural research
organizations providing $8.7 million to help finance
the programs of organizations such as the International
Institute of Tropical Agriculture in Nigeria, the International Livestock Center for Africa in Ethiopia, and
the International Potato Center in Peru.
Eighty-seven economic research projects and studies
were also underway in the IBRD during 1978. The results
of these studies are available to the international
research community and the public as well as to policy
makers within the Bank and member countries. Examples of
studies currently in process include strategies for control
of tropical diseases such as schistosomiosis and the use
of low cost technologies to provide safe drinking water
and sanitation facilities. In addition, examinations
are being made of small scale enterprises in selected
countries and a number of surveys and studies are being
conducted to provide a better analytical framework for
providing rural development assistance.
The World Bank has also continued efforts to
improve its systems for evaluating loan operations.
In 1978, the Bank published an Operations Evaluation
Department review of project performance audit results.
The system for providing feedback to the operating
departments from the audit process was strengthened
through improvement in annual and semiannual procedures
for reviewing completed and on-going projects. All Bank
loans now require the borrower to complete a project
completion report as a standard feature and in more
difficult sectors — such as agriculture, education
and urban development — the establishment of special
monitoring units is required. In 1978, the Bank also
sponsored a seminar on post-evaluation and review for
senior officials of several African countries. As a
result, discussions are continuing with those countries
regarding establishing national agencies to evaluate
public investment projects and similar seminars are
planned for other regions.

- 26 -

Similar functions and activities are carried out by
the regional development banks. For example, during 197
the Presidents of these banks held one of their regular
meetings at the headquarters of the Inter-American Devel
ment Bank to discuss major economic and financial issues
facing developing countries. At this meeting they were
joined by representatives from the World Bank,
the International Monetary Fund, the European Economic
Community, the European Investment Bank, the OPEC
Special Fund and the Islamic Development Fund. During
1978, the IDB initiated joint financing with OPEC
countries and organizations for development projects
in Haiti, Bolivia, and Honduras. The Bank also
sponsored symposia on the application of capital
saving technologies and the prospects for greater
use of solar energy. Last year, the Asian Development
Bank held a seminar for regional development banks
promoting improved appraisal and implementation of
public and private investment projects. The Bank
also completed a survey on South Pacific agriculture
and sponsored a COST-EFFECTIVENESS
seminar on irrigation development and
management.
The cost-effectiveness of U.S. participation
in the multilateral development banks is based on
three factors:
(1) Equitable sharing of the burden for
providing economic assistance with
other donor countries;
(2) Leveraging paid-in capital contributions
to the banks by borrowings in private
capital markets, based on callable
or guarantee capital;
(3) Extending bank resources through
cofinancing arrangements made with
other official sources, including
OPEC countries, and with private banks.
As I indicated at the beginning of my testimony,
the United States has been able progressively to
reduce its share of subscriptions and contributions
to the banks and the shares of other participating

- 27 -

countries have been correspondingly increased.
This process is continuing today. It reflects
the growing economic strength of other countries
and their increased capability to provide more
resources for development. These countries include
industrial countries such as Germany and Japan, the
OPEC countries and some of the relatively more advanced
developing countries such as Brazil and Mexico which
have increased their convertible currency contributions
to the Inter-American Development Bank.
During the past two years, this Administration
has negotiated replenishment agreements for the
International Development Association, the InterAmerican Development Bank, the Asian Development
Fund and the African Development Fund. In all of
these agreements, except that for the African
Development Fund, where the United States had
hardly participated at all, the share of the United
States has declined and the shares of other countries
have increased.
As finally agreed in the spring of 1977, the
fifth replenishment of IDA provided for a reduction
in the U.S. share from 33.32 percent to 31.42 percent.
Countries which increased their contributions to IDA V
were Saudi Arabia, the United Arab Emirates and Kuwait.
Germany and Japan, which had substantially increased
the level of their contributions to the fourth
replenishment, maintained this increased level
during the fifth replenishment.
Subsequently, during the course of 1977 and 1978,
a number of countries announced increases in their
contributions to IDA V including Saudi Arabia, Kuwait,
the Netherlands, Norway, and the United Kingdom.
Altogether, these increased contributions amounted
to $145.5 million with the largest sums coming from
Saudi Arabia which contributed $100 million and Kuwait
which contributed $20 million. As a result of these
additional increased contributions the U.S. share
of IDA V declined further to the level of 31.2 percent.
In preliminary discussions for the sixth replenishment
of resources, we are pursuing a sizable further reduction
in line with the Sense of the Congress Resolution
on shares contained in Title III of Public Law 95-481.

- 28 -

More equitable burden-sharing was one of the key
elements in the recently completed agreement to replenish the resources of the Inter-American Development
Bank, where our share is the largest because we are
the only sizable industrial country in the hemisphere.
Under the original terms of their entry into the bank
in 1974, the non-regional members of Western Europe
and Japan provided 4.4 percent of the Bank's total
capital. In the agreement just negotiated, they
raised the percentage share of their subscription to the
increase by more than two and one-half times to 11 percent,
pledging a total of $876 million in paid-in and callable
capital which serves as backing on the Bank's borrowing
operations. Under the agreement, Canada and Venezuela
are contributing $310 million and $467 million respectively
in paid-in capital and completely convertible backing
for the Bank's borrowing operations. In addition,
all of the recipient member countries of the Bank
are making two-thirds of their paid-in capital fully
convertible, thus mobilizing $178 million in convertible
resources, including $43.5 million from Argentina,
$43.5 million from Brazil and $28 million from Mexico,
or a total of nearly $115 million from these three
countries.
In the Fund for Special Operations, the Bank's
concessional lending facility, the non-regional member
countries maintained their entry share of 30 percent and
increased their contributions from $450 million
to $525 million. Canada, Venezuela and Trinidad and
Tobago agreed to make all of their contributions fully
convertible, providing $58.1 million, $70 million
and $3.9 million respectively for a total of $132
million to these resources which are lent to the poorest
countries in the hemisphere.
The three largest developing countries in the
hemisphere, Argentina, Brazil and Mexico, agreed to
make the equivalent of three-quarters of their FSO
contributions convertible; thus they are contributing
$72 million, $72 million and $46.5 million respectively.
They have also agreed to continue not to borrow these
convertible FSO resources. These three countries and
Venezuela are all former recipients of FSO resources.
They are now making convertible contributions to those
resources of $260 million.

- 29 As a result of these contributions and those of
the non-regional countries, the U.S. share of convertible
FSO resources has dropped from 57 percent in the last
replenishment to 45 percent in the new replenishment.
In terms of absolute amounts, the annual level of
U.S. contributions to the FSO will fall from $200
million under the last replenishment to $175 million
under the new one, a reduction of 12.5 percent or
$25 million per year in paid-in contributions to the
concessional lending fund of the IDB.
In the Asian Development Fund, negotiations
were completed last spring for a replenishment of
resources of $2.0 billion, with the United States
contributing $445 million, or 22.25 percent, and
meeting the share standard established in last year's
appropriations legislation. In addition, other donors
agreed to make supplemental contributions of
$150 million, thus effectively reducing the U.S.
share to 20.7 percent, significantly below the
standard set in last year's legislation.
Other donor countries have increased
their percentage shares of contributions to the
Fund. Japan, for example, originally on a par
with the United States in contributions to the
Fund, is contributing $673 million under the
basic agreement and a supplementary amount of
$118.3 million, for a total of $792 million or
36.8 percent of the total compared with our 20.7
percent. The Netherlands and Sweden also
made marginal increases in their previous
contributions and France, joining the Fund for the
first time, provided an additional $104.8 million.
The other replenishment agreement negotiated
by the Administration last year was for the African
Development Fund. This Fund is relatively small
and U.S. contributions in the past have been very
minor, amounting to $50 million or well under ten
percent of total Fund resources. In this particular
case, the Administration agreed to a very substantial
increase in the percentage share of our contributions
to somewhat under eighteen percent although it is
still a small amount in dollar terms ($125 million
over a 3 year period) because the AFDF is still quite
small itself.

- 30 We consider that this increase is fully justified
on the grounds that Africa is the least developed
continent, that it contains some of the poorest and
least advantaged countries in the world, and that
the African Development Fund has been steadily improving
its administrative and technical capabilities. In
the last two years, Africa has also assumed a much
greater importance than before in the overall foreign
policy of the United States. The announcement of the
$125 million for contributions to the Fund was made last
year at the time of President Carter's visit. It has
been widely publicized in Africa and favorably interpreted
as an indication of increasing U.S. interest.
USE OF CALLABLE CAPITAL
The second factor contributing to costeffectiveness is the ability of the banks to use
callable capital backing for bond issues, thereby
permitting them to raise private capital for
conventional lending, and avoiding budgetary
outlay by the United States or other member countries.
The ability of the banks to leverage limited paid-in
contributions in this way has grown to the point where
today, only one dollar in ten has to be paid-in and in
the case of the IDB it is even less, as a result of
the recent replenishment.
When the World Bank was first established in 1946,
20 percent of the capital was paid in and 80 percent
was callable. The higher proportion of paid-in capital
was necessary to cover start-up expenses, provide acceptable
financial ratios and to secure confidence and support
for the institution from private capital markets. As
the Bank developed, it established a record for prompt
collection and a reputation for financial prudence.
It was possible to reduce the paid-in portion
without damaging the Bank's ability to raise private
funds at an acceptable cost. On a cumulative basis,
the U.S. has paid in $884 million to the capital of
the World Bank and, as a result of burden-sharing
and leverage, supported a total lending program of
over $45 billion. On this basis, each dollar of U.S.
paid-in capital has been able to support approximately
$50 in Bank lending. This pattern has been followed
by the Inter-American Development Bank and the Asian

- 31 -

in the case of the World Bank, we are now at
the point when we can consider whether or not it is
in fact, necessary to continue to have 10 percent of
the capital paid into the Bank unde^the next general
capital increase. The final answer to this queltJon
n n P f h f S ^ ^ V ^ ^ ° n . t h e v i e w s o f a 1 1 members and
on the attitudes of private capital markets to this
prospect. We ourselves would want to consider very
carefully the implications that such a step might
nave for the Bank's financial strength, its cost of
C
in9llt i S , t h e ^ end ing rate policy that it will follow
in the 1980 s. In any event, I am confident that
it will be possible to reduce the paid-in portion
of the next general capital increase below the ten
percent level.
In the recently negotiated increase in caoital
of the Inter-American Development Bank, the financial
strength of the institution made it possible to reduce
the proportion of capital to be paid in. Under the
terms of the agreement reached last December, the
proportion of paid-in capital was reduced to seven
and one-half percent.
On a cumulative basis, the U.S. has paid in
$482 million to the IDB and supported a total capital
lending program of nearly $7.0 billion, a combined
leverage factor based on both burden-sharing and use
of callable capital of 14 to 1. This is much lower
than the multiple for the World Bank, but it reflects
the fact that the Bank was not established until 1959
and that the United States until the 1970's was the
only developed member country. The entry of the nonregionals and the increase in their capital shares
in combination with a reduced paid-in portion will
cause this multiple to become even larger in the future.
In the Asian Development Bank, the cumulative
paid-in capital contributions of the United States
amount to $242 million and they support a total lending
program in excess of $3.8 billion, a leverage factor
of 15 to 1.

- 32 -

COFINANCING
,A thir<3 way in which our participation in the
multilateral development banks is cost effective is
through cofinancing or complementary financing arrangements made with private banks or other public and private
organizations. The banks have been able to sell to
commercial banks "participations" in the early maturities
of their individual loans. These sales have been made
without recourse and originally at the fixed interest
rate set in each individual bank loan contract. This
procedure had the advantage — since it was done without
recourse — of freeing up Bank resources for additional lending. However, with the general rise and
increased volatility of interest rates that has occurred
during the 1970's, it has not been possible to continue
these particular programs on the basis of a fixed rate.
As a result, the Inter-American Development Bank
modified its participation program, introducing a
variable interest rate feature. In the case of the
World Bank, a parallel lending program was established
with a cross-default clause to provide additional
security for the commercial lender portion of the
loan. This clause permits but does not make mandatory
suspension of the entire loan, including the World
Bank portion, if there should be a default on the
portion of the loan held by the commercial bank. Under
its new program, the World Bank had mobilized a total
of $469 million in additional lending resources from
private banks as of the end of calendar year 1978.
The figure of $469 million does not include the
International Finance Corporation, which is also a
member of the World Bank Group and which, under its
mandate to encourage private enterprise in less developed
countries, is very active in cofinancing. As of
June 30, 1978, the IFC held investments amounting
to more than $1,315 million of which $332 million
or 25 percent were held for private purchasers and
participants. On average, IFC financing in individual projects is held to 25 percent or less of
total project costs and other resources have
necessarily been mobilized including additional^
private or public capital from developed countries
or from the"recipient country itself.

- '33 -

IFC operations in the past have been most
successful in middle income countries and in companies that have been in operation for some time.
Following the recent increase in resources, however,
it has been planned that operations in the poorer
recipient countries will be increased. IFC will,
therefore, perform a very useful role in putting together
proposals which can attract additional private financing
to countries, particularly in Africa and Asia, which
have had difficulty in this respect in the past.
In the Inter-American Development Bank there is
a complementary or cofinancing program based on sales of
participations. There is no need for a cross-default
clause, since the Bank administers the commercial
bank portion of the loan, acting as disburser and
collector. The Bank has had no difficulty in attracting
commercial bank participation at interest rates which
are agreeable to the borrowing countries and marginally
lower than they would have received in the absence
of the program, i.e., on a straight commercial loan
basis. Since 1976, the Inter-American Development
Bank has mobilized $278 million in additional lending
resources through its complementary financing program.
In both the World Bank and the Inter-American Development
Bank, we anticipate that the amounts of money raised
in this manner will rise in the future.
Participation in the cofinancing programs
has not been limited to U.S. banks. Major banks from
Germany, Japan, Switzerland and Canada, among other
countries, have taken significant portions of individual
loans. In addition to the resource extending beoefit,
which is helpful to us for domestic budgetary reasons,
there are other very definite advantages to the cofinancing
programs. They provide a mechanism for introducing
commercial bank lending in developing countries whose
international credit standing has not been firmly
established, thereby permitting these countries to
enter the world financial system and pave the way
for reducing still further, over time, the need for
public aid. They also enable the multilateral development
banks to lend in a larger number of sectors and for more
projects, permitting a greater concentration of
both conventional and concessional resources on
projects which reach the poor, without requiring
that critical infrastructure needs of recipient
countries be abandoned or left unmet.

- 34 -

The Asian Development Bank has made less
progress thus far than the World Bank and the InterAmerican Development Bank in revising and expanding
its private cofinancing program. At a recent Board
of Directors meeting which considered a management
proposal to take such action, the U.S. Director urged
that greater emphasis be placed by the Bank on this
cost-effective way of mobilizing additional resources
for its developing member countries.
The Asian Development Bank has been more
successful, however, in arranging cofinancing arrangements
with other official sources such as the OPEC Special
Fund, the Islamic Development Fund and individual
OPEC countries. As of the end of calendar year 1978,
the ADB had raised a total of $343 million in this
manner. The Inter-American Development Bank has also
helped the Venezuelan Government to establish a special
Venezuelan Trust Fund of $500 million which is
administered by the IDB for lending to other developing
countries in the hemisphere. This Fund is in addition
to Venezuela's regular contributions to the Bank's
capital and to the Fund for Special Operations. World
Bank figures show that cofinancing with OPEC countries
and agencies amounted to $1.4 billion at the end of
1977, the most recent period for which data are available.
Because its membership has been limited to the region,
the African Development Bank has not tapped the international
bond markets or sought to establish cofinancing relationships
with commercial banks. If non-regional countries join
the bank, which is a matter now under negotiation,
however, the AFDB in the fuuure should be able to
begin modest bond offerings based on the paid-in and
callable capital contributions of developed member
countries and may look toward the establishment
of cofinancing relationships with commercial banks.
The United States has benefitted from increased
burden-sharing and the mobilization of additional
capital through bond offerings and cofinancing. As
other countries have increased their contributions
to the multilateral development banks, it has been
possible for our overall share of contributions to decline.
As the banks have established themselves in private
capital markets, it has been possible for our overall
paid-in capital contributions to be reduced from
fifty percent in some cases to less than ten
percent.

- ^5 In comparison, the use of cofinancing has been
more limited. I am hopeful that the World Bank and
the Inter-American Development Bank will continue to expand their operations during this year and
that the Asian Development Bank will be able to launch
a new cooperative financing program with private
banks as well as continue its relationships with
public entities in the OPEC countries.
CAPITAL SAVING TECHNOLOGIES
A major U.S. objective in the banks is to promote
projects which more directly and effectively reach the poor
within beneficiary countries. One important means to help
achieve this objective is to promote the utilization of
capital saving technology in order to increase the productivity and incomes of poor people to insure that the greatest
number of people benefit from bank projects, and to promote
the most efficient use of scarce development resources.
Capital saving technologies involve the productive and
often innovative use of small-scale and labor-intensive
processes, techniques, equipment and tools which are less
complex and costly than those usually employed in the
developed countries. As a result, their application promotes the efficient use of available resources by substituting
abundant unskilled labor for scarce investment funds. The
approaches, activities, and techniques they embody also
permit a focus on reaching the maximum number of beneficiaries at relatively modest assistance costs.
The United States has sought policy decisions through
which the banks will place increased emphasis on the use of
capital saving technologies in their projects.°ln November
1976, the Inter-American Development Bank adopted a policy
to promote the use of light capital technology by making
it a significant component of development strategy.
In 1977, the Asian Development Bank incorporated
an enumeration and assessment of light capital technologies
into its project identification and evaluation procedures
so as to examine relevant technological alternatives
as an ongoing part of its project selection process.
The World Bank's policy guidelines on the use of
technologies are included in sector policy papers. For
example, one of the major recommendations of the Bank's

- 36 -

1978 paper, Employment and Development of Small Scale
Enterprises was that the Bank should urge recipient
governments to correct policies and regulatory measures
that have the effect of encouraging undue capital
intensity in investments. The paper points out that
larger firms may benefit more than smaller enterprises
from credit programs with artificially low interest
rates or from the subsidization of public services
such as power, transportation and water supply. It
concludes that these policies can be modified and
that additional incentives can be provided in other
ways such as reserving public procurement of certain
items to smaller firms, encouraging subcontracting, and
broadening the sectoral coverage of development finance
companies.
We have has also sought to maximize the use
of capital saving technologies in our review of
individual loans. The Executive Directors in all of
the banks, backstopped by Treasury staff, examine all
loan proposals specifically to assure that this criterion
is properly taken into account. They endeavor to promote
the use of capital saving technologies in their contacts
with other Board members, in communications with bank
management and in discussions with technical staff.
The U.S. concern for the application of capital saving
technologies has been emphasized by our requesting
clarification on the technological aspects and implications
of individual projects presented to the Boards. For
example, in connection with a fisheries loan to Ecuador,
the United States Executive Director of the IDB sought
and received assurance from the Bank that the craft
to be used in the project were the most appropriate,
least capital intensive alternative. In a feasibility
study for a dam in the Dominican Republic, the Executive
Director made sure that the guidance given to the consultants
by the Bank included instructions to specifically take
into account the possibilities for using light capital
technologies in designing the project.
The banks, with U.S. support, are making increased
efforts at the preinvestment stage to achieve a more
effective application of capital saving technologies.
By strengthening their project appraisal activities, the
banks facilitate the selection of projects incorporating
techniques that are most appropriate to the circumstances
and requirements of the borrowing countries. In a large
capital
number of
technologies.
cases this leads to the utilization of light

- 37 -

The results of efforts to introduce capital saving
technologies in appropriate instances can be seen in their
increasing use in individual bank projects. An example is
the recent IDB loan of $13.2 million mentioned earlier
to support community development in the economically
depressed northwest region of El Salvador. The objective
of the project is to help bring about an improvement
in the living conditions and incomes of approximately
144,000 people living in about 300 small rural communities
through self-help construction of small scale works
(roads, schools, bridges, potable water supply systems)
and the granting of credit to approximately 48,000
low income people to increase their agricultural, agroindustrial and crafts production, facilitate the marketing
of their products, and to meet other basic family needs.
The construction methods for the works subprogram
will be labor intensive and use a high proportion
of local materials. It is planned to limit the use
of construction equipment to the minimum amounts
necessary to assure a satisfactory output. In the
credit assistance subprogram, the use of machinery
will be limited to equipment that can be manually
or easily operated, such as knapsack pumps, manual
sprayers and sprinklers, and animal drawn plows. As
a result of making this extensive use of local labor
and materials in the works subprogram, the cost per
beneficiary will not exceed $80.
An IDA credit for artisan small and medium scale
enterprises in Upper Volta is an example of the
World Bank's efforts to create employment by working
through artisan groups and small scale enterprises.
The project has three major components and all are
expected to have important employment creation and
institution building effects. One of these is for
credit-in-kind and extension services to artisans.
It amounts to $820,000 or 21 percent of the total
credit and is based wholly on the provision of
capital saving technology. The credit-in-kind will
be largely raw materials such as wood, metal, and
cement, and equipment such as wheelbarrows, shovels,
axes, saws, molds and other basic tools. The
average loan size is expected to be $400 with a range
from a few dollars for working capital to a maximum
of $8,000 for artisans. Extension officers will distribute raw materials and assist in planning and

- 38 -

implementing investments as part of their regular
supervision visits to artisans. Artisan production
will be bricks, farm implements, wooden utensils and
probably pottery. Technical assistance to be provided
for the artisans will include basic skill training,
accounting for illiterates, general advice and direct
marketing. The target group of recipients are rural
and urban artisans with annual incomes of less than
$400. Since a total increase in direct employment
of 1,500 is projected, average investment cost per
job will be less than $200.
The El Salvador and Upper Volta projects are
two examples of efforts to reach the poor through
capital saving technologies. The information for
a detailed account of current efforts is presently
being collected and will be included in our 1979
report to the Congress on the use of light capital
technologies in MDB activities.
SALARIES
Another set of issues that has been of concern
to both the Congress and the Administration is that
of salaries, benefits, and administrative costs
within the multilateral development banks. Of these
issues, the predominant one has been staff salaries.
With the strong support of the United States, the
management of the World Bank and the IMF formed a
Joint Committee of Executive Directors on Compensation
Issues. This Committee was given responsibility
to study the compensation situation of all IMF/IBRD
employees and to make appropriate recommendations
to the Executive Boards of the two institutions. The
Committee met on numerous occasions throughout 1977
and 1978, employed professional compensation girms to
obtain necessary data for comparative purposes and
finished its work in late December. Its final report
has been printed, and copies were sent to the Congress
on February first.
This report and its recommendations provide
the framework for an objective determination of salaries
three
basic salary
recommendations:
based It
onadvances
public and
private
levels in member
countries.

- 39 -

— salaries in the main professional grades
will be determined as the average of those in the U.S.
private sector and the U.S. Civil Service, plus a premium
of ten percent. This premium is necessary to adjust
for regional differences of pay within the United
States and to make the salaries competitive on an
international as well as an East Coast basis. Data
from the U.S. private sector were used because the costs
involved are U.S. costs and the necessary data
were available.
— salaries in the management levels will
be determined by setting a moderate differential
for each successive grade over the preceeding grade,
to arrive at a rational management structure.
— tax reimbursement paid American staff will be
calculated from the net salaries, using the average
deduction for that income level, rather than the
standard deduction as heretofore.
The net effect of these recommendations would be
to bring Bank and Fund salaries more closely into line
with comparable public and private sector salaries, as
directed in Section 704 of Public Law 95-118.
We will be working with other countries to obtain
adoption of the new compensation system by the
Boards of the Bank and HUMAN
the IMF.
RIGHTS
The Administration and the Congress share a firm
commitment to a foreign policy which gives high priority
to enhancing respect for human rights throughout the
world. In December of last year, President Carter
vigorously reaffirmed this commitment on the occasion of
the 30th anniversary of the Universal Declaration of
Human Rights.
Our policy in the banks has been aimed at inducing
improvements in specific problem situations. We
believe this objective can be achieved by demonstrating
to human rights violators that there are costs attached
to continued oppressive practices, and conversely
by demonstrating that there are benefits to those
governments which promote human rights.

- 40 -

In a report submitted to the Congress in October 1978,
the Secretary of State and I described in detail how this
policy has been#implemented in the last 18 months. As
that report indicated, we have pursued our human rights
policy across the range of our relationships with other
countries. In the foreign assistance area", our bilateral
program has been governed by this principle and the
related concerns of reaching the poor and meeting basic
human needs. We define human rights to include, beyond
freedom from governmental violations of the person, basic
economic and social rights such as adequate food, housing,
clothing, health care and the opportunity to play a
productive role in society. The banks enhance respect
for human rights in the developing world by increasingly
shifting the emphasis of their lending programs toward
reaching the poor and meeting basic human needs.
We have encouraged the banks in this shift of emphasis
to projects which reach the poor and help meet basic human
needs, and we usually support projects for those countries
with human rights problems if they benefit the poor and
meet basic human needs, in order not to penalize the
people for the abusive policies of their governments.
We have undertaken consultations with other countries
on human rights problems, and we have raised human rights
concerns in the banks by opposing, through "no" votes or
abstentions, 50 loans to 15 countries where we considered
the human rights situations severe.
We have also taken steps to implement Section 611
of the FY 1979 Appropriations Act, which calls on the U.S.
Governor to "propose and seek adoption" of a charter
amendment in the banks that would establish human rights
standards to be taken into account in connection with each
loan. In an effort to generate support for such an amendment, and to ensure its best chances for adoption, we have
consulted other governments who share our human rights concerns and sought their views and agreement with this proposal
Thus far, the reactions of other governments to the
proposal of an amendment have been negative. They believe
the introduction of such amendments would be unnecessarily
divisive and that they would not obtain the broad support
required for their adoption. In view of such reactions
we are undertaking additional consultations to pursue
this approach and to achieve the objectives of the
legislation.

- 41 -

In light of existing legislation which requires the
United States to vote against loans to countries that are
found to violate human rights consistently, I see no need
for special legislation aimed at restricting multilateral
development bank lending to particular countries. In
accordance with Section 701(f) of Public Law 95-118 and
the Administration's policy, we have voted against
or abstained on 50 loans to 15 countries. The present
legislation is being implemented conscientiously, and
I believe that no change is necessary at this time.
Indeed, as I have stated in the past, contributions
made under legislation prohibiting the use of U.S.
contributions to the banks for loans to specific countries would have to be rejected by the institutions.
Under their charters, the banks cannot accept funds from
the United States or from any other member which are
restricted on country grounds. Any provision in U.S.
law which would prohibit the use of appropriated funds
for multilateral development bank lending to selected
countries would seriously jeopardize continued U.S.
participation in theACCOUNTABILITY
banks at the expense of our human
rights and other foreign policy objectives.
A number of steps have been taken during the
past two years to strengthen procedures for accountability
of the multilateral development banks and to increase
the flow of information on their activities which
is available to the Congress and to the public. We
are continuing to follow the activities of the banks
closely to assure ourselves that audit and evaluation
mechanisms within the banks are funcuioning
adequately.
Each of the banks is audited by well-known auditing
firms.
The results of these audits are published
in the annual reports. They are also required to file
specific financial information with the Securities
and Exchange Commission in order to issue bonds in
the U.S. capital market. This information is available
to the public. In addition, the banks have made available
to the public, on a subscription or referral basis,
their Monthly Operational Summaries which list all
projects under consideration for financing and show

- 42 -

their status, and statements of loans and press releases
on each loan which is approved. They also publish
many of their country economic reports, research
papers related directly or indirectly to their
operational lending programs, other occasional
papers, and a wide variety of statistical reports
on all aspects of their operations. The World Bank
makes available to the public its Catalogue of Publications
briefly describing its research and occasional papers
from which the public may order documents. Similarly,
the IDB makes available to the public papers prepared
for seminars and roundtable discussions as well as
many of their country economic reports. I might also
add that information from the loan documents is
available on request, after Board consideration,
to businessmen and other members of the public.
The Treasury Department routinely transmits
to the Congress and the General Accounting Office
numerous documents in compliance with various
legislative provisions as well as to meet special
requests. Included in the documentation which goes to
various offices are the Monthly Operational Summaries
listing loan proposals under consideration or appraisal
in the banks, Statements of Approved Loans for the
banks, statements of income and financial condition,
status of negotiation notices, brief loan analyses
prepared bi-weekly by Treasury Department staff, project
evaluation reports, and various sector and policy
papers and reports. In addition, the U.S. Executive
Directors and members of the Treasury staff are available
to talk with Congressional members and staff regardiog
any other material they may wish to know about the
bank or its activities.
During the past year we have continued to
press the banks to review their classification systems
and to declassify as many documents as possible.
The World Bank has declassified the World Development
Report, the Energy Report and its Commodity Price
Report. It has also made public project performance
audit reports. In the IDB, the Monthly Operational
Summaries have been declassified during the past year.
All of the banks now make available to the public
Monthly Operational Summaries on the status of future
projects. It is now possible for businessmen and

- 43 -

other members of the public to subscribe to these
reports on a monthly basis from the World Bank
and the Asian Development Bank, in the case of the
IDB, the Monthly Operational Summaries are available
to businessmen and the public through the U.S. Commerce
Department, although we are working with the bank
to get it to provide this material directly and on the
same basis as the other banks.
With regard to the question of financial controls
and reporting requirements, the Articles of Agreement
for all of the Banks contain explicit provisions that
the Banks shall ensure that the proceeds of any loan
are used only for the purpose for which the loan was
granted. To carry out this provision, the Banks include
a number of requirements either in the loan document itself or in other agreements made with the borrowers.
Each borrower is required to have his overall financial position audited by independent outside auditors
approved by the Banks. In addition, each project
in which the Banks participate is either subject to
independent audit or to a requirement that books
be kept open to the Banks for inspection.
Each of these banks has an independent operations evaluation unit whose personnel are responsible
to management and, in the case of the World Bank and
the Inter-American Development Bank, directly to
the respective Boards of Executive Directors. In
the Inter-American Development Bank, programs are
evaluated by a three-member "Group of Controllers"
and its staff. This group was established in 1968
and its members are appointed from outside the bank
for non-renewable tiree-year terms and report directly
to the Bank's Board of Executive Directors.
In the World Bank Group, projects are evaluated
by the Operations Evaluation Department. It is
headed by a Director-General who reports directly
to the Executive Directors. The Operations Evaluation
Department uses "Project Completion Reports" and
Project Performance Audits to evaluate the impact of
the Bank's development projects. In the Asian Development
Bank, selective project evaluations are conducted by
both the bank's own Economic Department and by independent
outside evaluators from various countries. The African
Development Fund is currently establishing a system
for evaluating projects.

- 44 -

During the past
completed studies of
evaluation units and
with regard to their

year, the General Accounting Office
these independent review and
made a number of positive findings
operations and effectiveness.

In the case of the IBRD, the GAO auditors indicated
that the World Bank Group has made considerable progress
toward developing an independent and continuous selective
examination, review, and evaluation of the Bank's programs
and activities.
With regard to the IDB, they said that the effectiveness of the Group of Controllers has improved steadily
since its creation and that its reports have contained
many recommendations for improving Bank operations.
They noted that most of the recommendations have been
adopted by the Board of Executive Directors and that Bank
management has taken specific actions to implement them.
With regard to the ADB, the auditors said that
some progress had been made in improving the review
and evaluation of projects assisted by Bank financing,
but that the expanding volume of Bank lending made
more independent and wider-range review and evaluation
necessary and desirable. They made several recommendations
in each report for improving the systems in the respective
banks. These recommendations cover, among other matters,
the scope of some of the individual reports and the need
for maintaining or strengthening the independence of the
evaluation units.
Specific requirements with regard to procurement
procedures and the disbursement of funds are set forth
in loan agreements with individual borrowers and in
operating manuals and instructions of uhe banks.
Procurement is either by international competitive
bidding, international shopping, or local procurement.
All of these procedures must meet detailed bank requirements. Depending on the exact disbursement procedure
followed, the borrower is required to present any
or several of the following types of supporting evidence
for substantiating withdrawals from the loan account:
the contract or confirmed purchase order and evidence
that the payment has been made, such as suppliers'
invoices and bills of lading, consultants' invoices
in case of consultancy services, contractors'
invoices and borrowers' certificate of work progress

- 45 in case of civil works, letters of credit against
which the banks' commitments are being sought,
and negotiating banks' reports of payment accompanied
by suppliers' invoices.
Each borrower is also obliged to meet a number of
other reporting requirements. He must keep records
relating to the progress of the project and the cost
of carrying it out. He must permit Bank representatives
to visit the project site, inspect the works being
carried out and the records related to it. He must
also be prepared to submit to the Bank on request any
additional information concerning the progress of the
project and his operational and financial conditions.
All of the banks maintain supervision systems
to oversee the fulfillment of the established
requirements. The IDB has a resident mission in
each recipient country which monitors the progress
of projects and checks for compliance with provisions
of the loan agreement. The World Bank and the ADB do
not have representatives in all recipient countries.
However, members of the staff visit the borrowers
and the project sites, generally once a year, but more
often if it is necessary. In addition, staff members
at the banks headquarters regularly review procurement documents and the recommendations for bid
awards. In the case of credit projects, they review
and approve subloans above certain minimal amounts.
They also review progress reports submitted by the
borrowers for all projects and correspond with them
on a wide range of project implementation issues.
We are working to carry out the recommendations
of the General Accounting Office/ We are also
committed to strengthening the accountability of
the banks and to increasing the flow of information
on their activities. Complete disclosure of all bank
information, however, is neither feasible nor desirable.
We have to balance our oversight responsibilities with
the confidential nature of the banks relationships with
its borrowers, COMMODITY
especially LEGISLATION
concerning economic policy
advice which may be sensitive in recipient countries.
Following passage of the appropriations legislation last October, procedures have been established to

- 46 implement two provisions in the legislation dealing
with commodities. The legislation requires that the
United States oppose use of MDB funds for the production
of any commodity for export if it is in surplus on
world markets and if substantial injury would be caused
to U.S. producers of the same, similar or competing
products. It also provides that the President shall
initiate international consultations designed to
develop standards governing the allocation of development
assistance for production of commodities in surplus
on world markets where increased efforts would cause
substantial harm to other producers.
As a matter of fact, however, the banks have been
making very few loans that could fall under these
provisions. To carry out the legislative requirements,
we have carefully analyzed these loans to determine
the economic impact of production on the world markets.
No loan proposals thus far this year have required
special action because the commodities to be produced
either were for domestic production or would not be in
surplus or result in substantial injury to U.S. suppliers.
Essentially, our approach is based on the
principle that loans for projects that will result
in the increased production of commodities in
prospective world surplus will prove to be a wasteful
use of development assistance resources. Fortunately,
our approach is also followed by the banks in identifying
and appraising projects.
With regard to the second provision of the legislation, the United States has raised internationally
the issue of allocation of assistance for the increased
production of commodities in surplus. We are seeking
agreement among the OECD countries on general principles
that such an allocation of assistance can be disruptive
to producers in developed and developing countries
alike, that it may prove counter-productive to bilateral
and multilateral development efforts, that international
standards should be developed generally to avoid assistance
for surplus commodities while taking into account
world-wide comparative advantages in commodity production.
There is no need for additional legislation
aimed at restricting uses of U.S. funds by the
banks for the financing of special commodities on
products. As I have noted with regard to country
restrictions, the banks could not legally accept contributions on those terms. Any such provision in
U.S. law would seriously jeopardize continued U.S.
oarticioation in the multilateral development banks.

- 47 CONCLUSION
In my testimony to this Subcommittee last year,
I expressed the hope that Congress and the Administration would work out a consensus or common view of our
objectives in the multilateral development banks. I
suggested that the consensus might include agreement
on our basic goals within the banks such as reaching
the poor more directly and effectively, promoting
human rights, assuring accountability, and rationalizing
administrative costs.
In my testimony today, I have dealt at some length
with these matters and with other issues which have
been of concern to the Congress and the Administration
including promoting use of capital saving technologies
and limiting bank financing for production of certain
commodities. Over the past year, there has been a
record of substantial progress on these issues. We
have not been able to prevail in every instance or
have every issue resolved exactly as we might have
wished. Other countries contribute to the banks and
their views have to be taken into account. That is
a limitation of the multilateral approach but it has
been more than offset by the many advantages we have
derived from our participation in these institutions.
I am hopeful, as a result of the progress that
has been made over the past year, that Congress
and the Administration will agree on providing our
share of subscriptions and contributions to the multilatral development banks for FY 1980 and that we can
continue to effectively pursue our interests in the
banks.

FOR RELEASE AT 11:00 A.M.
March 15, 1979

Contact:

George G. Ross
202/566-2356

THIRD PROTOCOL TO THE PROPOSED
INCOME TAX TREATY BETWEEN THE
UNITED STATES AND THE UNITED KINGDOM
The Treasury Department today announced the
signing in London of a third Protocol to the proposed
income tax treaty between the United States and the
United Kingdom.
The proposed treaty was approved by the United
States Senate on June 27, 1978, subject to a reservation on Article 9(4) which would have restricted the
power of states of the United States to apply the
"unitary method" of taxation to British enterprises.
The proposed tax treaty will not enter into force
until it is approved by the United Kingdom House of
Commons.
This third Protocol must be approved by both the
United States Senate and the United Kingdom House of
Commons before coming into effect. It modifies the
rules governing U. K. taxation of certain activities
carried on by U. S. residents in the United Kingdom
sector of the North Sea and provides for special
limits to the creditability by U. S. residents of the
United Kingdom petroleum revenue tax.
This third Protocol also conforms the language of
the proposed tax treaty to reflect the U. S. Senate
reservation on Article 9(4) and makes a number of other
changes of a technical or clarifying nature to the
proposed treaty.
A copy of the third Protocol is attached.

B-1457

o

0

o

THIRD PROTOCOL
FURTHER AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF
THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND. AND
THE GOVERNMENT OF THE UNITED STATES OF AMERICA FOR THE
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL
EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS,
SIGNED AT LONDON ON 31 DECEMBER 1975
The Government of the United Kingdom of Great Britain
and Northern Ireland and the Government of the United States
of America;
Desiring to conclude a third Protocol to amend the
Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income
and Capital Gains, signed at London on 31 December 1975, as
amended by Notes exchanged at London on 13 April 1976 and by
Protocols signed at London on 26 August 1976 and 31 March
1977 (hereinafter referred to as "the Convention");
Have agreed as follows:
ARTICLE I
(1) Paragraph (2) of Article 2 (Taxes covered) shall
be deleted and replaced by the following:
"(2) The existing taxes to which this Convention
shall apply are:
(a) in the case of the United States, the Federal
income taxes imposed by the Internal Revenue
Code and the tax on insurance premiums paid
to foreign insurers; but (except as provided
in paragraph (6) of Article 10 (Dividends))
excluding the accumulated earnings tax and
the personal holding company tax. The
foregoing taxes covered are hereinafter
referred to as "United States tax";
(b) in the case of the United Kingdom, the income
tax, the capital gains tax, the corporation
tax and the petroleum revenue tax. The
foregoing taxes covered are hereinafter
referred to as "United Kingdom tax"."

-2(2) Paragraph (3) of Article 2 (Taxes covered) shall
deleted and replaced by the following:
"(3) This Convention shall also apply to any
identical or substantially similar taxes which are
imposed by a Contracting State after the date of
signature of this Convention in addition to, or in
place of, the existing taxes. The competent
authorities of the Contracting States shall notify each
other of any changes which have been made in their
respective taxation laws."
(3) Paragraph (4) of Article 9 (Associated enterises) shall be deleted and replaced by the following:
"(4) Except as specifically provided in this
Article:
(a) where an enterprise doing business in one
Contracting State:
(i) is a resident of the other Contracting
State; or
(ii) is controlled, directly or indirectly,
by an enterprise which is a resident
of the other Contracting State; and
(b) where the enterprise which is a resident of
the other Contracting State is a corporation, such corporation is neither:
(i) a controlled foreign corporation
within the meaning of section 957 of
the United States Internal Revenue
Code of 1954 (as it may be amended
from time to time without changing the
principle thereof); nor
(ii) created or organised under the laws of
the first-mentioned State or of any
third State or controlled, directly or
indirectly, by a corporation which is
a resident of any third State;
then, in determining the tax liability of the firstmentioned enterprise in the State in which it does
business, such State shall not take into account the

-3mcome, deductions, receipts or outgoings of a related
enterprise which is a resident of the other Contracting
State or of an enterprise of any third State which is
related to the enterprise of the other Contracting
State, except that this prohibition shall not apply
where the first-mentioned enterprise is a resident of
the first-mentioned Contracting State, to the extent
that it owns, directly or indirectly, the capital of
the related enterprise."
ARTICLE II
The following new paragraph (6A) shall be added to
Article 7 (Business profits) after paragraph (6):
"(6A) The United States tax on insurance premiums
paid to foreign insurers shall not be imposed on
insurance or reinsurance premiums which are the
receipts of a business of insurance carried on by an
enterprise of the United Kingdom whether or not that
business is carried on through a permanent establishment in the United States."
ARTICLE III
Paragraph (5) of Article 10 (Dividends) shall be
deleted and replaced by the following:
"(5) Where a corporation which is a resident of a
Contracting State (and not a resident of the other
Contracting State) derives profits or income from the
other Contracting State, that other State may not
impose any tax on the dividends paid by the corporation, except insofar as such dividends are paid to a
resident of that other State (and where that other
State is the United States, to a national of the United
States) or insofar as the holding in respect of which
the dividends are paid is effectively connected with a
permanent establishment or fixed base situated in that
other State, even if the dividends paid consist wholly
or partly of profits or income arising in that other
State."
ARTICLE IV
Sub-paragraph (b) of paragraph (1) of Article 19
(Government service) shall be deleted and replaced by the
following:

-4"(b)

However, such remuneration shall be taxable
only in the other Contracting State if the
services are rendered in that State and the
recipient is a resident and a national of
that State."

ARTICLE V
Paragraph (4) of Article 23 (Elimination of double
taxation) shall be deleted and replaced by the following:
"(4) Notwithstanding subparagraph (a) of
paragraph (1) of this Article, the amount of United
Kingdom petroleum revenue tax allowable as a credit
against United States tax shall be limited to the
amount attributable to United Kingdom source taxable
income in the following way, namely:
(a) The amount of United Kingdom petroleum
revenue tax on income from the extraction of minerals
from oil or gas wells in the United Kingdom to be
allowed as a credit for a taxable year shall not exceed
the amount, if any, by which the product of the maximum
statutory United States tax rate applicable to a
corporation for such taxable year and the amount of
such income exceeds the amount of other United Kingdom
tax on such income.
(b) The lesser of (1) the amount of United
Kingdom petroleum revenue tax on income from the
extraction of minerals from oil or gas wells in the
United Kingdom that is not allowable as a credit under
the preceding subparagraph, or (2) two percent of such
income for the taxable year shall be deemed to be
income taxes paid or accrued in the two preceding or
five succeeding taxable years, to the extent not deemed
paid or accrued in a prior taxable year, and shall be
allowable as a credit in the year in which it is deemed
paid or accrued subject to the limitation in
subparagraph (a) above.
(c) The provisions of subparagraphs (a) and (b)
above shall apply separately, mutatis mutandis (but
with the deletion, in the case of (b), of the words
"the lesser of (1)" and "or (2) two percent of such
income for the taxable year") to the amount of United
Kingdom petroleum revenue tax on income from initial
transportation, initial treatment and initial storage

-5of minerals from oil or gas wells in the United
Kingdom."
ARTICLE VI
The following new Article 27A (Offshore activities)
shall be inserted after Article 27 (Effect on diplomatic and
consular officials and domestic laws):
"ARTICLE 27A
Offshore Activities
(1) Notwithstanding the provisions of Article 5
(Permanent establishment) and Article 14 (Independent
personal services) , a person who is a resident of a
Contracting State and carries on activities in the
other Contracting State in connection with the exploration or exploitation of the seabed and sub-soil and
their natural resources situated in that other Contracting State shall be deemed to be carrying on in
respect of those activities a business in that other
Contracting State through a permanent establishment or
fixed base situated therein.
(2) The provisions of paragraph (1) shall not
apply where the activities are carried on for a period
not exceeding 30 days in aggregate in any 12 month
period. However, for the purpose of this paragraph,
activities carried on by an enterprise related to
another enterprise shall be regarded as carried on by
the enterprise to which it is related if the activities
in question are substantially the same as those carried
on by the last-mentioned enterprise.
(3) The provisions of Article 8 (Shipping and air
transport) shall not apply to a drilling rig or any
vessel the principal function of which is the performance of activities other than the transportation of
goods or passengers."
ARTICLE VII
The following new paragraph (7) shall be added at the
end of Article 28 (Entry into force):

-6"(7) Notwithstanding any provisions of the
respective domestic laws of the Contracting States
imposing time limits for applications for relief from
tax, an application for relief under the provisions of
this Convention shall have effect, and any consequential refunds of tax made, if the application is made to
the competent authority concerned within three years of
the end of the calendar year in which this Convention
enters into force."
ARTICLE VIII
(1) This Protocol shall be ratified and the Instruments of Ratification shall be exchanged at Washington as
soon as possible.
(2) This Protocol shall enter into force immediately
after the expiration of 30 days following the date on which
the Instruments of Ratification are exchanged and shall
thereupon have effect, subject to the provisions of paragraph (3) of this Article, in accordance with Article 28 of
the Convention.
(3) Notwithstanding the provisions of Article 28
(Entry into force) of the Convention, the provisions of
Article 27A (Offshore activities) of the Convention (as
added by Article VI of this Protocol) shall not have effect
until the entry into force of this Protocol."
In witness whereof the undersigned, duly authorised
thereto by their respective Governments, have signed this
third Protocol.
Done in duplicate at London this 15th day of March,
1979.
For the Government of the
United Kingdom of
Great Britain and
Northern Ireland:

For the Government of
the United States of
America:

Evan Luard
Parliamentary Under Secretary
of State for Foreign and
Commonwealth Affairs

Robert J. Morris
Minister for
Economic/Commercial
Affairs

INGTON, D.C. 20220

TELEPHONE 566-20*1

FOR RELEASE AT 4:00 P.M.

March 14, 1979

TREASURY TO AUCTION $2,880 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,880
million of 2-year notes to refund approximately the same
amount of notes maturing March 31, 1979. The $2,879 million
of maturing notes are those held by the public, including
$743 million currently held by Federal Reserve Banks as
agents for foreign and international monetary authorities.
Without assurance, before the auction date of March 21,
of Congressional action on legislation to raise the temporary
debt ceiling, the Treasury will postpone this auction.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold
$640 million of the maturing securities that may be refunded
by issuing additional amounts of the new notes at the
average price of accepted competitive tenders. Additional
amounts of the new securities may also be issued at the
average price to Federal Reserve Banks, as agents for foreign
and international monetary authorities, to the extent that the
aggregate amount of tenders for such accounts exceeds the
aggregate amount of maturing securities held by them.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.

oOo

Attachment

B-1458

(over)

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED APRIL 2, 1979
March 14, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date March 31, 1981
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 5% of face amount
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.

$2,880 million
2-year notes
Series R-1981
(CUSIP No. 912827 JN 3)
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after aucti
September 30 and March 31
$5,000
Yield auction
None
Noncompetitive bid for
$1,000,000 or less

Acceptable
Wednesday, March 21, 1979,
by 1:30 p.m., EST
Monday, April 2, 1979

Thursday, March 29, 1979

Wednesday, March 28, 1979
Monday, April 2, 1979

FOR RELEASE AT 4:00 p.m.

March 14,

TREASURY WOULD POSTPONE AUCTION
OF TWO YEAR NOTE OFFERING IF CONGRESSIONAL ACTION
TO INCREASE THE DEBT CEILING HAS NOT BEEN ASSURED
The present temporary debt ceiling of $798
billion expires on March 31, 1979, at which time
the debt limit will revert to the permanent ceiling
of $400 billion. Without new legislation, the
Treasury would be unable to assure delivery on
April 2 of notes awarded in the auction scheduled
for March 21. Therefore, unless there is assurance
of Congressional action on legislation to raise the
temporary debt limit to allow delivery of the
new two year notes, the auction of these notes
would have to be postponed.

oOo

B-1459

FOR IMMEDIATE RELEASE
March 15, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT ANNOUNCES
PRELIMINARY COUNTERVAILING DUTY
ACTION ON TOMATO PRODUCTS FROM
THE EUROPEAN COMMUNITY
The Treasury today announced its preliminary
determination that the Commission of the European
Community (EC) is subsidizing exports to the United
States of tomato products.
This investigation was begun after a petition
was received on August 22, 1978, on behalf of the
Canners League of California. A final decision in
this case must be made by August 22, 1979.
Treasury's preliminary investigation found the
payments made under the EC program of production aid
to processors of tomato products to constitute a
subsidy.
The Countervailing Duty Law requires the Treasury
Department to assess an additional customs duty equal
to the net amount of a subsidy paid on imported merchandise.
Notice of this action appears in the Federal
Register today.
Imports of tomato products from the EC during
19 78 were valued at $8.7 million.

o

B-1460

0

o

REMARKS BY
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE
THE NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS
WASHINGTON, D.C.
February 28, 1979 — 11:45 a.m.
I am delighted to be here with all of you and to have
this opportunity to discuss recent developments in the savings
bank industry. Since your Washington conference last year,
we have all participated in significant developments in your
industry and in the financial intermediary markets generally,
that have been perhaps unparalleled in recent decades.
A simple listing amply demonstrates the breadth and
pace of the changes. Leading the list is, of course, the
introduction of the six-month money market certificate. I
want to return to this topic later, but for the moment I
would only note the observation made last September by the
President of your Association who said that the introduction
of these certificates represented an historic date for your
industry. Saul's judgment in these matters is seldom wrong.
Next comes the authorization by the federal bank regulators
of automatic transfers from savings to checking accounts.
Following that came the Congressional action extending NOW
accounts to New York State and eliminating the Regulation Q
differential on automatic transfer accounts in the Financial
Institutions Regulatory and Interest Rate Control Act of 1978.
That same Act, which the Administration supported throughout
its tortuous course in the Congress last year, also realized
a goal that your industry has long sought—a Federal chartering
alternative for savings banks.

B-1461

- 2 These are the major legislative and regulatory developments. Your industry is being affected by other forces as
well. Inflation continues to plague the economy. Interest
rates again hover near historic highs and mortgage rates are
pressing against the usury ceilings.
Your industry must confront these changes and challenges
in an environment that is quite different from what it was
just a few years ago. At one time the principal concern of a
savings bank may have been to respond to the demands of such
traditional competitors as commercial banks. That world is
long since past. To be sure, the introduction of NOW accounts
and automatic transfers has intensified the competition between
commercial banks and thrift institutions. But the concern of
the savings bank industry can no longer merely be with its
traditional competitors—no matter how the rules are changing
between them. The savings bank industry today must also react
to the broader changes in the financial markets which involve
challenges and competition from entirely new quarters.
Today your industry competes with credit unions that
have come to represent a very important factor in the competition for saving deposits. They may also soon become a
significant factor in providing home mortgages. It must
also face actual and potential challenges from nondepository
institutions that have already begun to tap the deposit
markets of banks and thrifts. At the end of last year,
money market mutual funds had accumulated assets of $10.8
billion; they have grown by another $3.1 billion since the
beginning of this year. Other investment vehicles and
services are being offered to the saving public. For
example, Merrill Lynch offers a cash management account
which permits customers to earn interest on margin accounts,
make purchases with a VISA card and write checks against
either cash balances or an overdraft line of credit. Also
in the wings is a plan reportedly being readied by Sears
Roebuck and Company to offer a half-billion dollars worth
of $1000 denomination medium-term notes to its 26 million
credit card holders. Apparently, AT&T has had a similar
issue of its own under consideration for some time.
These developments come at a time when the public
itself is expressing renewed dissatisfaction with the

- 3 savings vehicles offered by the traditional depository
institutions. I think it would be a mistake to view the
demands of the Gray Panthers, for example, as an isolated
matter. Theirs is a theme that finds support among many
of the nation's small savers. The challenge of the small
saver is one that depository institutions as a group must
meet. If they do not, others probably will.
In this setting, the experience of the thrift industry
with the six-month certificates assumes added significance.
The experiment initiated last June with the six-month certificates tied to market rates has to date been a success.
Reversing the experience in earlier high interest rate
periods, the new certificates have effectively stemmed
disintermediation from thrift institutions. In general
they have allowed housing to become a more effective competitor for money in a tight market and so have contributed
to the continuing availability of mortgage credit. At the
same time, these certificates have responded to the desires
of traditional savers for an instrument more responsive to
market conditions. I shouldn't doubt that in the process
the money market certificates may have created interest-rate
sensitivity among some savers, where it had not existed
before.
The figures themselves tell us part of the story.
Between June 1 and December 31, 1978, some $12.8 billion
moved into these certificates at savings banks. This
represented approximately 9.2 percent of the total deposit
base of savings banks. The year-end figures for S&L's were
higher, with $40.8 billion in certificates, representing
9.7 percent of total deposits. Preliminary figures for
January put the certificates at 12 percent of S&L deposits.
Looking toward year-end 1979, we have forecasts for these
certificates at 15 to 20 percent of savings bank deposits.
These forecasts, of course, assume no changes in regulations
or law and also depend heavily on interest rate developments.
As I suggested, these figures tell us only part of
the story. There are still several questions about the
certificates that remain unanswered. One is where the
proceeds of these certificates are actually going. Some
funds are clearly being invested in high yielding short-term
instruments outside the housing sector. But the extent of
such non-housing investment is not yet clear from the data.

- 4 Another question concerns the percentage of six-month
funds that represents new money as opposed to mere shifting
of money between types of accounts in an institution. Some
industry sources estimate that shifting is responsible for
65 to 75 percent of certificate totals. Some of the regulators apparently would put the figure at closer to 50 percent, by adjusting for funds that would have otherwise left
the institution entirely.
The importance of the shifting phenomenon lies in its
effect on profits. In the short term, those institutions
that are experiencing substantial shifting will find these
certificates more costly than those institutions that are
able to attract new funds with the certificates. But even
for institutions experiencing substantial shifting, it is
not clear that these certificates represent a more costly
alternative than disintermediation. Moreover, in the longer
run, these certificates may contribute to profitability by
providing thrift institutions with the funds to make more
high yielding mortgages than would otherwise be the case.
This earnings prospect would be dampened, however, to the
extent that mortgage rates reach the usury ceiling as they
have in a number of states.
The regulators are, of course, sensitive to the effects
that these certificates may have on the profits and capital
position of banks and thrift institutions. For this reason
they have been monitoring the development in six-month certificates very carefully. Preliminary analysis indicates
that these certificates had a significant but not destabilizing
effect on savings bank profits in the second half of 1973. It
is obviously too early to make any confident predictions about
their effects on profits in 1979. Much will depend on the
overall direction of interest rates.
The experiment with six-month certificates provides a
perspective on another issue that is sure to command increasing attention in Washington. That is the issue of the overall
role of the thrift industry in supplying mortgage credit.
The figures on net acquisitions of residential mortgages
for the 19 70-197 8 period provide some interesting insights
into the structure of the mortgage market. S&L's and savings
banks were the principal providers of mortgage credit, accounting for more than 5 0 percent of the $523 billion net growth
in residential mortgage credit over the 1970-1978 period.

- 5 Commercial banks also became important mortgage lenders,
though their contribution tended to vary over the business
cycle. Banks accounted for more than 17 percent of the
total mortgage growth over the period. In 1970, they
accounted for approximately 5 percent of net acquisitions.
In 197 8, they accounted for more than 20 percent of net
acquisitions. Over this period, pools for mortgage-backed
securities also grew dramatically, accounting for nearly
15 percent of the growth in residential mortgage credit.
The role of federal programs designed to assist mortgage
credit bears special mention. For purposes of this discussion, I am including in the concept of federal support
direct residential mortgage acquisition by on-and-off budget
federal agencies, FHLB advances to S&L's and increases in
mortgage pools net of S&L acquisitions. Again I am looking
at the period covering 1970-197 3. In 1970 these federal
measures accounted for approximately 30 percent of the net
increase in residential mortgage credit. In the next two
years, this figure dropped to 7 and 9.5 percent, respectively. In 1974, federal support soared to nearly 50 percent
of residential mortgage credit growth due in part to the
maturation of the sponsored agency programs and mortgage pool
activity and in part to the severe disintermediation suffered
by depository institutions. Federal support of the mortgage
market could be characterized as countercyclical over the
1970-174 period, when credit markets eased and tightened
again.
Since 1974, the pattern of federal support has changed
considerably. Although the proportion of residential mortgage
growth attributable to direct and indirect federal support
fell in 1975 and 1976, it did not recede to the 1971-1972
levels of less than 10 percent. Since 1976, the pattern of
federal support has continued to account for an increasing
proportion of residential mortgage credit growth. By the
fourth quarter of 1973, total direct and indirect federal
support had grown to more than one-third of the total net
increase in residential mortgage credit.
These trends put in perspective the role of the sixmonth certificates in sustaining the overall mortgage market.
Between the first quarter and fourth quarter of 19 78, the
thrift industry's share of residential mortgage credit growth
fell from 54 percent to 44 percent. Over the same period,
the federal share rose from 2 0 to 34 percent.

- 6 Regulation Q
We must also look beyond the six-month certificates
to the broader question of Regulation Q itself. Public
interest in Reg Q has never been greater. Public statements on the issue abound. Indeed, we are even at the
point where Reg Q has captured the attention of newspaper
cartoonists.
As you know, last year the President established an.
interagency task force to provide recommendations on the
future of Regulation Q. That task force has been at work.
We would hope over the next month or so to move toward a
set of options for the President. Right now no one can
say with much confidence what the final options will look
like. As you might suspect, there is substantial disagreement among task force members over some of the issues. But
I suppose we might all take a clue from the direction in
which financial markets already appear to be moving. The
developments in recent years have pointed to a progressive
easing on the liability side of the thrift ledger: the
removal of the ceilings on CD's of $100,000 or more; the
introduction in New England and spread to New York of NOW
accounts; the advent of automatic transfers; and, of course,
the six-month certificate itself. The thrift industry will
continue to feel pressure on the liability side as small
savers in particular increase their demands for recognition.
All of this places a special premium on achieving changes
in the asset powers of the thrift industry to balance the
changes occurring on the liability side.
The savings bank industry in particular, has a very
substantial stake in ensuring that the asset powers of the
thrift industry provide the necessary base to support the
changes occurring on the liability side. This is one issue
on which
your voices must be heard.
Tax
Proposals
Let me turn for a moment to some issues that I know are
of interest to you and that fall squarely within Treasury's
traditional area of concern. These are issues of tax policy
and tax reform. I think it might be useful just to recap
where we stand today and where we are likely to go in the
future. As you know, the Administration's tax package last

- 7 year included several proposals that would have directly
affected the thrift industry. Of great interest to all was
the Administration proposal for a significant adjustment in
the bad debt deduction for financial institutions. This
proposal did not find substantial support in the Congress
last year, and we do not plan to reintroduce it this year.
What then does the present year hold in the way of tax
proposals? One of the themes that is already appearing in
proposals,before the Congress is tax relief for savers and
home-buyers. This is not a new theme, but it seems to be
receiving some attention again. Although the specifics
vary, the proposals generally take two forms. One is a
tax credit or deduction for amounts contributed to an
individual housing account. The other is a general exclusion from gross income for specified amounts of interest
earned on time and savings accounts.
In commenting on these and the other proposals that we
will surely see in coming months, there are several considerations we must keep in mind. First is a concern for
the saving and capital formation process and for the effects
that these proposals may have generally in this important
area. Another is a concern for the efficiency and equity
of providing subsidies to the housing sector, particularly
through tax measures. But outweighing all other considerations in the end is a simple and direct concern for the
revenue effects of these proposals.
Because these proposals are directed only at interest
earned on accounts at depository institutions, we question
whether they will have any substantial effect on the overall
capital formation or savings process. Such proposals might
merely lead to a shifting of funds out of such sources as
federal securities and tax exempt municipal securities into
depository institutions. Thus the indirect effect could be
to increase the borrowing costs for federal and municipal
entities and for other private entities as well. The need
for additional capital formation can play little role in
justifying these proposals if their primary effect will be
merely to redistribute savings within the economy.
These redistributive effects suggest to me that the
Reg Q considerations loom larger in these proposals than
capital formation considerations. Indeed, I have already
seen it suggested that we use these tax proposals to requite the small saver for the limits imposed by Reg Q.

- 8 Revenue considerations aside, I think it would be a mistake
to 'rely on tax measures to address the more fundamental
questions presented by Reg Q.
Considerations of efficiency and equity also cast some
doubt on these proposals. I question, for example, whether
the individual housing account will really induce many home
purchases that would not otherwise have occurred. We would
be adding subsidies to a sector of the economy that already
enjoys substantial tax advantages and direct subsidies.
These additional subsidies would come at a very substantial price. Estimated revenue costs for the first four
years of operation of an individual housing account like that
proposed by Senator Chafee total $6.9 billion. The estimated
revenue costs of providing a general exemption for the first
$500 of interest earned on time or demand deposits would be
at least $3 billion annually. We believe that these are
unacceptably high costs to incur in a period of budget
austerity when the federal government is exerting a maximum
effort to contain the deficit.
That may seem an unduly unsympathetic view of a modest
proposal, but we try to be evenhanded in the Treasury. Last
year, I am told, we considered at least 8 7 varieties of suggested tax credits--some as appealing as credits to hire
maids, to beautify neighborhoods or to heat swimming pools
with solar devices. Many were directed at generally laudable
objectives, but if they all had been adopted the economy
would have collapsed under extraordinary federal deficits
and the integrity of the federal tax system would have been
destroyed. Now and then a tax credit is an efficient instrument of public policy, but at Treasury I must admit that the
time is seldom now.
oOo

- 2strongly suggest that the importance of our bilateral trade
will continue to grow. At the same time, the critical trade
issues facing us must De viewed in the broader perspective
of the global trading system and of the global economic interests
of both countries.
A major factor in this perspective is that the United States
is of course the world's largest trading country, with farreaching responsibilities for promoting the maintenance and
further liberalization of the world trading system. Another
is that Mexico, to its credit, has over the past two decades
clearly emerged as a major participant in the international
economic system. It is, in fact, one of a small group of
countries we now refer to as Advanced Developing Countries,
or ADC's—countries which have achieved intermediate levels
of economic development and which clearly have the potential
to move into the ranks of major world economic powers.
An indicator of Mexico's growing status is the performance
of its exports in this decade. Since 1970, its total exports
increased from $1.4 billion to about $6 billion in 1978, an
average annual growth rate of 21 percent. Moreover, Mexico
enjoys some of the brightest prospects of any country for
future expansion of exports and of its domestic economy.
We welcome the enhanced role Mexico is assuming in the
global economy. Its new position will lay the groundwork for
expanded and productive Mexican relations with the United States

- 3 and other countries.

We reaffirm that there is room for Mexico,

as a result of its dynamic development and outstanding prospects,
among the major industrial and trading nations of the world.
Mexico is, of course, considering how it can most effectively
translate its augmented position in the world economy into
the greatest possible benefits for its own economic development.
In the trade area, it is now assessing whether to take two
important steps to improve its prospects — membership in
the General Agreements on Tariffs and Trade, and full participation
in the pending conclusion of the Multilateral Trade Negotiations
in Geneva. Mexico has decided to initiate negotiations for
possible accession to the GATT, and is participating fully
in the MTN negotiations. If Mexico is to play its rightful
role in the global trading system, and if we are to assure
maximum cooperation between the United States and Mexico in
the trade area in the years ahead, Mexican GATT accession
and full Mexican participation in important MTN agreements,
such as the code on subsidies and countervailing duties,
could make an important contribution.
U.S.-Mexican Trade
Bilateral trade between the United States and Mexico has
multiplied in this decade and has assumed greater importance
for both countries. In 1977, such trade reached $9.2 billion compared with $2.8 billion in 1971. Mexico is already

- 4 the United States' fifth largest trade partner. The United
States supplied 60 percent of Mexico's imports in 1977, and
took 62 percent of its total exports. Bilateral trade flows
could well reach $30-35 billion by the mid-1980's — a remarkable increase over such a short period of time.
Mexican exports of both manufactured and agricultural
goods have figured importantly in the total trade picture.
In 1977, fully $2.2 billion of U.S. imports from Mexico (47
percent) were industrial products. An additional billion
dollars in imports (21 percent) were agricultural products,
an important source of income for Mexico. We expect that both
these categories of imports will continue to show sizable
increases. We see Mexico as a trading partner of growing
stature, a true partner with whom we will develop a full range
of trade relations that will strengthen economic growth on
both sides of the border.
To be sure, Mexican energy exports to the United States
are also likely to grow. As President Carter has emphasized,
the development of Mexico's energy resources is a decision
which will be made by Mexico based on its own priorities
and needs. Our two Presidents had fruitful discussions
last month on a range of U.S.-Mexican energy issues. They
agreed to continue bilateral talks on a number of these
issues, including possible exports of Mexican natural
gas to the United States. I am confident that, based on

- 5 those discussions, we will now be able to make progress
toward an accord which will fulfill important objectives
of both countries.
We welcome indications that Mexico is about to embark on
an ambitious new industrial development program.

We support

its goals of encouraging rapid economic growth, decentralizing
industrial development, encouraging investment in strategic
sectors of the economy, and spurring the development of small
industries.

Most importantly, the program should greatly

increase employment opportunities in Mexico—which is of great
interest to the United States.
Such a program will certainly encourage—and, indeed will
in part depend on—increased exports, both to the United States
and other markets.

At the same time, it will stimulate demand

for imports, which are likely to come largely from the United
States.

We welcome the prospects of greater bilateral trade,

and remain committed to maintaining the greatest access possible to our market for Mexico.

Our success in carrying out

this policy thus far can be measured by several indicators:
U.S. imports of Mexican manufactured goods more
than quadrupled from 1971 to 1977, expanding from
$492 million to $2.2 billion;
Duty-free imports from Mexico into the United
States under the Generalized System of Preferences (GSP) have grown from $253 million in

- 6 1976 to $458 million in 1978, a jump of 81 percent in only three years and considerably above
the 65 percent increase in all GSP imports over
the same period;
Mexican imports under sections 806.30 and 807
of the U.S. Tariff Schedules have increased
from $270 million in 1971 to $1.15 billion
in 1977, with $525 million of the latter
accounted for by Mexican value added. These
sections provide for reduced payment of duty
on articles imported from the United States,
assembled or manufactured in Mexico, and reexported to the United States;
Between 1975 and 1977, Mexico's trade deficit
with the United States declined from $2.1 billion to $200 million, and our projections indicate that the balance may soon be in Mexico's
favor.
The United States has consistently resisted demands for
new import restrictions. President Carter in 1978 rejected
five recommendations to restrict imports, while the relief
granted in three other cases affected an insignificant amount
of trade with Mexico — only about $1.5 million. We intend to
continue this policy to benefit Mexico, as well as other developing
countries, as much as possible through access to our markets.

- 7 In the MTN, for example, we have offered to cut tariffs on
a wide range of products of interest to Mexico.
Potential Problems
The increase envisaged in U.S.-Mexican trade, however, is
not without some risk. We have maintained our record of openness
to imports despite strong domestic pressures to place limits
on them. Those products which Mexico is most able to export
to the United States, including certain agricultural goods and
labor-intensive manufactured goods, are often the subject
of proposals for restrictions in the United States.
Increasingly, the ability of the United States—and other
industrial countries—-to maintain its commitment to trade
liberalization depends critically on the willingness of other
countries in turn to open their markets to imports and to
avoid subsidies on their exports. Clearly, it is in the interest of Mexico and other ADCs to help maintain the momentum of
liberalization from which they have so greatly benefited.
In the past, Mexico has discouraged imports by means of
a complex system of import licensing. We are encouraged by
Mexico's recent shift in emphasis from licensing requirements
to tariffs. Since it began to reduce its licensing requirements,
Mexico has removed over 5,000 categories, or nearly 70 percent
of the total, from the import permit list. We applaud these
initiatives and hope that Mexico may soon begin to reduce

- 8 -

its sizable tariffs and eliminate other restrictive requirements
as well. We believe that such steps would indeed abet the
country's future economic development.
The GATT
The importance of these issues suggests strongly that it
would oe beneficial for a nascent industrial power like Mexico
to assume membership in the body which regulates and fosters
world trade—the GATT. Over 80 countries, including virtually
all the world's important trading nations, are members. Several
more have expressed their intention to join. We would welcome
Mexican membership in the GATT and believe it would further
U.S.-Mexican trade relations.
The .GATT system has permitted rapid expansion in world
trade since its inception over 30 years ago. The management
of our bilateral trade problems, and assurance of Mexican
access to world markets, can be achieved most effectively
through the GATT framework. We see a number of marked advantages
for Mexico in GATT membership:
— Mexico's access to foreign markets will enjoy a
much greater degree of security. Mexico already
enjoys substantial security in the U.S. market.
But if it is to diversify its exports and its
markets, Mexico needs assurances of security of
access on a multilateral basis;

- 9 — Mexico would have access to the dispute-settlement procedures of GATT in case of disagreements.
If necessary, impartial multilateral panels can
be called upon to settle differences.

Such multi-

lateral review can entail greater objectivity and
flexibility, as well as greater bargaining leverage, than may be available bilaterally;
—

Mexico would be in a position to be a strong
advocate of its own interests—and the interests
of developing countries generally—in GATT deliberations concerning future international trading
rules; and

—

Mexico will stand to gain much more from the MTN
if it joins the GATT.

Other nations will be able

to make greater concessions to Mexico if they
have assurances that Mexico will participate in
and contribute to the global trading system.
GATT membership plainly would benefit Mexico.

As one of

the leading trading countries of the world, Mexico's participation in the major world trading organization would also enable
it to play a leadership role in trade policy among, and on
behalf of, developing countries as a group.
To be sure, GATT membership will entail Mexico's assumption of greater responsibilities and obligations.

Fears that

membership will place intolerable burdens on Mexico, however, or

- 10 that it will interfere with Mexico's industrial development
plans, would seem to be unfounded:
Accession to the GATT is achieved through negotiations between the acceding country and GATT
members. The acceding country thus can freely
negotiate a gradual schedule of increasing obligations, and need not bind itself immediately
to any international obligations it will not or
cannot undertake;
GATT Article XVIII provides special provisions
for developing countries to ensure that they
can protect their developing infant industries.
These provisions have been strengthened in the
current MTN negotiations;
The GATT contains special provisions permitting
developing countries to exercise safeguards for
balance of payments reasons. These rules too
have been improved in the MTN;
The presence of dozens of developing countries
already in the GATT, many of which have experienced dynamic export growth and have been
fully able to pursue trade policies which fostered their development, represents empirical
evidence that membership does not place intolerable
burdens on developing countries; and, finally,

- 11 While developing countries are expected to contribute to trade liberalization in the MTN,
these contributions are freely negotiated and
are to be consistent with each country's development, trade, and financial needs. The reciprocity which industrial countries are according each other is neither expected nor sought
from developing countries.
The case thus seems clear. Mexico's world role points
to its membership in GATT. Other countries would welcome it.
Mexico's own interests would seem to require it. We hope
Mexico will choose this course in the near future.
The MTN Subsidy Code
Full Mexican participation in the MTN package about to
be concluded in Geneva is also important. Mexico has taken an
energetic role in MTN discussions, including thorough talks
with the United States on tariff reductions. We think that
Mexico acted wisely in choosing to work actively in the MTN,
and that it should be recognized for its readiness to engage
in extensive MTN discussions.
We believe these talks have been useful to clarify differences in perspective and lay the groundwork for ultimate agreement. But time is short — the United States is now wrapping
up its negotiations, and the Administration intends to present
a final MTN package to Congress in April. As our two Presidents

- 12 agreed, it is therefore essential that the United States and
Mexico rapidly conclude a tariff agreement. We have offered
substantial cuts which will benefit Mexico. We hope Mexico will
join in the MTN efforts to liberalize trade by making contribution
consistent with its development level.
One of the most important components of the MTN is a code
regulating the use of subsidies and countervailing duties (CVDs).
Mexican participation in the code is of great significance
to ensure the smooth future development of U.S.-Mexican trade
relations. We believe that Mexico has much to gain by participating in the subsidies code:
Mexican exports to the United States that benefit from subsidies would be protected from the
threat of automatic countervailing duties. For
countries which assume obligations under the code,
such products could not be subjected to CVDs unless
injury is demonstrated—but no such test will
apply for countries which stay outside the code.
Mexican participation would help encourage the
widest possible participation in the code.
With such broad participation, exporting countries will have greater assurances that their
exports will not have to compete in third markets with products subsidized by other countries
— an important consideration for Mexico, which

- 13 subsidizes much less than some of its competitors
among the developing countries.
The United States is prepared to make an important contribution to the subsidies code—the Administration has recommended
to Congress that an injury test be incorporated in U.S. law.
But it should be noted that nations which do not accept the
obligations of the code, whether industrial or developing,
will not receive its benefits. In particular, the United States
cannot apply the injury test to subsidized exports from those
nations that fail to sign the code and assume appropriate
obligations. In the absence of such obligations, we would continue our current practice of imposing countervailing duties
against subsidized imports without an injury finding.
The Code does not seek to eliminate subsidies entirely;
rather, its aim is to set guidelines for the use of subsidies"'
which adversely impact on international trade. Developing
countries which join the code can fulfill the general obligation to refrain from the use of industrial and mineral export
subsidies by assuming obligations regarding the use of these
subsidies commensurate with their competitive needs. This
provision specifically recognizes that export subsidies are
an integral part of many development programs. We realize,
for example, that Mexico wishes to adopt certain domestic
subsidies to spur development.

- 14 But the code also recognizes that subsidies become less
necessary as nations develop. This provision is designed to
encourage the phase-out of export subsidies as nations become
more advanced, and hence have less need for such practices.
Nations which accept these responsibilities under the code
receive an assurance that, as their subsidies are phased out,
their exports will not be countervailed unless injury is shown.
One major ADC has already undertaken such a phase-out
commitment and begun to implement it. We hope and expect that
Mexico and other advanced developing countries will undertake
similar commitments—tailored, of course, to their own development
situations.
We do not believe that Mexican obligations under the
subsidy code would impair its ability to carry out its development
program. Mexico has not relied heavily on export subsidies
in the past, although its industry programs may occasionally
include such provisions. Mexico's recently announced subsidies
too are aimed largely at domestic production, not exports.
In any event, the cardinal point holds — Mexican sales
to the United States, and to all of its major markets, will
be better protected with Mexico inside the code rather than
outside it. Useful discussions on this issue have already
been held on a technical level. We believe that the time
is now ripe to bring these talks to fruition in the form
of arrangements for Mexican accession to the subsidy
code.

- 15 Potential Cooperation for the Future
Mexico clearly has developed into one of the world's most
dynamic and influential developing economies. We welcome
Mexico's enhanced status and believe that it offers a firm
basis to strengthen overall U.S.-Mexican relations.
At the same time, Mexico has an important role to play
in the international economy and a vital interest in the evolution of world trade relations over the next decade. In order
to protect its interests, and to assume its rightful role in
the global trading system, Mexico deserves to have an effective
voice in the management of these relations. Active and constructive participation in the GATT and the Subsidy/CVD Code
offers a unique opportunity for it to do so.
Both our countries are anxious to obtain the greatest
possible benefits from bilateral trade. We know that this is
not an easy task. It implies increased commitments and responsibilities. It means greater discipline in the conduct of
trade policy. But we firmly believe that the benefits of a
more open and flexible world trading system greatly outweigh
these considerations. It is our sincere hope that we can work
together to help pave the way for greater international trade
cooperation and progress in the future.

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
MARCH 19, 1979

STATEMENT OF THE HONORABLE ROBERT H. MUNDHEIM
GENERAL COUNSEL OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TRADE
SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Trade Subcommittee:
I am appearing this morning in support of the
Administration's request that the Congress extend for
a brief period the authority of the Secretary of the
Treasury to waive temporarily the imposition of
countervailing duties in selected cases.
The authority to waive countervailing duties was
included in the Trade Act of 1974 so that during the
4-year period following its enactment, the Administration
would be able to conduct talks with our trading partners
in an atmosphere conducive to reaching agreement on an
international regime to regulate the use of subsidies.
Governmental subsidies to domestic industries are
an increasingly important phenomenon. As Congress
recognized, the best hope for preventing such subsidies
from distorting trade patterns lies in international
agreement. Ambassador Strauss has brought us close
to successful conclusion of this difficult task.
Unfortunately, it was not possible to conclude the
negotiations among a great many participants within the
4 years originally foreseen by the Trade Act. Thus, the
bill before you has the very limited purpose of extending
the waiver authority for the brief period during which
the negotiations will be concluded. It does not commit
you in any way to the substance of the MTN negotiations.
B-1463

-2You and your colleagues in the House and Senate will
have a full opportunity to review what has been
negotiated. In other words, the bill is intended
simply to preserve the status quo for about 6 months.
Doing so helps make possible the conclusion of agreements which will significantly benefit the United States.
When the waiver expired on January 2, orders that
we had published in December suspended final liquidation
of imports of the merchandise affected and required
importers to deposit estimated duties, provide bonds
to cover those duties, or post equivalent irrevocable
letters of credit. The specific steps taken are in
the discretion of the District Director of Customs.
Thus, if the waiver is not extended, the revenue will
be fully protected. However, if, as contemplated in
this bill, the waiver authority is extended, there
will be no problem in making that extension retroactive.
There are presently 15 waivers in effect. Attached
to my testimony is a chart showing all of the waivers
granted under the law, the subsidy initially found and
any amount remaining at this time. As you will see,
in some cases, such as those involving Mexican steel,
Brazilian handbags, and all the Uruguayan products
there has been a complete elimination of the subsidy
so that a revocation of the initial countervailing
duty order was or is now appropriate. In the other
cases, the bill would extend the waivers retroactively
to January 3.
In addition, the bill would grant the Treasury
authority to waive countervailing duties during the
remaining pendency of the negotiations and congressional consideration of the MTN package. In two
cases decided before the expiration of our waiver
authority — concerning textiles from Brazil and fish
from Canada — we indicated that a waiver would be
granted if such authority existed at the time that
the ITC has completed its consideration of the case.
The ITC has determined that there is no injury with
respect to the Brazilian textile imports. There may
also be cases in which the subsidizing country may
agree to significant reductions of its subsidy
practices and is playing a significant role in the
MTN negotiations so that a waiver might be appropriate. However, we anticipate that throughout, the

-3remaining life of the waiver authority, we would
exercise the waiver authority pursuant to the same
terms and conditions as this Administration has
applied to the waivers granted — subject, always,
of course, to congressional reporting and review.
That course should assure us and our trading partners
that the remaining months of the negotiations are
not troubled by what may be regarded by some as a
needlessly provacative or unfriendly act.
Finally, we will continue to review the waivers
that are now outstanding. The current bill contemplates that we would revoke any waiver where changes
in conditions under which it was granted warrant such
action. We have taken such action in the past and
would do so in appropriate circumstances in the future.
0 00

FOR IMMEDIATE RELEASE

March 19, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,901 million of 13-week Treasury bills and for $3,002 million
of 26-week Treasury bills, both series to be issued on March 22, 1979,
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 June 21, 1979
Price

Discount
Rate

97.609
97.594
97.599

9.459%
9.518%
9.498%

26-week bills
maturing September 20. 1979

Investment
Rate 1/

Discount Investment
Price
Rate
Rate 1/

9.85%
9.92%
9.89%

95.213 9.469% 10.11%
95.205
9.485%
10.13%
95.206
9.483%
10.13%

Tenders at the low price for the 13-week bills were allotted 74%.
Tenders at the low price for the 26-week bills were allotted 36%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$
28,955,000
4 ,412,790,000
21,565,000
32,385,000
22,105,000
31,030,000
294,740,000
45,760,000
4,600,000
27,390,000
12,830,000
184,305,000

Treasury
TOTALS

12,435,000
$5,,130,890,000

Accepted

: Rec.eived

$
28,955,000 1
2 ,512,890,000 :
21,565,000
27,385,000
22,105,000 ,
31,030,000 .
102,140,000 .
23,260,000
4,600,000
27,390,000 .
12,830,000
74,305,000 .
12,435,000 .

$

17,140,000
5,,112,290,000
7,045,000
17,170,000
11,780,000
20,470,000
322,005,000
38,150,000
2,975,000
23,280,000
5,040,000
295,660,000

$
17,140,000
2,807,820,000
7,045,000
14,170,000
11,780,000
20,470,000
23,805,000
10,150,000
2,975,000
23,280,000
5,040,000
45,660,0p0

12,325,000

12,325,000

$2 ,900,890,000a / $5,,885,330,000

a/Includes $378,740,000 noncompetitive tenders from the public.
b/Includes $221,970,000 noncompetitive tenders from the public.
I/Equivalent coupon-issue yield.

B-1464

Accepted

$3,001,660,O0uV

FOR IMMEDIATE RELEASE
March 19, 1979

Contact:

Del Dobbins
202/566-5158

FRANK GREATHOUSE AND WILLIAM HENDERSON
RECEIVE 19 78 JOINT FINANCIAL MANAGEMENT
IMPROVEMENT PROGRAM AWARDS
Treasury Under Secretary Bette B. Anderson today presented
the 19 78 Financial Management Improvement Awards to Frank Greathouse, Assistant to the Comptroller of the Treasury of the State
of Tennessee and Director of State and Municipal Audit, and
William Henderson, Fiscal Affairs Specialist, U. S. Department
of the Treasury. They were recognized for their outstanding
contributions to the improvement of financial management in
the public sector at the Eighth Annual Financial Management
Conference of the Joint Financial Management Improvement Program
(JFMIP) in Washington.
JFMIP is a joint and cooperative undertaking of the Department of the Treasury, the Office of Management and Budget, the
General Accounting Office, and the Office of Personnel Management
to improve financial management practices throughout the Government.
Frank Greathouse was commended for his outstanding leadership
and accomplishments in intergovernmental cooperation and
coordination of audit efforts for federally assisted programs.
He was also recognized for his continued leadership in improving
financial management in Tennessee.
Mr. Greathouse has worked with both the National and
Southeastern Intergovernmental Audit Forums to enhance coordination of audit efforts among Federal, State, and local governments
and to improve auditing of federally assisted programs. He also
successfully directed a project to develop a uniform financial
and compliance audit guide for auditing organizations that
receive multiple grants from many agencies at various levels of
government. The guide will provide a means to implement the
"single audit" concept for these organizations, thereby eliminating
the need for each grant-making agency to perform a separate audit
of its own programs.

B-1465

- 2 -

Under his direction, the Division of State and Municipal
Audit has expanded its operational scope to include auditing of
federally assisted programs, monitoring independent public
accountants' audit of federally assisted programs, and conducting operational and management audits.
In addition, through his efforts, uniform State-wide
accounting manuals were prepared for municipalities in Tennessee,
and audit standards were developed for auditing municipal governments .
William Henderson was commended for his professional
excellence in improving cash management in the Federal Government.
As the Treasury respresentative on the President's Reorganization
Project to review cash management policies and practices throughout the Federal Government, Mr. Henderson was cited for excellence
in conducting and coordinating sophisticated financial analyses
to reduce Federal borrowing requirements and related interest
costs. He also demonstrated outstanding leadership and technical
expertise in representing the project to senior Government
officials and preparing reports for the President.
Mr. Henderson led the cash management reviews in the Internal
Revenue Service, the Bureau of Alcohol, Tobacco and Firearms,
and the Customs Service of the Department of the Treasury. He
developed creative and practical ways to strengthen Federal cash
management by accelerating the collection of duties and the
deposit of accompanying receipts, and accelerating the flow of
tax revenues by selectively reducing tax deferral periods. His
recommendations are expected to save the Government millions of
dollars annually and reduce unnecessary and inflationary Governmental requirements for small businesses.
o

0

o

Treas.
HJ U.S. Dept.-of the Treasury.
.A13P4 Press releases.
v.219