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U. S. Dept. of the Treasury.
• PRESS RELEASES
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FOR RELEASE ON DELIVERY
Remarks of the Honorable Anthony M. Solomon
Under Secretary of the Treasury for Monetary Affairs
before the
Subcommittee on International Trade, Investment and Monetary Policy of the Committee on
Banking, Finance and Urban Affairs
House of Representatives
May 1, 1979 - 10:00 A. M.
Mr. Chairman:
I am pleased to testify today in support of H.R. 3348,
transmitted to the Congress on March 8, 1979, to authorize
the appropriation of administrative expenses for the international affairs function of the Treasury. I will briefly
explain the background of this request and outline its main
elements.
Very soon after coming to the Treasury, Secretary
Blumenthal and I initiated an examination of whether the
administrative expenses associated with the Treasury's
international responsibilities should continue to be
funded from the resources of the Exchange Stabilization
Fund, as they had been for decades, pursuant to the Gold
Reserve Act of 1934. The financing of these expenses from
the ESF had been a source of Congressional concern, and,
moreover, the Treasury's international responsibilities had
grown very substantially since the 1934 authorization. We
concluded that administrative expenses directly tied to ESF
operations comprised only a small part of the total ESF
administrative budget, and that Treasury's international
affairs administrative expenses could and should be subjected
to the regular budgetary process.
We submitted legislation last year to terminate payment
of administrative expenses from the ESF and bring these
expenditures under the appropriations process. Your Committee
approved that legislation with certain modifications, and
it was passed near the close of the last Congress and was signed,
as P.L. 95-612, by the President on November 8, 1978. That
B-1573
- 2 - Conduct price or cost analyses on negotiated
procurement actions (FPR 1-3.807-2),
- Audit proposals (FPR l-3.809(b)),
- Conduct negotiations regarding initial, revised,
and final prices (FPR 1-3.811).
The first contract (TEP-6214), was awarded to ABN on
a sole source basis. It appears that BEP provided ABN
with current figures showing the costs the Bureau had
been billing to the Department of Agriculture. This conclusion was reached by comparing the Bureau's solicitation
document with ABN's offer. The solicitation document sent
out already had the approximate current prices which BEP
was billing the Department of Agriculture shown on the continuation sheet. It appears that ABN simply copied this
information onto its offer.
While no contracts were awarded in fiscal 1976,
production pursuant to prior contracts continued through
that year.
Several changes have been made in Bureau of Engraving
and Printing procurement practices since the Carter Administration took office in 1977. These changes were instituted
by the Treasury Department and remain in effect at this time.
First, on July 21, 1977, by Transmittal No. 97, the
Department amended the Treasury Procurement Regulations
to require both legal review and review by the Office of
the Secretary of all Bureau solicitation documents expected
to exceed $100,000 and all proposed contracts that pass
this threshold. The purpose of these reviews is to assure
that all procurement procedures, contract documentation,
and clause inclusion have been completed.
Since these procedures were initiated, the Office of
the Secretary has advised the appropriate Bureau procurement officer of the results of its review, including, where
appropriate, specific comments on missing contract clauses,
insufficient documentation, etc. As a result, corrective
actions have been made to BEP contract documents where
inadequacies were identified.
- 3 Second, on January 16, 1979, procurement authority was
temporarily withdrawn from the Director of the Bureau of Engraving
and Printing and delegated instead to the Director, Office
of Administrative Programs, Office of the Secretary, Department of the Treasury. Under this arrangement Treasury's
Office of Administrative Programs has general authority
over the procurement function at the Bureau. In the exercise
of that authority, OAP reviews all sole source purchase orders,
contracts or amendments over $5,000; purchase orders or contracts for consulting services; contractual instruments with
American Bank Note Company (ABN) or with any other company with
which ABN was an unsuccessful competitor; and all proposed
responses to Freedom of Information Act requests for copies
of contract documents.
Since these measures were instituted, there has been a
general improvement in the contract placement activities of
BEP, with greater assurance that requisite contract clauses
are included and that procurement regulations are followed
with respect to solicitation procedures and contract file
documentation.
(1) (B) Q: Why were incurred cost audits not performed
prior to September 1977?
A: It appears that the contracting officer did
not request an incurred cost audit.
Q; What action was taken by BEP after the submission of the September 1977 audit report?
A: The profit figures from BEP Audit Report Number
1(C)-17 were forwarded to ABN by the Bureau on September 20,
1977, with a request for analysis and comment. ABN replied on
September 26, disagreeing with some of the analysis of
profit. The Chief, Office of Administrative Services,
BEP, then wrote a memorandum on October 7 to Acting
Director Seymour Berry suggesting a further joint audit
by BEP and ABN to resolve accounting differences. Berry
approved this and ABN acquiesced in a letter to the Bureau
dated January 16, 1978. However, nothing further was done.
As the Subcommittee is also aware, on September 12, 1977
a Bureau of Engraving and Printing employee submitted a suggestion that the Bureau attempt to recover excess profits on
all prior food coupon contracts with the American Bank Note
Company. That suggestion cited Audit Report Number 1(C)-17.
The suggestion was referred to the Bureau's Legal Counsel,
who advised, on May 9, 1978, that the statutory basis for
recovery explicitly mentioned in the suggestion was not applicable
to the food coupon contracts, but that the matter should be
- 4 referred to the Office of Audit to see if any alternative
basis for recovery could be found. On June 19, the Chief,
Office of Audit, referred the matter on to the Chief,
Office of Administrative Services, "for an administrative
determination in connection with [his] functional responsibility as Contracting Officer."
The Chief, Office of Administrative Services, apparently
declined to read the employee suggestion as extending beyond the
statutory ground expressly mentioned, and recommended that
it be denied. After resubmission by the employee on the
broader ground that any available basis for recovery should be
pursued, the suggestion was denied on December 7, 1978,
by the Chief, Office of Financial Management, with the
explanation:
"A. The Legal Counsel for the Bureau has determined
that the renegotiation and excess profit issue
does not apply to the contracts mentioned in the
suggestion; and
"B. The Chief, Office of Administrative Services, has
opined that the procurement practices and procedures applied by BE&P resulted in the best ABN
prices obtainable under existing market conditions;
the changing nature of Department of Agriculture
program estimates; and consideration of the make-up
comparison of manufacturing Food Coupons vs. the
ABN total product mix."
On April 14, 1978, the Department recommended to EEP that
its audit staff review pricing history to determine
reasonableness of price. Also on that date the Department asked
the Bureau to examine whether it could use one of the statutory
authorities for negotiation (41 U.S.C. 252(c)(1) et seq.) to
negotiate better prices and terms on future contracts. BEP
is now auditing offers received on major procurements to
determine whether the price is fair and reasonable.
In early 1979 Treasury's Inspector General requested
a review of TEP 75-206 (TN) and TEP 77-1 (TN) as a result
of his investigations. That process of review and evaluation is continuing within the Treasury Department, and
a determination whether procedures for recovery of excess
profits should be invoked is to be made by Treasury this
summer. The Bureau has at least until September 1979 to
perform a post-award audit if Treasury determines that
this approach would be fruitful.
- 5 Q: What were the results of any attempts or
discussion within BEP to recover excess profits by ABN?
A: Internal correspondence indicates that BEP
inquiries into the feasibility of recovering excess profits on
past contracts were fruitless. The Bureau should have used
the past audited profits of ABN as a bargaining point in
new contract negotiations, but there is no evidence in the
contract files that such a procedure was instituted for the
contracts which immediately followed the audit report.
(1) (C) Q; What have been the comparative profits made
by ABN and USBN since company has been receiving food
coupon contracts?
A: We understand that the comparative profits
of the two companies have been computed by GAO and reported
to the Subcommittee. GAO derived those figures from information provided by the American Bank Note Company. The only
independent source that Treasury has for checking these data
is the audit performed by the Bureau (Audit No. 1(C)-17) on
contracts TEP 75-206 and TEP 77-1. This audit produced
figures from ABN records that agree substantially with the
GAO results. For this reason, Treasury has no reason to
question the GAO figures for any of the contracts.
(1) (D) Q: Was the cost information submitted by ABN and
USBN prior to award of contracts certified as complete,
accurate, and current?
A: Cost and pricing data (Optional Form 59)are
required only in the case of negotiated contracts. The
ABN negotiated contracts had cost and pricing data in all
cases except two: contract TEP-6214 (1971), which had no
Form 59's, and TEP-75-206 (1975), which had forms dated
after the date of the contract award. The U.S. Bank Note
negotiated contracts had Form 59's in each case.
(1) (E) Q: What were BEP's costs of producing and distributing food coupons in 1971 at about the time of the
first award of food coupon printing and distribution contract to ABN?
A: While ABN did not begin to distribute food
coupons until September 1973, it is useful to compare
BEP's printing costs at the time of the first contract
with the price charged by ABN. The following table shows
both the cost of production and the amount of billing to
Agriculture for $2 and $3 books in FY 70, 71 and 72, the
period surrounding the award of the first coupon contract
(TEP-6214) to ABN. The minor differences between "cost of
- 6 production" and "billing to Agriculture" arise because the
Agriculture billing was based on an estimate at the beginning
of each fiscal year, which varied slightly from the actual
cost of production computed later during that year. The
figures compare on the average very closely with the prices
of $7 per 1000 for the $2 books and $5.95 per 1000 for the
$3 books charged by ABN under the first contract. This met
Agriculture's stipulation that it not have to pay more
for food coupons produced on contract than it had been
paying for BEP-produced coupons.
TABLE 1
Cost of Food Coupon Production at BEP
(per 1000 Books)
Book FY 70 FY 71 FY 72
$2 6.77 6.83 . 6.85
$3 5.64 5.60 5.61
Billing to Agriculture
$2 7.00 6.751/ 7.10
6.941/
$3 5.75 5.75^ 5.95
5.402/
1/ July 1, 1970 to January 31, 1971
2/ February 1, 1971 to June 30, 1971
SOURCE: Data on record at the Office of Financial
Management, BEP
Q: How were these costs determined and have they
been independently verified?
A: The costs were derived from records maintained
at the Bureau's Office of Financial Management. There has
been no independent verification.
- 7Q: Is there any evidence tending, directly or
circumstantially, to indicate that BEP's costs were disclosed to ABN prior to such first contract award?
A: As stated above, it appears that BEP's costs
were disclosed to ABN since the solicitation document (and
its draft) contained a cost estimate. There is no evidence
that this cost estimate was arrived at through negotiations.
(D (F) Q: What remedies does the Government have to
recover from contractors the differences between profits
based upon costs actually incurred in the performance of
a contract and profits based upon costs submitted by the
contractor in Form 59's prior to the award of the contract?
A: Form 59's are used in connection with negotiated
contracts. The Government may recover excessive profits only
if there is evidence that defective cost and pricing data were
submitted and that the contracting officer relied on these
defective data during negotiations in order to determine
whether the prices were "fair and reasonable."
Q: Do the remedies differ in the case of negotiated
contracts versus those awarded on the basis of advertising?
A: Yes. In contrast to the description given in
answer to the previous question, in a formally advertised
procurement, cost and pricing data are not required since
there are no negotiations and award is made to the lowest
bidder that is deemed to be responsive and responsible.
However, under FPR 1-3.214, contracts may be negotiated after
advertising if it is determined that the bid prices submitted
under a formally advertised solicitation are not reasonable,
or have not been independently arrived at in open competition.
- 8 (D (G) Q: What role did James Conlon and others play in
selecting ABN in the first food coupon contract?
A: The early files contain correspondence from
Mr. Conlon directing the contracting officer to enter into
a sole-source contract with ABN. Mr. Conlon indicated that
his decision was predicated on his determination that ABN,
alone, had the capability to produce food coupons, by the
intaglio process and at a single location, in sufficient
quantity to meet the requirements.
In addition, correspondence from ABN shows that Mr. Conlon
discussed with ABN executives his feeling that no other contractor had the capability to meet the requirements of the
food coupon program.
Finally, it also appears that BEP personnel assisted
ABN in arranging for suppliers, who were sources for BEP,
to provide such materials as coupon paper, cover stock,
boxes, and cartons.
Q: Is there an "in-house" cost estimate by BEP
for printing and distribution of food coupons?
A: The 1970-1972 in-house cost figures for printing
at the time of the award of the first contract to ABN are
given in the answer to (1)(E) above. Other cost figures
for food coupons, during the periods BEP printed or distributed them, are available from the Office of Financial
Management at the Bureau.
Q: Did the original contract to ABN (TEP-6214)
include distribution?
A: The original contract did not include
distribution. At that time, distribution was done by BEP.
(1) (H) Q: What has been BEP's record of overseeing the
performance of ABN and" USBN in the production and distribution of food coupons in termr of accountability, inventory
control and payments for production?
A: Three units within the Bureau have shared responsibility for overseeing the performance of ABN and USBN
in the production and distribution of food coupons: the
Office of Audit, the Office of Security, and the Production
Control Division of the Office of Industrial Services.
- 9 The Production Control Division has been responsible
for the Quality Assurance provisions of the contracts, and
has visited the plants, verified quality and accountability
records, and reviewed the companies' inhouse operations on
a monthly basis since prior to 1974. Several revisions in
contract provisions have been initiated to improve this
program.
The Office of Security has had responsibility since
1976 for on-site inspections to verify production accountability records, control destruction of mutilated coupons, and
examine physical security. Physical security and destruction
surveys have been conducted monthly throughout that period.
Accountability audits have been scheduled on a quarterly
basis, but in practice have been performed less regularly,
ranging from monthly to as infrequently as 10 months.
The Office of Audit has had responsibility for contract
compliance, including production (other than Office of Security
responsibilities), storage, and shipment of coupons. On-site
inspections have been performed in connection with audits on
an irregular basis, averaging several times per year, but with
occasional fairly lengthy intervals.
During this past winter, a Treasury Department team
preparing a management review of the Bureau examined the
administration of the food coupon contracts to see whether
they followed approved procedures. The study (and various
other inquiries taking place simultaneously) raised the
level of concern at BEP about the food coupon contracts
and an intensive audit and inspection effort was launched
by BEP in February 1979. The Office of Audit Report
No. 1(C)-23 subsequently documented several weaknesses
in the administration of the food coupon contracts.
First, during the first part of FY 1979, $1.1 million
had been paid to ABN without proper authorization by the
contracting officer on Purchase/Delivery Orders. Moreover,
the Bureau had not verified the quantity of coupons delivered
from the ABN factory to the ABN warehouse before making payment. This procedure was changed in February 1979, and the
head of Production Scheduling for the Bureau now verifies
coupon quality, while the Office of Audit staff sian receipts
for delivery before payment is made. Initially the Bureau
auditors had difficulty verifying delivery of coupons to the
ABN warehouse because the goods were not arranged in an
orderly fashion; first-in, first-out shipping procedures had
not been followed, and there were many coupons in stock that
dated back as far as 1974.
- 10 Second, the ABN warehouses were severly overstocked
and the inventory was out of balance when compared with
levels of demand for various books. This appeared to be
pa tlall
J
Y a r e s u l t o f early-1979 Department of Agriculture
orders for large amounts of some book denominations in
anticipation of demand that did materialize. Two million
books were found that had been rejected for quality reasons,
but not designated for destruction.
Third, large amounts of materials awaiting destruction
were found, and the ABN destruction facilities appeared
inadequate to deal with the flow of mutilated coupons.
- 11 (2) The acquisition, cost and performance of the Magna
presses manufactured by ABN (American Bank Note Co.)
(2) (A) Q: What assistance was given ABN by BEP in the
development of their Magna Press program?
A: (1) We were unable to identify from BEP records
any assistance which BEP may have provided ABN in development
of the Magna Press program prior to the contract to purchase
four presses. Repairs and modifications to the equipment
after delivery to the Bureau were accomplished by both ABN
and Bureau personnel. However, ABN reimbursed the Bureau
for BEP costs of these repairs or modifications until BEP
purchased the presses outright in July 1978.
(2) The Bureau provides engraved test plates
(which look different from real currency plates) to all
equipment manufacturers when presses are being built in order
to ensure that the presses can actually print currency. BEP's
Office of Security also indicated that they provide ink and a
non-distinctive paper.
(3) Papers provided us by the Senate investigators
indicate that there were equipment discussions between James A.
Conlon and ABN management.
(2) (B) Q: What were the comparative costs per unit of the
four Magna presses versus the two Giori Super 98 presses
acquired by BEP from 1974 through 1978?
A: The comparative lease purchase costs for the
Magnas and Giori Super 98' s are shown below.
Price Per
Press
Unit
Total
Contract Cost 4 Magna $1,293,000.00* $5,172,000.00*
Actual Cost
4 Magna
1,167,982.90
4,671,931.59
Contract Cost 2 Giori Super 1,090,176.00**
2,180,352.00**
98
* The Bureau negotiated an outright purchase of the Magnas
from ABN on 7/31/78 which resulted in a $500,068.41 reduction
from the contract cost.
** The initial bid for the Giori Super 98 was $1,236,727 per
unit. The Buy American Act required addition of six percent
to the cost and another six percent was added for the work to
be done in a depressed area (this made ABN the low bidder).
However, Giori later indicated that the relationship of the
dollar to the mark made a reduction of $60-$70,000 possible.
The actual reduction was even greater resulting in the contract
price per unit for the Giori presses being $202,824 less than
the Magna presses ($72,002 less when adjusted for Buy American
Act and depressed areas).
- 12 (2) (C) Q: What has been the comparative currency production
record of the four Magna presses versus the two Giori presses
since they have been in operation?
A: From July 1977 through December 1978 the
comparative production is shown below.
Press
Total Production
2 Giori Super 98 82,072,000 41,036,000
4 Magnas
56,350,000*
Production
Per Press
17,030,858*
These figures are skewed due to a preference for operating
the Giori Super 98';s. Thus when production demand is low
or a shortage of printers exists the Magna presses will not
be utilized.
The Assistant Superintendent of the Construction and
Maintenance Division, who was the project engineer for
installing the Magna presses, has stated that only two major
problems remain with the Magnas. The first is the delivery
gripper system for which C&xM has designed a new system
similar to that of the Giori presses. If this is successful
all Magnas will be retrofitted with the new system. The
second problem is bad gears in the ink fountain system. This
appears to be a problem of the gears being made of the wrong
material and not having an adequately hardened surface. C&M
is attempting to correct this problem now.
For comparison purposes the percent of full days that
the Magna and Giori presses were down for all reasons is shown
from July 1976 to February 1979.
Equipment Down Time
Giori Super 98's 4.1%
Magna Presses
34.3%
(2) (D) Q: Has the performance record of the Magna presses
been a factor in the rising cost of U.S. currency?
A: To some extent. The cost of operating the
Magna presses has averaged $0,594 per 1000 notes higher than that
of the Giori Super 98's ($5,469 to $4,875). The following
chart shows the components of price increase over the last two
years.
*
The last Magna press was not accepted until July 21,
1978. Therefore ''Total Production" was divided by
3.31 to arrive at "Production Per Press," recognizing
that one of the Magnas was in production for only part
of the period.
- 13 Cost Breakout of Recent Changes to Billing Rate for Currency
($ per 1000 notes)
FY 76
FY 78
% Increase
Manufacturing
Administrative
Other Support
Surcharge
TOTAL
8.9886
3.2335
1.9620
.6869
14.8730
10.224
4.018
2.447
1.430
18.119
13.7
24.2
24.7
30.7
Billing Rate
14.5194
18.700
The Magna presses produce greater volume when printing
the backs of currency than the fronts. (The backs are
printed first; thus the paper is easier to handle.) For this
reason the Bureau has scheduled the Magnas to print backs
and the Gioris to print faces of currency. Thus utilization
of the Magna presses has increased to 75.5 shifts per unit
(with average production of 32,735 sheets per shift) during
the month of March. This compares to 79.5 shifts for the
Giori Super 98's(with average production per shift of 33,609
sheets) during the same period.
The increased utilization and production of the Magna
presses is likely to reduce the gap between the costs of
currency produced on the Magnas and Giori Super 98's.
(2) (E) In addition to the Subcommittee's requested information,
Treasury Department personnel examined the contracting arrangements for the Magna presses and determined that contract
TEP-74-134, awarded to ABN for $5,172,000, has the following
procurement deficiencies:
- There appears to be no abstract of bids as required
for formally advertised procurements (FPR 1-2.204). The
file is in complete disarray and it is virtually impossible
to determine which of the two bids received was the lower.
- 14 - While lease-to-ownership and purchase plans were
requested from vendors,there is no indication why a straight
lease plan was not requested.
- The file contains correspondence from ABN requesting
clarification of certain technical and contractual items in
the Invitation for Bids to which BEP quickly responded.
There is no indication that other prospective
bidders were given this information. In all fairness to
other bidders, and in order to maintain a fully competitive
environment, any information submitted to one prospective
bidder should be provided to all the others.
There is no indication that the requirement was
advertised in the Commerce Business Daily (FPR 1-1.1003-2).
The solicitation document was not designed as a
formally advertised procurement or a negotiated procurement.
This designation is necessary since different procurement
regulations exist for each method.
- 15 -
(3) Private contracting for gasoline rationing coupons
m 1974.
It is our understanding that three private companies
with intaglio printing capability, namely ABN, USBN and
Jefferies Bank Note Company, received contracts from BEP
to produce substantial quantities of gas rationing coupons.
It is our further understanding that a large number of these
coupons became inoperative when it was discovered that the
likeness of George Washington on the face of certain gas
coupons was the same as that on the dollar bill and that
the coupons could be used in coin change machines. In
this regard:
(3) (A) Q: How many coupons were printed with the George
Washington likeness — what was the cost to the government
as a result of this oversight?
A: The total number of gasoline ration coupons
printed was 4.8 billion. All such coupons were printed
with the likeness of George Washington. * Some of those
coupons were printed with inks that would be unacceptable
to a change machine. The basic coupon, of course, is
only one-third the size of a $1 bill.
The possibility that some coupons may be altered so
as to be usable in some change machines has not cost the
Government anything at this time. Since relatively
inexpensive offset overprinting of identifying numbers
or other materials may eliminate the possibility that
gas coupons could be used in some change machines, the
cost may not be substantial. Should the coupons be
assigned a value of more than $1 in use, there would,
of course, be no reason for the Government to incur
any costs to alter them.
(3) (B) Q: BEP Audit Report #l(A)-638 states that "the
unit cost rate of~5l.67 per thousand coupons for gasoline
ration coupons manufactured at the Bureau was more than
50 percent less than unit cost rates of $3.52 (ABN) and
$4.09 (USBN) attributable to outside contractors." Was
any incurred cost audit ever done to determine the rate
of profit made by ABN and USBN on the gas rationing contracts? Is the cost differential typical of the lower
cost of "in house" production?
A: No incurred cost audit was ever done. This
cost differential is not typical of the lower cost of
"in-house" production, but a substantial reason for the
- 16 large disparity in costs is the extremely large difference
in the quantities produced in each facility. Printing work
tends to have large initial costs, which decline with increases
in quantities produced. BEP's costs were predicated on production of 3.7 billion
coupons, ABN's on production of
650 million, and USBN's on production of 450 million. Whether
the differences in quantities fully justified the differences
in prices would involve many issues of judgment.
- 17 (4) Development of ABN's Security Signature System, and
rne Proposal of June 20, 1977 for its sale to the BEP.
Much of the information in the possession of the
Treasury Department concerning these matters has been
developed by the Inspector General. That investigation
was initiated on October 6, 1978 and was referred to the
Department of Justice on December 18, 1978. The Department of Justice has advised the Treasury Department that
the release of materials prepared at the request of the
Department of Justice could be harmful to its investigation.
Consequently, the following answers will not reflect the
Inspector
General's knowledge of matters covered.
(4) (A) Q: The role of James Conlon in the development
of SSS from September 1976 to July 1, 1977.
A: The Security Signature System was a device
intended to protect against counterfeiting. As proposed
it was to involve the impregnation of currency with
materials that would be invisible to the.naked eye, yet
detectable with specialized equipment.
Treasury Department records reflect that:
- Former Director James A. Conlon met with a
Mr. Weitzen of the American Bank Note Company
concerning this system on September 9, 1976.
- A further meeting was held on December 7, 1976
involving representatives from the Federal Reserve Board
and
the American Bank Note Company, Mr. Conlon,
and other personnel from the Bureau of Engraving
and Printing.
- Mr. Conlon wrote to Mr. Weitzen on December 22,
1976 itemizing 34 areas in which further information was needed.
- On January 17, 1977 at Boston, Massachusetts a
meeting was held involving Federal Reserve, the
American Bank Note Company, Mr. Conlon and one
additional Engraving and Printing employee.
- On February 9, 1977 and April 21, 1977 the same
individuals plus three additional Bureau of
Engraving and Printing employees met at the
Bureau of Engraving and Printing.
- 18 On May 10, 1977 Mr. Conlon wrote to Mr. Thomas E. Gainer,
Chairman, Subcommittee on Currency and Coin, Federal
Reserve Bank of Minneopolis, to announce "[w]e have
determined that the Security Signature System proposed
by the American Bank Note Company is significantly
superior [to a competing signature system that had
been under development]. Tn the best interests of the
government, . . . . I am advising the American Bank
Note Company of our interest in acquiring equipment
for the Bureau's manufacture of currency employing
a new technology. As early as we are able to complete arrangements for this acquisition I will prepare
for discussion . . . a timetable towards the availability
of the first currency adapted for us on the automated
currency handling equipment."
On May 20, 1977, Mr. Conlon sent a memorandum directly
to the immediate Office of the Secretary of the Treasury,
proposing a meeting for three purposes. The first of
those was "[t]o brief [the] Secretary on changes to
U.S. currency, involving design adjustments and a
confidential treatment to assure authentication in
automated currency handling." Stating that this
program had originally been proposed in 1970, the
memorandum stated that the Bureau had been working
closely with the Federal Reserve Subcommittee on
Currency and Coin, that the "Federal Reserve fully
endorses the new technique as critical to the
automation project", and that there were "[n]one
opposed" to it. Because the items to be discussed
at the meeting had never been reviewed or approved
by the Under Secretary, the meeting with the Secretary was not scheduled as proposed.
On May 31, 1977, Mr. Conlon sent a memorandum to
the Under Secretary, with an attached informational
memorandum for the Secretary. The memorandum to the
Under Secretary stated that a meeting would no longer
be necessary because of her instructions to delete
two major items from his March 20 proposal, and
requested that the Secretary be asked to approve
certain currency design changes needed for the
introduction of a new genuineness treatment, and
provide signature samples for the new currency.
The informational memorandum described the need
for the currency design changes, attributing the
"genuineness" aspects of the project to a general
project that had been underway since 1970, and
of
the
flatly
the
equipment
asserting
currency."
necessary
that "E&P
for is
appropriate
currently preparation
acquiring
- 19 - On June 2, 1977, Mr. Conlon met with the Secretary
in a meeting arranged by the Under Secretary, who
was present for at least part of the meeting. The
currency design changes were presented and approved,
and Mr. Conlon spontaneously offered a brief demonstration of the Security Signature System. [As
described below, Mr. Conlon submitted his written
retirement on June 2, 1977, to the Under Secretary.
He had, however, orally notified her of his intention
the previous week in a telephone conversation.]
- On June 24, 1977, Mr. Conlon wrote Governor Phillip E
Coldwell, Federal Reserve System, proposing that the
Federal Reserve advance the Bureau of Engraving and
Printing $13,943,060 to fund the purchase of two
security signature impregnation machines. That
letter stated that the Federal Reserve would save
$14,372,940 over 5 years because the Bureau would
avoid $5.7 million in lease-to-purchase costs and
•would redistribute $8.7 million of overhead costs
by carrying the equipment at "zero-value".
- On July 1, 1977 Director James A. Conlon retired.
(4) (B) Q: What studies were made by BEP to justify the
expense of the SSS in terms of the nature and scope of
the problem of counterfeiting of U.S. currency?
A: No records have been located indicating that
such studies were conducted.
(4) (C) Q: What role did the R&D Section of BEP under
Richard Sennett play in the development of anti-counterfeiting technology, ink development, test paper coating,
distinctive paper, etc.?
A: The research and engineering section of the
Bureau of Engraving and Printing conducts extensive work
in the areas listed. Records reflect that Mr. Sennett
was present at several meetings listed under (4)(A) above,
and reflect that some distinctive currency paper was
impregnated at American Bank Note Company using the SSS
technology and Federal Reserve notes were printed thereon.
(4) (D) Q: When and under what circumstances did Conlon's
superiors in the Department of Treasury learn that Conlon
had accepted employment with ABN? Ditto Richard Sennett?
FOR RELEASE UPON DELIVERY
MAY 2, 1979 10:00 A.M. E.D.S.T.
STATEMENT OF BETTE B. ANDERSON, UNDER SECRETARY,
DEPARTMENT OF THE TREASURY, BEFORE THE PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS OF THE SENATE
COMMITTEE ON GOVERNMENTAL AFFAIRS
Mr. Chairman and Members of the Committee:
The Treasury Department and the Bureau of Engraving
and Printing fully support and welcome these hearings.
As you know, we have cooperated fully with your investigation and, within the limits of available resources,
we have provided staff support to augment your efforts.
Mr. James Conlon spent ten years as the Director of
the Bureau of Engraving and Printing, finally retiring in
July 1977 — approximately seven months after the Carter
Administration took office. As both the Committee and
the Treasury are now aware, a number of problems apparently
developed in the Bureau during Mr. Conlon's tenure as
Director. Treasury shares with you a firm resolve to
rectify problems which have occurred. We are attacking
them on several-fronts.
Our focus has been on management aspects of the
problem. In general, we are moving to find or develop
new top Bureau managers, and to improve the information
and control systems within the Bureau. We are not, I
want to emphasize, taking this approach in disregard
of the need to deal with past problems. Two important
developments are relevant to the past.
First, over the past twenty-one months the entire
Bureau management group that was associated with
Mr. Conlon's Directorship has retired from the Bureau.
I do not, by that statement, mean to impugn the conduct
or the motives of any particular former Bureau manager.
Certainly, the Bureau will miss the accumulated experience
of the career employees who occupied its top three managerial
levels. Nonetheless, this unprecedented turn-over marks an
important transition in the Bureau's life, and we intend to
B-1574
- 2 legislation also authorized a sum not to exceed $24 million
to be appropriated for FY 1979. The House Appropriations
Subcommittee on Treasury, Postal Service, and General
Government held hearings on March 22, 1979, on the sum
requested (as a supplemental) for the last quarter of FY 1979,
as well as the sum requested for FY 1980, in anticipation of
your authorization hearing today.
As I noted earlier, the Treasury's involvement in
international affairs has expanded significantly over the
years. The international affairs function embraces the wide
range of issues involved in formulating policies and conducting
negotiations with other governments and institutions on world
economic, monetary and financial problems for which the
Treasury has responsibilities. As chief financial officer
of the United States, the Secretary of the Treasury has major
international duties assigned by the President or directed by
statute. He is Governor for the U.S. in the International
Monetary Fund, the World Bank and the other multilateral
development banks of which we are a member. He oversees U.S.
international monetary policy and operations, including
operations utilizing the resources of the Exchange Stabilization
Fund. He is co-Chairman of the Saudi Arabian-United States
Joint Commission on Economic Cooperation; Honorary Director
of the U.S.-U.S.S.R. Trade and Economic Council; co-Chairman
of the U.S.-U.S.S.R. Commercial Commission; and co-Chairman
of the recently formed U.S.-China Joint Economic Committee,
which will coordinate and oversee the development of U.S.
economic relations with the People's Republic of China. He
formulates and represents the Treasury's views on policy over
the range of international trade, financing, development,
energy and natural resource issues. He represents the United
States in discussions and negotiations of bilateral and
international monetary and financial issues with other nations
and closely assists the President at economic summit meetings.
Such activities as these, on the part of the Secretary
and other senior Treasury officials, require highly professional staff support. There is a continuing need for
knowledge and analysis of economic conditions and policies
abroad, for development and representation of U.S. positions
at staff level with foreign representatives, and for relating
U.S. foreign economic policy activities to the national
interests of the United States.
The authorization we are requesting for FY 1980 is
approximately $23 million which -- despite inflation -- is
slightly below the amount authorized for FY 1979. We are
- 3deeply concerned that our responsibilities be carried out
efficiently, and we have made a deliberate and effective
effort to control the costs of conducting Treasury's international activities. We have been less successful in some
areas than in others, because of inflationary cost increases
and international developments that have demanded more
extensive international contact. But we are determined to
limit costs and activities wherever possible and consistent
with performance of our responsibilities.
Our draft bill also requests an authorization for
appropriations for FY 1981, consistent with Section 607 of
the Congressional Budget and Impoundment Control Act of 1974.
I note that you, Mr. Chairman, have submitted a bill which
restricts the authorization to FY 1980. We would prefer an
authorization for both years, simply because it would permit
a more orderly budget process. The problem with seeking both
authorization and appropriation in the same year is largely
one of timing, and the result may frequently be hearings by
the appropriations committees prior to action by the
authorizing committees, as has been the case this year. A
two year authorization this year would enable us to maintain
an orderly sequence; and, if approved, we would plan to submit
a request for FY 1982 next year.
This concludes my statement, Mr. Chairman. I urge the
Subcommittee to report the bill favorably both for FY 1980
and FY 1981. I would be pleased to answer any questions
that you or other members of the Subcommittee may have.
- 4emphasized the need for borrowing authority to fund purchase
of equipment. One of the apparent causes of the rising costs.
of currency related to an expensive lease-to-purchase agree--""
ment that had been made with the American Bank Note Company for four high-speed Magna presses over the period 1974 to
1978. It appeared that the Bureau might have avoided the
high cost of this arrangement if it had obtained the necessary
borrowing authority or an outright appropriation. I responded
by requesting that borrowing authority legislation along the
lines recommended by GAO be drafted and submitted to OMB.
Other factors also contributed to the growth of the
Bureau's costs at that time. Some involved rapidly rising
wage rates and the increasing costs of printing materials.
The poor quality of some of the new Magna presses was
another. They failed to function much of the time, produced
a high spoilage rate, forced the use of additional overtime,
and required substantial corrective maintenance. There was
no feasible escape from this difficulty, however, because
we had to continue to satisfy the Federal Reserve's need
for currency. Building and installing new presses would
have required a one year to 18 months delay. We bowed to
the inevitable, kept the faulty presses, and tried to make
them work as well as possible. Presently they are used
primarily to print the backs of currency.
Meanwhile, another equipment purchase proposal was
brought to my attention. In the fall of 1977 I was told
that the Federal Reserve was looking into the possibility
of purchasing and placing in the Bureau some equipment
which would provide anti-counterfeiting protection for
the currency. That project had come to my attention on
one previous occasion. In May of 1977 Mr. Conlon had
sent the Secretary a briefing paper and requested an
appointment to brief him on an anti-counterfeiting
device.
In his briefing memorandum, Mr. Conlon asserted that
the Bureau and the Federal Reserve had been working on the
project since 1970, and that the Federal Reserve was eager
to proceed. He added that the proposal was a closely held
idea within the Bureau, and that even the Federal Reserve
was not familiar with the technology involved.
Thus, when the idea that the Federal Reserve might
purchase the equipment and help us avoid our capitalization
problems came up in October, I was receptive. The supporting
materials submitted by the Acting Director at the time,
- 5Mr. Berry, contained the same representations concerning
the Federal Reserve's position. Thus, I felt free to
contact Governor Coldwell to discuss the financing. He
requested that I seek the approval of the appropriate
Congressional Committees before he made a commitment. I
then contacted Chairmen Chiles and Steed and obtained
letters indicating that they had no objections.
When I informed Governor Coldwell of these developments,
I was completely surprised to receive a reply that indicated
that the Federal Reserve Board had never been asked to approve
the project.
The Federal Reserve has not made an affirmative decision
on the project. In the meantime, the Bureau has continued its
technological research on various proposals. In addition, I
have established a Task Force on Counterfeit Threat Assessment
within the Treasury. That group, composed of the Secret Service,
the Assistant Secretary for Enforcement and Operations, and
the Bureau, is responsible for constantly assessing potential
threats to our currency and monitoring proposals to deal with
those threats. Naturally, that Task Force will be working
closely with the Federal Reserve Board.
To deal with the contracting problems that I perceived
at the Bureau, I began early to insist upon compliance with
a July 1977 Department Directive that required Departmental
review of all procurement contracts over $100,000. I requested
a listing of all of the Bureau's outstanding contracts within
that category and, during the fall of 197 7, I asked that the
Department's auditors examine the Bureau's contracting activities
and make recommendations. I believe that the Committee has
received a copy of that report. It indicates that the Bureau
had begun to correct some of its faulty procedures. I requested
that the Treasury auditors monitor the Bureau's progress on the
recommendations. Periodic progress reports were made by the
Bureau until early 1979. At that time we thought it prudent
to remove the Bureau's procurement authority and vest it in
Treasury's Office of Administration. The Office of Administration has subsequently delegated limited authority
directly to procurement officers at the Bureau, but their
actions are closely monitored by Treasury employees.
My experience in dealing with individual problems
persuaded me that we needed a thorough and comprehensive
review of management practices in the Bureau, with a set
of recommendations for action. That review has now been
completed. It outlines the following major areas for
action:
- 6- Introduction of an automated system of cost
accounting under which time and attendance,
production reporting, and labor distribution
are drawn from a single set of entries and
reconciled on a daily basis.
- Revival of the Bureau's ADP Steering Committee,
development of two-year and five-year plans, and
phased introduction of an eventual automated
management system.
- Various alterations in current procedures for
awarding, administering, and auditing contracts,
with introduction of some automated data processing
abilities.
- Initiation of a study of the organizational structure
of the Bureau, with emphasis on .developing a staffing
model to be used to control the Bureau's overhead
activities.
- Establishment of work and productivity measurement
systems to improve control of labor use and planning,
and cost-benefit analyses of all major equipment
purchases to improve capital equipment use and
planning.
We are in the process of. reviewing the action
recommendations in the Report and I would be glad to
return at your convenience and report on our progress
in implementing them.
Appendix*
(1) The food coupon contracts to the American Bank Note
Company (since 1971) and to the U.S. Bank Note Company
(since 1974).
(A) Qt Were federal procurement regulations (including,
but not limited to, those providing for pre-solicitation or
pre-award cost and price analyses; post-award (incurred) cost
and profit audits; assessments of the adequacy of price competition; and documentation of the foregoing and other material
actions, i.e., the contracting process) followed in the negotiation and audit of sole source and advertised contracts for
food coupon production and distribution? Apart from compliance
with such regulations, did BEP adequately employ tools available
to it to protect the interests of the Government?
A: Treasury Department and Bureau of Engraving and
Printing [hereinafter "Bureau" or "BEP"] records indicate
that the Bureau began printing food coupons for the Department
of Agriculture in the early 1960's. The first private production of food coupons occurred when the Bureau awarded a
contract to the American Bank Note Company on November 2, 1971,
to print $2 and $3 coupon books. Private production gradually
increased until, in September 1976, the Bureau ceased in-house
production. Since that time all food coupons have been procured
from either American Bank Note Company or the United States Bank
Note Company.
Our examination has revealed that a number of provisions
of the Federal Procurement Regulations (FPR) were not followed
in awarding these contracts. The files regarding contracts
awarded from 1971 through 1975 rarely if ever contain
documentation to show that the following necessary actions
were taken:
- Publicize proposed procurements in the Commerce
Business Daily (FPR 1-1.1003-2),
- Publicize awards of contracts, and modifications,
in the Commerce Business Daily (FPR 1-1.1004),
This Appendix to the Statement of Under Secretary of the
Treasury Bette B. Anderson has been prepared by Treasury
personnel from records available within the Treasury and
the Bureau of Engraving and Printing. In many instances,
as reflected in the text, information was missing or limited
as a result of both the passage of time and the existence
of parallel investigations.
- 2 use the opportunity to build a sound management team.
The selection of Mr. Harry R. Clements, who is with me
today, is a first step in that direction. Mr. Clements,
now Acting Director of the Bureau, joined the Bureau in
January as Deputy Director after a nationwide search
that was instituted on my instructions.
Second, last fall the Inspector General of the
Treasury initiated a broad investigation of problems
at the Bureau. This investigation includes an inquiry
into the conflict of interest problems in which this
Committee has a particular interest. That investigation
resulted from information that was obtained internally,
as well as through the good offices of this Committee.
On December 18, some aspects of that investigation were
referred to the Department of Justice for further action.
At this time, the Inspector General is continuing his
efforts, both in support of the Department of Justice
and independently. Unfortunately, the referral to the
Department of Justice restricts my ability to go into
any detail on the Inspector General's investigation.
You have asked me to focus on matters relating to
the tenure of Mr. Conlon at the Bureau. My role, as
you know, has been that of coping with the management
problems that we have identified within the Bureau.
My ability to speak directly to the subjects you
identified in your letter to me may, therefore, be
somewhat limited.
As you know, my staff has been working for some
time to provide the Committee's investigators with
relevant documents from Bureau and Treasury files,
and your investigators have had unlimited access to
Bureau personnel and files since your investigation
began last August. In addition, the Treasury staff
has been working with the Committee staff to develop
detailed answers to a list of questions prepared by
your investigators. While the bulk of the information
that is responsive to those questions antedates this
Administration, and in some cases can no longer be
fully reconstructed, I am nonetheless including it
as an Appendix to my testimony in the hope that it
will prove useful to your investigation.
I am also happy to respond to any questions the
Committee may have concerning my personal role in
supervising the Bureau since my arrival in 1977. It
- 3may be helpful, however, if I begin with a short description
of some of my actions during that period. Prior to this
Administration, direct responsibility for oversight of the
activities of the Bureau of Engraving and Printing lay in
the Assistant Secretary for Enforcement, Operations, and
Tariff Affairs, who also had the responsibility for the
Customs Service, the Secret Service, the Bureau of Alcohol,
Tobacco, and Firearms, the Bureau of the Mint, and the
Federal Law Enforcement Training Center. The Assistant
Secretary reported to the Under Secretary.
Secretary Blumenthal, in April, 1977, concluded that
these reporting arrangements did not permit enough direct
supervision of the manufacturing bureaus. Unlike other
bureaus, Engraving and Printing and the Mint are most like
a business — they produce goods. The Secretary requested
that I undertake the direct oversight of these businesses
as an addition to my other duties.
The Bureau of Engraving and Printing was experiencing
rapidly rising costs and customer dissatisfaction. It was
also clear that the Bureau was managed by a small group of
individuals, a majority of whom had spent over 30 years
within the Bureau and were accustomed to their own particular
ways of doing things. In general, they had not been trained
as managers, but had achieved their positions through the
production side of the Bureau.
In addition, this management group had not been used
to active oversight. One of the first steps I took was to
make it clear that I would personally review all proposals
the Bureau wished to present to the Secretary. I also made
it clear that I would be taking an active role in other
Bureau decisions. Shortly thereafter, Mr. Conlon retired.
Immediately after the departure of Mr. Conlon in July
1977, I sent two members of Treasury's staff to conduct
private interviews with Bureau personnel. Those interviews
indicated that the Bureau's institutional memory and overall
knowledge of operations had largely been confined to one man —
retired Director Conlon. Despite recommendations in earlier
management studies, Mr. Conlon had not built a strong, deep
staff. This is an important problem to which we are currently
addressing our attention.
As I indicated earlier, rising cost was a prime problem.
For example, in February of 1977, the Federal Reserve had
expressed concern about the rising costs of currency. In
March, the General Accounting Office had completed a report
suggesting that there was a need for statutory authority to
increase capitalization at the Bureau. The GAO report had
- 20 A: Treasury records do not reflect that this
information was presented to the Under Secretary, who is
the direct superior of the Director, in any formal or
written manner. We are unable to reconstruct this information from memory more accurately than to state that she
believes that she learned of the employment of both
Mr. Conlon and Mr. Sennett at the same time, and that
this occurred during the late fall of 1977.
(4) (E) Q: Did Mr. Conlon consult with or receive the
approval of anyone in the Treasury Department before he
wrote his letters of May 10, 1977 and May 17, 1977 in
which he decided to acquire the SSS from ABN?
A: No, not as far as we can determine.
(4) (F) Q: When and under what circumstances did
Mr. Conlon notify the Treasury Department of his
intention to retire? [It is our understanding That
Conlon met with Ms. Anderson and other Treasury
officials on June 2, 1977 to discuss: (1) the SSS
project; (2) certain labor problems at BEP; (3) the
printing of U.S. securities by private companies and;
(4) a new building and printing facility for BEP.
What were the results of that meeting?]
A: The recitation above could not be fully
reconciled with Treasury Department records and
recollections. Mr. Conlon informed the Under Secretary
of his intention to retire during the last week of May
in a telephone conversation. The Under Secretary requested
that he confirm that statement in writing, and he did so in
a letter that he delivered to her office on June 2. The
Under Secretary
does not recall that
the four items
described in this question were discussed with her at that
time.
(4) (G) Q: Did Mr. Conlon seek or obtain Treasury Department approval to send his June 24, 1977 letter regarding
the financing of the SSS to the Federal Reserve?
A: No(4) (H) Q: When Ms. Anderson wrote her November 8, 1977
letter to the Federal Reserve re SSS, did she know that
Conlon had joined ABN as President of ABN Development
Company^?
- 21 A: As is described in the response to (D), above,
it has been impossible to reconstruct that information. In
any event, the Under Secretary understood the proposal for
an alteration in prior funding arrangements for currency
impregnation machines to be no more than a minor financial
alteration of a project that had been seven years in planning,
with the full concurrence of the Federal Reserve and appropriate
personnel within the Treasury Department.
(4) (I) Q: What is the current status of the SSS within
BEP—Treasury Department?
A: The Security Signature System is one of
numerous anticounterfeiting devices and technologies
that have been presented to the Treasury Department.
No commitment has been made to any particular anticounterfeiting device or technology at this time.
Before any commitment was made to a particular anticounterfeiting device or technology, thorough analysis
of the need for, and practicality of the use of, that
device or technology would be required.
(4) (J) Q: What official action did James Conlon and
Richard Sennett take in the period from September 1, T976
through June 30, 1977, which affected ABN, including but
not limited to, actions with regard to an actual or proposed
contract relationship, providing material, information, or
assistance to ABN? Actions include those taken personally
and instructions to subordinates.
A: Under the time constraints of our search, and
the limitations associated with the lapse of time involved
and the parallel investigations in progress, it is impossible
to provide an exhaustive list of the actions described.
Certain forms of assistance, such as provision of dies,
were required under existing food coupon contractual agreements. The Bureau also provided some quantities of distinctive currency paper to ABN during the first half of 1977
in connection with the Security Signature System, but we
did not find documentation establishing that such shipments
were ordered by the Director.
Aside from such institutional action, the activities
of Mr. Conlon in connection with the Security Signature
System are detailed in the response to question (4)(A)
above. Bureau documents indicate that Mr. Sennett met
with an ABN representative in connection with that System
on October 12, 1976, and on December 4, 1976. Subsequently,
those records indicate that Mr. Sennett was present at the
- 22 December 7, 1976, meeting, the February 9, 1977, meeting,
and the April 21, 1977, meeting. Those documents do not
reveal what occurred at any of those meetings.
In connection with the four Magna presses obtained
from ABN, Bureau documents indicate that Mr. Sennett
played a substantial role in negotiating a modification
of the lease-to-purchase contract, TEP-74-134(A), to
provide for suspension of payments upon loss of use of
the equipment due to equipment failure, during September
and October, 1976. The modification was signed October 4,
1976.
On June 7, 1977, the Chief, Office of Engineering,
wrote Mr. Sennett a memorandum stating that the Magna
press contractor, "is over two years delinquent in performance with a history of making commitments without
adequate resources to fulfill commitments. I believe
a full review of the contract should be made in line
with contractual requirements. After tnis review is
completed and a plan of action formulated in line with
production demands, I would recommend that the contractor
be informed in detail of his obligations and consequential
alternative actions under the contract." Correspondence
from ABN to the Bureau's Procurement Officer, indicates
that Mr. Sennett held a series of discussions with ABN
in June, 1977, during which ABN made additional commitments to attempt to solve the press difficulties.
- 23 (5) Labor policies and practices of Conlon while Director
of BEP.
(5) (1) Q: Did Conlon eliminate or alter apprenticeship
programs in such a way that outside hiring of plate printers
and other crafts could not be achieved?
A: Our examination revealed only two instances
when the apprenticeship program for the skilled crafts had
been altered. We could find no evidence of it being eliminated,
although on one of the two occasions there was an initial
proposal to suspend the apprenticeship program for a short
period of time.
In 1965 the bureau instituted a Craft Opportunities
Program. This program was designed to meet equal employment opportunity objectives and provide in-house opportunities for bureau non-craft employees. Instead of
utilizing the Civil Service Commission Apprenticeship
Registers, which were dominated by non-minority males
with 10 point veterans preference, the bureau limited
the apprenticeship programs in the craft's to bureau
employees. The program started with the plate printers
craft and eventually expanded to all other crafts, including
the non-printing ones. With respect to the plate printers,
there were three apprenticeship classes. The first one was
in April of 1969, the second in December of 1971 and the
last one was in June of 1973. Each apprentice plate printers
class took in 25 employees. The last employee completed the
four year apprenticeship program in April of 1978.
In August 1976, the Bureau of Engraving and Printing
in evaluating its plate printer needs for the following
18 to 24 months determined that approximately 30 additional
journeyman plate printers would be required by October of
1977. The requirement was attributed to an increased
customer demand aggrevated by a greater than usual attrition
rate of plate printers. The bureau proposed, in light of
the great number of recent apprentice graduates in its
journeyman work force and the imminent need for additional
journeymen, to hire highly skilled pressmen, who would be
given further training in intaglio printing. For well
over a year bureau management and the union had discussions
concerning the bureau's proposal involving the creation of
an "intermediate plate printer" position using pressmen as
the source of recruiting. Management had sought the union's
input into qualifications, skills, and training necessary to
achieve the objective. The union, however, continued to
oppose the proposal in principle and offered no alternatives
other than continuing an apprenticeship program (which provides
- 24 journeymen four years down stream) and the hiring of die
stampers (whose knowledge and skills were not considered
to correspond to those required in operating sophisticated
high-speed intaglio printing equipment). Initially, the
bureau's proposal mentioned the suspension of the apprenticeship program. Eventually, however, the bureau committed itself to the hiring of seven apprentices per year over a four
year period. The proposal became a matter of discussion
between union and Treasury Department officials, as well
as an exchange of correspondence between the Treasury
Department and the Secretary of Labor and Mr. George Meany,
President of the AFL-CIO. The proposal was eventually
approved and at the present time fourteen intermediate
plate printers have been hired, with a commitment for
an additional 16 intermediate positions to be recruited
in two groups.
The bureau has experienced difficulty in the past in
hiring journeyman plate printers from the outside. The
intaglio method of printing is considered to be a specialty
process not commonly used because it is time consuming,
expensive, and involves scarce and exacting skills. There
are very few private or public printing establishments which
use the method. No private firms in the metropolitan
Washington, D.C. area utilize this process, except the
Bureau of Engraving and Printing. The only other source
of recruiting is in New York City, Chicago, Philadelphia,
and California areas. (There are other bank note houses
in those cities.) Canadian sources may not be utilized
because of the requirement of American citizenship. The
relatively small labor market, coupled with the relocation
factor, often thwarted successful recruitment of journeymen.
(5) (2) Q: It is our understanding that labor officials
have complained about the shrinking number of craftsmen,
especially plate printers and engravers, intolerable amounts
of overtime for existing craftsmen, and the inefficiency of"
Magna presses. They have reportedly complained that the
reputation of the craftsmen has suffered but that rising
costs of BEP products, such as currency, and postal stamps
are the result of poor management, imprudent acquisition
of Magna presses and inaccurate cost accounting. Do these
allegations have merit?
A: Over the years there has been a shrinking in
the number of plate printers at the Bureau of Engraving and
Printing. Our examinations do not show any shrinking in the
numbers in either the engravers or siderographer crafts.
With respect to engravers, in June 1959 the bureau employed
eight engravers; in November of 1969 it employed 14 engravers;
- 25 -
and, in January of 1979 it employed a total of 18 engravers.
With respect to siderographers, the bureau in December of 1959
employed 4 siderographers and two apprentices, in May of 1969
it employed 4 siderographers and in May of 1978 it employed 4
siderographers. Turning to the plate printers, from 1941
through 1951 the number of plate printers varied anywhere
from a low of 455 journeyman plate printers to a high of
603. During the same period the apprentices ranged from
a low of 2 to a high of 41.
In 1954 and 1955 there was a plate printers RIF in the
Bureau of Engraving and Printing which coincided with the
introduction of high-speed presses. Consequently, in 1955
the bureau employed 377 plate printers (journeyman), in
1956 there were 292, in 1958 there were 254, and in 1959
there were 232. We found no indications of any apprentices
being hired in that period of time. In February of 1969 the
bureau employed 121 journeyman plate printers and 18 apprentices.
In April 1979 the Bureau of Engraving and Printing employs
99 journeyman plate printers, 14 intermediate plate printers
and no apprentices. However, with an authorized total strength
of 136 positions, the bureau has committed 16 positions to
intermediate plate printers to be hired in two groups and
seven apprentices. It might be logically concluded that
the shrinking in the number of the plate printers at the
Bureau of Engraving and Printing was brought about by the
technological advances (introduction of high-speed presses)
and an unusually high rate of attritions through retirement during 1975 and 1976. As indicated in the comments
to question number (1), attempts to fill the vacancies created
by the high rate of attrition in 1975-76 were delayed by union
resistance to the recruiting of highly skilled pressmen into
intermediate plate printer positions.
There are records to indicate an extensive amount of
overtime in the plate printing division at the present time.
Craftsmen in that division are working a twelve hour shift
seven days a week. The bureau has attempted to work with
union representatives to mitigate the impact of such extensive
overtime upon the employees involved.
No evidence could be found to substantiate the subjective
union characterization of the reputation of the craftsman in
the intaglio process. The efficiency of the Magna presses,
and the rising costs of BEP products, are treated elsewhere
in this response.
- 26 (6) Gifts or gratuities received by BEP employees from
firms doing business with the government.
(6) (A) Q: State the identities of all present and
former BEP employees who were recipients of food, refreshment, entertainment, travel, lodging or other gratuities
or gifts from ABN, USBN, and other private firms or
principals there of which have had proposed or actual
contract relationships with BEP or other government
departments and agencies.
(6) (B) Q: State the details of such expenditures,
including dates, occasions, persons involved, and
nature of expenditures.
(6) (C) Q: State whether receipt of such expenditures
as to each employee, individually or in the aggregate7
was in violation of the Department of Treasury's Minimum
Standards of Conduct.
(6) (D) Q: State the identity of each employee mentioned
in (A) who received reimbursement from the government for
any item which they received as a gift or gratuity and
state the details of each double billed item (e.g. date,
amount, nature of item).
(6) (E) Q: State matters described in response to the
above which the Department of Treasury has referred to
the Department of Justice or with respect to which the
Department of Treasury has taken internal disciplinary
action.
A: Treasury records would not contain information of the type requested in (A),(B), and (C). The
Inspector General's investigators may have developed
information of this type from sources outside the Treasury
Department. That investigation, however, was referred to
the Department of Justice on December 18, 1978 and we have
been advised by the Department of Justice that the release
of materials prepared at its request could harm that investigation.
As to question (D), section 0.735-33 of the Department
of the Treasury's Minimum Standards of Conduct prohibits
the acceptance of gifts, gratuities, or entertainment from
any person who (1) has, or is seeking to obtain, contractual
or other business or financial relations with the Department,
(2) conducts activities that are regulated by the Department,
or (3) has interests that may be substantially affected by
the performance of the recipient's performance of his duties.
The Bureau of Engraving and Printing has no supplemental
regulation, but contains a reference to this rule.
- 27 Exceptions are provided for (1) gifts, entertainment,
and food "when the circumstances make it clear that obvious
family or personal relationships rather than business are
the motivating factors," (2) "food and refreshments of
nominal value on infrequent occasions when such action
occurs in the ordinary course of a luncheon or dinner
meeting or other meeting or on an inspection tour where
an employee may properly be in attendance." The latter
exception "also applies when Treasury officials are in
attendance at large organized functions which have
traditionally been considered appropriate and important
ones to attend because of the recognized benefit of such
attendance to Treasury operations." Two additional
exceptions permit loans at "customary terms" from "banks
or other financial institutions", and "unsolicited
advertising or promotional material . . . of nominal
intrinsic value."
All matters of the type described of which the
Treasury Department has knowledge, through its own
investigations or through the good offices of the
Subcommittee, have been referred to the Department
of Justice. No internal disciplinary action can be
initiated in such cases until the Department of
Justice declines to prosecute a case or otherwise
completes its investigation because procedures
associated with disciplinary actions could prejudice
the Department of Justice action. The Inspector General
has stated that he is reluctant to disclose the precise
nature of the matters referred because of the damage
that might be done to the Department of Justice
investigation.
Testimony for the
Senate Subcommittee on Investigations
H. R. Clements
May 2, 19 79
Mr. Chairman and Members of the Subcommittee:
My name is Harry R. Clements. I am the Acting Director
of the Bureau of Engraving and Printing, having assumed that
position on the retirement of Mr. Seymour Berry on April 7,
just over three weeks ago. I first joined the Bureau on
January 22, when I was hired as Deputy Director. Previously
I had been employed in the aerospace and general transportation
industries, as well as in Federal Government.
In my short time at the Bureau I have already come in
contact with people worldwide who are associated with bank note
and secure document production. Among them, I find that the
Bureau has an unparalleled reputation for quality work produced
on an economical basis.
My own observations confirm that view. Whatever management deficiencies might have been suffered by the Bureau, as
a result of the matters being explored by this Subcommittee,
the injury has not been fatal.
I, therefore, am now preparing improvements in the
management and operation of the Bureau with enthusiasm and
high expectations of success. I would like to tell you about
some of them.
Procurement and Contract Administration
The Bureau has a diverse and demanding procurement program due to the high cost of distinctive raw materials utilized
in its products, the sophistication of its printing presses and
support equipment, and the added responsibility in some cases
of procurement of finished documents. The problem is exacerbated
by the limited number of suppliers available for most of the
items and services.
I believe that generally Treasury Department procurement
regulations are adequate to the task. But we must be extremely
careful both in the selection of suppliers and in the administration of contracts. Particular attention must be paid to
sole-source procurement and the need for comprehensive program
control over the activities of critical suppliers. We plan
both to improve the capability of the personnel involved in
these activities and to establish additional safeguards against
deviations from established procedures.
-2I also intend to require some measure of cost effectiveness
on every major procurement. Where it is not possible to obtain
a sufficient number of responsive competitive bids, we will use
pre-award cost criteria. Those criteria will be based upon inhouse build ups, where possible. In each case, I intend to
require stringent auditing compatible with the nature and type
of contract. Particular emphasis will be given to the provision
of exacting and comprehensive bid specifications. Analytical
techniques will be amplified and coordinated with price considerations in a total systems cost evaluation. Those evaluations
will be conducted by teams representing all contributing Bureau
operations to ensure a balanced approach. This philosophy is
currently being applied to the procurement of new presses for
both currency and postage stamps applications.
Accountability
Accountability must be maintained'for basic materials,
dies and plates, and printed samples or products. The broad
scope of Bureau operational and R&D activities requires it to
deal with other Federal agencies, the U. S. private sector,
and both public and private organizations in foreign countries.
This makes adherence to security and accountability requirements difficult, particularly in the face of demanding time
constraints for test results, and schedules for product
delivery.
I intend to require that all organizations with which we
interchange accountable materials demonstrate compliance with
minimum requirements of accountability and security, to be
determined by the Bureau. I have already issued instructions
to Bureau personnel that I am to be the final approval
authority for all such systems. The security and accountability
manuals of the Bureau are now being updated and improved, and
they will be used as models for the outside organizations.
Cost Accounting
Current Bureau budgetary and cost accounting practices
are not entirely suited to industrial activity. While, for
some time, we will be hampered by a lack of automated data
processing programs and our inability to require the use of
time clocks, I intend to improve the timeliness and usefulness
of our cost accounting data with several interim measures.
The first will be a comprehensive cost budgeting procedure.
That procedure will require us to project future programs
and resources, and will provide a basis for measuring progress
and performance. Budgets, and related cost information, will
be comprised of controllable elements so that productive
corrective action may be undertaken. The procedure will begin
-3with identifiable major components, and detail will be added
as automated systems are developed. Eventually, controls will
be extended to those major support areas and administrative
activities.
The cost controls will include meaningful resource
management concepts to provide individual resource managers
with the tools with which to carry out their responsibilities.
Since management of assets must often cross organizational
lines, I intend to encourage the use of broadly structured
committees. While this concept will include such classical
elements as fixed assets, raw materials, indirect supplies,
and programmatic labor, the philosophy will be extended to
such resources as time, schedule, personnel development,
technical knowledge and facilitating tools. There will be
special categories of those items most subject to abuse such
as travel, personal equipment, and overtime.
Research and Development
The Bureau and its colleague organizations, the Federal
Reserve System and U. S. Secret Service, must be prepared to
deal with counterfeit threats on a responsible basis. In
recognition of some recent technological developments that
may be adapted to counterfeiting, we have recently joined
with England and Canada in a tri-national endeavor to assess
the whole range of current and projected counterfeit threats
and to develop reasonable deterrents to those anticipated to
be most serious.
This group is exploring the effectiveness and economy of
a number of deterrents. We intend to avoid being constrained
by any one deterrence technology or conferring a monopoly on
any private firm. The initial four-month effort of this activity
is about to come to fruition, with submission of technical
papers and policy recommendations for the three governments
to consider.
Beyond this international effort to deal with certain
specific problems, the Department of the Treasury has
established a working committee to carry on a continuing
evaluation of developments in the scientific community that
could pose a threat to U. S. currency. The Bureau has been
assigned the responsibility for research and development to
analyze these threats and find pragmatic deterrents for them.
The Secret Service will be responsible for advice on the
operational aspects of these counterfeit activities, and advice
of the Federal Reserve System will be sought on currency handling
-4implications. Through this committee, we expect to reach
sound decisions on currency configuration and authentication
devices. The Bureau will be improving its technical capability
in a wide spectrum of scientific disciplines in order to fulfill
its responsibilities in these areas.
Since the advanced counterfeit threat research and
development activities will demand a given dedication of
resources, it will be necessary for the Bureau to ,be more
productive in its continuing development activities. Accordingly, Bureau planning, budgeting, and management of research
and development has become more stringent, and I look forward
to improved achievement in these areas.
Personnel Practices and Policies
To a large extent, personnel practices and policies within
the Bureau are controlled by Department-wide and Governmentwide rules. In a few areas, however, management latitude can
be applied to improve present practices.
The craftsmanship and talents of our organized labor
unions provide a pool of information and capability which
can improve overall Bureau performance. We must recognize
the interest and concerns of these bargaining units, and
encourage them to participate in furthering Bureau objectives.
I have begun to identify these organizations' expressed needs
and work with them. While formally included in some contracts
now, the ability of craftsmen to advise on the configuration
of, and requirements for, special equipment still needs to be
nurtured.
A particularly difficult personnel problem is that of
selection of population from which candidates for apprentice
programs will be chosen. We must find ways to reconcile our
desire to improve the opportunities for disadvantaged groups
and our need for trained personnel.
The policy of the Bureau will be to open candidacy for
apprenticeship programs to a population that will provide
sufficient qualified candidates, while conforming to affirmative action philosophy. Opportunities, if at all possible,
will be provided first to Bureau employees, then to the
Department of Treasury, and only then to a wider population.
The proportion of disadvantaged groups in the current Bureau
employment should assure fulfillment of affirmative action
goals. An important element of this philosophy will be carefully drafted requirements for the program and job classification
-5so that the candidates will have the potential to develop the
necessary skills, but without emphasis on education and
experience, which may not be applicable to the job requirements.
As I mentioned earlier, cost accounting control will be
utilized in administrative and support, as well as production
areas. In addition to individual or unit performance criteria
that will match employee levels to functional requirements,
organizational structure will follow principles of proper work
flow and reporting channels and adhere to accepted practice in
supervisory ratios.
Auditing Practices
Historically, the Bureau has accepted extensive internal
audit activity. These audits, undertaken with management
approval, however, have grown beyond the resources available.
Many of them have merely duplicated the responsibilities of
other functions. In order to get maximum effect from the Bureau
audit function, I will reduce the scope of evaluations and use
them to measure conformance to policy and procedure rather
than performance of routine operations. Since there are
competing requirements for regular audits of internal
operations and supplier activities (as well as ad hoc problems
and informative unscheduled audits), I will establish a
stringent priority to assure that the most important projects
are undertaken first.
Conclusion
All of the changes I have described involve use of:
(1) classic management techniques concerning delegation of
responsibility and authority; (2) procedures that assure the
participation of all levels of employees and the necessary
disciplines in important decisions; (3) a plan that includes
demanding operational goals, appropriate measures of progress,
and necessary corrective tools; and (4) checks and balances
that assure that the basic reporting system is giving inclusive
and valid information. Procedures and systems that involve
those persons most able to contribute will eliminate ad hoc,
narrowly based and perhaps self-serving management decisions.
These will assure that the potential of the Bureau of Engraving
and Printing as an effective and valuable element of Government
is realized.
FOR RELEASE AT 4:00 P.M.
May 1, 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 May 10, 1979.
This offering will result in a pay-down far the Treasury of about
$200
million as the maturing bills are outstanding in the
amount of $6,225 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
February 8, 1979,
and to mature August 9, 1979
(CUSIP No.
912793 2F 2), originally issued in the amount of $3,007 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 3,000 million to be dated
May 10, 1979,
and to mature November 8, 1979
(CUSIP No.
912793 2U 9).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing May 10, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $3,101
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 Daylight Saving time,
Monday, May 7, 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 - 1575
-2Each tender roust 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 roust 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 May 10, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
May 10, 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 IMMEDIATE RELEASE
May 1, 1979
RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $2,255 million of
$6,233 million of tenders received from the public for the 10-year
notes, Series A-1989, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 9.36%^
Highest yield
Average yield
9.38%
9.37%
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 99.296
High-yield price
Average-yield price
99.168
99.232
The $2,255 million of accepted tenders includes $ 360 million of
noncompetitive tenders and $1,895 million of competitive tenders from
private investors, including 57% of the amount of notes bid for at
the high yield.
In addition to the $2,255million of tenders accepted in the
auction process, $ 350 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing May 15, 1979.
1/ Excepting one tender of $15,000
B-1576
FOR RELEASE ON DELIVERY
Remarks of the Honorable Anthony M. Solomon
Under Secretary of the Treasury for Monetary Affairs
before the
Subcommittee on International Finance
of the
Committee on Banking, Housing and Urban Affairs
United States Senate
May 3, 1979 10:00 A.M.
Mr. Chairman, I am pleased to appear before your Subcommittee
to support S.976, the proposed budget authorization for the
Treasury's international affairs function, and to discuss recent
international monetary developments. I have provided the Subcommittee
separately with a more extensive assessment of the operation of the
international monetary system during the period July 1977 to March
1979, and have submitted written responses to the specific questions
raised in your letter of April 20 to Secretary Blumenthal.
I.
BUDGET AUTHORIZATION FOR INTERNATIONAL AFFAIRS
Mr. Chairman, this Subcommittee acted favorably last year on
legislation to bring the salaries and administrative expenses of
Treasury's international affairs functions under the appropriations
process. In last year's hearings, I explained that, pursuant to
the Gold Reserve Act of 1934, salaries and other administrative
expenses associated with the Treasury's international responsibilities
had in the past been paid from the resources of the Exchange Stabilization Fund (ESF). Shortly after taking office, Secretary Blumenthal
and I ordered a review of this practice, and concluded that the
former "off-budget" and non-appropriated status of these expenditures
could and should be terminated.
The legislation authorizing appropriations for these expenses
was passed near the close of the last Congress and was signed, as
P.L. 95-612, by the President on November 8, 1978. It authorized
a sum not to exceed $24 million to be appropriated for FY 1979, and
B-1577
- 2 -
terminated the authority to use the ESF to meat administrative
costs as soon as funds were made available by an appropriations
act. We are at present seeking an appropriation to cover the
last quarter of FY 1979 pursuant to the FY ld79 authorization.
The Treasury's international affairs function embraces the
wide range of issues involved in formulating policies and
conducting negotiations with other governments and institutions
on world economic, monetary and financial problems for which the
Treasury has responsibilities. As chief financial officer
of the United States, the Secretary of the Treasury has major
international duties assigned by the President or directed by
statute. He is Governor ror the U.S. in the International
Monetary Fund, the World Bank and the other multilateral
development banks of which we are a member. He oversees U.S.
international monetary policy and operations, including
operations utilizing the resources of the Exchange Stabilization
Fund. He is co-Chairman of the Saudi Arabian-United States
Joint Commission on Economic Cooperation; Honorary Director
of the U.S.-U.S.S.R. Trade and Economic Council; co-Chairman of
the U.S.-U.S.S.R. Commercial Commission; and co-Chairman of the
recently formed U.S.-China Joint Economic Committee, which will
coordinate and oversee the development of U.S. economic relations
with the People's Republic of .China. He formulates and represents
the Treasury's views on policy over the range of international
trade, financing, development, energy and natural resource issues.
He represents the United States in discussions and negotiations of
bilateral and international monetary and financial issues with
other nations and closely assists the President at economic summit
meetings.
Such activities as these, on the part of the Secretary and
other senior Treasury officials, require highly professional
staff support. There is a continuing need for knowledge and
analysis of economic conditions and policies abroad, for development
and representation of U.S. positions at staff level with foreign
representatives, and for relating U.S. foreign economic policy
activities to the national interests of the United States.
The authorization we are requesting for FY 1980 is approximately
$23 million which — despite inflation — is slightly below the
amount authorized for FY 1979. We are deeply concerned that our
responsibilities be carried out efficiently, and we have made a
deliberate and effective effort to control the costs of conducting
Treasury's international activities. We have been less successful
in some areas than in others, because of inflationary cost increases
- 3 -
and international developments that have demanded more extensive
international contact. But we are determined to limit costs
and activities wherever possible and consistent with performance
of our responsibilities.
Our draft bill also requests an authorization for appropriations for FY 1981, consistent with Section 607 of the
Congressional Budget and Impoundment Control Act of 1974. We
would prefer an authorization for both years, simply because it
would permit a more orderly budget process. The problem with
seeking both authorization and appropriation in the same year
is largely one of timing, and the result may frequently be
hearings by the appropriations committees prior to action by the
authorizing committees. A two year authorization this year would
enable us to maintain an orderly sequence; and, if approved, we
would plan to submit a request for FY 1982 next year.
This concludes this part of my statement, Mr. Chairman, and
I urge the Subcommittee to report the bill favorably both for
FY 1980 and FY 1981.
II.
INTERNATIONAL MONETARY DEVELOPMENTS
In the exercise of your oversight responsibilities, you have
asked for an assessment of the operation of the international
monetary system since the last oversight hearing in October 1977.
For this purpose, it is useful to examine separately two
periods of heavy pressure on the exchange markets during which
the dollar depreciated sharply against the Deutschemark and the
yen, and to compare these episodes with the recent period of
improved market conditions.
In the six months ending March 31, 1978, the trade-weighted
value of the dollar against the currencies of all other members
of the OECD depreciated by 7 percent. The Deutschemark rate rose
about 16 percent, while that for the yen appreciated by approximately
20 percent. These movements occurred despite substantial intervention by a number of central banks.
- 4 When the market senses that there is a risk of fairly rapid
appreciation or depreciation of a currency, traders and investors
try to position themselves to avoid losses or make gains by
accumulating assets denominated in currencies that are expected
to rise, and liabilities in currencies that are expected to fall.
Thus, anticipatory moves tend to accelerate and amplify the
pressures on the exchange market that may arise from other causes.
The relative impacts of energy shortages on countries, relative
rates of inflation, relative rates of economic growth and unused
capacity, changing current account positions in deficit and surplus
countries and differential interest rates are some of the more
frequently cited specific causes of market pressures. Expectations
as to shifts in government policy or governmental actions affecting
basic conditions are particularly important.
The growing deterioration in the United States current account
was probably the leading cause for dollar depreciation in the period
of market stress which extended from October 1977 to March 1978.
In that six-month period, the United States' current account deficit
exceeded $27 billion at a seasonally adjusted annual rate, more than
double the rate for the preceding six months. The U.S. economy was
continuing to expand quite rapidly while growth was lagging in
Germany and Japan. Much public attention was being given to the
debate over the need of policies to promote expansion in the surplus
countries. There were widespread misperceptions as to U.S. policy
toward the dollar.
During the second period of heavy market pressure extending
from July through October of 1978, the Deutschemark, yen and Swiss
franc again appreciated sharply against the dollar. In percentage
terms, the rise was 18 percent for the Deutschemark, 14 percent
for the yen and 26 percent for the Swiss franc. Once again there
was heavy central bank intervention. In this second period of seven
market disorder, the pressure developed in spite of the fact that thi
U.S. current account position had improved so that the annual rate
was only about half as large as in the previous period of pressure under $14 billion at an annual rate. In part, the development of marke
disorder in the face of this U.S. improvement can be attributed to
the continuation of current account surpluses in the three major
surplus countries in the range of about $25 billion a year. The
major factor, however, was the growing concern about rising rates of
inflation in the United States, doubts as to the degree of restraint
in domestic macroeconomic policies in the United States, and fears
that the U.S. authorities were not concerned about the decline of
the dollar.
- 5 These fears about the appropriateness and adequacy of U.S.
policy, and thus the danger that the dollar exchang
rate might
decline rapidly, led to large sales of dollars against DM and yen,
especially in October, associated with leads and lags in commercial
transactions and other forms of precautionary shifts of asset and
liability positions. A few central banks, as well as some private
entities, appear to have initiated policies leading to slight
reductions in the proportion of their reserves held in dollars.
These shifts of funds took place despite the fact that short-term
interest rates were substantially higher in the U.S. than in Germany,
Japan and Switzerland, implying expectations that the effect of
continuing dollar decline on capital value of short-term investments
would more than offset the effect of the interest rate differential.
As shifts occurred, they caused rate movements which simply
reinforced the expectations of further declines.
Our November 1 program — details of which are described in
our Assessment — turned the market psychology.. There were some
events — the turmoil in Iran and the unexpectedly large increase
in oil prices -- which revived the pressure temporarily. When the
market saw that the U.S. and its partners in this operation -the monetary authorities of Germany, Switzerland and Japan — were
firm, the expectations changed.
I believe the markets now accept the Administration's assurances
not only that intervention on a large scale will be carried out to
deal with disorderly markets, but also that bringing inflation under
control has become a dominant factor in United States' domestic
economic policy.
The disorder has now subsided. A good deal of the speculative
movement has been reversed. The timing of payments for trade in
relation to shipments seems to be returning to more normal patterns.
Confidence has returned. Since November 1, the trade-weighted value
of the dollar has risen against other OECD currencies by about
10 percent.
The two periods of stress that I have cited confirm that in
a world of increasing interdependence in trade and great fluidity
of capital movements across boundaries, divergent trends in
competitive positions or in domestic macroeconomic policies are
likely to be reflected quickly in the exchange markets for major
currencies.
There are times when intervention on a forceful scale is needed
and, in combination with sound basic policies, can be effective in
combating disorder and restoring confidence. But market expectations
- 6 -
as to future economic policies which will impact on the trade
balance, future rates of inflation and prospective interest rate
movements — in sum, market confidence in government policies
and government determination to prevent disorder — are crucial.
A stable monetary system therefore is heavily dependent on
sound domestic policies that restrain inflation in deficit countries
and that promote noninflationary growth in surplus countries.
Let me turn to a brief look ahead. The recent increase in
OPEC oil prices and the imposition of surcharges by most OPEC
members have altered the general tone of the outlook for the
global economy. Most importantly, an already delicate inflationary
situation has been exacerbated by higher oil prices. Our current
projections suggest that inflation rates outside the U.S. will
quicken this year, following two years of steady decline. Adding
our own inflation rates means that inflation in the OECD area could
be at least one percent faster in 1979 than in 1978.
The second troubling aspect of the recent OPEC price rise
concerns external balances. For the last several years steady
reductions in the OPEC surplus and redistributions of deficits
among oil importing countries have significantly reduced the degree
of external imbalance within the global economy. Much of this impro^
ment will be erased this year as the OPEC surplus — which almost
disappeared in the second half of last year — will rise to somethinj
like $30 billion. The counterpart of this larger OPEC surplus will
be a return to deficit of the developed countries of the OECD as
a group, and a somewhat larger deficit in the non-oil LDCs. Actuall]
most of the OPEC members are recording deficits -- the surplus is
becoming increasingly concentrated in a few countries.
But the outlook is not all gloom and doom. During 1979 we
should continue to see slow, steady progress in a number of importanl
areas. We expect a substantial reduction in the disparities in
economic performance among OECD countries. This is especially
important in the larger countries. Somewhat faster foreign growth
abroad combined with slower U.S. growth will add stability. Real
growth outside the U.S. will exceed that of the U.S. for the first
time since 1975.
This alteration in relative growth rates, coupled with the
gains from past changes in competitive positions, will reduce
external imbalances. We are already seeing very important changes
in Japan and the U.S. and expect some reduation in the German surplui
- 7 In closing, I am encouraged by developments in the exchange
markets since November 1 of last year. Major countries have
now out into place the framework of policies agreed upon at last
year s Summit meeting — policies which seem appropriate to
current circumstances. While there remain very difficult elements
in the outlook, these cooperative policies are reducing some of
the more disruptive payments imbalances. This will contribute to
greater stability. Lasting monetary stability in our interdependent
system will depend on sustained efforts to improve international
cooperation, and on Implementation of coordinated macroeconomic
policy. We must recognize that there will be periods of stress
and instability so long as there are wide divergences in national
economic priorities and policies, and in relative competitive
positions. Our system must accommodate those divergences and
facilitate the adjustments that will inevitably be needed. If
the national priorities of the advancing nations come closer to
a common scale, we can expect the international monetary system
to operate more smoothly than has been the case in recent years.
oo 00 oo
»
FOR IMMEDIATE RELEASE
May 2, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY DEPARTMENT EXTENDS PERIOD OF
INVESTIGATION ON TITANIUM DIOXIDE FROM
BELGIUM, FRANCE, WEST GERMANY AND THE
UNITED KINGDOM
The Treasury Department today said that it will
extend its antidumping investigation involving imported
titanium dioxide from Belgium, France, West Germany,
and the United Kingdom for an additional period not to
exceed 90 days.
The decision was made because more time was needed
to analyze the data provided before determining whether
this merchandise is being sold in the United States at
"less than fair value." (Sales at less than fair value
generally occur when the price of merchandise sold for
exportation to the United States is less than the price
of such or similar merchandise sold in the home market
or to third countries. If Treasury determines that
sales at less than fair value occur, the case is referred
to the U. S. International Trade Commission for an injury
determination. An affirmative ITC decision would require
dumping duties.)
Treasury also announced that in the event it withholds appraisement on this merchandise as a result of
finding sales at less than fair value, the Department
plans to limit the withholding period to no more than
three months.
Notice of this action will appear in the Federal
Register of May 3, 1979.
Imports of this merchandise from these four countries were valued at about $57.9 million in 19 77.
o
B-1578
0
o
FOR RELEASE UPON DELIVERY
EXPECTED AT 9:00 A.M.
THURSDAY, MAY 3X 1979
STATEMENT OF THE HONORABLE DANIEL H. BRILL
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE SUBCOMMITTEE ON ECONOMIC STABILIZATION
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
Mr. Chairman, I am pleased to be here today to
discuss with the Committee the Treasury Department's
recent investigation of the U.S. oil import position and
its impact on our national security.
Background
As you know, Mr. Chairman, the Treasury Department
recently made public the result of an investigation of
the national security implications of oil imports into
the United States.
in 1959 and 1975.
Similar investigations were conducted
The 1959 investigation found that oil
was being imported in a manner which threatened to impair
the national security, and it will come as no surprise to
you that each of the subsequent findings reached the same
conclusion.
In fact, the 1975 and 1979 findings concluded
the threat had become more serious.
Investigation
Section 232 of the Trade Expansion Act of 1962, which
authorizes the Secretary of the Treasury to make these
investigations, couples in paragraph (c) the national
economic welfare and national defense as a part of national
B-1579
-2security.
The statute, indeed, goes beyond consideration
of the obvious requirement of industrial capability to
supply defense needs.
It requires the recognition of
"...the close relation of the economic welfare of the
Nation to our national security, and ... consideration
of the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial
unemployment, decrease in revenues of government, loss
of skills or investment, or other serious effects resulting
from the displacement of any domestic products by excessive
imports ... in determining whether such weakening of our
internal economy may impair the national security."
It was
within this' framework of analytic considerations that the
investigation was conducted.
In determining the existence of a threatened impairment of the national security arising from the quantity
or circumstances under which a commodity, particularly
oil, is being imported, there are several factors to be
considered.
Initially, the commodity must be one that is
essential to our national defense or is vital to the
functioning of the U.S. economy.
Petroleum meets both of
these tests.
The Armed Forces' mobility is highly dependent upon
petroleum.
The Defense Production Act assures the allo-
cation of petroleum to the Armed Forces, but at the expense
of the civilian sector.
In the event of a loss of supply,
-3this could increase the effect of the loss upon the
civilian sector. Assuming that domestic supply is
adequate to sustain the Armed Services and the industrial
support for the Armed Services, there is a wide range of
economic activity that would be curtailed by any loss of
supply.
In our recent 232 investigation we asked the Commerce
Department to assess the damage to the economy from the
1973/1974 oil embargo. Although the embargo was not very
effective and there were other factors involved, there
was a significant impact upon the petrochemical industry,
and the inherent uncertainties led to a significant drop
in automobile sales and services associated with automobile
and air travel. There also was an adverse impact in the
consumer durable and housing construction sectors.
The Department of Commerce, as well as the Council of
Economic Advisers and the Department of Transportation,
also made an assessment of the economic impact of an oil
supply interruption. I will not attempt to summarize
these analyses, but each concluded that importation of
petroleum at current levels threatened impairment of the
national security because an interruption of supply could
have severe economic impacts.
The next consideration is the chance of supply interdictions occurring. As the report of our investigation
states, the United States is highly dependent for oil
-4upon a small number of producing states located at a
great distance from the United States requiring long
tenuous supply lines. The result is that our imported
oil supply is extremely vulnerable to interruption by
terrorist activity, political upheaval, embargo, and
interdiction at sea. The risk of supply loss ranging
from minor to substantial must be considered as highly
possible. Due to the fragile world oil supply/demand
balance, even a small interruption can have impacts out
of proportion to the loss of supply.
Another factor to be considered is the loss of control
over the price of oil resulting from the high oil import
level. We have seen a large increase in the nominal
price of imported oil since 1974. As a result, the cost
of imported oil to the United States has risen significantly. Our 1959 oil import bill was $1.5 billion. In
1975 it was $27 billion. In 1978 it was $42.3 billion.
It is estimated that it will be about $50 billion or over
in 1979. In this regard I should like to quote the
Council of Economic Adviser's analysis that is a part of
the Treasury report:
At the current level of imports, each $1.00
increase in the real price of world oil increases
U.S. oil costs by $4.5 billion (in 1978 dollars)
and domestic inflation by 0.2 percent. The increase in the balance of trade deficit, adjusted
for a partial offsetting increase in U.S. exports
to OPEC, is estimated at $3.2 billion.
-5In the Treasury 232 investigation we concluded that
our present excessive dependence upon oil'is making it
more difficult to achieve U.S. domestic and international
economic objectives.
The rising price of imported oil
increases domestic inflationary pressures by directly
raising costs and heightening inflationary expectations,
and the resulting uncertainties inhibit business investment required for noninflationary growth.
Rising oil imports have put greater adjustment
burdens on other elements of the U.S. balance of payments
and greatly increases the need for expansion of exports.
Excessive and growing U.S. dependence on oil imports also
increases the danger of reduced confidence in the dollar
and makes the dollar more vulnerable to downward pressures
in the foreign exchange market. Widespread loss of confidence in the dollar could lead to sudden and large-scale
international capital flows in ways that would be disruptive to our banking system and world financial markets.
The economic risks are real and can be estimated to
some extent. Much more difficult to assess is the stress
placed upon the social and political stability of the
Nation by the economic and life style changes that could
result from loss of supply or destructive pricing of oil.
I think serious instability is not beyond the realm of
possibilities.
-6President's Energy Program
The continuing threat to the national security that
was identified by the Treasury Department's 232 investigation was an important consideration underlying the
program announced by the President to reduce consumption
and increase domestic production of oil and other sources
of energy.
In his message of April 5 the President
announced a series of proposed conservation measures to
reduce total energy demand, particularly demand for oil.
I will not repeat the list of these measures; however,
it is estimated that if each of these short-term measures
were fully implemented, the United States, by the end of
this year, could reach the President's goal of up to a
5 percent reduction in the estimated 1979 level of oil
consumption.
At the same time the President also announced new
initiatives for encouraging the production and development
of alternative sources of energy, including, importantly,
the decision to end the subsidy to oil consumption
inherent in the existing controls system which has kept
the price of domestically produced oil below its replacement cost.
The proposal to phase out price controls by
1981 will encourage reduced consumption and the development of new domestic energy supplies.
As the Treasury 232 investigation and other Administration officials have emphasized, the development of
-7alternative sources of energy is an important national
goal.
Clearly, one possible and likely alternative
source of energy is synthetic fuels. Thus, the early
development of the Nation's capacity to produce synthetic
fuels by private industry, utilizing coal, shale, and/or
biomass conversion, is consistent with the President's
energy program.
early.
And, I think I should underscore the word
It has been pointed out by many people knowledgeable
in this area that a long lead time is required to bring on
new technologies to the point where they can make a
meaningful contribution to the Nation's energy needs.
In his report to the President on the Treasury 232
investigation, Secretary Blumenthal stated that we should
provide appropriate incentives in order to encourage
additional domestic production of oil and other sources
of energy.
The President in his April 5 energy message
announced that he would seek enactment of a windfall
profits tax, with receipts from this tax to be used to
establish an Energy Security Trust Fund.
This fund will
be used to assist low-income households to offset higher
costs of domestic petroleum arising from decontrol, to
provide increased assistance for energy-efficient mass
transit purposes, and to finance new energy initiatives
and investments that will permit us to develop alternatives
to imported oil. The receipts from the Energy Security
Trust Fund would supplement funds that the President has
-8already requested for energy research and technology
development.
The Fund will finance a program of tax
credits for solar energy, woodstoves, and oil shale and
the construction of a second Solvent Refined Coal demonstration plant assuming that a windfall profits tax is
enacted.
If tax revenues are adequate, additional
initiatives to reduce imports will be proposed.
The
activities financed from both the Energy Security Trust
Fund and the President's budget requests should provide
significant results in terms of demonstrating commercial
technologies that have the capability of replacing imported
oil.
While the President has outlined the conceptual use
of the revenues from the windfall profits tax and the
Energy Security Trust Fund, all of the details have not
yet been completed.
As you know, Mr. Chairman, the Congress
is now considering the windfall profits tax, so the exact
amount of revenues from the sources is not assured.
The President's energy proposals would also encourage
the development of synthetic fuels in one other way. By
decontrolling the price of oil we can expect higher
effective domestic oil prices. Higher prices for oil should
help make synthetic fuels more competitive with oil and,
therefore, provide incentive for private development and
commercialization of such liquid fuels.
-9Mr. Chairman, this concludes my brief formal
statement.
I will be happy to answer any questions
that you or other members of the Committee may have.
FOR IMMEDIATE RELEASE
May 2, 1979
RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF MAY FINANCING
The Department of the Treasury has accepted $2,005 million of $4,837
million of tenders received from the public for the 30-year bonds
auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 9.22%
Highest yield
Average yield
9.24%
9.23%
The interest rate on the bonds will be 9-1/8% . At the 9-1/8% rate,
the above yields result in the following prices:
Low-yield price 99.039
High-yield price
Average-yield price
98.838
98.938
The $2,005 million of accepted tenders includes $162 million of
noncompetitive tenders and $1,843 million of competitive tenders from
private investors, including 36 % of the amount of bonds bid for at the
high yield.
In addition to the $2,005 million of tenders accepted in the auction
process, $200
million of tenders were accepted at the average price
from Government accounts and Federal Reserve Banks for their own account
in exchange for securities maturing May 15, 1979.
SUMMARY RESULTS OF MAY FINANCING
Through the sale of the two issues offered in the May financing,
the Treasury raised approximately $2.5 billion of new money and refunded
$2.3 billion of securities maturing May 15, 1979. The following table
summarizes the results:
New Issues
9-1/4%
9-1/8%
Notes
Bonds
Maturing
Net New
5-15-89 5-15-04-2009
Securities Money
Total
Held
Raised
Public $2.3 $2.0 $4.3 $1.7 $2.5
Government Accounts
and Federal Reserve
Banks
0-4
0.2
0.6
0.6
-_
TOTAL
$2.6
$2.2
$4.8
$2.3
$2.5
Details may not add to total due to rounding.
B-1580
FOR IMMEDIATE RELEASE
May 3, 1979
REMARKS BY
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
ASIAN DEVELOPMENT BANK'S TWELFTH ANNUAL MEETING
MANILA, THE PHILIPPINES
Introduction
It is a great pleasure for me to attend the 12th annual
meeting of the Asian Development Bank in the gracious and
hospitable city of Manila. I would like today to reiterate
the strong support the United States has expressed in previous
years for the Asian Development Bank in its mission to promote
growth and development in Asia. As the Bank enters the second
year of its second decade, its important role as a focal point
for development assistance and cooperation in an area where
more than half of the world's population resides, is already
well established.
The United States is deeply committed to peace, economic
development and social progress in Asia as well as to a stable
system of independent states in the region. We are a Pacific
nation; indeed, parts of our nation stretch far into the Pacific.
We are and will continue to be an integral part of this region,
not only because of our geography, but because our political
security and economic interests dictate that the United States
remain actively involved in Asian-Pacific affairs.
Much of the Asian region has reached a new era in the field
of economic development. During 1978, as pointed out in the
ADB's annual report, the economic performance of most of the
Bank's developing member countries was impressive — particularly
in the light of economic developments in the world generally.
B-1581
- 2 World Economic Situation and Outlook
infnil*^6 developing economies of Asia grow, they are being
JUS 9 f . ? . w l S h t h e w o r l d economy and more closely linked to the
industrialized economies outside the region. Thus, the economies
or Asia share the uncertainties about the future that concern
us all: significant increases in the price of energy, sluggish
aggregate demand in much of the industrial world outside the
United States since 1973, higher than normal rates of inflation,
and increasing protectionist pressures, among others.
Nevertheless, the global economy ended 1978 on an upswing.
We estimate that developed country growth increased to 4.3 percent in the second half of the year, while growth in the
developing countries continued at more than 5 percent for the
year.
A major concern we now have is that the oil price increases
of last December and March will undo progress and exacerbate
those negative trends that have persisted. We can probably
expect industrial country growth rates to return in 1979 to the
3.6 percent range experienced in 1978, while rising oil prices
will add to inflationary pressures in both the developed and
developing countries. We can also expect the pattern of current
account balances as a whole to retreat from important gains, with
the OPEC surplus rising from about $5 billion to something over
$20 billion this year while the deficit of the oil importing
developing countries will increase by $2-3 billion.
Economic Developments in Asia
Asia continues to be marked by sharp contrasts in economic
conditions and performance. It includes the fastest growing nations
on the globe side-by-side with some of the slowest, where per
capita growth is lost to swelling populations. A review of
economic performance during 1978 shows that, in terms of major
economic indicators, namely real income, food production, inflation,
and trade, there were wide variations among individual countries,
but the region overall registered good progress.
Real growth increases ranged from 3.0 percent for Fiji and
3.5 percent for India to 12.1 percent and 12.6 percent for Korea
and Taiwan respectively. Agricultural production, perhaps the
cornerstone of the regional economy, was good in 1978. Rice
wheat and maize production all rose by about 5 percent. Price
increases were held to 6.2 percent — a level many of the
developed countries would envy at this time. Early estimates
suggest that exports rose 17 percent to about $80 billion in 1978
while imports rose 23 percent to a projected $91 billion. The
- 3 $11 billion trade deficit was double the $5.5 billion trade
deficit of the previous year, but it was easily financed by
increased capital flows. Indeed, international reserves for the
region rose about $5 billion to a year-end estimate of $30.8 billion, equivalent to about 4.7 months' import coverage.
United States Economic Policy
In the past twelve months the United States has undertaken
a number of actions designed to promote sustained growth, fully
recognizing that a strong, non-inflationary U.S. economy is a
vital prerequisite to meeting our obligations to assist the
developing nations and our broader responsibilities for assuring
an effective functioning of the world economy.
During 1978, the U.S. output of goods and services increased
in real terms by almost four and one-half percent, a considerably
faster rate than the average of the other industrialized countries.
We created three million American jobs and reduced our unemployment
rate below six percent. On the negative side, inflation worsened
in 1978. Consumer prices rose by nine percent, a substantial
increase from the six and three-quarter percent price rise in 1977.
In response to these conditions, President Carter has pursued
a restrained budgetary policy, curtailing the growth of Federal
spending and lowering the share of America's GNP accounted for by
Federal government spending. Additional efforts to reduce
inflation include the deregulation of certain industries such as
the airlines in order to promote more active competition, the
institution of voluntary wage and price restraints, and more
restrictive monetary policies.
On the energy front, we have moved to increase conservation,
to decontrol domestic oil prices and to provide greater incentives
to produce oil and gas. These actions will help to adjust
permanently the U.S. economy to higher world oil prices which have
become a fact of life. The United States has also reached aqreement
with 19 other oil consuming nations to reduce expected oil
consumption by five percent.
These actions have been instrumental in establishing the
fundamental conditions required for a sound dollar at home and
abroad. The U.S. dollar is now stronger in worid currency markets
than at any time during the recent past. In addition, we have
joined with other major industrial countries to coordinate closely
on direct action in foreign exchange markets to prevent any
resumption of the disorders which led to the precipitous decline
of the dollar last year.
- 4 In spite of an array of economic problems and strong
internal political and economic pressures favoring the
adoption of inward looking protectionist measures, president
Carter has made it clear that his administration will pursue
a liberal trade policy as the only path to sustained economic
growth.
In this regard the trade package to conclude the Tokyo
Round of Multilateral Trade Negotiations, will go before the
Conoress shortly. As enacted, that agreement will reduce U.S.
tariffs on some $40 billion of imports by about 30 percent and
sharply reduce non-tariff barriers. Several parts of the agreement provide for various forms of special and differential
treatment to the imports from developing countries.
The United States Policy Toward the Developing Nations
As an integral part of the world economic system, the
developing nations share our interest in an open international
trading and financial system, in stable international monetary
arrangements, in helping to promote adequate rates of growth
of global production, and in improving the economic well-being
of poor peoples everywhere. This mutuality of interests
reduces the usefulness of bloc approaches to relations between
developed and developing countries. As President Carter
concluded in a speech last year in Caracas: "Real progress
Will come through specific actions designed to meet specific
needs—not symbolic statements by the rich countries to
salve our consciences, nor by developing countries to recall
past injustices."
We believe that an effective economic relationship between
the industrialized and developing nations must be based on the
twin principles of shared responsibility by all and right
of all to participate in international economic decisions.
The degree of responsibility assumed by each country will
depend on ist stage of development. The developed countries
must ensure that adequate concessional development assistance
is provided for the poorer nations; for the advanced developing
countries, we see a need for a gradual phaseout of preferential
treatment that may be necessary for the poorer countries, and
the beginning of active participation in efforts to assist
those countries which are less well-off.
Consistent with these policy principles, the United States,
in cooperation with other nations, has undertaken since 1976 a
number of important actions of direct concrete benefit to the
developing countries, particularly those in Asia:
- 5 — In trade, the United States has maintained an open
trading system, allowing U.S.-Asian trade to far outstrip the
growth ant. volume of U.S. trade with any other region of the
world. Two-way trade grew by 27 percent and amounted to $78 billion last year alone. Trade also continued to expand with the
developing countries under the U.S. Generalized System of
Preferences.
— In the commodity field, the United States, along with
other producers and consumers, recently agreed to the outlines
of < market responsive buffer stock agreement for natural rubber
to ensure balanced stabilization of rubber prices, related to market
trends. We have made a commitment to contribute to the tin buffer
stock. We expect our Congress to complete ratification of the new
International Sugar Agreement within the next few months. Finally,
we joined a consensus in March for a framework Common Fund
agreement to facilitate the financing of commodity agreements
— In development finance, the Carter Administration
is requesting this year, from the U.S. Congress, $8.3 billion
in economic development assistance for the developing countries.
That includes $974 million in U.S. bilateral assistance to Asia
and $419 million for the ADB.
— in the field of energy, the United States has strongly
supported a growing role for the World Bank, the regional
development banks, and our own Overseas Private Investment
Corporation in the search for energy throughout the developing
world.
— in food security, we have proposed the establishment
of a reserve stock policy designed to assure adequate grain
supplies at reasonable prices and to meet food aid commitments.
U.S. farmers, acting on government incentives, have placed
33 million tons of grain in reserve. We have also requested,
and hope to receive, authority this year to create a special
food aid reserve of four million tons of grain.
In looking to the future, the United States intends to
emphasize programs which most directly contribute to equity as
well as growth. We are all painfully aware that an estimated
one billion people remain mired in poverty throughout the world,
and most are in Asia. A major concern of my Government is that
bilateral and multilateral assistance actually reach these
people to help them become productive and contributing members
of their own national economies. Unless we make progress in this
important area, there can be no long-term political or economic
stability.
- 6 The Multilateral Development Banks
The United States views the multilateral development banks
as unusually qualified to provide the effective development
assistance and economic change required to move us toward
commonly held development objectives. Their staffs are highly
trained and experienced. The projects the banks finance are
generally soundly conceived, carefully supervised and well
executed. The volume and range of the banks' operations allows
a development impact which is greater than that of any individual
country donor. This important influence coupled with
their apolitical character enables the banks to support the
adoption of appropriate economic policies in recipient countries.
Because of their effectiveness, their increased attention to meeting basic human needs and directing more benefits to
the poor, and their promotion of worldwide economic growth
and political stability strongly support the efforts of
these institutions. U.S. contributions to these banks have
grown dramatically in recent years. This year the Carter
Administration is requesting of the U.S. Congress appropriations
for the banks of $3.6 billion, despite urgent domestic priorities
and the need to cut government spending to slow inflation.
The Asian Development Bank
The advantages of channeling development assistance
through the multilateral development banks are clearly evident
in the ADB's development program and in its success in meeting
the needs and aspirations of the developing members of Asia
despite a membership encompassing a variety of historical,
cultural and racial backgrounds and economic situations
as broad as any region in the world.
Nowhere has the Bank been more impressive than in its
efforts to expand food output through its irrigation,
fisheries and feeder road projects, and other agricultural
sector lending designed to better reach the poor. We are
heartened to note that the percentage and volume of funds
directed toward agriculture and agro-industry have increased
from 11 percent or $47 million five years ago to 27 percent or
$311 million in 1978. We are pleased that the Bank has committed
itself to an active lending program for the agricultural sector
over the next several years. In its thoughtful and comprehensive
sector paper on agricultural, the Bank also recognizes that the
proper distribution of the benefits of agricultural output is as
important as the increase in output. Finally, the ADB has shown
through its integrated approach to designing projects that it is
sensitive to the particular requirements of individual developing member countries (DMCs).
- 7 I would also like to acknowledge the Bank's recent
initiative in undertaking a larger role in the development of
the mineral resources of its DMCs. The Bank's program is
designed to assist borrowers in intensifying their efforts to
exploit their non-fuel mineral and coal resources, particularly
as they relate to energy development. We recognize that the
level of Bank assistance to the energy sector, in particular
hydropower generation, has been substantial. However, for
those countries without sufficient hydro-resources or
significant fossil fuel deposits, energy production at reasonable costs is a serious problem that will require investment in
non-conventional energy systems. We believe the Bank can play a
useful and more expanded role in this area.
The ADB's program does not foresee a role for the Bank in
the exploration, prospecting and production of new sources of
petroleum. This is a wise course in view of the Bank's limited
resouces and the recent initiative of the World Bank in this
area. Indeed, these twin initiatives by the two Banks are a
good example of the complimentary nature of assistance provided
by different banks in the same region.
We are also pleased that this year the Bank will inaugurate
its activities in the field of population. Although the Bank is
a newcomer in this area, its contribution in future years can be
substantial and we look forward to the type of innovative and
effective approach that the Bank has demonstrated when presented
with new challenges.
The Bank has demonstrated its ability to adapt its programs
to the needs of its members by incorporating, as part of normal
project design procedures, technology selection compatible
with the goals of the project and the availability of factors
of production. This often results in technologies that conserve
capital while taking advantage of the region's vast human
resources.
In this regard, we note that the ADB will lend its
expertise in this area to the United Nations Conference on
the transfer of technology, scheduled to take place this summer.
We believe that strengthening the technological capacities
of the developing countries holds great promise for constructive
and cooperative action, and we see a continuing vital role for
the private sector in this area and thus the need for creation of
a climate conducive to entrepreneurial activity in the development, transfer, and application of technology.
I would also like to note that we believe that the goals and
purposes of the Bank encompass a broad range of fundamental
concerns related to the development process, including recognition
of human rights. We also believe that scarce development funds
- 8 generally can be best utilized to promote economic and social
objectives by governments which have manifested a commitment
to protecting and promoting the rights of their people. As
Secretary Blumenthal has emphasized, we seek to cooperate with all
members in finding ways to best advance our common commitment to
the protection of internationally recognized human rights including
the fulfillment of basic human needs while at the same time insuring
the integrity and effectiveness of all the development banks.
The ADB has been diligent in seeking to increase the effectiveness of its operational structure. I want to compliment the
Bank management for the major reorganization of the operations
and administration divisions of the Bank undertaken last year.
These changes will, among other things, guarantee greater attention to loan implementation, an area requiring increased attention
since disbursements of funds needed for project implementation,
have been lagging behind commitments. The reorganization of the
operations division will also strengthen the Bank's ability to
formulate an integrated, region-wide development policy through
the creation of a separate development policy office.
All of us look upon the Bank as the most appropriate
and effective institution to formulate region-wide development
priorities and to lead in drawing up a common approach to
Asia's economic problems. In this regard, we encourage the
Bank's efforts to coordinate with all donors and recipients
in the region to assure the most efficient use of resources.
The coordination session that the world bank and the ADB will
hold here immediately after this meeting is a good illustration
of the progress being made in this area.
An extremely important development last year, in my
Government's view, was the creation of a separate post
evaluation unit which reports directly to the President of the
Bank. The creation of an independent post evaluation office,
together with the recent strengthening of the Office of the
Internal Auditor, have set the stage for the Bank to increase
and expand its ability to audit and evaluate the activities
of the Bank and of its borrowers. We welcome these steps
taken by the ADB.
The United States also believes that it is in the best
interest of all member Governments that there be made available
to member Governments, and to their publics, as much information
as possible regarding the operations of the Bank. We urge the
Bank to review its document classification system with a view
to making the maximum number of documents available on an
unrestricted basis.
- 9 For the past several months we have been engaged in an
oversight process with relevant Congressional committees
concerning the operational procedures of the multilateral
development banks. We expect that out of this process will
emerge a number of suggestions designed to enhance the
effectiveness of the banks. Our suggestions will deal with
auditing and evaluation procedures, the availability of
documentation, the banks' role in aid coordination and the
banks' efforts to better "reach the poor," as well as other
possible areas. We look forward to discussing our ideas with
both Bank management and ADB member countries.
I also want to encourage the Bank's greatly increased ability
to attract co-financing to its development projects. We believe
that recent creation of a focal point within the Bank for cofinancing was an important step in the right direction. Currently,
however, a vast majority of the Bank's co-financing operations
is with other public or international sector institutions; we
hope that in the future the Bank will be equally successful in
attracting co-financiers from the private sector. That type
of co-financing must, of course, be carefully negotiated so
that it does not result in the Bank assuming risks that properly
are those of the private sector lender.
CONCLUSION
In conclusion let me reiterate that the United States
views the Asian Development Bank as a creative, dynamic,
important and efficient institution through which to further
the economic development of a large part of Asia and the Pacific.
We have been, are now, and will continue to be firm supporters
of the Bank as it continues to make substantial contributions to
the development of this vast and important region. The management, staff and member countries merit praise for what they have
accomplished. We are confident that they will not rest on their
laurels, and will continue and improve upon their fine work in
the coming years.
STATEMENT OF EMIL M. SUNLEY,
DEPUTY ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY,
ON OIL COMPANY FINANCING AND PROFITABILITY
BEFORE THE SUBCOMMITTEE ON ENERGY AND FOUNDATIONS
OF THE SENATE FINANCE COMMITTEE
Mr. Chairman and Members of this Subcommittee:
I am pleased to appear today to discuss in some detail
what we know about oil company profitability and financing.
Without going into the specifics of the President's energy
program, I will describe our estimates of the impact of this
program on oil company profitability. Hopefully the testimony
will provide useful background information for the Committee's
consideration of the President's proposals, particularly his
windfall profits tax.
The President on April 5 announced that he is phasing
out Government price controls that hold down our domestic
production, encourage consumption, and increase our dependence on foreign oil. However, as controls end, oil companies
will reap billions of dollars of windfall profits. The
President, therefore, has proposed a tax to capture these
windfall profits. This tax will provide needed revenue to
help those most hurt by decontrol, to improve mass transit,
and to fund energy research and development.
I have included in the Appendix several tables containing
basic data on the petroleum industry — its size, structure,
taxes, profitability, assets and liabilities, and sources
and uses of funds. In my testimony I want to highlight the
salient facts and conclusions to be drawn from those tables.
As I proceed, I will make note of the limitations of the
data.
B-1582
- 2 In the course of previous reviews of oil industry
economic statistics, I am sure you have learned there is no
single completely satisfactory set of statistics by which to
accurately characterize this industry. There are three
basic confounding factors that create this state of affairs:
vertical integration, conglomeration, and foreign operations
First, although the oil and gas industry is fundamentally a
collection of extractive activities, minerals must first be
processed and transported before they may be used. As a
result, the structure of enterprises engaged in the mineral
business, including oil and gas companies, is extremely
heterogeneous. At one extreme, there are some few companies
wholly devoted to oil and gas extraction; but even these
companies may engage in exploration and development to
maintain their productive capacity. At the other extreme,
there are companies which participate to a greater or lesser
degree in all stages of the oil and gas business, from
exploration through refining to retail distribution of
petroleum products. Obviously, changes in wellhead oil and
gas prices have more economic impact on the exploration
through production stages of the business than on transportation, processing, and distribution. Unfortunately, none
of the standard statistical series relating to the operations
of enterprises popularly called "oil companies" makes
distinctions between the several stages of the oil business.
Second, the mineral and fuel market expertise of oil
company managements, particularly their skill in, and
aptitude for, long-range investment planning, is, and has
been, transferable to nonoil and gas activities. Oil
companies not only engage in the closely related activities
of the petrochemical industry, some also engage in coal and
metal mining. Company statistics are not readily decomposed
into the different lines of activity in which they engage,
and this makes still more difficult the task of assessing
effects of oil price policy on the economic position of "oil
companies."
Third, virtually every company with significant U.S.
oil production is also active abroad. Normally available
company financial data do not provide a basis for clearly
distinguishing domestic from foreign operations, and in
those cases, such as tax returns and FTC financial surveys,
where a consistently defined domestic/foreign reporting
system is imposed, the classification of financial data by
line of activity is still beyond reach. Moreover, since
19 71, and particularly since 1973, sharp changes in the
Notes to Appendix Tables
The following tables are based on four data sources;
Statistics of Income (SOI), published by the Internal Revenue
Service, Department of the Treasury; Quarterly Financial
Report for Manufacturing, Mining and Trade Corporations""
(QFR), published by the Federal Trade Commission; Survey of
Current Business (Survey), published by the Bureau of
Economic Analysis, Department of Commerce;: and Compustat, a
financial service of the Standard and Poor's Corporation.
Each data source has its own scope, purpose and severe
limitations, some of which are listed below. The user is
advised to turn to descriptive material in these documents
in conjunction with the use of data in this Appendix.
Statistics of Income. Data in the SOI are based on a
stratified sample of unaudited tax return information.
Industry classification generally conforms with the Enterprise Standard Industrial Classification, designed to
classify single activity establishments. Returns are
classified into the industry accounting for the largest
portion of total receipts. Consolidated returns are generally
permitted at the election of the reporting group as long as
an 80 percent ownership test is met. In Appendix Table IV,
taxable income is allocated between domestic and foreign
operations based on foreign taxable income as reported on
Form 1118 in support of foreign tax credit claimed. Taxable
income and/or loss of corporations not filing this form is
allocated to domestic operations. Current tax return
tabulations do not permit identification of these amounts.
Quarterly Financial Report. The QFR is based on a
stratified sample of Financial Reports that" must be filed
with the Federal Trade Commission. The reports are based on
generally accepted accounting principles. However, one of
the goals of the QFR is to isolate domestic from foreign
operations. This has resulted in a hybrid report in which
the following are important results:
(a) In general consolidation of all domestic operations
owned more than 50 percent by a reporting corporation is
required.
(b) Foreign entities (corporate or noncorporate),
foreign branch operations, and domestic corporations primarily
engaged in foreign operations are excluded.
- 2 (c) Classification by industry, based on the Enterprise
Standard Industrial Classification, is a function of domestic
gross receipts contributing the largest portion of total
receipts. To minimize reporting burdens, smaller corporations
are cycled through the sample in such a way that one-eighth
of the respondents are dropped each quarter. The summation
of four quarters to derive annual totals is thereby affected
to an unknown degree.
Survey of Current Business. Appendix Tables VII-A and
B trace the relationship between taxable income and the
national income measures of earnings in the petroleum
industry. The line items that represent the Bureau of
Economic Analysis' (BEA) adjustments are basically those
published in the aggregate in the Survey each July in
Table 8.5. BEA measures profits from current domestic
production, thus the exclusion of foreign income (foreign
profits net of corresponding outflows are included in a
separate industry, rest-of-the-world). Other adjustments
include:
(1) Deletion of all domestic dividends received — this
avoids double counting of income when industries are
aggregated.
(2) Depreciation vs. expense adjustment — this
capitalizes certain capital expenditures that may be deducted
currently on the tax return (such as intangible drilling
costs).
(3) Oil well bonus payments — this adjustment restores
to income bonus payments associated with dry holes and
expensed on the return.
(4) State income tax — income is to be measured before
all income taxes.
(5) Audit — SOI data are based on unaudited returns.
This is an estimate of profit that would be disclosed if
all returns were audited and the books were kept in a manner
consistent with national income concepts.
- 3 Compustat. Compustat is a computer data service
provided by a subsidiary of Standard & Poor's Corporation.
Financial data, derived from Form 10K reports filed with
the SEC, is organized into a common framework for approximately
3,000 large U.S. and Canadian firms. While standard accounting
procedures underlie each company's financial statement,
practices may vary and consistency cannot be insured. In
the event of a merger, only data from the primary company is
retained and the secondary company is dropped from the
files. As no attempt is made to adjust the file for these
changes in retained company financial data, company and
industry data change discretely. The 10K data is considered
final and not revised; however, prior to the receipt of a
10K preliminary data from other sources may be posted.
The sources and uses of funds statement in Table XI has
been adjusted from the Compustat format by netting certain
similar transactions that occur on both sides of the balance
sheet, thus reducing totals. Capital expenditures have been
defined as gross capital expenditures minus the sales of
property, plant and equipment. Issues of long-term debt are
net of reductions in long-term debt, and stock issues are
defined as new stock issues less purchases of own common and
preferred stock. Increases in investments have been reduced
by investment sales. Modifications have also been made in
the breadth of the categories reported. Operating income,
defined net of investment, property and equipment sales, is
composed of four items: income including extraordinary
items, depreciation and amortization, deferred taxes and a
residual. The excess of the total of the above sources over
the above total uses represents a decrease in working capital;
conversely an excess of the above described uses over
sources represents an increase in working capital. The
change in working capital balances the accounting for
sources with that for uses.
In the balance sheets shown in Table VI, total assets
are defined to more closely correspond to assets employed in
the business by netting each company's accounts payable
against receivables. When the difference is positive —
receivables exceed payables — this element of working
capital is part of the assets employed; when the difference
is negative, trade credit helps finance the assets employed.
Return on equity reported in Table X is computed as
income before extraordinary items and discontinued items
divided by the sum of reported common equity plus preferred
stock at book value. Return on assets is the income to
- 4equity as defined in the numerator above plus interest
expense and extraordinary income or losses divided by total
assets as previously defined. The return on common stock is
earnings per share divided by the average of the common
stock high and low. Aggregate industry rates of return
on equity and assets represent the sum of industry returns
divided by the sum of the corresponding denominators. For
stock price fluctuations and earnings per share, company
ratios are weighted by shares outstanding.
Appendix Table I-A
Gross Domestic Product
Total and Product Originating in the Petroleum Industry
(Extraction and Refining)
Calendar
year
($ billions)
:Petroleum:Gross Product Originating in the Petroleum Industry
All :Percent distribution
Gross :
as
:other : Employee : Profit
domestic: percent
:compo-: compensa- : type
product :
of
tion
income
: total
:nents
V, • .
1965
1966
1967
1968
1969
$
683.4
748.8
791.8
863.7
931.1
I
19 • • )
2.09%
1.96
2.03
1.96
1.84
$14.3 $ 4.2
14.7
4.3
16.1
4.5
16.9
4.9
17.1
5.2
)
$ 3.0
3.1
4.0
3.7
3.0
$ 7.1
7.3
7.6
8.3
8.8
29.4%
29.3
28.0
29.0
30.4
21.0%
21.0
24.8
21.9
17.5
1970
1971
1972
1973
1974
977.8
1,056.8
1,164.1
1,297.5
1,399.8
1.86
1.74
1.71
1.75
2.25
18.2
18.4
19.9
22.7
31.5
5.5
5.7
6.1
6.7
8.0
3.2
2.6
2.9
4.5
11.7
9.5
10.0
10.9
11.6
11.9
30.2
31.0
30.7
29.5
25.4
17.6
14.1
14.6
19.8
37.1
1975
1976
1977
1978
1,518.3
1,685.7
1,869.9
2,087.6
2.21
2.47
2.55
2.56
33.5
41.6
47.6
53.5p
9.6
11.0
12.9
15.3
9.8
14.4
16.7
18.4
14.1
16.2
18.0
19.7
28.7
26.4
27.1
28.6
29.2
34.6
35.1
34.4
ffice of the Secretary of the Treasury
Office of Tax Analysis
May 4, 1979
ource: Bureau of Economic Analysis (published and unpublished data)
Dte: Profit-type return consists of proprietor's income with inventory valuation
adjustment and without capital consumption adjustment, rental income of
persons without capital consumption adjustment, corporate profits with
inventory valuation adjustment and without capital consumption adjustment,
less subsidies received. All other components include indirect business
taxes and nontax liability, business transfer payments, net interest and
capital consumption allowances.
- Preliminary
Appendix Table I-B
Gross Domestic Product
Total and Product Originating in Selected Industries
Calendar
year
Gross domest:ic product
: Percent of gross domestic product
originalting in:
originating in:
:Petroleum
Petroleum
:
All
All
All
;
AH
: extrac- •
extracother
other
other
Total
Total :
tion
tion " other
'manufac- indusmanufac-' indus•
and
and
tries
turing
tries
• refining- turing '
: refining
(
)
) (
1965
683.4
14.3
182.0
487.1
100.0
2.09
26.6
71.3
1966
748.8
14.7
201.2
532.9
100.0
1.96
26.9
71.2
1967
791.8
16.1
205.2
570.5
100.0
2.03
25.9
72.1
1968
863.7
16.9
224.9
621.9
100.0
1.96
26.0
72.0
1969
931.1
17.1
237.5
676.5
100.0
1.84
25.5
72.7
1970
977.8
18.2
232.1
727.5
100.0
1.86
23.7
74.4
1971
1056.8
18.4
243.1
795.3
100.0
1.74
23.0
75.3
1972
1164.1
19.9
268.9
875.3
100.0
1.71
23.1
75.2
1973
1297.5
22.7
299.1
975.7
100.0
1.75
23.1
75.2
1974
1399.8'
31.5
303.1
1065.2
100.0
2.25
21.7
76.1
1975
1518.3
33.5
316.6 *
1168.2
100.0
2.21
20.9
76.9
1976
1685.7
41.6
361.2
1282.9
100.0
2.47
21.4
76.1
1977
1869.9
47.6
404.0
1418.3
100.0
2.55
21.6
75..8
1978p
2087.6
53.5p
(... 2034.1 ..)
100.0
2.56
(.. 97.4 ..)
i of the Secret:ary of the Treasury
.ce of Tax Analysis
May 4, 1979
'eliminary.
t: Bureau of Economic Analysis (published and unpublished data:
Detail may not add to totals due to rounding.
For a further description of the content of each industry see Table 6.1,
Survey of Current Business. Bureau of Economic Analysis.
Appendix Table I-C
Constant Dollar Gross Domestic Product
Billions of 1972 Dollars
Total and Product Originating in Selected Industries
Calendar
year
Gross domestic product
originating in:
:Petroleum All
All
: extrac- other
other
Total : tion manufac- indusand
tries
turing
: refining
6 mii4«„»
(
Percent of gross domestic product
originating in:
__
:Petroleum All
All
: extrac- other
other
Total : tion manufac- indusand
tries
turing
: refining
) (
1965
919.9
16.3
218.8
684.8
100.0
1.77
23.8
74.4
1966
975.6
16.9
237.1
721.6
100.0
1.73
24.3
74.0
1967
1001.9
17.4
236.7
747.8
100.0
1.74
23.6
74.6
1968
1045.7
18.3
250.1
777.3
100.0
1.75
23.9
74.3
1969
1073.1
18.5
257.7
796.9
100.0
1.72
24.0
74.3
1970
1069.8
19.5
241.1
809.2
100.0
1.82
22.5
75.6
1971
1100.3
19.6
244.5
836.2
100.0
1.78
22.2
76.0
1972
1164.1
19.9
268.9
875.3
100.0
1.71
23.1
75.2
1973
1227.4
20.2
292.8
914.4
100.0
1.65
23.9
74.5
1974
1211.0
20.0
271.9
919.1
100.0
1.65
22.5
75.9
1975
1197.5
20.1
257.0
920.4
100.0
1.68
21.5
76.9
1976
1264.3
20.4
282.8
961.1
100.0
1.61
22.4
76.0
1977
1325.3
21.5
300.8
1003.0
100.0
1.62
22.7
75.7
1978p
1377.5
22.7
(... 1354'•8 . •) 100.0
1.65
(... 98..4 ...)
ffice of the Secretary of the Treasury
Office of Tax Analysis
May 2, 1979
- Preliminary.
ource: Bureau of Economic Analysis (published and unpublished data)
ote: Detail may not add to totals due to rounding.
For a further description of the content of each industry see Table 6.1,
Calendar Year 1975
Petroleum Refining and Integrated Companies 1/
($ millions)
Statistics of Income
Asset
size
•
Stock
holders'
equity
Income
subject
to tax
Net
federal
Income
tax
Taxable
income
after
tax
Worldwide
sales
(. $ millions ;) i
Under $5 m llllon
5 under
10
10 under
25
25 under
50
50 under
100
100 under
250
250 or more
Total
$
250
63
208
116
786
882
85.992
$88,297
$
57
23
44
56
181
102
15.559
$16,022
$
22
35
13
28
31
105
64
$
10
16
25
76
38
1.877
$2,064
13.682
$13,958
$
1.273
355
745
864
2,611
4,399
249.232
$259,479
Taxable
Income
per dollar
of
stockholders'
equity
22.87.
36.5
21.1
48.3
23.0
11.6
18.1
18.67.
Taxable
income
after tax
per dollar
: of etock: holders'
equity
14.07.
20.6
13.5
26.7
13.4
7.3
15,?
15.87.
Taxable
income
Number
per
of
dollar
of sales
returns
4.5
6.5
5.9
6.5
6.9
2.3
6.2
1,509
6.2%
1,622
Net income
per dollar
of sales
Number of
returns
22
26
10
12
15
28
Quarterly Financial Report
Net
Income
before
tax
Stock
holders'
equity
Asset
size
Net
Income
after
tax
Provision
for
Income
tax
Sales
(Domestic)
(. S millions .1
Under $5 million
10
5 under
25
10 under
50
25 under
100
50 under
250
100 under
250 or more
Total
$
218
40
153
140
166
1,166
74.047
$75,930
$
63
34
85
44
77
241
12.763
$13,307
$
24
$
39
16
34
21
36
102
18
51
23
41
139
3.771
$4,004
8.992
$9,303
$
981
191
1,202
542
1,011
4,875
112.955
$121,757
Net Income
before tax
per dollar
of stockholders'
equity
28.9%
85.0
55.6
31.4
46.4
20.7
11:1
17.5%
Net income
after tax
per dollar
of stockholders'
equity
17.9%
45.0
33.3
16.4
24.7
11.9
12.1
12.37.
May 2, 1979
Office of the Secretary of the Treasury, Office of Tax Analysis
Sources: Statistics of Income — Tax return data compiled by the Statistics Division, Internal Revenue Service.
Quarterly Financial Report — Financial reports filed with the Federal Trade Commission.
1/ Excludes companies classified in the oil and gas extraction Industry. Includes coal products. Classification is
~ based on the Enterprise Standard Classification Manual.
NOT
AVAILABLE
Appendix Table III
Petroleum Extraction and Refining
Selected Tax Return Income Statement Items by Legal Form of Business
($ millions)
1973
Sole
CorPartpropri- ner
porations etors ships
Total receipts .. 145,688
Sales
139,074
Other
6,614
1,571
1,540
31
1,182
1,082
100
1974
1975
1976p
: Per:
Per:
Per: PerCor- ' Sole "PartCorSole
PartCorSole
Part:
cent
Total : cent
po- |proprl- ner Total : cent
po- propri- ner Total
popropri- ner Total : cent
:corpo- rations' etors [ships
:corpo:corporcorporations etors [ships
rations etors ships
: rate
: rate
; rate
; rate
(%)
(7.)
(X)
(%)
148,441 98.1 313,487 2,448 2,367 318,302 98.5 311,758 2,910 2,839 317,507 98.2 367,086 3,222 3,886 374,194 98.1
141,696 98.1 304,648 2,382 2,233 309,263 98.5 303,088 2,843 2,627 308,558 98.2 354,705 3,147 3,499 361,351 98.2
8,839
66
8,670
67
75
6,745 98.1
134
9,039 97.8
212
8,949 96.9 12,381
387 12,843 96.4
Total deductions.131,991 1,616 1,750 135,357 97.5 276,686
Costs of sales
228,065
& operations. 97,702 285 283 98,270 99.4
6,160
194
124
6,478 95.1 14,456
Depletion
28,129 1,137 1,343 30,609 91.9 34,165
Other
Net income
(less loss) ...
Net income ..
Net loss ....
13,683
14,032
350
-45
219
264
-568
265
833
Number of
returns (thou.)
8
50
13
13,070 104.7
14,516 96.7
1,447 24.2
71
36,787
37,094
307
11.3
2,169
2,638 281,493
98.3 272,261
2,660
3,468 278,389
97.8 319,735
3,031
3,266 326,032
98.1
366
332
1,471
468 228,899 99.6 229,137
350 15,138 95.5
1,«69
1,820 37,456 91.2 41,455
483
353
1,824
604 230,224 99.5 270,755
234
2,256 75.0
1,607
2,630 45,909 90.3 47,373
510
428
2,093
543 271,808
107
2,142
2,616 52,082
99.6
75.0
91.0
279
536
257
-271
737
1,008
49
12
36,795 100.0
38,367 96.7
1,572 19.5
Office of the Secretary of the Treasury
Office of Tax Analysis
1/ Includes constructive taxable Income from related foreign corporations.
Source: Corporation and Business Statistics of Income.
p - Preliminary
70
12.9
39,476
39,931
455
251
-629
588 '1,027
337 1,657
49
13
39,098 101.0
41,546 96.0
2,449 18.6
71
12.7
48,827
49,568
741
191
636
445
619
1,755
1,136
49,637
51,959
2,322
98.4
95.4
31.9
10
53
15
78
12.8
May 2, 1979
Appendix Table IV
Income and Taxes — Foreign Versus Domestic
(Based on tax returns)
Corporations
($ millions)
1972
Foreign eparations :
(as reported on
:Domestlc
Form 1118 In support: operaof foreign tax
: tions
credit claimed) :
Crude petroleum and natural gas extraction:
Income subject to tax
.»*•
United States Federal income tax, gross —..
Credits claimed, total
Foreign tax credit
Investment tax credit 2/
Other credits
United States Federal income tax, net
Effective tax rate
Petroleum refining (including integrated):
Income subject to tax
^v.
United States Federal income tax, gross v..
Credits claimed, total
Foreign tax credit
Investment tax credit 27
Other credits
United States Federal income tax, net
Effective tax rate
Office of the Secretary of the Treasury
Office of Tax Analysis
2,921
1,402 1/
1,394
1,394
8
0.3%
3,839
1,842 1/
1,559 ""
1,559
283
7.4%
300
139
19
--
Total
3,221
1,541
1,413
1,394
19
19
120
129
4.0
40.0
721
451
132
--
4,560
2,293
1,691
1,559
132
132
•
*
319
602
44.2
13.2
1975
Foreign operations :
(as reported on
:Domestic
Form 1118 In support: operaof foreign tax
: tiona
credit claimed) :
20,985p
10,073 1/
10,073
10,073
1,139
528
76
75
453
39.8
10,806p
5,187 1/
5,067
5,067
120
1.1
5,216
2,454
509
509
*
1,945
37.3
Total
1976p
Foreign operations :
(as reported on
:Domestic
Form 1118 in support: operaof foreign tax
: tlons
credit claimed) :
1,409
Total
28,934
13,855
13,289
13,191
22,124
10,601
10,149
10,073
75
*
452
2.0
27,525
13,212
13,191
13,191
16,022
7,641
5,577
5,067
509
*
2,064
12.9
8,925
4,284
4,093
4,093
8,784
4,134
1,058
—
—
1,042
16
16
191
2.1
3,076
35.0
3,267
18.4
643
98
—
—
21
0.1
98
98
545
566
2.0
38.7
—
17.709
8,418
5,151
4,093
1,042
May 2, 1979
Source: Corporation Statistics of Income and Treasury estimates.
Note: 1) For a particular firm, net U.S. liability on foreign operations may
p - Preliminary
by offset by negative liability due to domestic losses.
1/ Assumed to accrue at 48 percent.
2) Foreign losses of firms not claiming a foreign tax credit and therefore,
2/ Allocated to domestic operations.
not reported as part of- Form 1118 taxable income (less loss) will be
3/ Includes (under domestic operations) additional tax for tax preferences:
reflected in the domestic operations column.
1972, $9 million, 1975, $15 million, 1976, $25 million).
4/ Includes (under domestic operations) additional tax for tax preferences:
~ 1972, $166 million, 1975, $32 million, 1976, $ million).
Selected Balance Sheet and Income Statement Items as Measured in Financial Reports
Filed with the Federal Trade Commission
Petroleum Refining and Integrated Companies 1/
(S millions)
1974
B
teta8h"!:.
Cash, U.S. Government and other securities
Inventories
Depreciable and amortizable fixed assets including
construction work in progress
Deduct: Accumulated depreciation, depletion, and
amortization
All other assets
Liabilities
Long-term debt due in more than one year
Other liabilities
Stockholders' equity
Income statement: ,,„.,,.- -.,* nn, ,„ „0
Net sales, receipts, and operating ratios
Income (or loss) before income taxes and extraordinary items.
Provision for current and deferred domestic income taxes:
Federal
State and' local''.'.'....
Net income (or loss) of foreign branches and equity in earnings
(or losses) of domestic and foreign nonconsolidated entities
and investments accounted for by the equity method, net of
foreign taxes
Income (or loss) after income taxes
Cash dividends charged to retained earings
1975
Calendar Years
1976
1977
1978
$114,819
10,077
7,451
$122,667
9,421
8,050
$143,017
10,683
10,368
$155,462
8,346
12,734
$171,374
8,841
12,670
76,701
84,061
96,827
108,891
122,766
41,770
62,360
42,374
14,352
28,022
72,445
45,314
66,449
46,738
16,237
30,501
75,929
50,413
75,552
56,885
20,606
36,279
86,133
54,091
79,582
63,360
23,810
39,550
92,103
60,120
87,217
73,036
24,299
48,737
98,337
113,496
14,425
121,762
11,670
141,345
14,573
162,291
15,072
177',738
15,548
2,831
404
3,618
387
4,700
476
5,130
482
5,682
606
3,293
14,483
3,949
1,640
9,307
4,245
2,330
11,725
4,479
2.718
12,179
5,007
3,535
12,795
5,443
Operating ratios:
Rate of profits on stockholders equity at end of periodBefore income taxes
24.5%
17.5%
19 6%
19 3%
19.41
After income taxes
20,0
12.3
13.6
13.2
13.0
lL
Ratio of long-term debt to equities at end of period ........
19.8
'*
_
_
*
Office of the Secretary of the Treasury, Office of Tax Analysis
May 2, 1979
1/ Excludes companies classified in the oil and gas extraction industry. Includes coal products. Classification
" is based on the Enterprise Standard Industrial Classification.
Appendix laDie V-B
Selected Balance Sheet and Income Statement Items as Measured in Financial Reports
Filed with the Federal Trade Commission
All Other Manufacturers
($ millions)
1974
Balance sheet:
Assets
..»••«•••«••••••••••••• •••••••«»•••••••••*•••*•***
Cash, U.S. Government and other securities
.
Inventories
Depreciable and amortizable fixed assets including
construction work in progress
— ••
Deduct: Accumulated depreciation, depletion, and
amortization
All other assets
Liabilities
Long-term debt due in more than one year
Other liabilities
Stockholders' equity
Income statement:
Net sales, receipts, and operating ratios
Income (or loss) before income taxes and extraordinary items.
Provision for current and deferred domestic income taxes:
ederal
o
S654 135
'
"^o'os?
172,251
ORO'™?
252,365
])*>215
V,,o
202,448
JJ3
'^U
JnnVn
67,727
J
»i"
AA'OA!
Vc'fio
15,510
13 2°
•
34.5
1977
1978
$688,243
49,265
165,907
$740,843
58,736
176,662
$807,534
59,877
187,762
$914,976
62,012
210,547
414,330
439,633
476,085
527,651
205,683
264,424
328,716
128,962
199,754
359,527
217,574
283,386
351,636
132,954
218,682
389,206
232,210
316,020
387,909
143,453
244.456
419,624
252,968
367,734
450,134
157,442
292,692
464,844
943,453
59,816
1,061,888
79,167
1,165,772
87,949
1,320,099
101,116
23,496
3,293
31,181
4,045
34,538
4,595
39,722
5,396
6,801
39,828
15,723
8,851
52,794
18,284
9,372
58,187
21,578
12,521
68,519
23,517
18..5%
11 .1
35 .9
22. 6%
13,.6
34 .2
385,051
119
State and local
Net income (or loss) of foreign branches and equity in earnings
(or losses) of domestic and foreign nonconsolidated entities
and investments accounted for by the equity method, net of
foreign taxes
Income (or loss) after income taxes
Cash dividends charged to retained earings
Operating ratios:
Rate of profits on stockholders equity at end of periodBefore income taxes
After income taxes
••••
•••
Ratio of long-term debt to equities at end of period
..,.
Office of the Secretary of the Treasury, Office of Tax Analysis
1975
Calendar Years
1976
23. 2%
13,.9
34,.2
May 2,, 1979
24.4%
14.7
33.9
integrated r e t r o x e u m a n a K e r x n i n g c o m p a n i e s
(amounts in $ m i l l i o n s )
•————•
ASSETS,
TOTAL
AOJ, C U R R E N T
PLANT (NET)
INVESTMENTS
INTANGIBLES
ALL OTHER
• — —
1970
......
...... 1971
••——•»
......
i«7f
•»—••—»
AHfUINI
ecu
AUOUUX
££l*
Auiumx
eu*
AMOUiil
ftjt.
65486.597
15445.420
60665.e?e
7998.508
176.620
1202.17?
1.00
• 18
92296,494
16786,324
65250,064
8696.018
207.570
1356.520
l.oo
• 18
1.00
• IB
• 00
• 02
106615.0*7
19664.449
74258.304
10404.034
181.508
2196.773
1.00
• 18
• 09
• 00
• 01
100223.353
18322.249
70143.305
9903.690
219.497
1634.614
85488.597
3326.749.
15771.411
2899.059
63491.378
1.00
• 04
92296.494
4067.327
18041.618
3260.071
66927.479
1.00
• 04
• 20
• 04
• T3
100223.353
5201.402
19983.205
3580.258
71458.488
1.00
• 05
• 20
• 04
• Tl
1066*5.067
5957.631
20905.019
4055.79?
75716.425
— — •
1976
AMfillill
..—.—•
.Tl
• 09
• 00
• 01
.Tl
.TO
.10
•noma
ecu
• ot
110263.083
27)21.569
78332.29*
10676.216
163.382
1970.421
1.00
• 23
• 66
• 09
• 00
• 02
1.00
• 06
• 20
• 04
• Tl
118263.883
8040.262
21557.319
4978.080
83688.223
1*00
• 07
• 18
• 04
• 71
.•0
• 10
• 00
LJIBRUIES.
TOTAL
A O J . CURRENT
LN-TERM DEBT
D E F E R R E D TX.
NET WORTH
.18
• 03
• 74
......
AUhUUl
ecu
ASSEIS.
TOTAL
ADJ. C U R R E N T
PLANT (NET!
INVESTMENTS
INTANGIBLES
ALL OTHER
1456)6.107
43284.396
89089.233
10811.078
122.654
2308.750
1*00
LXABII 1TXES.
TOTAL
AOJ. CURRENT
LN-TERM DEBT
DEFERRED TX.
NET WORTH
145616.107
18340.928
21995.426
6358.958
96920.797
l«oo
• 13
.30
• 61
.07
• 00
• 02
.16
• 04
.67
—
—
1975
AUQliUX
......
ecu
157314.389
43111.472
97803.859
13046.921
170.514
3181.625
1.00
157314.389
17957.892
30700.388
8366.730
100289.381
1.00
.?7
• 62
.06
• 00
.02
.11
• 20
• 05
• 64
...... H77
ecu
A^niiN?
ecu
176993.889
48650.733
111114.229
13372.126
117.270
3739.533
1.00
197877.490
51337.1.1?
127937.887
14443.706
134.926
4024.283
1.00
• 26
• 65
176993.889
21618.893
36936.113
10162.838
108276.045
1.00
• 12
197877.490
22562.013
42331.300
12316.301
120667.877
1.00
• 11
• 21
• 06
.27
• 63
.08
.00
• 02
.21
• 06
.61
.07
• oo
• 02
.61
Appendix Table VI
Balance Sheet Items, 1969-1977 Oil and Gas Extraction Companies
(amounts in $ millions)
— . . .
1972
..—•••
..————
1970
—————
...... 1971 ••••••
aUQiitll
ASSETS.
TOTAL
AOJ. CURRENT
PLANT (NET)
INVESTMENTS
INTANGIBLES
ALL OTHER
LIIH1I ITIfS
TOTAL
ADJ. CURRENT
LN-TERM OEBT
OEFERRED TX.
NET WORTH
kO&uHl
ecu
8386,287
1283.IV
5804.794
972.042
75,192
251,120
1.00
• 15
8386,287
460,711
2196,071
160,812
5568.692
1.00
7564.700
1074,255
5200.194
1015.936
70.200
204.115
1.00
• 67
• 14
• 01
• 02
1.00
• IS
• 67
• 14
• 01
• 02
1.00
• 04
• 23
• 01
• 72
6922,079
343,249
1629.867
144.695
4804.368
1.00
• 05
• 24
• 02
• 69
7564,700
382,665
1808,947
170,746
5202,342
1.00
1.00
• 16
6242.165
264.889
1420.696
83,561
4473.019
.——.—•
ASSETS.
TOTAL
ADJ. CURRENT
PLANT (NET)
INVESTMENTS
INTANGIBLES
ALL OTHER
ecu
6922.079
1071.169
4671.703
964.546
65.483
149.178
6242.165
978.393
4191.792
086.588
61.838
123.554
AMOIINI
ecu
ACU
PfT,
11492,282
2180.156
7990.712
861*160
44.016
416.238
1,00
• 19
• 70
11492.282
892.474
2664.251
421.425
7514,132
1,00
.07
• 00
.04
......
1975
—————
—
—
1976
.14
• 69
.13
• 01
• 03
.05
• 24
• 02
• 69
— — .
— . . .
• 69
• It
.01
• 03
.05
• 26
.02
• 66
1977
AMftnM|
ecu
Annual
ecu
kumm
ecu
13201,963
2581.158
9406,793
843,702
38.121
333.189
1.00
15266.569
2773.982
11043.503
650.863
23.459
574.762
1,00
17612,108
2891.806
13153,103
934-510
\4.64*
617,644
1,00
13201.963
1002,835
2928.177
801.320
8469.631
1,00
15266.569
999,091
3637,998
999*706
9629,774
1,00
17612,108
1109.850
4002,762
1469,901
11029,596
1,00
.20
.71
.06
.00
• 03
.18
• 72
.06
• 00
• 04
,16
.75
• 05
• 00
.04
l.l.BiUUL&S..
TOTAL
ADJ. CURRENT
L N - T E R M DEBT
DEFERRED TX.
NET W O R T H
,08
• 23
• 04
• 65
,08
• 22
,06
• 64
.07
• 24
• 8.7
• 63
,06
• 23
• 06
• 63
IttfllifjX
ecu
9558,634
1565,191
6613,616
975,038
74,066
330,723
1.00
• 16
• 69
• 10
• 01
• 03
9558,634
565,941
2324,146
223,051
6441.497
1.00
• 06
.24
• 02
• 67
Corporations Classified in the Crude Petroleum and Natural Gas Extraction Industry
Reconciliation of Taxable Income Per Returns and Pretax Earnings Per National Income and Product Accounts
($ millions)
Corporation Statistics of Income:
Income subject to tax
Plus:
Net operating loss deduction
Dividends received deduction
WHT deduc t ion
DISC and Subchapter S net income
Other
Equals:
Net income, returns with net Income .
Plus:
Deficits, returns without net Income
Tax-exempt interest
,
Less: Foreign taxable Income
constructively received
Equals: Total receipts less total
deductions
,
Bureau of Economic Analysis adjustments:
Subtract:
Foreign income included in total
receipts less total deductions:
Foreign dividends
WHT deduction
Other foreign income
Domestic dividends received
Gain, sale of assets
Add: Domestic depletion
Depreciation vs. Expense adjustment ...
Oil wal1 bonus payments
State income tax
Audit
,
Other (net)
Equals: Corporate profits - Current
domestic production - National
Income Product accounts
Calendar Years
1972
1971
1970
1965
1966
1967
1968
1969
882
1,060
1,091
1,228
1,253
1,398
2,141
53
17
5
27
-4
33
12
1
17
57
18
2
14
59
13
1
12
43
15
2
12
-7
68
45
3
22
--
77
15
1
15
-3
980
1,121
-151
2
831
—
—
1,196
1,317
1,336
-189
4
-226
3
-141
4
-223
3
12
1
924
971
3,221
56
29"
3
18"
1974
1975
6,028
23,494
22,124
28,934
92
49
39
207
43
8
80
115
29
9
73
,«,
__
__
183
66
16
44
35
—
--
1,463
2,279
3,325
6,206
23,832
22,349
29,278
-284
4
-304
4
-303
3
-303
2
-252
4
-380
4
-437
34
17
8
5
681
22
139
247
39
8
5
27
4
1
1
902
22
59
218
28
8
4
28
5
8
1
904
21
100
322
28
8
5
30
-4
306
230
326
1,180
1,111
1,180
1,978
3,023
5,902
23,582
21,955
9
2
9
1
10
2
8
3
8
3
13
1
14
8
19
9
1,043
1,068
1,202
1,845
2,897
5,567
22,646
20,595
23
83
229
21
8
7
37
6
23
96
255
35
10
8
52
-8
20
89
233
26
10
12
48
-31
62
51
275
11
11
14
45
-5
45
159
294
39
12
19
46
-30
53
156
286
44
13
27
49
-17
66
253
415
144
21
56
55
-8
69
233
332
275
29
80
74
-33
328
266
155
360
291
514
1.278
1,787
Office of the Secretary of the Treasury, Office of Tax Analysis
p - Preliminary.
n.a. - Not available.
Note: Details may not add to totals due to rounding.
Sources: Corporation Statistics of Income (IRS), and Bureau of Economic Analysis.
1976p
1973
May 2, 1979
28,810
n.a.
1.777
Appendix Table VI, continued
Nonoil Companies
(amounts in $ millions)
. 1969
IMOIIMT
.....
BET.
......
••••—
1970
annum
BCI.
1971
AHOiiMX
ecu
AMouni
ecu
...... 1973
•UOUall
BCU
— — •
......
1972
— "
ASSfTS,
TOTAL
ADJ. CURRENT
PLANT (NET)
INVESTMENTS
INTANGIBLES
ALL OTHER
216990.156
91013.682
99088.739
14027.739
5925.714
6934.285
1,00 238050.297
.42
96661.350
.46
109408.814
.06
16164.098
.03
7474.981
.03
8341.055
1,00
,41
,46
.07
.03
.04
260006.105 1*00
109156.725
,42
116577*962
,45
17760.677
,07
8120,683
,03
8389,661
,03
260243.520
120210.756
1233*9.7*5
16695.268
8820.066
9227,629
1.00
.43
.44
,07
,03
,03
315533,937 1.00
139637.736
.44
135560.576
*43
20733.397
.07
9466.6?5
.03
10135.606
.03
LUHII ITIfS
TOTAL
ADJ. CURRENT
LN-TERM DEBT
DEFERRED TX.
NET WORTH
216990.156
16386.261
44606.447
4323.700
151471.750
1.00 238050.297
.08
19797.297
.21
51581.968
,02
5022.450
,70
161646.584
1.00
.08
• 22
.02
• 68
260006.105
21630,607
57194.508
5975.493
175205,299
1,00
«06
,22
,02
,67
280283.5*0
20526.821
61906.706
6716.549
191131.449
1«00
,07
,22
,02
,66
315533.937 1.00
29380.314
.09
66319.339
.21
6162.014
.03
211671.273
.67
...... 1976
AMOUNT
......
ECU
1• 00
.44
.44
.06
.03
.03
425550.680
195331.633
181567.086
26633.743
1A246.001
11772.219
.46
.43
.06
,02
,03
469322.320
212339.596
201262.9.32
30365.3?9
10979.915
14374.523
1*00
.46
.43
.06
.02
*03
1.00
.09
.22
.03
.65
425550.680
43752.717
B7O?0.3»7
14699.368
280070.211
1.00
10
20
03
66
469322.320
46405.676
93749.7?6
16665.413
310501.506
1.00
.10
«*0
.04
.66
.
1974
Annum
ASSFIST0TAL
ADJ. CURRENT
PLANT (NET)
INVESTMENTS
INTANGIBLES
ALL OTHER
LIABILITIES,.
TOTAL
ADJ. CURRENT
LN-TERM DEBT
DEFERRED TX.
NET WORTH
359325.640
162131.551
153780.918
22297.063
10491.415
10624.695
359325.840
4U27.946
77530.019
9790.174
230677.703
.....
PPT.
...*.- 1975
•MOUNT
1.00 381500*676 1.00
.45
168901.949
.43
167146.443
.06
23884.401
.03
10249.244
.03
11318.645
1,00
.11
,22
.03
,64
381500.676
35942.015
84785.857
11992.367
248780.437
-----«
ECU
—*.... 1977
— ,
AMC-UNX
&CL*
Corporations —
Petroleum (Extraction and Refining) Earnings and Net Federal Tax Liability
as Measured In the National Income and Product Accounts
($ millions)
trporate profits before tax:
Petroleum and coal products
Crude petroleum and natural gas
extraction
Total
1973
1974
1975
3,606
5,505
10,773
8,293
11,704
12,944
291
514
3,897
6,019
1.278
12,051
1.787
10,080
1.777
13,481
2.137
15,081
754
1,282
2,518
2,517
3,939
4,306
101
828
126
880
194
1,476
405
2,923
492
3,009
588
4,527
761
5,067
91
739
94
734
108
772
183
1,293
388
2.535
447
2,562
711
3,816
n.a.
n.a.
19.9
19.0
20.4
22.2
21.7
26.6
: 1966
: 1967
: 1968
1969
$2,843
3,197
3,820
3,623
3,324
306
$3,149
230
326
328
266
155
360
3,427
4,146
3,951
3,590
3,812
3,957
679
684
620
519
746
727
53
732
47
731
76
696
-12
586
84
830
49
683
57
674
55
641
51
535
20.2
16.5
16.5
15.1
Federal, state and local corporate profits
tax liability:
Petroleum and coal products
$405
Crude petroleum and natural gas
extraction
74
Total
$479
State and local $ 30
Federal
Calendar Years
1972
1971
1970
1965
:
$449
Federal corporate profits tax liability as
percent of profits less state and local
Income tax
14.47.
Office of the Secretary of the Treasury, Office of Tax Analysis
p - Preliminary
Note: Details may not add to totals due to rounding.
n.a. - Not available.
Source: Bureau of Economic Analysis.
3,657
3,597
: 1976p : 1977P
29.9
Hay 2, 1977"
Appendix Table VII-B
Corporations Classified in the Petroleum and Coal Products (Manufacturing) I" d u « t *y
Reconciliation of Taxable Income Per Returns and Pretax Earnings Per National Income and Product Accounts
($ millions)
—
—
;
I
1965
Corporation Statistics of Income: n ,__ , _._ . c__ , ,«<;
Income subject to tax
2,427
Calendar Years
: 1966 : 1967 : 1968 : 1969 : 1970 : 1971 : 1972 : 1973 :
3,199
3,511
3,424
"Set operating loss deduction 37 18 62 22 19 11 13 XL 38
Dividend, received deduction
424
513
551
629
WHT deduction
136
134
166
138
DISC and Subchapter 8 net income
3
2
10
1
Other
Equals:
Net income, returns with net income .. 3,026
3,864
4,300
4,214
Deficits, returns without net income . -37 -26 -20 -48 -87 -38 -57 -64 -47
Tax-exempt interest
3
6
11
8
3,398
3,677
4,560
507
107
6
822
121
6
932
169
12
4,036
4,637
5,685
12
8
2
4,560
1,2551
149j
10
5,987
3
J*
10
^dlc^nr'.!!".^*! I^3^4Tm4^3^4T50T5^5^9T863
570
136
887
502
122
1.415
221
252
25
216
6
452
134
918
604
490
1.501
194
260
45
219
-143
506
166
1,371
649
209
1.774
155
258
52
285
-33
467
138
1,556
744
212
1.899
173
265
48
308
-64
Office of the Secretary of the Treasury, Office of Tax Analy.l.
p - Preliminary. n.a. - Not available.
Note: Details may not add to totals due to rounding.
Sources: Corporation Statistics of Income (IRS), and Bureau of Economic Analysis.
815
107
1,477
598
328
1.865
256
316
43
354
-55
832
121
1,482
968
187
1.760
214
307
79
392
-7
1.011
169
2,338
1.102
162
2.022
94
336
80
371
-45
1,331
149
1,973
1.486
394
2.097
330
350
89
338
-44
: 1976p
14,359
16,022
17,709
105
5,053
707
19
-61
48
231
1,271
11
22
2,265
2.16
17
-9
20,182
17,582
20,290
-55
11
-75
28
-304
10
958
505
1,466
19,180
17,029
18.531
2,869
707
5,850
5,996
251
4,670
1,210
678
332
415
-129
1,361
1,271
9,626
321
974
768
2,309
952
367
525
-104
10,773
8,293
--
10,408
" ^nttru^tvety^Ived 67 124 80 62 90 105 108 147 506
E<,U U:
Bureau of Economic Analysis adjustments:
Subtract:
Foreign Income included In total
receipts leBa total deductions:
Foreign dividend.
W T deduction
...
Other foreign income
D c J T l c d w I d . n d . received
Cain .ale of asset
Add: C o p t i c depletion
Depr^tl ion vs\ Expense adju.t~nt....
011 well bonus payment.
State income tax
l^it
Other (net)'.'!!!.!
Equals: Corporate profit. - Current
1975
7.505
U !
'
1974
. „„„
1.393
317
3.342
3.015
170
2.622
370
434
156
335
-40
n.a.
11,7 •'•
May 2, 1979
Selected Rates of Return*/Oil Companies and Others, 1969-1977
Item
Rate of return to equity:
Oil and gas extraction
Integrated petroleum
and refining
Others
Rate of return to assets
employed:
Oil and gas extraction
Integrated petroleum
and refining
Others
Rate of return to market
value of equity:
Oil and gas extraction
Integrated petroleum
and refining
Others
Office of the Secretary of
Office of Tax Analysis
Source:
197- : 1973 : 1974 : 19/5
(percent)
1976 : WTT
1M9
TFTO
~WTT
12.6
11.4
6.7
7.2
10.6
19.9
15.0
15.2
14.7
11.1
12.4
10.5
10.3
10.8
11.3
10.0
12.9
15.2
14.4
18.4
13.0
12.9
12.0
13.9
14.4
13.5
14.8
9.0
8.5
6.0
6.0
8.3
14.0
10.3
10.4
10.2
9.2
10.0
8.5
8.9
8.9
9.5
8.4
10.5
11.5
11.2
12.8
10.6
9.2
10.2
9.7
11.2
9.6
11.5
4.6
6.2
2.9
3.0
4.9
11.7
9.9
8.5
9.1
6.9
4.8
9.0
4.8
8.4
4.7
7.4
4.9
11.2
6.2
18.4
8.4
13.4
8.1
13.0
8.7
12.7
10.3
the Treasury
Standard and Poor's Corporation Compustat Filev
May 2, 1979
nppcllUlA
XA
Petroleum Refining and Integrated Companies 1/
Return on Stockholders' Equity as Measured in Financial Reports
Filed with the Federal Trade Commission
Asset Size ($ millions)
1974
1975
Calendar Years
1976
1977
1978
24.6
34.1
13.3
22.0
26.7
17.6
15.2
13.0
13.2
16.0
33.7
17.2
16.8
15.5
16.2
16.8
12.8
13.0
36.2
51.1
21.0
41.0
39.0
30.0
24.3
18.8
19.3
41.1
41.6
26.7
33.6
24.3
24.5
30.0
19.0
19.4
Net Income After Tax* Per Dollar of Stockholders' Equity
33.5
31.0
41.9
23.7
35.8
15.5
28.5
19.8
20.0
Under $5 million
5 under
10
25
10 under
under
50
25
100
50 under
250
100 under
250 under 1,000
1,000 and over
Total
17.9
45.0
33.3
16.4
24.7
11.9
14.7
12.1
12.3
12.6
28.2
32.6
30.9
18.7
14.4
16.2
13.5
13.6
Net Income Before Tax* Per Dollar of Stockholders' Equity
Under $5 million
5 under
10
25
10 under
50
25 under
100
50 under
250
100 under
250 under 1,000
1,000 and over
Total
47.3
52.4
76.7
42.4
60.8
24.9
40.6
23.9
24.5
28.9
85.0
55.6
31.4
46.4
20.7
22.2
17.1
17.5
20.6
50.0
65.1
57.0
35.9
21.0
25.5
19.2
19.6
Office of the Secretary of the Treasury
Office of Tax Analysis
May 2, 1979
Source: Federal Trade Commission, Quarterly Financial Report, (unpublished data).
*Excludes extraordinary gains or losses and minority stockholders' interest in income or
loss of consolidated corporations.
1/ Excludes companies classified in the oil and gas extraction industry. Includes coal products.
"" Classification is based on the Enterprise Standard Industrial Classification Manual.
Disposition of Net Increase in Oil Receipts
(Money Amounts in Billions of Dollars)
1979
Base Case—No Increase in Real OPEC Price
Calendar Years
1981
1980
1982
Total
1979-81
Total
1979-82
Net increase in oil receipts
1.0
5.0
9.3
10.9
15.4
26.3
Net increase in after-tax producer
and royalty income
Without windfall profits tax
With windfall profits tax
0.5
0.5
2.6
2.1
4.9
3.4
5.7
3.9
8.0
6.0
13.7
9.9
-
18.4%
31.3%
30.8%
25.1%
27.4!
Gross windfall profits tax
0.8
2.5
2.8
3.2
6.0
Net windfall profits tax (after
reduction in Federal income
taxes)
0.5
1.5
1.7
2.0
3.8
Percent reduction due to windfall
profits tax
Alternate Case—3 Percent Increase in Real OPEC Price
Net increase in oil receipts
1.0
5.3
10.7
13.7
17.0
30.7
Net increase in after-tax producer
and royalty income
Without windfall profits tax
With windfall profits tax
0.5
0.5
2.5
1.9
5.0
2.9
6.3
3.5
8.1
5.4
14.4
8.8
Percent reduction due to windfall
profits tax
-
23.5%
42.0%
45.4%
33.5%
38.7%
Gross windfall profits tax
1.0
3.4
4.7
4.3
9.0
Net windfall profits tax (after
reduction in Federal income
taxes)
0.6
2.1
2.9
2.7
5.6
Office of the Secretary of the Treasury, Office of Tax Analysis
May 3, 1979
Appendix Table XI
Sources and Uaea of Funds, 1971-1977 Oil and Gaa Extraction Companies
(amounts in $ millions)
>
1969
AMUUl
SQUBCfS
ALL-SOURCES
WORK CAP OEC
OPERATIONS
NET-INCOME
CAp-CONSUMp,
DEFERRED TAX
OTHER-OPER*
ISSUES-LTO
ISSUES-STOCK
ALL-OTHER
.000
• 000
• 000
• 000
• 000
.000
• 000
• 000
• 000
.000
•
1970
— a . — — —p
»--•
1971
-••••
S£I*
AtlQUJ-1
ftCl*
A-tflUUl
kLU
.00
• 000
• 000
• oo
• 00
• ooo
• ooo
• ooo
• ooo
• ooo
• ooo
• 000
• ooo
.00
1243.012
48.888
807*679
300.358
482.533
18.137
• 6.651
66.234
51.985
268.226
100,00
3.93
64.98
24.16
36.62
1.46
• 94
S.33
4.16
-1»5I
1243.012
• 000
164.150
821.276
58.959
198.627
100.00
,00
13.21
66.07
4.74
15.98
• 00
• 00
«oo
• oo
• 00
.00
• oo
• 00
• 00
• oo
• oo
,00
• 00
• oo
»oo
.00
— — —
1972 »•—••'
n
A_ ltNI
Jt£2*
— — -
1SS0.229 1Q0.00
•060
.00
6*5.0?6
54.51
361.418
23.31
»?6.413
34.09
12.9*17
.64
-57.76*
-3.73
435.960
26*12
108.602
7.01
160.641
10.36
2129.057 100.60
•000
«00
1211.243
67*00
563.959
27.48
669.569
31.51
26.264
1*24
•66.569
-3.23
76.792
3.71
265.226
12*48
569.794
26.61
MHLW1
1973
.-,
BLmU
usxs
ALL-USES
WORK CAP INC
DIVIDENDS
CAP-EXPEND.
INVESTMENTS
ALL-OTHER
• 000
.000
• 000
• 000
• 000
• 000
• oo
• ooo
• ooo
• ooo
• ooo
• 000
• ooo
• 00
.00
• 00
• oo
• 00
——————
A.QtlUI
£CX»
2724.600
.000
2107.094
1202.733
755.923
29.430
119.00b
179.187
20.791
417.528
100.00
.00
77.34
44.U
27.74
1.06
4.37
6.58
2724.600
245.548
165.367
1942.473
22.942
348.270
100.00
9.01
6«07
71.29
« — —
1975
A-QlJUI
• oo
• oo
• 00
.00
• 00
• 00
— — — — <•!
•—-—
1976
—-—••i
eci.
WORK CAP OEC
OPERATIONS
NET-INCOME
CAP-CONSUMP.
D E F E R R E D TAX
OTHER-OPER,
ISSUES-LTO
ISSUES-STOCK
ALL-OTHER
• 76
15.32
—...
3202.200
.000
2069.586
1022.208
883.262
167.490
-3.374
288.380
196.438
647.796
100.00
.00
64.63
31.92
27.58
5.23
-.11
9.01
6.13
20.23
3537.440
.000
2363.517
1171.317
975.473
172.113
44.6U
707.344
108*151
358.426
100.00
.00
66.8}
33.11
27.56
4.87
1.26
20.00
3.06
10.1)
3202.200
250*738
257,446
2377,492
-43.968
360*492
100.00
7.83
8.04
74.25
-1.37
11.26
3537.440
54.083
279.223
2605.673
168.551
429.910
100.00
1.53
7.69
73.66
4.76
12.11
100.00
6.30
7.76
69.17
3.12
11.65
|977
AHQiiia
sniiBf.fft
ALL-SOURCES
1550.229
128.670
1?0.?66
1072.301
48.366
160.664
—-
tzu
4511.467 100.00
•000
.00
3099.46)
68.70
1427.552
31.64
1228.422
27.23
453.441
|0.0B
•9.936
-.22
332,?62
7,36
697.013
15.45
362.709
8.46
usxs
ALL-USES
WORK CAP INC
DIVIDENDS
CAP-EXPEND.
INVESTMENTS
ALL-OTHER
.64
12.78
45U.4A7
40.674
361.J01
1338.195
45.679
725.018
100.00
.90
6.02
73.99
1.62
14,07
2125.057
148.971
127.808
1517.060
33.360
297.696
100.00
7.01
6.01
71*39
1.57
14.02
May 14, 1979
TEXT OF CLAIMS/ASSETS AGREEMENT BETWEEN THE UNITED STATES
AND THE PEOPLE'S REPUBLIC OF CHINA
AGREEMENT BETWEEN THE GOVERNMENT
OF
THE UNITED STATES OF AMERICA
AND THE GOVERNMENT OF
THE PEOPLE'S REPUBLIC OF CHINA
CONCERNING THE SETTLEMENT OF CLAIMS
In order to develop bilateral economic and trade relations
and to complete the process of normalization of relations on the
basis of equality and mutual benefit and in accordance with the
spirit of the Joint Communique on Establishment of Diplomatic
Relations between the United States of America and the People's
Republic of China, the Government of the United States of America
(hereinafter referred to as the "USA") and the Government of the
People's Republic of China (hereinafter referred to as the "PRC")
have reached this Agreement:
ARTICLE I
The claims settled pursuant to this Agreement are:
(a) the claims of the USA and its nationals (including
natural and juridical persons) against the PRC arising from any
nationalization, expropriation, intervention, and other taking
of, or special measures directed against, property of nationals
of the USA on or after October 1, 1949 and prior to the date of
this Agreement; and
(b) the claims of the PRC, its nationals, and natural and
juridical persons subject to its jurisdiction or control against
the USA arising from actions related to the blocking of assets by
the Government of the USA on or after December 17, 1950 and prior
to the date of this Agreement.
ARTICLE II
(a) The Government of the USA and the Government of the PRC
agree to a settlement of all claims specified in Article I. The
Government of the PRC agrees to pay to the Government of the USA
the sum of $80.5 million as the full and final settlement of the
claims specified in Article I. The Government of the USA agrees
to accept this sum in full and final settlement of those claims.
B-160A
- 2 -
(b) The Government of the USA agrees to unblock by October
1, 1979 all assets which were blocked because of an interest,
direct or indirect, in those assets of the PRC, its nationals, or
natural and juridical persons subject to its jurisdiction or
control, and which remained blocked on the date of the initialing
of this Agreement, March 2, 1979. The Government of the USA
further agrees, in a spirit of mutual cooperation, that prior to
unblocking under this paragraph, it will notify the holders of
blocked assets which the records of the Government of the USA
indicate are held in the name of residents of the PRC that the
Government of the PRC requests that assets of nationals of the
PRC to be unblocked not be transferred or withdrawn without its
consent.
ARTICLE III
The Government of the PRC shall pay to the Government of the
USA, $80.5 million of which $30 million shall be paid on October
1, 1979 and the remaining $50.5 million shall be paid in five
annual installments of $10.1 million each on the first day of
October with the first installment due on October 1, 1980.
ARTICLE IV
The Government of the USA shall be exclusively responsible
for the distribution of all proceeds received by it under this
Agreement.
ARTICLE V
After the date of signature of this Agreement, neither
government will present to the other, on its behalf or on behalf
of another, any claim encompassed by this Agreement. If any such
claim is presented directly by a national of one country to the
government of the other, that government will refer it to the
government of the national who presented the claim.
ARTICLE VI
This Agreement shall enter into force on the date of
signature.
The Agreement was signed on May 11, 1979 at Beijing, in
duplicate, in the English and Chinese languages, both versions
being equally authentic.
FOR THE GOVERNMENT OF THE FOR THE GOVERNMENT OF THE
UNITED STATES OF AMERICA
PEOPLE'S REPUBLIC OF CHINA
/s/ Juanita M. Kreps
/s/ Zhang Jingfu
Appendix Table XI, continued
Integrated Petroleum and Refining Companies
(amounts in $ millions)
—— — — —
mSCU
AttOUtU
souecfs
ALL-SOURCES
WORK C A P OEC
OPERATIONS
NET-INCOME
CAP-CONSUMP.
O E F E R R E D TAX
OTHER-OPER.
ISSUES-LTO
ISSUES-STOCK
ALL-OTHER
US£S
ALL-USES
WORK CAP INC
DIVIDENDS
CAP-EXPEND.
INVESTMENTS
ALL-OTHER
.00
.00
.00
.00
.00
.00
.00
.00
.00
.00
17134.395
13289.654
7122,707
6100.965
344.051
-278.069
2350*358
-16.280
1510.663
17134.395
999.562
3719.965
10952.937
883.200
578.711
• 00
• 00
• 00
• 00
• 00
• ooo
• ooo
• ooo
• ooo
• ooo
• oo
.000
• ooo
• ooo
.000
• 000
.00
• 000
.000
• 00
• ooo
• 000
• 000
• 00
• 00
• 00
• 00
• ooo
• ooo
• ooo
• 000
• ooo
• ooo
.00
1975
— — • -
• ooo
• 000
• ooo
• ooo
,00
• 00
•
—
•
— — —
-.-•-— 1971
AMQUMI
kdu
.000
• 00
——————
A.Qum
.00
• ooo
• 00
.00
• 00
.00
• oo
—
—
I97ei
AMQUUI
— — .
fed*
100,00
100.00
3.41
21.62
63.90
4.95
5.93
23186.472
4628.146
3985.420
11869.952
574.413
2108.541
100.00
19.96
17.19
51.26
2.46
9.09
Atmuui
BCT.
100.00
5.63
21.71
63.92
5.15
3.38
79.37
41.16
37.77
2.49
-2.07
5.63
.68
• — — — — - >
36343.181
• 000
25227.447
15937.205
6501,720
1102.513
-313.991
2896.531
268.163
7931.041
100,00
28909.307
816.766
18613.509
11423.645
9504.638
1118.999
•3433.973
5017.344
293.639
4168*049
100.00
2.63
64.39
39,52
32.88
3.87
-11.88
17.36
1.02
14.42
33449.211
• ooo
23213.020
13380.961
9539.025
1721.630
•1428.596
5611.574
677.568
3947.050
100.00
36343.181
5747.777
4598.512
19420.103
2611.035
3965.754
100.00
15.82
12.65
S3.44
7.18
10.91
28909.307
• ooo
4843.326
20949.962
1437.932
1678.087
100.00
• 00
16.75
72.47
4.97
5.80
33449.211
2455.451
5151.210
22351.207
827.364
2663.979
69.41
43.85
23.39
3.03
-•86
7.97
• 79
21.82
17109.423
582.756
3732.914
10932.665
846.097
1014.969
77.56
41.57
35.61
2.01
-1.62
13.72
-.10
8.82
££1*
69.40
40.00
28.52
5.IS
-4.27
16*78
2.03
11.60
33915.560
• 000
26723.927
14275,446
10973.316
2153.536
-678,371
3351.516
605.932
3234.163
100,00
• 00
78.80
42.09
32.35
6.35
•2*00
100.00
7.34
15*40
66.82
2.47
7.96
33915.560
752.606
5615.24?
24552.899
626.463
2166.349
100.00
2.22
17.15
72.39
1.85
6.39
.00
9.88
1.79
9.54
uses
ALL-USES
WORK CAP INC
DIVIDENDS
CAP-EXPEND.
INVESTMENTS
ALL-OTHER
ACXt
13.92
.00
BCI.
AUQUbU
100.00
• 00
60.06
49.32
31*45
3*46
-4.16
2.04
-2.37
20.27
• ooo
13579.636
7046.247
6462.461
425,170
-354.242
997.901
150.J33
2361.753
• oo
—
23186.472
.000
16563.079
11435.064
7291.261
601.303
-964.549
473.244
-549.171
4699.320
100.00
AU-U-Ul
.00
— — —
1972
—
Atmum
fiCU
17109.423
acz*
ABOUbll
ALL-SOURCES
WORK CAP OEC
OPERATIONS
NET-INCOME
CAp-CONSUMP.
D E F E R R E O TAX
OTHER-OPER.
ISSUES-LTO
ISSUES-STOCK
ALL-OTHER
1970
.000
• 000
.000
• 000
.000
• 000
•
snugsrs
-
Summary of Additional Oil Receipts and Taxes under Decontrol and the Windfall Profits Tax
Assuming No OPEC Real Increase in Prices
($ millions)
•
•
:
Decontrol:
Gross increase in oil receipts
Less deductible costs of induced production
Net Increase in oil receipts
Less depletion and state and local severences and
income taxes
Increase in federal taxable income
Federal marginal income tax rate
Increase in federal income tax before windfall
profits tax
Windfall profits tax:
Gross windfall profits tax
Net change in federal taxable income
Federal marginal income tax rate
Reduction in federal income tax for windfall
profits tax
Disposition of net increase in oil receipts:
Private sector
State and local government
Federal Government (includes federal royalties)
Total net increase
Addenda:
Effective federal tax rate:
On gross increase in oil receipts
On net increase in oil receipts
Effective federal income tax rate before windfall
profits tax:
On gross increase in oil receipts
On net increase in oil receipts
Office of the Secretary of the Treasury
Office of Tax Analysis
1979 : 1980 :
Calendar Years
1981 : 1982
1983
1984 :
1985
1,208
-167
1,041
5,797
-751
5,046
11,503
-2.170
9,333
14,488
-3.625
10,863
15,119
-4,687
10,432
17,657
-7.366
10,291
20,375
-10.156
10,219
-134
907
.45
-644
4,402
.45
-1.158
8,175
.45
-1,308
9,555
.45
-1.218
9,214
.45
-1.184
9,107
.45
-1.176
9,043
.45
408
1,981
3,679
4,300
4,146
4,098
4,070
.45
766
-638
.45
2,457
-2,062
.45
2,815
-2,384
.45
2,022
-1,729
.45
1,752
-1,502
.45
1,510
-1,296
.45
-287
-928
-1,073
-778
-676
-583
520
92
429
1,041
2,116
369
2.561
5,046
3,357
583
5.393
9,333
3,922
682
6.259
10,863
4,110
721
5.601
10,432
4,176
735
5.380
10,291
4,266
752
5__201
10,219
.34
.39
.42
.49
.45
.56
.42
.56
.36
.52
.29
.50
.25
.49
.34
.39
.34
.39
.32
.39
.30
.40
.27
.40
.23
.40
.20
.40
April 27 , 1979
GPO
941 546
Selected Purchases by Petroleum Companies of Businesses Not Clearly
Identified as Petrochemical or Other Energy
Examples
Purchasing
company
8. Ashland
9. Teaoro
10. Pennzoll
Purchased
company
Selected Detail*
Date
1971
Polk Material
Angelo Tomasso
1971
1972
Mac's Super Glass
Harrison Incorporated
1972*\
1972* >
Franklin Stone
Star Construction
1972*J
*asphalt paving
Reno Construction
1972
Mac's Super Glass
1972
(auto polishes and
related products)
Seaboard Construction
1973
Levlngston Ship
Building Company
1975
Hodges & Company
1976
Nielsons
1977
20,000 common shares
520,000 shares
63,024 common shares
132,089 common shares
320,000 common shares
63,024 common shares
65,000 common shares
Exchange of shares; 802,632 were Issued
38,500 shares
565,000 common shares
104,530 shares and $212,000 payable in stock and cash
Arnold Pipe Rental
1970
Charles Wheatly Company
1972
(producer of
petroleum valves) 220,000 shares
VFI Incorporated
1973
Eagle Transport Company
1974
40,000 common shares
$700 million
Turner Drill Pipe
1974
Cash and provialonary note
W. S. Ranch
1973
Pending
11. Mobil
12. Sun
13. Occidental
Corporation
Badcow (forest products, liner
board, oil & gas)
Preferred stock of $475 million (represents a portion of authorized but not Issued stock)
1. Metrodata Computing
(INCs computing dlv.)
$3 million — Merger, amount undisclosed
Meade Corporation
14. Standard Oil
Cypress Mines
Office of the Secretary of the Treasury, Office of Tax Anaysla
(Indlft"a)
Source: Moody's and Annual Reports.
April 26, 1979
- 5reporting worldwide sales of integrated petroleum and refining
companies show that over 96 percent of the sales were accounted
for by 28 companies, 1.7 percent of the total. This dominance
of the largest firms is also reflected in FTC data pertaining
only to domestic sales: nearly 93 percent of total sales
was reported by the largest firms, those with assets over
$250 million.
Similarly, because capital intensity in the oil business
is extremely high, corporations are by far the most dominant
form of business organization. In 1976, the most recent tax
year available, among enterprises engaged in oil and gas
extraction and refining corporations accounted for over 98
percent of sales, but only 13 percent of the enterprises, in
the industry.
U.S. Oil Extraction and Refining Enterprises
1973 1974 1975 1976
($ million)
Worldwide sales: 141,696 309,263 308,558 361,351
Percentage by:
Corporations
Proprietorships
Partnerships
Source:
98.1
1.1
0.8
98.5
0.8
0.7
98.2
0.9
0.9
98.2
0.9
1.0
Appendix Table III.
Due to the historical precedence of the U.S. oil
industry, it has been a dominant force in world trade. When
rich oil discoveries abroad burgeoned during the preceding
35 years, U.S. companies were among the most successful
developers of productive capacity. As a consequence, the
income of U.S. oil companies is predominantly foreign. In
1976, nearly 80 percent of all oil company corporate income
subject to tax derived from foreign operations. However,
there is some indication that the widespread recourse to
expropriation policies abroad has caused some decline in the
relative importance of foreign operations of U.S. companies.
- 6 Foreign and Domestic Taxable Income; All Oil Company Tax Returns
1972 1975 1976
Amount Percent Amount Percent Amount Percent
(
($ million)
)
Worldwide taxable
income:
7,781 100.0
Foreign operations 6,760
86.9
Domestic operations 1,021
13.1
Source: Appendix Table IV.
38,146
31,791
6,355
100.0
83.3
16.7
46,643
36,450
10,193
100.0
78.2
21.9
As a final perspective on the oil industry, I would
like to review its financial structure. For this purpose, I
shall utilize data from the Compustat file of financial
reports maintained by Standard and Poor's and also financial
survey data published by the Federal Trade Commission. The
Compustat file covers more than 3,000 publicly held corporations, and records data from their financial statements.
The FTC survey directly collects financial information from
a sample of nonfinancial corporations; in contrast with
Compustat and other compilations of financial statistics,
the FTC data are requested in a format designed to isolate
foreign operations. With respect to the oil companies each
includes in its coverage, the balance sheet and income
statement items are not fully comparable with those reported
by other manufacturing corporations. The asset and income
accounting conventions used by oil companies more frequently
permit current deduction of investment outlays for establishing
the existence of oil and gas reserves, a significant and
valuable asset. This results in a relative understatement
of income whenever such outlays are increasing and in an
undervaluation of the reserves and net worth. However,
these accounting conventions are less frequently used by
smaller independent companies engaged primarily in extraction.
In 1977 the Compustat data indicate that oil extraction
companies had 75 percent of their total assets in fixed
plant, integrated and refining companies 65 percent, and
nonoil companies only 43 percent. This mildly understates
the heavy reliance of oil companies on fixed plant. Other
companies devote more of their assets to working capital —
cash and inventories — and this provides them a higher
average turnover rate. Because the FTC data are especially
consolidated to focus on domestic operations, the balance
sheet elements based on reports to the FTC (Appendix Table
V) do not usefully portray the composition of assets
- 7 employed: the value of plant, equipment, and working
capital in foreign operations is subsumed under "other
assets" in the form of interests in those enterprises.
Fixed Assets As Percentage of Total Assets
Industry 1971 1972 1973 1974 1975 1976 1977
Oil and gas extraction
69
69
69
70
71
72
75
Integrated petroleum
and refining
70
70
66
61
62
63
65
All other manufacturing
44
43
43
44
43
43
45
Source: Appendix Table 7I.
Notwithstanding the oil companies' greater reliance on
fixed assets, the method by which they finance their total
assets does not markedly differ from other large companies.
For example, in 1977 oil extraction and integrated refining
companies financed 63 and 61 percent of their assets by
equity, respectively, as compared with 66 percent for other
manufacturing corporations. Although the equity percentage
of other manufacturing has held fairly steady over the
period 1971-77, the equity percentage of oil companies
appears to decline, suggesting a greater reliance on debt.
Both the slightly lower oil company equity percentages
and the indicated declines therein are influenced by the
accounting conventions noted above. In the period since
1972, when oil prices have been rising, many of the oil
companies' real assets have been appreciating. Thus, as
Equity (Net Worth) as Percentage of Total Assets
Industry 1971 1972 1973 1974 1975 1976 1977
Oil and gas extraction
69
66
67
65
64
63
63
Integrated petroleum
and refining
71
71
71
67
64
61
61
All other manufacturing
68
67
64
65
66
66
Source:
67
Appendix Table VI.
- 8 large volumes of resource replacement expenditure have been
made, more of these additions to total assets have been
financeable by borrowing on the enhanced, but financially
unrecorded, value of oil company reserves.
These comparative statistics are consistent with the
FTC data, after allowance for the differences in definition
of total assets. Whereas we have "netted out" trade credit
in compiling Compustat data, the FTC data include the total
of accounts and short-term notes receivable among the
assets, and total accounts and short-term notes payable
among the liabilities. As compared with the foregoing
Compustat percentages, both the oil companies' and others'
figures are lower, the latter by more because of the greater
importance of trade credit in their operations but the
downward trend of the oil companies' equity percentage still
appears while the other companies' percentages hold steady.
Equity (Net Worth) as Percentage of Total Assets
Industry 1974 1975 1976 1977 1978
Integrated petroleum and
refining
63
62
60
59
57
Other manufacturing 51 52 53 52 51
Source: Appendix Tables V-A and V-B.
A final descriptor of the. financial structure of
corporations is the ratio of long-term debt to equity.
Given the near equivalence of oil and nonoil company equity
percentages and the fact that nonoil companies rely more on
trade credit, it follows that oil companies will exhibit
slightly higher long-term debt to equity ratios. Thus, in
1977 when oil extraction and integrated refining companies
had long-term debt outstanding equal to 36 and 35 percent of
their equity, respectively, other manufacturing firms had a
ratio of but 30 percent.
Long-term Debt as Percentage of Equity
72
1973
1974
Industry 1971
Oil and gas extrac35
36
39
tion
35
1975
1976
1977
35
38
36
Integrated petroleum
and refining
28
28
26
25
31
34
35
Other manufacturing 33
32
31
34
34
31
30
Source: Appendix Table VI.
- 9 Profitability
I should like to make four general observations before
reviewing the information on oil company profitability we
have been able to assemble. First, profits have a complex
relationship to changes in the price of output. When output
prices, crude oil prices in the present instance, rise,
profits also immediately rise. However, the extent to which
higher profits can be maintained depends upon the behavior
of costs. Real unit costs rise as greater effort is expended
on pumping oil from existing fields and as less attractive
prospects are drilled. Until costs rise to fully match
increases in output prices and thus to restore profits to
normal levels, higher levels of profits will prevail.
Second, profits are an aggregate, like a wages bill or
costs of materials. For an enterprise as for a collection
of them, as activity expands and efforts are made to increase
capacity, the capital aggregate to which the profits are
attributable also grows. It is one thing to observe that a
wages bill has doubled while the number of person-hours
expended has remained the same; it is another to observe
that wages have doubled simply because twice as many personhours are employed. Similarly, profits may be evaluated
only if they are compared to an appropriate base. Profit
per dollar of" equity capital is one such measure.
Third, profits are but one share of the income generated
by the capital employed by an enterprise. As we have noted,
about a third of oil company assets are financed by creditors.
If we are to examine the vitality of an industry, we must
consider the net return earned by all the assets, the sum of
interest to creditors and profits to shareholders.
Finally, prices and sales revenues are all pretax
magnitudes. But it is commonly accepted that individuals
making market decisions are driven by after-tax magnitudes.
Consumers may spend only what remains to them from their
earnings after tax; and the funds to acquire capital assets
are also what creditors and shareholders have left from
their earnings from all sources after tax. At the corporate
level, then, what is of interest in discussing profitability
is what remains from the corporation's product after all
costs and corporation taxes, when this residual magnitude is
expressed as a rate of return to equity or to total assets
employed.
- 10 "Profits" of corporations are a residual obtained by
subtracting from the amount of receipts (sales plus returns
on securities held) the cost of goods sold, interest paid
creditors, and an allowance for capital consumption. Thus,
there is no unambiguous measure of "profit." While receipts
are measurable with little controversy, measurement of the
cost of goods sold in a period of inflation is both difficult
and controversial, and for oil companies, whether certain
outlays for reserve discovery and development should be
treated as current period costs of goods sold or capitalized
is a further controversial and unresolved issue, as is then
the allowance for capital consumption.
To illustrate the great variance in measures of oil
company profits, in 1976, the taxable income of oil companies
was $46.6 billion; for that same year, the Department of
Commerce estimated pretax corporate profits for the same
companies at $13.5 billion. By far the biggest source of
difference between these two measures is due to scope:
taxable income is worldwide, National Income and Products
Account profits by industry are restricted to domestic
production. The other large source of difference arises from
differences between tax rules for treating outlays for
depreciable and depletable property and for income excluded
by the Code, such as tax-exempt interest and percentage
depletion. Thus, over the period from 1971 to 1976, income
(profits) subject to tax increased by a factor of 7, National
Income profits by a factor slightly greater than 3.
Pretax Profits of U.S. Oil Companies
1971 1972 1973 1974 1975 1976
(
Worldwide income
subject to tax
$ billion
)
6.7
7.8
13.5
37.9
38.1
46.6
Corporation profits,
domestic, National
Income and Product
Accounts basis
4.0
3.9
6.0
12.1
10.1
13.5
Source: Appendix Tables VII-A.VII-B.
- 11 If one accepts the National Income Accounts estimate of
oil company profits, then these may be compared with the
estimate of associated Federal income tax from the same
source. In 1976, after payment of State and local income
taxes, $12.8 billion of oil company domestic income generated
$3.8 billion in Federal tax liability, an average tax rate
of 29.9 percent. It will be observed that in 1975 and 1976,
the average rate of tax estimated by the Commerce Department
has increased, from 21.7 percent in 1974 to 26.6 percent in
1975. This reflects, of course, the repeal of percentage
depletion for oil and gas with respect to the integrated oil
companies.
Corporations in the Petroleum
Sector
1971
1972
1973
1974
($ billion)
1975
1976
Corporate profits before
Federal income tax,*
National Income and
Products Account basis
3.9
3.8
5.8
11.7
9.6
12.8
Federal income tax
liability
0.7
0.8
1.3
2.5
2.6
3.8
19.0
20.4
22.2
21.7
26.6
29.9
Average tax rate on
National Income and
Products Account
profit (percent)
*Corporate profits after State and local income taxes.
Source: Appendix Table VIII.
Unfortunately, the National Income and Products Accounts
estimates of oil company profits and Federal income taxes
cannot be used to derive a useful measure of profitability.
There is no corresponding balance sheet to provide a measure
of the capital employed in the industry nor to indicate how
the claims against this capital are distributed as between
creditors and shareholders. For measures of the profit
rate, then, we must turn to financial statements, keeping in
mind the inherent weaknesses of the measures of pretax
income and the balance sheet valuation of assets and net
worth.
- 12 The indications here are that in 1977, while all nonoil
companies in the Compustat file earned an after-tax rate of
return of 14.8 percent, oil extraction companies earned
slightly less, 14.7 percent, and integrated oil and refining
companies still less, 13.5 percent. During the period 197177, while nonoil companies were increasing their rates of
return by 3.5 percentage points, or 31 percent, extraction
companies increased their extremely low 1971 rate of return
by 119 percent, and integrated companies increased their
return by 25 percent. In 1974, as a result of the higher
prices on crude oil, the oil companies did achieve higher
than normal rates of return, approximating 20 percent.
However, rising costs caused these profit rates to recede.
The FTC data, closely track the Compustat returns despite
the difference in industry coverage.
Rates of Return to Equity (After-tax)
Industry
1973
1974
1975
1971
1972
(percent)
Compustat:
Oil and gas extraction
1976
1977
6.7
7.2
10.6
19.9
15.0
15.2
14.7
Integrated petroleum and
refining
10.8
10.0
15.2
18.4
12.9
13.9
13.5
Other manufacturing
12.9
14.4
13.0
12.0
14.4
14.8
N.A.
20.0
12.3
13.6
13.2
N.A.
13.2
11.1
13.6
13.9
FTC:
Integrated petroleum and
refining
Other manufacturing
Sources:
11.3
Appendix Tables V-A, V-B, X-
If we combine interest paid and after-tax profits of
stockholders as a measure of the earnings of assets employed
in the oil business, their ratio to the total amount of
assets employed is another indicator of industry profitability
These percentages tell essentially the same story as rates
- 13 of return to equity. In 1977, returns to oil company assets
were slightly below nonoil manufacturing corporations in the
Compustat file. These latter firms averaged a return of
11.5 percent on total assets employed while oil extraction
companies earned 10.2 percent and integrated oil and refinery
companies earned 9.6 percent. These indicators also show
that oil company earnings were relatively unfavorable in
pre-1973 years and that 1974 was an extremely profitable
year.
Rates of Return on Assets Employed
Industry 1971 1972 1973 1974 1975 1976 1977
(percent)
Oil and gas extraction
6.0
6.0
8.3
14.0
10.3
10.4
10.2
Integrated petroleum
and refining
8.9
8.4
11.5
12.8
9.2
9.7
9.6
Other manufacturing 9.5 10.5 11.2 10.6 10.2 11.2 11.5
Source: Appendix Table X.
Finally, I would call your attention to Appendix Table
IX which the FTC has kindly furnished us. This presents a
distribution of rates of return to equity for integrated oil
and refinery companies by size of total assets for each year
1974-78. There is no clear relationship between size of
company and rate of return except that in each year the very
largest size class has earned a below average rate of
return. This result is consistent with similar analyses we
have made of tax return data; it may either indicate that
the largest firms are less efficient, or it may indicate
that the largest firms, because they enjoy stability of
earnings, can raise funds at lower cost.
Financing the Changes in Capital Employed by Oil Companies
We have been requested to provide an analysis of oil
company finances in recent years to include both the three
major sources of funds — cash flow from operations, new
borrowing, and new issues of shares — as well as the
application of these funds to distributions to shareholders,
outlays for plant and equipment, and investments in the
securities of other enterprises. For such data, the only
- 14 source readily accessible to us is the Compustat file which
provides conveniently formatted sources and uses of funds
statements beginning with the year 1971. These data,
classified by industry as above, are presented in Appendix
Table XI.
Sources of Funds
Cash Flow. Like any group of long-established firms,
oil companies engaged primarily in extraction as well as
integrated firms rely heavily on operations for the bulk of
their disposable funds. After reducing the net realizations
from sales of goods and services for production expenses,
net payments of interest, and taxes, the remainder, commonly
called "cash flow" accounted in 1977 for 69 and 81 percent
of all sources of funds for oil companies as compared with
87 percent for all manufacturing companies. As shown in
Appendix Table XI, total sources of funds include external
financing and reductions of working capital (cash, inventories,
and net receivables) as well as cash flow from operations.
Cash Flow
1971
1972
1973
1974
1975
1976
(percent of total sources)
1977
Oil and gas extraction
64
58
60
73
65
66
69
Integrated petroleum and refining
79
81
84
70
76
74
81
Other manufacturing 77 83 85 74 78 85 87
Source: Appendix Table XI.
In principle, cash flow consists of two elements: the
after-tax income which might be distributed to shareholders
and leave the corporation's earning capacity unchanged, and
the amount of capital consumed which, if not replaced by new
capital outlays, would impair the earning capacity of the
corporation. As a practical matter, standard accounting
procedures for estimating depreciation and depletion provide
no reliable measure of capital consumption, particularly in
the oil industry which is characterized by relatively long
physical lives of plant and equipment and where the principal
assets — oil and gas reserves — defy conventional accounting
- 15 valuation. Given the long lives of refineries and pipelines,
they are particularly susceptible to technical and marketshift obsolescence, exacerbated in the last 15 years by the
rapid evolution of environmental regulations that have
affected both the nature of refinery products demanded and
the processing techniques required. Moreover, the persistence
of inflation over the same period has cast further doubt on
standard accounting measures of depreciation and depletion
because these rely on historic costs. Thus, although the
total cash flow from current operations, which is measured
in current year dollars, is a reliable figure, its allocation
oetween net income of corporate equity and capital consumption
is questionable.
Two further complexities arise in evaluating cash flow
because it is reported net of income tax. First, unlike the
accounting for sales and expense transactions that underlie
the measurement of pretax income, the accounting for taxrelated transactions is not uniformly on an accrual basis.
For example, the income tax account is used to clear tax
refunds pertaining to prior year losses. When this occurs,
the "refund" is reported as an addition to current year net
income; this "inflates" net (after-tax) income in the year
the "refund" is received while causing an overstatement of
the loss in the year it was experienced. Similarly, the
income tax account is used to clear payment of the investment credit, and this may be accounted for under existing
accounting principles as a reduction in tax and, hence, an
increase in after-tax income even though the tax subsidy has
little to do with income-earning operations of the year in
question.
Second, under the tax laws, recovery of depreciable and
depletable capital outlays is commonly more accelerated than
the comparable capital consumption allowances estimated for
financial reporting purposes. For oil companies, tax
depreciation allowances tend to be computed by more accelerated
methods than are used for financial reporting; and drilling
costs are more rapidly written-off for tax than for financial
reporting purposes. When this occurs, taxable income
generated by the company's operations is deferred to later
years as compared with the pretax income reported by the
corporation for a given year. By the same token, tax
liability for a given year is deferred. Under accepted
accounting principles, this condition is reported under the
heading "deferred taxes"; and although this source of funds
- 16 is in the nature of an interest-free loan, it is conventionally
reported as a component of cash flow arising from operations.
With these qualifications, the reported composition of cash
flow for oil companies is:
Composition of Cash Flow
1971 1972 1973 1974 1975 1976 1977
(
percent of cash flow
Net income:
Oil and gas
extraction
)
38
40
46
60
49
51
46
Integrated petroleum and
refining
52
51
59
62
52
54
52
Other manufacturing
53
56
59
56
54
59
60
Capital consumption:
Oil and gas
extraction
60
59
52
38
43
52
40
Integrated petroleum and
refining
45
46
37
33
43
39
40
Other manufacturing
45
42
39
40
42
37
37
Deferred taxes:
Oil and gas
extraction
Integrated petroleum and
refining
Other manufacturing
Source: Appendix Table XI.
8
14
8
- 17 -
The notable distinctions of oil company cash flow as compared
with nonoil companies are these: (a) except in 1974, net
income is a smaller contribution to oil company cash flow;
(b) correspondingly, capital consumption allowLces tend to
be relatively more^important; and (c) most notably, deferred
taxes have become increasingly important. The implication
of this latter fact is that tax-preferred capital outlays by
oil companies, have been rising since 1974, particularly
among oil extraction companies.
External Financing, in addition to cash flow, funds
may be obtained by the issuance of securities. Cash flow is
commonly called "internal financing"; funds obtained by net
new borrowing and issuance of stock is called "external
financing."
External Sources of Funds
Source/Industry
1971
(
Long-term debt:
Oil and gas extraction
1972
1973 1974 1975 1976
percent of total sources . .
28
20
Integrated petroleum
and refining
14
6
Other manufacturing
5
3
New stock:
Oil and gas extraction
2
0
1977
8
18
17
10
16
11
2
5
12
15
Integrated petroleum
and refining
0
1
(2)*
1
1
2
2
Other manufacturing
9
9
9
2
4
4
0
* Net reduction in stock outstanding.
Source: Appendix Table XI.
Altogether, external financing accounted for 22 percent of
oil extraction company funds in 1977, 12 percent of integrated
oil and refining company funds, and but 5 percent of nonoil
company funds. The wide annual variation in percentages of
funds derived from external sources results from the compounding
effect of some variation in the amounts of securities issued
- 18 each year and the larger variation in cash flow. In this
respect, the oil companies seem to behave no differently
than nonoil companies. There is no evidence that oil
companies are somehow more reliant on cash flow than companies
in other industries.
Uses of Funds
Dividends. An essential application of corporate funds
is the payment of dividends to stockholders. Whatever may
be the precise financial policy of a large corporation
regarding its retention of after-tax income, it must sustain
some level of pay-out to stockholders by way of providing
them assurance that their real incomes are being preserved,
or enhanced, by management's stewardship. As the following
dividend data show, integrated oil companies behave very
much like nonoil companies: dividend payouts are a relatively
stable fraction of total sources of funds, but a variable
fraction of reported net income. Oil extraction companies
follow a similar policy, but they pay out much smaller
fractions of net income and total sources.
It is worth noting that each of the three categories
tends to pay out a declining fraction of reported net income,
thereby manifesting a justifiable doubt about the "quality"
of reported earnings. Similarly it is notable that in 197374, when both classes of oil companies experienced sharp
boosts in net earnings, payout fractions dropped dramatically.
Stockholder Distributions
Item 1971 1972 1973 1974 1975 1976 1977
(
dollar amounts in billions . . . .)
Oil and gas extraction
Dividends paid
$0.2
$0.1
$0.1
$0.2
$0.3
$0.3
$0.4
Percent of:
Net income
55
36
22
14
25
24
25
All sources
13
8
6
6
8
8
8
Integrated petroleum
and refining
Dividends paid
$3.7
Percent of:
Net income
52
22
All sources
$3.7
$4.0
$4.6
$4.8
$5.2
$5.8
53
22
35
17
29
13
42
17
38
15
41
17
$10.4 $11.1
$11.3
.
$13.7
.
$16.6
41
21
37
23
40
23
Other manufacturing
Dividends paid
$8.9
$9.5
Percent of:
Net income
50
43
All sources
25
25
Source: Appendix Table XI.
38
22
40
20
- 19 -
Capital Outlays. But by far the most important use of
funds is for capital outlays. These outlays not only cover
replacement of capital consumed — oil and gas productive
capacity exhausted by production and obsolescent and wornout plant and equipment — but also any net additions to
productive capacity that appear to be economically justified.
In accounting for the application of funds during a year,
only those outlays which are capitalized, shown as an
increase in plant and equipment, are included as use of
funds. Repairs, R&D expenditures, and, in the case of oil
companies, a considerable expenditure for discovery and
development, are capital stock maintenance outlays that
perform the same function &s "capital outlays", but they are
netted against gross income from sales, i.e., are accounted
for as if they reduced cash flow, .not as an application of
funds.
1973 1974 1975 1976 1977
Capital Outlays
dollar amounts in billions . , . .)
Item 1971 1972
(
Oil and gas extraction:
Outlays
$0.8
Percent of:
Cash flow
102
Total sources
66
Integrated petroleum
and refining:
Outlays
$11.0
Percent of:
Cash flow
82
Total sources
64
Other manufacturing
Outlays
$21.1
Percent of:
Cash flow
63
Total sources
60
$1.1
$1.5
$1.9
$2.4
$2.6
$3.3
127
69
125
71
92
71
115
74
110
74
108
74
$10.9
$11.9
$19.4
$20.9
$22.4
$24.6
81
64
64
51
77
53
113
72
96
67
92
72
$21.1
$28.7
$37.1
$34.3
$35.6
$42.8
57
59
62
61
78
66
69
65
58
61
62
60
Source: Appendix Table XI.
With these precautions in mind, we may observe that, in
1977, oil companies made capital outlays of $27.9 billion.
Extraction companies accounted for $3.3 billion, an amount
- 20 exceeding their cash flow by 8 percent that year and equal
to 74 percent of their total sources of funds. The remaining
$24.6 billion expended by "integrated companies represented
92 percent of their cash flow and 72 percent of their total
sources of funds. Extraction companies quadrupled their
annual capital outlays between 1971 and 1977 and, except in
1974 when cash flow was swollen by the sharp OPEC price
increases in January of that year, outlays throughout the
period exceeded 100 percent of cash flow and constituted an
increasing proportion of total sources. This is what we
would expect for an industry with good profit prospects.
The industry's investments would exceed cash flow and the
industry would have no difficulty in attracting external
financing for its capital outlays.
Expectedly, the integrated companies present an investment behavior pattern between the extraction companies and
nonoil corporations. Integrated companies comprise a blend
of extraction and manufacturing activities. Thus they
generally devote more of both their cash flow and total
sources to capital outlays than nonoil companies, except in
1973-74 when they experienced a larger increase in cash
flow. Integrated oil companies have more than doubled
annual capital outlays and generally increased the fraction
of cash flow and total sources of funds devoted to capital
formation. And unlike the nonoil companies whose outlays
were lower in 1975 and 1976 than they had been in 1974, both
classes of oil companies sustained outlay growth.
Before reviewing the last major use of funds, for
investments in securities and acquisitions of other firms, I
should like to supplement the foregoing review of capital
outlay statistics with supplementary data. The financial
statistics we have been reviewing cover all the diverse
operations of corporations that have been classified as
principally engaged in the oil business, and they include
both foreign and domestic operations. Since our principal
interest today is in investment expenditures directly
related to oil and gas productive capacity in the United
States, it is illuminating to examine a statistical series
explicitly devoted to such expenditures.
The Joint Association Survey, a compilation prepared by
the American Petroleum Institute on behalf of the Institute,
the Independent Petroleum-Association, and the Mid-Continent
Oil and Gas Association has provided estimates of exploration
and development expenditures within the United States since
- 21 1966; and since 1973, the Bureau of the Census has prepared
similar estimates as part of its Current Industry Reports
series. Both estimates are based on survey techniques. In
1977, these sources estimated that a total of $16.9 billion
was expended on oil and gas field exploration and development.
Exploration and Development Outlays
Type 1971 1972 1973 1974 1975 1976 1977
(
billions
)
Exploration: total $2.3 $3.5 $5.5 $8.7 $5.3 $7.2 $7.8
Land acquisition 0.6 1.7 3.6 5.8 1.6 3.0 2.6
Other 1.7 1.8 1.9 2.9 3.7 4.2 5.2
Development $2.6 $3.0 $3.0 $4.4 $6.-4 $7.7 $9.1
Sources: Joint Association Survey and Census Annual Survey of Oil and Gas
You should bear in mind that this $16.9 billion of
expenditures in 1977 cannot be compared to the $27.9 billion
of capital outlays referred to above; the $16.9 billion
includes expenditures by companies not included in the
Compustat file, expenditures that would be financially
expensed, and is restricted to U.S. expenditures of this
type. Over the period, these expenditures have more than
tripled from the $4.9 billion 1971 level. Except for
irregular bulges in land acquisition expenditures — mostly
lease bonsues paid for mineral rights — expenditures for
this critical kind of capital formation have steadily
increased during the period.
Securities Purchases and Acquisitions. Finally,
because economic prospects may not warrant expenditure of
all available funds for capital items to be employed in the
company's existing lines of activity, and because our income
tax laws discourage the pay-out of currently excess funds to
stockholders, funds may be used to acquire other firms
(within or outside of the company's own lines of activity)
or make investments in securities. Some amount of investment
in securities and for the acquisition of other corporations
by oil companies has taken place. In 1977 $672 million of
such investments outside the oil companies' existing
activities occurred. For the oil extraction companies, this
utilizied about one percent of available funds sources; for
- 22 integrated refining companies, two percent. However, these
investments by integrated companies were large in 1974 and
1975; the $4 billion spent those two years represented an
increased share of funds already enlarged by the OPEC price
increases.
Investments and Acquisitions
Item 1971 1972 1973 1974 1975 1976 1977
(
dollar amounts in millions
Oil and gas extraction:
Funds used
$59
)
$48
$33
$23
($44)* $169
$46
7
5
6
3
3
2
1
1
7
5
1
1
Integrated petroleum
and refining:
Funds used
$883
$846
$827
$626
4
2
2
2
Percent of:
Cash flow
Total sources
Percent of:
Cash flow
Total sources
7
5
Other manufacturing:
Funds used
$1,118
Percent of:
Cash flow
Total sources
6
5
$574 $2,611 $1,438
3
2
10
7
8
5
$1,533 $2,036 $1,230 $1,312 $1,380 $2,651
3
3
4
4
4
4
3
2
3
3
2
2
4
4
*Net reduction in investments; sale of subsidiary.
Source: Appendix Table XI.
Two final qualifying observations are in order. First,
it should be noted that the investments compiled here only
cover mergers and similar combinations that are financed by
the direct use of the acquiring company's funds. Thus, in
1974, the purchase of a 54 percent interest in Marcor by
Mobil is included in the $2.6 billion presented above; but
the 1976 completion of the merger is not shown, since it was
consummated by an exchange of securities. Second, it is
worth noting that not all the acquisitions encompassed in
- 23 the total above take the acquiring company outside the
industry in which it is predominantly engaged. Petrochemical companies, refiners, oil producers and other
related oil businesses, along with other mineral activities
are the most frequent purchases of oil companies. Selected
examples of oil company acquisitions in recent years are
presented in Appendix Table XII.
Impact of President's Proposals
Phased decontrol of oil will increase the net oil
receipts of producers and royalty owners by $15.4 billion
over the 3-year period 1979-81 (assuming no increase in real
OPEC prices). These increases in income are essentially
windfalls; they are unexpected. When the producers and
royalty owners made investments, they never anticipated that
oil might rise to $13 or $16 a barrel.
If the President's windfall profits tax is not enacted,
the producers and royalty owners out of the increased
receipts will pay State severance, ad valorem, and income
taxes, and the Federal income tax. After paying these
taxes, they will have $8.0 billion left. The windfall
profits tax will further reduce the after-tax revenues from
decontrol received by producers and private royalty owners.
to $6.0 billion. Thus the proposed windfall profits tax
will reduce the after-tax income received by producers and!
private royalty owners by 25 percent over the 3-year period,
1979-81.
Disposition of Net Increase in Oil Receipts, Assuming
Total
Calendar
Years
Base Case — No
Increase
in Real OPEC Price
1979-81
1979
1980
1981
1982
Net increase in
oil receipts
with windfall
profits tax
% Reduction due to
windfall profits
tax
15.4 26.3
1.0
1.0 5.0 9.3 10.9
Net increase in
after-tax producer
and royalty income
without windfall
0.5
profits tax
2.6
4.9
5.7
0.5
0.5 2.1 3.4 3.9
18.4%
Source: Appendix Table XIII.
31.3%
Total
1979-82
8.0 13.7
6.0 9.9
30.8%
25.1% 27.4%
- 24 If OPEC prices increase by 3 percent in real terms each
year, the windfall profits tax will reduce by 40 to 45
percent the amount of money that the oil industry will
actually keep as a result of decontrol. The President's
proposed windfall profits tax is not the pussycat tax that
some have suggested.
Disposition of Net Increase in Oil Receipts, Assuming
Alternate Case — 3% Increase in Real OPEC Price
Calendar Years Total Total
1979
1980
1981
1982
1979-81
1979-82
Net increase in oil
receipts
1.0
5.3
10.7
13.7
17.0
30.7
Net increase in
after-tax producer
and royalty income
without windfall
profits tax
0.5
2.5
5.0
6.3
8.1
14.4
with windfall
profits tax
0.5
1.9
2.9
3.5
5.4
8.8
-
23.5%
42.0%
45.4%
33.5%
38.7%
% Reduction due to
windfall profits
tax
Source: Appendix Table XIII.
The Treasury estimates of the impact of this program
are by no means static estimates. In fact they assume
considerable response — or feedback, if you will — on
domestic crude oil production as the result of the increase
in oil prices. By 1985, we assume that scheduled decontrol
will increase domestic production by about 1.5 million
barrels per day, roughly a 20 percent increase over the
volume of production which would have prevailed under
continued price controls. Consequently, in calculating our
revenue impact we have taken into account not only increased
oil receipts resulting from higher prices on production
which would have occurred anyway, but also additional
increases in oil production receipts resulting from priceinduced production increases.
- 25 With respect to price-induced production increases, our
40 percent income tax rate is applicable only to net changes
in producer's income since higher levels of production
obviously are associated with higher levels of deductible
production costs. Since this has been an apparent point of
confusion leading to some public criticism of our analysis,
I have shown in Appendix Table XIV both the 40 percent
Federal income tax rate which would apply to net increases
in oil receipts (net of production costs before deduction of
state income and severance taxes) as well as the income tax
rates which can be applied to the gross increases in oil
receipts. This implied Federal income tax rate on gross
increases is 34 percent in 1979, when relatively little
induced production occurs, and declines to 20 percent by
1985, when induced production accounts for nearly 17 percent
of total domestic output.
This concludes my testimony. I would be most pleased
o 0 o
to respond to your questions.
1
Apartment of theTRUSURY
ASHINGTON, D.C. 20220
^Li."^
mi - m
TELEPHONE 566-2041
M
I I R RAR Y
Tiw.bUKi' 0::PAhfHLNT
FOR RELEASE UPON DELIVERY
Expected at 10:00 A.M.
Tuesday, May 8, 1979
TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SENATE APPROPRIATIONS SUBCOMMITTEE ON TREASURY
POSTAL SERVICE AND GENERAL GOVERNMENT
I am pleased to be here with you to discuss the
Department of the Treasury's budget request for fiscal
year 1980 and the current state of the economy and the
prospects for inflation.
As your schedule indicates, the Treasury bureau heads
will appear later before this Committee to justify their
individual requests in detail.
I would, however, like to
discuss in summary the budget proposals that we have included
in our requests, as well as some comments on the state of the
economy and the Administration's economic policy.
At the
conclusion of my statement, I will be pleased to discuss any
matters relating to the bureaus which the Committee may wish
to review with me.
B-1583
H '<•
• >l
- 2 >
ECONOMIC POLICY
The American economy is at a critical juncture.
Since
the deep recession of 1974-75, we have enjoyed an impressive
recovery of employment and production.
We have had less
success in maintaining the purchasing power of our currency.
This imbalance in our achievements cannot persist.
Unless
we right the balance ourselves by bringing inflation under
orderly control, vents could 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.
Recent Economic Developments
The pace of economic activity has fluctuated widely over
the past 15 months.
Paralyzed by violent weather conditions
and a coal strike, economic expansion ground to a halt in
the winter of 1978, but bounced back vigorously last spring
as consumer spending strengthened.
During the summer months,
consumer buying abated, as did the growth rate of real GNP.
But in the autumn and early winter, consumers returned to
the shops —
and business capital spending accelerated —
to
lead another resurgence in overall economic activity.
In the final months of 1978, the economy was charging
ahead at a clearly unsustainable rate.
Real growth in the
fourth quarter was almost 7 percent, at an annual rate,
more than double our estimate of the economy's long-term
- 3 growth potential, and well above the 5 percent average rate
of real growth during the current expansion.
Coming as it
did in the fourth year of cyclical recovery, with only narrow
margins of unutilized skilled labor and industrial capacity
remaining, this unexpected upsurge in real growth was reflected
in an accelerating rise in costs and prices.
In combination,
real growth and inflation added up in the fourth quarter to
more than a 15 percent annual rate of increase in gross national
product at current prices —
a rate exceeded only twice before
in the current expansion.
The pace of overall economic activity has slowed markedly
in the early months of this year as reflected in the first
quarter GNP results.
Some of this slowing has reflected
adverse weather, some has reflected a normal let-up in consumer spending following the surge in buying in late 1978,
some has reflected the pinch on purchasing power as inflation
has outpaced wages.
But at the same time the consumer has held back, we have
seen efforts by businesses to rebuild inventories in anticipation of work stoppages and higher prices, to accelerate
ordering as delivery times lengthen, to borrow more heavily
to finance outlays.
The pressure of these business demands,
added to the pressures pushing up prices of food and energy,
have resulted in an acceleration in inflation.
- 4 The Recent Inflation Record
The rate of advance in prices in recent months is
running far above acceptable levels.
Consumer prices rose
over the first three months of 1979, at an annual rate of 13
percent.
This compares with a 9 percent rise in 1978 and just
under 7 percent during 1977.
In part, the recent bad news on the inflation front
reflects special unfavorable developments in farm and food
prices.
Part of the sharp January rise in food prices was
due to severe weather in the Midwest and strikes in California.
Meat prices rose nearly 5 percent in February alone.
Some of
these and other special factors will not be present later in
the year.
In April, agricultural prices declined for the
first time since November.
But acceleration has also been taking place across
a broad range of other prices.
Home ownership costs,
apparel prices, automobile prices —
at an increasing rate.
all have been rising
Clearly, the recent acceleration
is not all due to special and temporary factors.
Recent developments in wholesale prices have been
particularly disappointing.
The producer index for finished
goods has risen at a 13 percent annual rate so far this year.
Farther down the production chain at the intermediate and
crude materials levels, rates of increase have been even
faster.
This has built up pressures which will push up
retail prices for the next few months.
With delivery times
- 5 slowing and rates of capacity utilization relatively high,
demand pressures are clearly a major factor behind the recent
deterioration in wholesale price performance.
More bad price news is possible in the months to come.
In addition to rapid increases in materials costs, prices
will be under upward pressure from rising unit labor costs.
Productivity performance continues to be poor* growing less
than half a percent over the past four quarters, while labor
compensation costs continue to rise rapidly, not as a
result of accelerating wage rates so much as a result
of the increase in minimum wages and social security
taxes at the beginning of the year.
The combination
of rising material and labor costs will put profit
margins under pressure; in the context of strong market
demands and long order backlogs, such pressures are likely
to be reflected in efforts to maintain margins by boosting
prices.
Hopefully, however, the policy actions already put
in effect will result in some moderation in inflation as
the year progresses, by precluding a resurgence in aggregate demand.
The austere budget for FY 1980 proposed by
the President will reduce the Federal Government's share
of demand placed on our physical and financial resources.
And the Administration's effort to reduce the cost and
complexity of regulation will also contribute to a lessening of inflationary pressures.
- 6 i
Moreover, the most severe feedback effects on domestic
prices from last year's depreciation of the dollar have
already been felt.
The stabilization of the dollar since
our November 1 actions will alleviate some of the pressure
on domestic prices induced by a weakening dollar.
Finally, the wage/price deceleration program has
been tightened in a number of respects, to prevent sudden
sharp jolts to prices such as were experienced earlier
this year.
As these general and specific measures take hold,
and as some of the special factors fade from the picture,
the latest upsurge in inflation should begin to moderate.
By persisting with policies of austerity and restraint,
we shall begin to make some progress in bringing inflation
down from the double-digit range.
The Longer-Term Program
While some abatement in inflation is expected this
year, we have to recognize that significant and enduring
abatement requires persistent application of restraint.
There is no quick cure for an inflation that has been
building for over a decade.
out.
And there are no easy ways
Unless the growth of aggregate demand is restrained,
demand-pull inflation will be super-imposed on cost-push,
and inflation will accelerate even further.
Incomes policies, such as the voluntary wage/price
deceleration program, can play an important part in contain
- 7 -•
ing inflationary pressures.
But they can be effective only
in the context of macro economic policies that limit the
growth in aggregate demand to the growth in resource
availability.
The Need for a Strong 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
was illustrated sharply and painfully. 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. Perhaps as much as 1 percentage point of the
9 percent inflation last year can be traced to the weakening of the dollar.
The President moved forcefully on November 1st to put
an end to this vicious cycle. He endorsed an increase in
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.
- 8 Our determination was tested and we, along with our
partners in this arrangement, intervened heavily to halt
the speculation.
We withstood the test.
Conditions in the
foreign exchange market have clearly improved since
November 1.
The severe and persistent disturbances which
characterized the markets last fall have been overcome and
all of the resources actually used by the U.S. in the period
following November 1 have been regained.
speculative movement has been reversed.
Much of the
From its low point
on October 31, the dollar has recovered on a trade-weighted
basis by about 12 1/2 percent relative to OECD currencies.
Against the DM, the Swiss franc, and the yen, the dollar has
appreciated by 9 to 27 percent.
Uncertainties regarding oil supplies and prices are
the principal source of concern in the foreign exchange
market in recent months.
While the dollar has been quite
firm during this period of market uncertainity, the continued long-run health of both our currency and our
economy requires a clear, firm and constructive energy
policy.
The energy program announced by the President on
April 5 is clear, firm and constructive.
The commitment
to end the subsidization of oil imports, by permitting
prices of domestic oil output to rise gradually to world
price levels, offers powerful incentives to increase
domestic production and, correspondingly, reduce our
- 9 dependence on foreign oil. In the short-run, there will
be a modest upward push to the inflation rate.
But the
cost of our phased decontrol program is trivial relative
to the costs we are already paying for excessive dependence on imported oil, and the even higher costs to which
we would remain exposed unless we reduce this dependence.
At the same time, the windfall profits tax revenues will
fund more agressive development of alternative energy
sources.
It should be noted, Mr. Chairman, that the Treasury
Department recently completed an exhaustive, year-long
study of the effects on our national security of our
heavy dependence on imported oil.
Such studies are
authorized under Section 232 of the Trade Expansion Act
of 1962.
The findings of the study —
which involve many
offices of our Department -.- contributed significantly
to the decisions reached in formulating the new energy
program.
TREASURY DEPARTMENT FISCAL YEAR 1980 OVERVIEW
At this point, I would like to review briefly some
of the other major programs of the Department, and our
budgetary requirements covering our many and varied
responsibilities.
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
- 10 our policy role in the financial and economic affairs of the
nation.
In keeping with the President's efforts to prevent a
runaway growth of government, minimize inflation,and produce
a balanced budget by 1981, we have tightened our belts and
requested additional resources only where the workload clearly
dictates.
On the other hand, while we are trying to set an
example of efficiency and economy, we have not sought to
reduce spending levels below levels that are essential if
the Department is to carry out its responsibilities relating to the financial and economic affairs of the Nation.
We
have attempted to protect our revenue production capacity
and carry out effectively our law enforcement duties.
I am
sure the testimony of the bureau officials will make these
points very clear to the Committee.
I do want to bring to the Committee's attention the type
and level of workload facing the Department in FY 1980.
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 estimate that we will be issuing 726 million checks from
our disbursing centers (24 million more than in 1979); producing 15 billion coins, (15 percent more than 1979); issuing,
servicing and redeeming 293 million bonds and securities and
introducing a new EE and HH series of savings bonds to replace
the existing E and H series; processing approximately 137
- 11 million tax returns (2 percent more than 1970); processing
300 million or more arriving persons (4 percent over 1979);
and 4 million formal Customs entries, (7 percent over 1979).
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 pro-
posals has been withdrawn was recently published in the
Federal Register.
An important element in improving the productivity of
the Department is the Bureau of the Mint's request 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.
A Treasury Depart-
ment Task Force is currently conducting a study of this
question under the standards set forth in OMB Circular A-76.
I am pleased to note that as a result of the review of
refining operations, productivity has already significantly
increased at the Assay Office.
The work force has decreased
from more than 190 employees to 16 5 employees, whole output
- 12 of refined gold has increased 25 percent.
Bids, will be
received from private refineries at the New York Assay
Office on July 15 and will then be evaluated to determine
if the Assay Office has sufficiently increased productivity
to be competitive with private sector refineries.
I am
sure that the Task Force, which is composed of representatives of my office and the Mint, will present a fair and
objective report regarding the future of New York Assay
Office refining.
The Department's decision on this issue
is expected by the end of July.
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 —
mentals.
the original appropriation plus pending supple-
The large reduction compared to 1979 is the net of
program increases of $45 million ($19 million for workload
and $26 million for program improvements), 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 for social
service program claims.
Attachment A describes in further
detail the major increases requested for the Treasury bureaus.
- 13 In addition, attachments B, C, and D show your Committee how
these increases compare to our fiscal year 1979 level.
Mr. Chairman, the budget before you is a lean request.
The minor program increases have been substantially offset
by program reductions and other cost savings actions.
We
have reduced the total request for personnel by 539 while at
the same time providing for the accomplishment of the projected fiscal year 1980 workload increases.
This completes my statement on the FY 1980 budget
request for the Department.
I shall, of course, welcome the
opportunity to answer any questions you may have.
Thank you.
Attachment A
' <
THE DEPARTMENT OF THE TREASURY
Additional Detail on FY 1980 Budget Increase
Program Increases for Workload
To meet workload increases, we are requesting an additional $35.5 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.
An increase of $16 million is requested for the U.S.
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.
- 2 We 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 $9.7 million for program
improvements. This represents less than a half of a percent of
our proposed authorized level for 1979.
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
involving both arriving passengers and containerzied 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-o'f-entry in 1980.
Finally, $1.4 million is requested to interface the Customs
- 3 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.
.
- 4 -
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.
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 Ooperating 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 $543 million in one-time 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 a net of the following:
price and
other mandatory increases, $138.0 million; reduction for onetime payments to states, $54 3.0 million; other one-time costs,
savings and program reductions, $96.3 million.
- 5 Nearly 60 percent of the $138 million for price and other
mandatory increases is needed for the full-year cost of programs and pay increases authorizied in 1979, and for two additional workdays in 1980.
The remaining increases in this area
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 of our desire to restrain growth
in Federal expenditures.
Attachment B
THE DEPARTMENT OF THE TREASURY
Operating Accounts Appropriations
Treasury Department for 1979
and Estimated Requirements for 1980
(in millions of dollars)
1979
Proposed
Authorized
Level 1/
1980
Budget
Estimate
Increase or
Decrease (-)
Compared to
1979
Regular Operating Approporiations:
Office of the Secretary $ 31.0
$
International Affairs 5.5
22.8
Federal Law Enforcement Training
Center
30.8
$ - .2
17.3
15.0
12.7
728.3
—
.2
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
Bureau of the Mint 46.0
50.6
4.6
Bureau of the Public Debt 171.0
183.4
12.4
Bureau of Government Financial Operations:
Salaries and Expenses
Government Losses in Shipment
Payments to Guam
-2.3
Bureau of Engraving & Printing ——
Internal Revenue Service:
Salaries and Expenses
Taxpayer Service & Returns Processing
Examinations and Appeals
Investigations and Collections
Total IRS
142.9
789.7
789.7
476.7
$2,182.5
.7
U.S. Secret Service 140.9
157.0
17.0
TOTAL, Regulation Operating Appro. $3,873.1
$3,417.0
$-456.1
142.2
754.1
780.3
478.7
$2,155.3
9.4
9.4
-2.0
frfl
1/ Includes pay increases authorized by E.O., effective October 1, 1978, and progran
supplementals 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).
Attachment C
THE DEPARTMENT OF THE TREASURY
Operating Accounts
Comparative Statement of Average Positions
Fiscal Year 1979 and 1980
(Direct Appripriations Only)
Proposed
1979
Authorized
Level
1980
Budget
Estimate
Increase or
Decrease (-)
Compared to
1979
Regular Annual Operating Appropriations:
Office of the Secretary
803
794
International Affairs
123 (509) 1/
491
368 (-18)
Federal Law Enforcement Training Center
297
249
-48
Bureau of Government Financial
Operations
2,730
2,750
20
Bureau of Alcohol, Tobacco & Firearms
3,928
3,786
-142
U.S Customs Service
14,027
13,618
-409
Bureau of the Mint
1,667
1,703
36
Bureau of the Public Debt
2,639
2,572
-67
4,638
4,516
-122
34,576
29,805
18,444
35,235
29,551
17,927
659
-254
-517
87,463
87,229
-234
3,579
3,525
-54
Internal Revenue Service:
Salaries and Expenses
„ Taxpayer Service & Returns
Processing
Examinations and Appeals
Investigations and Collections
Total, IRS
U.S. Secret Service
TOTAL, Regular Annual Operating
Appropriations
117,256
(117,642)
116,717
-9
-539
(-925)
1/ Reflects average positions for the full year. The 123 average positions reflect
requirements for three months.
Attachment D
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 Supplemental
1. Pay Increase
(a) Classified
(b) Wage Board
$80,348
179
+80,527
2. Program Increases:
(a) International Affairs - to find 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 and 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 in 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
38,517
700
+ 61,605
$3,873,109
Hi I r\ n rp
Department of IhtTREASURV W&
TELEPHONE 566-2041
WASHINGTON, D.C. 20220
FOR IMMEDIATE RELEASE
May 7, 1979
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 3,002million of 13-week Treasury bills and for $3,001 million
of 26-week Treasury bills, both series to be issued on May 10, 1979,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Price
High
Low
Average
26-week bills
maturing November 8. 1979
13-week bills
maturing August 9, 1979
Discount
Rate
97.573-^
97.566
97.568
Investment
Rate 1/
Price
9.601% 10.00%
9.629%
10.03%
9.621%
10.03%
Discount
Rate
95.148 9.597%
9.631%
95.131
9.617%
95.138
Investment
Rate 1/
10.25%
10.29%
10.28%
a/ Excepting 1 tender of $2,865,000
Tenders at the low price for the 13-week bills were allotted 55%,
Tenders at the low price for the 26-week bills were allotted 92%,
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
$
50,995,000
4,891,155,000
23,815,000
28,305,000
32,075,000
41,335,000
243,800,000
41,250,000
18,335,000
23,070,000
24,430,000
318,720,000
Treasury
TOTALS
18,990,000
$5,756,275,000
Accepted
$
: Received
40,995,000 :
2 ,587,290,000 '
22,330,000 *
28,305,000 :
27,065,000
41,335,000 :
59,150,000 :
16,250,000
8,020,000
21,070,000
14,430,000
116,470,000 :
18,990,000 '
$
52,575,000
4 ,480,130,000
19,030,000
73,710,000
20,870,000
27,475,000
227,055,000
34,965,000
14,950,000
28,775,000
9,695,000
261,495,000
$
37,575,000
2 ,605,570,000
9,030,000
24,310,000
20,870,000
27,475,000
62,055,000
12,965,000
14,950,000
28,675,000
9,695%000
121,495,000
26,135,000
26,135*000
$3, 001,700,000 b/' $5 ,276,860,000
$3 ,000,800,000c
b/lncludes $ 446,290,000 noncompetitive tenders from the public.
c/lncludes $ 341,915,000 noncompetitive tenders from the public.
j_/Equivalent coupon-issue yield.
B-1584
Accepted
i^H^wnHB^n^B^H^p___p_i
FOR IMMEDIATE RELEASE
May 7, 1979
Contact:
George G. Ross
202/566-2356
UNITED STATES AND COSTA RICA
TO DISCUSS INCOME TAX TREATY
The Treasury Department today announced that
representatives of the United States and Costa Rica
will meet in San Jose in late May to begin preliminary
discussions on an income tax treaty between the two
countries. There currently is no income tax treaty
between the United States and Costa Rica.
The proposed treaty is intended to prevent double
taxation and to facilitate trade and investment between the two countries. It will be concerned with
the taxation of income from business, investment and
personal services, and with procedures for administering the provisions of the treaty.
The new treaty is expected to take into account
the 19 77 "model" income tax convention of the Organization for Economic Cooperation and Development, the
May 17, 19 77, United States "model" income tax
convention, and recent treaties entered into by the
United States.
The Treasury Department invites comments or
suggestions concerning the forthcoming discussions to
be in writing, and submitted, as soon as possible, to
H. David Rosenbloom, International Tax Counsel, Room
3064, U. S. Treasury Department, Washington, D. C. 20220.
Since the negotiations are likely tc continue beyond
the May meeting, even those comments received after that
time will be considered.
This notice will appear in the Federal Register of
May 10, 1979.
o
B-1585
0
o
FOR IMMEDIATE RELEASE
May 7, 19 79
Contact: George G. Ross
202/566-2356
TREASURY RELEASES REPORT ON TAXATION OF
FOREIGN INVESTMENT IN U. S. REAL ESTATE
The Treasury Department today released a report titled,
"Taxation of Foreign Investment in U. S. Real Estate." The
Report finds that foreign persons can generally avoid paying U.S.
tax on their capital gains when they sell U.S. real estate and
recommends changes in U.S. law to prevent this tax avoidance.
The Report identifies various ways in which capital gains
on real estate, ordinarily taxable, can legally be converted into
capital gains on other assets which would not be taxable. A
principal means by which this is accomplished is through a real
property holding company, which allows capital gain on real estate
to be converted into capital gains on corporate shares.
The Treasury does not believe that taxing capital gains on
the sale of corporate shares is desirable or practical. But, to
prevent unintended tax avoidance, the Treasury Report recommends
modifying the specific statutory provisions under which foreign
owners of U.S. real estate are able to convert taxable gain into
nontaxable gain. The Report describes certain steps which may be
taken in this regard. The Treasury plans to work with the
Congress and with other agencies of the Government in developing
formal legislative proposals in this area.
The Report also notes that rental income can be offset by
deductions for maintenance and operating costs, property taxes,
mortgage interest and depreciation but that these deductions are
equally available to domestic and foreign property owners.
The Revenue Act of 19 78 mandated that the Treasury Department
undertake a full and complete study and analysis of the appropriate tax treatment of income derived from, and capital gain on the
sale of U.S. real estate held by non-resident aliens and foreign
corporations. This study, together with the recommendations of
the Treasury Department, was to be submitted within six months of
the date of enactment of the Revenue Act of 1978.
Copies of "Taxation of Foreign Investment in U.S. Real Estate"
are available for purchase from the Superintendent of Documents,
U.S. Government Printing Office, Washington, D. C. 20401. When
ordering, use Stock No. 048-000-00327-3.
oB-1586
0 o
FOR RELEASE AT 4:00 P.M.
May 8, 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 May 17, 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 $6,221 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
February 15, 1979, and to mature
August 16, 1979 (CUSIP No.
912793 2G 0 ), originally issued in the amount of $2,907 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,CO million to be dated
May 17, 1979,
and to mature November 15, 1979 (CUSIP No.
912793 2V7).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing May 17, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,745
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 Daylight Saving time,
Monday, May 14, 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-1587
-2*,- - ? a c n t e n d e r 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 May 17, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
May 17, 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.
^mmlmm^mmlmmWmmmWA
leparlmentoltheTREASURV'*) |
(ASHINGT0N,D.C. 20220
TELEPHONE 566-2041
For Release Upon Delivery
Expected at 2:00 p.m.
STATEMENT OF
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
May 9, 1979
Mr. Chairman and members of this distinguished Committee:
Today I come before you to consider yet again our
nation's energy crisis — particularly as it relates to
crude oil.
I will first discuss the severe energy problems we
face. Then, I will turn to our President's program: his
bold decision to decontrol crude oil prices, the imposition
of a windfall profits tax on domestic crude oil production,
and the creation of an Energy Security Trust Fund to utilize
the tax revenues generated by decontrol and the new windfall
profits tax.
Nature of Our Energy Problem
Many Americans apparently still doubt the reality of
the energy crisis. This is shocking. These doubts pose a
serious threat to rational policy making. They must be
dispelled with finality. It is beyond question by reasonable men that this nation faces energy problems that strike
to the core of our political and economic security, and
affect the very stability of our society.
The vast economy of the United States faces a central
problem: the availability and cost of crude oil. The story
can be told by a few numbers. In 1970, the posted price of
light Saudi Arabian crude, the key indicator of world oil
prices, was $1.60 per barrel. Today the posted price is
B-1588
- 2 $14.54, a nominal increase of 708 percent. In 1970, the
U.S. met 76.7 percent of its crude oil needs out of its own
production. Today, we meet only 50 percent of our needs
from our own production despite gains from Alaska. In 1970,
72.7 percent of our oil imports were supplied by Western
Hemisphere nations (primarily Canada and Venezuela).
Today, less than 20 percent of our imports come from these
countries. In 1970, our oil import bill was $2.9 billion.
We now expect our 1979 oil import bill to be about $52
billion.
Three times over the past 21 years- — in 1958, 1975,
and 1979 — senior economic policy officials have carefully
examined, under Section 232 of the Trade Expansion Act and
its predecessor, whether our national security is threatened
by the volume and character of our oil imports. In each
case the answer has been: Yes I
The national security elements are clear:
° Because so much of the oil used in the United States
originates thousands of miles away, supplies are
vulnerable to interruption for a variety of causes. As
the oil embargo of 1973 and subsequent energy shortages
have illustrated, interruptions in energy supplies
seriously
economy.
o As
our oildisrupt
import our
bills
have skyrocketed, our export
growth has not been sufficient to balance our trade
accounts. Large trade deficits have been the result,
with the consequent risk of dollar depreciation.
Excessive dollar depreciation can be extremely harmful
to the American people because it increases domestic
inflation and erodes personal income. Excessive dollar
depreciation also hurts the entire world economy
because the dollar is the dominant currency in world
trade and finance.
If we continue to rely more and more on uncertain
foreign sources of oil, the independence and vigor of
our foreign policy is put at risk.
Cartel control of over 50 percent of the world's oil
supply exacts an increasing drain on the real resources
of the consuming nations. It jeopardizes their economic
security and ability to plan their economic futures.
- 3With world prices dictated by political forces, rather
than by free markets, sensible inflation control
becomes extremely difficult for the consuming nations.
° Our increasing oil imports play directly into the hands
of the world oil cartel and add to upward pressures on
world oil prices. Our oil imports today constitute 17
percent of world oil production. Absent increases in
non-OPEC energy supplies, or a reduction in world oil
consumption, rising U.S. oil imports will directly
tighten the world market and undercut efforts to
encourage responsible and moderate oil policies by the
OPEC nations.
° Finally, as escalating U.S. oil imports suggest, this
country is not yet making a determined and creative
transition to a world in which oil supplies are scarce,
expensive, and often unreliable. We are continuing to
use energy, and particularly oil, at a far too lavish
rate, and we are failing to make those long-term
investments in alternate energy technologies that will
be essential to our economic and political security in
the remaining years of this century.
These are enormous problems. President Carter, to his
everlasting credit, has chosen to address them. Last year,
with the National Energy Act, we together took major strides
to correct imperfections in our coal, natural gas, conservation, and utility rate policies. But, despite the hard
and sound work of this Committee and its Chairman, the core
issue -- crude oil policy — was not resolved at that time.
By failing to act in this area, the federal government
has left in place policies that actually aggravate our
energy problems. Of these, the most perverse and serious is
the system of price controls and entitlements imposed on
domestic oil production.
The system originated with the comprehensive wage and
price controls instituted by the Nixon Administration in
1971 and has operated in its present form since 1973. The
system has grown steadily more complicated. At present, no
single expert can pretend to understand how all the regulations work or whom they benefit. If ever a federal program
deserved to be called a "bureaucratic nightmare", the
regulation of U.S. oil prices has earned that distinction.
- 4 What _Ls clear about the system is that it intensifies
our energy problems. It does so by disguising from the
American people — consumers, investors, and industry
alike — what we are all really paying for oil. The system
is, quite literally, an exercise in economic self-deception.
Because of it, we use and import more oil than we should; we
produce less domestic oil than we should; and we neglect to
make economically sensible and necessary investments in
alternative energy sources and technologies. Could there be
any greater condemnation?
The oil pricing system has two components. First, it
sets various ceiling prices for the domestic production of
oil. Lower-tier oil — production from fields in operation
in 1973 — is generally capped at about $6 per barrel.
Upper-tier oil — production from fields placed in operation
since 1973 — is capped at approximately $13 per barrel.
Second, the system requires refiners to make payments —
known as "entitlements" — to each other so that each
refiner pays the same average price for a barrel of oil,
regardless of the source of supply.
The results of these controls and regulations are
o The average price of oil to refiners, and thus to
rather
obvious:
individual and industrial consumers of oil, is substantially less than the world price. For example, in
February of this year, the country was facing a price
of $15.80 a barrel for imported oil on the world
market. But the controls-and-entitlements system
established an average refiner price of $13.24 per
barrel, regardless of source. As a consequence there
was an effective, federally-mandated subsidy of $2.56
per barrel to import oil, rather than use domestic oil,
and a like subsidy to consume oil, rather than to
conserve it or use some alternative form of energy,
such as coal, natural gas, or solar energy.
The incentive to produce oil domestically is artificially depressed. About 40 percent of domestic oil
has been subject to the lower-tier cap of about $6, and
another 30 percent to the upper-tier cap of about $13.
Compared to a world price of $15.80 in February, these
controls constituted a straightforward signal to oil
owners to invest in more profitable ventures, either
here or abroad.
- 5In brief, since the OPEC-generated explosion of oil
prices in 1973, the U.S. has been operating a program that
encourages oil consumption and imports and discourages
domestic oil production and the development of new energy
sources. Although this has been done in the name of "protecting" the consumer, it has had precisely the opposite
effect. By discouraging investments in domestic oil production and development of alternative energy sources, by
enlarging the trade deficit and weakening the dollar, and by
tightening world oil markets, these price control policies
have added to upward price pressure not only on world oil
prices but also on the general price level of all goods and
services. Far from protecting the consumer, the domestic
oil control system has instead served to aggravate inflation.
The President's Program
The President has recently addressed the critical
problems created by our dependence on oil imports in the
following ways.
° By agreeing with our allies in the International Energy
Agency to reduce U.S. imports (by the fourth quarter of
1979) by up to 1 million barrels a day below levels
expected prior to the 1979 OPEC price increases. This
action —and similar actions by our allies — should
moderate future increases in world oil prices, reduce
our trade deficit and strengthen the dollar.
° By phasing out price controls on domestic crude oil.
This ends the subsidy to consumers of oil, encourages
conservation and substitution of other energy sources,
and provides appropriate incentives to expand domestic
oil production.
° By proposing a windfall profits tax. This captures for
the U.S. Treasury some of the excessive profits from
existing oil wells and a portion of future windfalls
generated by OPEC price increases, and creates a
mechanism through which the U.S. can offset the effects
of decontrol on the poor, encourage energy efficient
mass transit and further its efforts at developing
alternative energy sources.
The Decontrol Program
The key element in the President's program is the decontrol of crude oil prices. The route chosen will delay as
- 6 much of the inflationary impact of decontrol until 1981 or
1982 as is practicable while maximizing the incentive to
increase production in 1979 and 1980.
The major features of the decontrol program adopted by
the President are:
° Producers of lower-tier oil (also called "old" oil)
will be allowed to reduce the volume of output they are
required to sell as old oil by 1-1/2 percent each month
in 1979 and 3 percent each month from January, 1980 to
September, 1981, determined from new control levels
established as of January, 1979. This means that a
property whose old oil control level is 100 barrels a
day in January, 1979 will be required to sell as old
oil only 82 barrels a day in December, 1979, and 46
barrels a day in December, 1980. Production above
these levels may be sold as upper-tier oil.
° The price of upper-tier oil will be phased up to the
world price beginning on January 1, 1980 and ending on
October 1, 1981.
° As of June 1, 1979, newly discovered oil will be
decontrolled, as will that volume of production from
any oil field that results from introducing tertiary
recovery programs.
° Production from marginal wells — that is, wells
producing less than specified amounts of oil in 1978 —
will be allowed to sell at the upper-tier price beginning June 1, 1979.
A key aspect of this program is the decontrol of old
oil. From 1976 to 1978, oil price regulations gave the
lowest return to those producers who made the greatest
effort to increase production after the 1973 embargo, while
giving the highest return to those producers who did the
least to meet the national need after 1973. The decline
rate change for lower-tier oil announced by the President
eliminates the disincentive to produce from old oil fields,
since the profit earned from increased production in old oil
properties will be the same as from investments in new oil
properties. From the standpoint of production incentives, a
rapid decline rate is the most efficient method of decontrolling lower-tier oil.
A second critical element in the President's program is
the decontrol of newly discovered oil and incremental
- 7production which results from the completion of tertiary
recovery projects. No longer will exploration for new
reserves in untapped areas be discouraged by a stifling
system of price controls.
Further, the incentive to invest
in tertiary projects which involve risky efforts to apply
expensive, experimental procedures to the recovery of
additional oil from depleted reserves will be as great as
the incentive to explore for newly discovered oil. This is
as it should be in a competitive economy.
The Windfall Profits Tax
Decontrol is an essential step toward a-sensible national energy policy. However, decontrol will create some
windfall profits since, in many instances, the world price
exceeds that necessary to induce rapid production and
discovery. To recapture some of these windfall profits,
while at the same time preserving production incentives, we
have proposed a tax of 50 percent on the windfall profits
per barrel generated by decontrol and by future OPEC price
increases. An additional portion of the windfalls will
automatically be recovered through existing federal income
tax laws.
The Chairman of this Committee has introduced a windfall profits tax addressing the same concerns as the Administration's proposal. The Chairman's bill is similar to our
proposal in most important respects and provides a sound
basis for the Committee to explore the issues raised by the
tax. The Administration greatly appreciates the efforts of
the Chairman to play a major role once again in resolving
our domestic crude oil problems in a sensitive and effective
manner.
Our tax involves a 50 percent levy on three bases: the
windfall profits from moving lower-tier oil to the upper
tier; the windfall profits from moving upper-tier oil to the
world price; and the windfall profits from future real
increases in the world price. For percentage depletion
purposes, gross income is reduced by the amount subject to
the 50-percent tax.
A. Lower-tier
The tax on old oil would be equal to 50 percent of the
difference between the price at which the oil is sold and
the control price of the old oil. The control price is
currently about $6.00 per barrel and is to be increased by
inflation.
- 8The Administration's tax on old oil is imposed on production which most likely would have come forth had controls
remained in effect, so that genuine increases in production
from old oil properties are not taxed. Specifically, the
tax applies only to that volume of lower-tier oil freed to
the upper tier under decontrol which exceeds the volume of
oil which would be freed under a 2 percent decline rate
after January 1, 1980.
Let me use a simple example to show how the tax works.
If an old oil property were required to sell as old oil 100
barrels per day in January, 1979, we would tax production in
future months as follows:
° Until 1980, no tax applies.
° In January, 1980, 80 barrels of daily production would
be potentially taxable. However, since DOE would still
require 79 of these barrels to be sold as old oil, only
one barrel would be taxed. Production above 80 barrels
per day would not be subject to the lower-tier windfall
profits tax.
° In January, 1981,- 56 barrels of daily production would
be potentially taxable. However, since DOE would
require that 43 barrels still be sold at the old oil
price, only 13 barrels would be taxed. Production
above 56 barrels per day would not be subject to the
lower-tier windfall profits tax.
° In October, 1981, 38 barrels of daily production would
be taxable. Since full decontrol would be in effect
then, all 38 barrels would be taxed as lower-tier oil.
Production above 38 barrels per day would not be
subject to the lower-tier windfall profits tax.
The decontrol plan uses a 3 percent decline rate while
the windfall profits tax uses a 2 percent rate. The difference is dictated by economics. As I noted above, a 3
percent decontrol decline rate was required to provide the
incentive of replacement cost pricing for old oil properties
and also to allow for a smooth transition to complete
decontrol in 1981. Had a lower decline rate been employed,
the "gap" when complete decontrol is required in 1981 would
have been larger and the inflationary shock in 1982 greater.
- 9However, the 3 percent decline rate exceeds the actual
decline rate observed in almost every oil field. Thus, a 2
percent decline rate was selected for tax purposes as being
closer to historical experience. Using a lower decline rate
than 2 percent for tax purposes would obviously increase the
amount of old oil subject to tax, but would risk discouraging production to some extent. The 2 percent decline for
tax purposes represents a reasonable balance between capturing windfalls and assuring maximum production.
All production from a property which qualifies as a
marginal property will be exempted from the lower-tier tax,
and treated as upper-tier production. Marginal well taxation is based on the higher costs of production associated
with these properties. The production costs per barrel for
a 5,000 foot well which produces only 20 barrels a day are
generally greater than for a well of the same depth which
produces 500 barrels a day. Providing separate treatment
for marginal wells is also consistent with the decision of
the House last October to deregulate marginal oil completely.
B. Upper-Tier
The tax on upper-tier oil will be equal to 50 percent
of the difference between the price the oil sells for and
the inflation adjusted price of upper-tier oil. The uppertier tax is structured differently from the lower-tier tax
because upper-tier oil is to be decontrolled by ramping the
control price to the world price level by October, 1981,
rather than by using a decline rate mechanism. The tax
would begin phasing out in November, 1986, and would disappear by January, 1990. The upper-tier tax will have
little if any adverse impact on production of upper-tier oil
since the control price was close to the world price before
the recent OPEC surcharges.
The upper-tier tax is phased out in order to simplify
the windfall profits tax at a point in time when fine
distinctions are no longer needed. Computing the upper-tier
tax requires reference to the last vestiges of price controls. Since revenue from the upper-tier tax will decrease
substantially after 1985 as the volume of upper-tier oil
diminishes, we decided to phase out the upper-tier tax after
1986.
The upper-tier tax excludes new production, incremental
tertiary production and any oil subject to the lower-tier
tax.
- 10 C.
Uncontrolled tier
-
•
-
-
-
-
-
-
-
~
—
—
—
—
—
—
—
The upper- and lower-tier tax bases will cover about
two-thirds of U.S. production. The remaining third is
composed of output from the Alaskan North Slope, stripper
wells (wells that produce less than 10 barrels a day for a
12-month period), newly discovered oil and incremental
production resulting from the introduction of tertiary recovery procedures in old oil fields. These categories of
production are now either decontrolled or effectively decontrolled, andTRus are able to earn the world market
price.
The third base of the windfall profits tax applies to
this uncontrolled oil (other than Alaskan North Slope oil)
to the extent not subject to the lower-tier or upper-tier
tax. The 50-percent tax would be imposed on the difference
between what the producer receives, and a base price of $16
per barrel as of January 1, 1980. The base would be adjusted
for domestic inflation occurring after 1979. Eventually,
the decontrolled tier tax would apply to all other domestic
oil, as it is decontrolled.
The exemption of Alaskan North Slope oil is based on
the economics of Alaskan production. According to the most
recent DOE data, the average wellhead price of Alaskan crude
was only $5.40 a barrel, due to the extraordinarily high
transportation costs which must be incurred to bring this
production to market. While this wellhead price will rise
dollar-for-dollar with increases in the world price of oil,
it would not reach $16 per barrel until the wellhead price
of Saudi Arabian marker crude reaches $22 a barrel (in 1980
prices). Although prices of imported oil have been increasing rapidly over the last few months, we will not
likely see posted prices at the $22 level in the near
future. It is easier to exempt Alaskan production from the
tax than to require Alaskan producers to file tax returns
solely for the purpose of showing that no liability has been
incurred.
A number of questions have been raised concerning the
$16 per barrel base price for the uncontrolled tier tax.
The $16 figure is based on the estimated world price which
would be in effect as of the first quarter of 1980 as a
result of the December, 1978 OPEC price announcement. The
base price was calculated to allow for uncertainties about
the difference between the posted price of Saudi Arabian
marker crude, and transportation costs, quality differential
- 11 and other relevant factors. By choosing $16, most domestically produced uncontrolled crude oil would pay no tax
unless OPEC were to raise its prices in excess of inflation.
Second, it has been suggested that the $16 base be
increased because recent OPEC surcharges have already
increased the price of oil. However, the President's
windfall profits tax proposal is designed to prevent domestic
producers from benefiting from just these kinds of sudden
price increases. There is no rational reason for exempting
the profits domestic producers are realizing from these
surcharges from the windfall profits tax.
Third, it has been argued that since the tax on the
uncontrolled oil tier is permanent, the United States is
permanently condemning producers to a lower price at home
than they might realize abroad, and that the United States
will produce less oil than would be produced in the absence
of a permanent tax.
The world price of oil has major non-competitive
aspects. Since 1973, it has been set well above the cost of
production by a cartel. Given these circumstances, there
is no economic reason for allowing domestic producers to
receive the world price of oil on their production.
Moreover, it is simply not true that producers can earn
even more abroad than they can at home if the uncontrolled
tier tax is enacted. In every other producing country,
increases in the price of oil have immediately been accompanied by increases in taxes on producers or by nationalization. Either action deprives the producer of the
increased revenues. Even in the U.K., the tax on North
Sea producers is designed to make the government the principal beneficiary of higher world oil prices. This same
effect has been realized in Venezuela through nationalization.
Similar examples can be found in most other countries.
Finally, those who argue that we will lose a small
amount of domestic production due to the uncontrolled tier
tax fail to recognize the risk of imposing no tax at all.
Political forces will not allow complete and permanent decontrol of oil so long as we face an unqualified threat of
embargoes and sudden price increases. In the absence of a
permanent tax, a future surge in oil prices may compel a
return to regulation. It is preferable to risk sacrificing
the very small potential supply response in order to avoid
such a situation. By imposing a permanent tax with a base
which is adjusted for inflation, I believe we will, in the
- 12 long run, allow producers to receive approximately the same
price as is received outside the U.S. but with standby
protection that will prevent them from receiving sudden
windfall profits due to increases in prices as a result of
anti-competitive cartel practices.
D. Further comments
I would like to respond to some of the general questions
that have been raised about the President's windfall profits
tax proposal.
It has been suggested, and I believe misleadingly so,
that the Administration has proposed a "weak" tax. This is
not so. Our goal is to capture windfalls without prejudicing production incentives. This we have done.
There are almost no exceptions to the upper-tier tax.
The only exception to the uncontrolled-tier tax is the welljustified exclusion for Alaskan North Slope oil. The
exceptions to the lower-tier tax are geared to ensure
maximum possible production from domestic sources, and old
oil exempt from the lower-tier tax is subject to the uppertier tax. Furthermore, the uncontrolled tier tax is permanent, and captures half of all increases in oil industry
revenues which are due to price increases beyond that which
would be allowed solely by inflation.
Absent our windfall profits tax, producers would
receive $0.43 net from each dollar increase in revenue.
With the tax, the producer's take drops to $0.29 per dollar.
Assuming oil prices do not increase in real terms beyond
1979, the tax reduces by 30 percent the amount of money
which the oil industry would actually keep as a result of
decontrol. If oil prices were to increase in real terms,
say, by 3 percent per year, the tax would reduce industry
revenues from decontrol by 40 to 45 percent.
Assertions that the tax is weak have in some instances
been based on misleading comparisons. For example, comparisons are made between the gross revenues generated from
decontrol — before payment of any additional production
costs and any taxes — and the net federal tax receipts due
to the windfall profits tax. These types of comparisons
fail to take into account the automatic effect of other
taxes and the increased expenditures for greater oil output.
The proper comparison is between producer and royalty
revenues with and without the windfall profits tax. Under
- 13 this analysis, producer and royalty revenues are 30 to 45
percent lower with the windfall profits tax than without it.
It has also been said that the windfall profits tax
denies capital required for further exploration. Such
arguments are without economic foundation. The economic
incentive is provided by the price of newly discovered oil,
not by the cash flow from existing production. The argument
for increased cash flow is untenable. It would lead to a
cheap source of capital for those now engaged in the exploration for oil and gas while new entrants must pay the
market price for capital. This is inconsistent with a
competitive economy, because it would further impede entry
by non-oil firms into oil production and thus reduce competition. Moreover, providing "free" capital means that the
investment basis in oil property is reduced. To be consistent, the "cash flow" advocates should demand that such
oil be sold at a lower price — or perhaps given away —
since the investment has already been recovered.
A variation on the "cash flow" argument is plowback.
Plowback is an offset against the windfall profits tax for
certain oil-related investments. Plowback should be recognized for what it is: a subterfuge for repealing the
windfall profits tax. This tax is being sought in part
because some of the increased profits from decontrol are
windfalls that do not lead to appreciably increased domestic
oil production. Likewise, plowback — which is merely a
reduction in the tax — will not necessarily add to domestic
oil production.
Proponents of plowback argue that it provides a useful
subsidy for domestic oil production. However, as a subsidy,
plowback is deficient. Since plowback would be limited only
to present owners of oil, it would provide no incentive to
new entrants into production. This would discourage competition in the industry and encourage concentration.
Moreover, plowback subsidies would be distributed only to
the owners of interests in the oil, such as royalty holders.
Not all owners produce oil, and it is production, not mere
ownership, which should be encouraged. In addition, plowback would require complex and arbitrary definitions of
threshhold or base period investment levels and of qualifying
investments, leading to interminable administrative disputes
and litigation.
- 14 Finally, some have challenged the windfall profits tax
proposal on the basis that we subject no other windfall to a
special tax. This argument ignores the very special circumstances of the domestic oil industry. Windfalls are most
commonly found among commodities, such as oil. In most
cases, however, competition and the legal structure of the
market rest within the authority of the United States. This
is simply not the case with respect to oil prices. The
windfalls are attributable to the action of a foreign
cartel, totally outside the legal control of the United
States. There is simply no sound reason why we must stand
idly by and permit windfalls to be reaped in the United
States because of actions taken by a foreign cartel.
Energy Security Trust Fund
The President has proposed to convert windfall profits
derived from OPEC pricing into the direct advancement of
energy technology, the development of energy efficient mass
transit, and for assistance to those least able to afford
energy price increases attributable to decontrol. This will
be done through the Energy Security Trust Fund. I will
outline the Fund in very broad terms. The Director of OMB,
Jim Mclntyre, who will be appearing before you shortly, will
describe the Fund in greater detail.
The Fund will consist of the proceeds of the windfall
profits tax, and increased federal income taxes attributable
to decontrol during the deregulation period. The Fund is an
addition to, and not a replacement of, existing Department
of Energy funding.
The cost of all Fund programs will be limited to Fund
resources. The new programs will be undertaken only if the
windfall profits tax is enacted. The cost of any new energy
tax expenditures will be charged against Fund receipts in
order to control these subsidies more effectively. All
spending programs financed from the Fund will be subject to
annual authorization and appropriation.
Given available
funds, additional initiatives may be undertaken to reduce
U.S. oil import dependence,
The Treasury Department will be responsible for
holding the Fund, and for estimates of revenues and tax
expenditures. On the basis of these estimates, and estimates!
made by OMB of other demands on the Fund, the extent of Fund
resources available will be determined.
- 15 Economic Impacts
We estimate that the additional inflation resulting
from phased decontrol compared to retaining controls indefinitely amounts to about 0.1 percent in 1979 and averages
0.2 percent a year over the next three years. By 1982, the
level of the consumer price index will be approximately 0.75
percent higher with phased decontrol than if controls had
been retained indefinitely.
These estimates assume that OPEC prices rise only as
fast as world inflation. If world oil prices increase
faster than world inflation, the inflationary impact of
decontrol would be slightly greater. For example, if world
oil prices increase 3 percent a year faster than world
inflation, the level of the consumer price index will be
approximately 0.9 percent higher by 1982. Thus, inflation
is not very responsive to faster OPEC price increases. This
is because price controls govern only a third of all U.S.
oil consumption. The remaining two-thirds (imports, stripper
production, and Alaskan oil) are already free to receive the
world price.
These inflation estimates are based only on quantifiable
decontrol effects, such as the higher prices of gasoline,
heating oil, and goods manufactured from petroleum, and the
induced impact on prices resulting from wage increases
caused by cost of living adjustments made in response to the
additional inflation. The estimates do not include any
effects from reduced prices of non-energy imports due to the
strengthening of the dollar, and from the lower oil prices
which would result from future world oil price moderation
due to reduced U.S. demand. The excluded effects are simply
not quantifiable. Since the nonquantifiable elements
suggest lower inflation impacts, it is probable that our
numbers overstate the effect of decontrol on inflation.
Decontrol will restrain aggregate demand and economic
growth slightly over the next two years — by perhaps 0.1
percent a year. In later periods, fiscal and monetary
policy can be adjusted to the needs of the economy as they
develop, taking into account the specific economic impacts
of decontrol and expenditures from the Energy Security Trust
Fund.
The Department of Energy estimates that, relative to
continued price controls, the President's program will
reduce oil imports by about 370,000 barrels per day in 1981
- 16 and 950,000 barrels per day by 1985, assuming OPEC prices
increase only with worldwide inflation. Should OPEC raise
prices at a rate in excess of worldwide inflation, the oil
import savings would be greater. DOE has estimated that
imports would be reduced by 440,000 barrels per day
in 1981 and 1,100,000 barrels per day in 1985 under a case
where OPEC raised its prices at a rate which was 3 percent
per year greater than worldwide inflation.
Conclusion
The U.S. faces a severe energy problem today despite
recent corrective measures. At the root of our present
energy problem is the price of oil. In the past we have
refused to address this problem because of the windfall
profits involved. We can no longer afford to avoid the
issue. By artificially suppressing the price of oil, too
much oil is consumed and too little produced; other efforts
to solve our energy problem are frustrated; and less incentive to switch to other fuels or to conserve energy is
provided.
President Carter has recognized this dilemma. He has
acted to decontrol crude oil prices permanently by the end
of 1981. He has also addressed in an effective manner the
issue of windfall profits created by decontrol. Now he
needs your assistance in passing a windfall profits tax and
creating an Energy Security Trust Fund.
I look forward to working with this Committee in taking
these next steps in resolving our energy problem.
o 0 o
FOR IMMEDIATE RELEASE
EXPECTED AT 12:00 NOON
MAY 9, 1979
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
INSTITUTIONAL INVESTORS INSTITUTE
ANNUAL WASHINGTON ROUNDTABLE
WASHINGTON, D.C.
The Outlook for World Trade:
Continued Liberalization or Protectionism?
There has been considerable talk in recent months
about where we are going in world trade:
Pressures for import restraints have been strong
throughout the past three to four years in response to
slow recovery from the 1975 global recession and continued
economic difficulties in particular industrial sectors.
The International Monetary Fund has argued that
the safeguard or escape clause actions adopted by a number
of nations since 1976, together with the increase in
antidumping and countervailing duty actions and the
negotiation of orderly marketing arrangements in certain
sectors, constitute a clear and continuous retreat from
liberal trade.
B-1589
- 2 — Some have argued that liberal trade is bound to
suffer in periods of high unemployment and slow economic
growth and that the prospect for continued slow growth
and increasing competition from both Japan and the advanced
developing nations presages a clear protectionist trend
for the period ahead.
Some have even called for stringent import
controls as the only means of "balancing" trade for the
United States and other major deficit nations, providing
us with a protective barrier from excessively competitive
Japanese and developing nation trade behind which to
stimulate domestic economies and spur export growth.
Are import restraints becoming not only politically
attractive, but intellectually respectable as well?
Has the international community already chosen to follow
a protectionist path?
I don't think so:
In spite of the recent actions by a number of
countries to safeguard a few domestic industries from
rapid surges in imports, there has been real net progress
toward trade liberalization since the late 1960s.
I'll
discuss some of these liberalizing moves in a moment.
The recently concluded Multilateral Trade
Negotiations represent the international community's most
comprehensive attempt ever to address the full spectrum
of restraints on international trade, providing not only
- 3 a substantial reduction in industrial tariffs but also new
codes governing the use of government standards, procurement,
and customs valuation, which should significantly reduce
these non-tariff barriers to trade.
The new code on subsidies and countervailing
measures will also bring much-needed discipline to one
of the most contentious areas of government intervention
in trade and should help strengthen global support for
liberal trade by assuring that trade will also be fair.
Although increasing competition from the developing
nations will require fundamental structural adjustment
in the industrial nations —
which will take time —
the
importance of lower cost imports in fighting domestic
inflation, the political necessity of improved NorthSouth cooperation, and the increasing dependence of
the industrial countries on exports to the developing
nations to pay for essential imports should argue strongly
against widespread import restraints by the industrial
nations.
History, international agreements, and self-interest
all come down on the side of the continued trend toward
trade liberalization, rather than protectionism.
I'd
like to discuss each of these areas today.
Trade Trends, 1950-1970
From the end of World War II until the completion
of the Kennedy Round of trade negotiations in 1967,
world trade grew approximately three-fold in value from
- 4 less than $60 billion to roughly $190 billion.
It doubled
again, to $375 billion, by 1972, when the staged tariff
cuts were completed. This dramatic expansion was facilitated
by a commitment among the industrial nations to long-term
trade liberalization and strong economic growth in virtually
all nations. Between 1958 and 1970 world exports grew
at an average annual rate of nearly 10 percent. Exports
1/
of the OECD nations grew at a substantially faster rate
than the growth of gross national product — by factors of
1.4 for France and Japan, 1.5 for the United Kingdom,
1.6 for Canada and Germany, 1.9 for the United States,
and 2.5 for Italy between 1955 and 1970, allowing for
changes in prices. From 1968 to 1970, in fact, exports
were growing twice as fast as domestic production.
The structure of trade also changed dramatically.
The share of industrial nations' exports in world trade
rose from 50 percent in 1950 to 72 percent in 1970, while
the developing countries' share fell from 32 percent to 17
percent over this period — despite a substantial absolute
increase in the value of their trade. This trend reflected
the overall shift in the pattern of trade to more sophisticated products and the dramatic rebuilding of supply
capabilities in Europe and Japan. The share of manufactures
in world trade increased from 41 percent in 1950 to
65 percent in 1970, at the expense of trade in food and
1/ Organization for Economic Cooperation and Development,
including the 24 Western industrial nations.
- 5 primary products. The LDCs also increased the share
of manufactures in their exports, from 15 percent in
1960 to 23 percent in 1970.
By the late 1960's and early 1970's, therefore:
Manufactures trade had clearly become the major
arena for international competition, while political and
social concerns in the agricultural area made liberalization
of agricultural trade extremely difficult.
The LDCs had begun to increase their exports of
manufactured goods, a trend which would gain even further
momentum in the next few years.
Trade was becoming increasingly important to
domestic economies in terms of dependence on imports and
share of production going into export. In short, national
economies were becoming highly integrated and increasingly
interdependent.
Basic structural changes in the global economy
were beginning to be felt in the industrial nations,
together with a general difficulty in adjusting to these
changes. High rates of inflation and unemployment began
to coincide; the growth of real wages overtook the growth
of productivity; and the growth of investment in manufacturing
began to decline, while government subsidies to domestic
production were becoming increasingly widespread. These
trends would intensify during the 1970s, and would form
the back-drop for later pressures for import restraints.
- 6 —
The system of fixed exchange rates adopted at
Bretton Woods, which had provided a stable framework for
the post-war expansion of trade, had also become outmoded.
The dollar had become seriously overvalued, sharply
weakening the international competitive position of the
United States and producing understandable —
misplaced —
calls for import controls.
though
Change in the
international monetary system was now essential to avoid
the future distortion of trade patterns.
All of these factors argued for fundamental reform
of the international trade and monetary systems during
the 1970's.
The international community had, in effect,
reached a turning point.
Pressures for import restraint
were building, and continued liberalization would require
a mutual political resolve to go well beyond the gains
of the Kennedy Round.
Developments Since the Kennedy Round
The Kennedy Round of trade negotiations provided
the most significant liberalization of international
trade prior to the recent Tokyo Round of Multilateral
Trade Negotiations.
Liberalization focused on the
reduction of industrial tariffs by the industrial nations,
resulting in a weighted average reduction of about 35
percent over a period of five years.
Total concessions
involved trade of over $40 billion, or approximately
one-fifth of total world trade in 1967.
As a result
of these negotiations, average tariff rates for the major
- 7 -
industrial countries""
in 1973 were 6.2 percent on all
imports and 10.7 percent on dutiable items only.
Agricultural trade was left virtually untouched
by the Kennedy Round, as too politically sensitive.
Non-tariff barriers were also not addressed, but would
become increasingly important factors in international
trade during the next decade.
In the aftermath of the Kennedy Round, a number of
nations decided to complete their tariff reductions ahead
of schedule, primarily as a means of countering inflationary
pressures.
Argentina put its Kennedy Round reductions
into force in 1967, Iceland in 1968, Canada and Ireland
in 1969 and Switzerland in 1970.
The United States took
a few steps in the other direction, introducing import
quotas for meat and negotiating voluntary export restraints
with principal steel suppliers in 1968.
But inflation led to the termination of these and
other U.S. import restraints during 1973-74, together with
similar liberalizing moves by a number of other countries,
industrialized and developing alike.
Many people at the
time had been worried about a resurgence of protectionism
to check imports.
However, inflation had become more
important than unemployment and was the driving force
behind a new wave of unilateral trade liberalization.
2/ United States, Canada, Japan, European Community,
Austria, Finland, Norway, Switzerland, Australia,
and New Zealand.
- 8 Even the historically most protectionist countries,
Canada and Australia, unilaterally cut their tariffs across
the board. The Australian cut was a full 25 percent.
Germany relaxed quotas on imports of textiles and clothing,
which had experienced above-average price increases.
The United States removed or suspended its import quotas
on oil, steel, meat, sugar, and cheese. Japan reduced
tariffs on a wide range of industrial imports. Oilexporting countries such as Iran and Nigeria and developing
countries such as Colombia also liberalized imports. Even
Italy, the only major country to impose controls in 1974
due to its huge payments deficit, exempted a wide range of
products from the outset and started liberalizing the
system as soon as it was instituted. Such previously
contentious trade issues as the Common Agricultural Policy
in Europe, which checks U.S. farm exports, became moot
as world prices far exceeded its support levels.
Inflation therefore had at least the one beneficial
effect of helping to check protectionism. The exchange
rate parity changes of 1971-73 and subsequent shift towards
flexible exchange rates also eliminated (or even reversed)
most of the earlier balance-of-payments disequilibria,
and defused that justification for protectionism. In
the United States there was less pressure for general
import controls with unemployment above 8 percent in
1975 than with unemployment at 5 percent in 1971, because
- 9 the dollar devaluations had gone far to restore the
international competitiveness of American firms and workers.
This trend was particularly surprising because it
occurred during the runup to an expected multilateral
trade negotiation in which countries were planning, in
the traditional way, to trade off import barriers one
against the other on a strictly reciprocal basis.
In that
kind of environment in the past, countries had always
husbanded their existing import barriers to preserve
their negotiating position in the coming reciprocal talks.
But there was much unilateral reduction of barriers in
1973-75, taking the world another step toward more open
trading arrangements.
The calm was disturbed following late 1975
as a number of industrial countries (Britain, France,
Japan, Sweden, the European Community as a group) raised
new import barriers in sensitive industries, as a result
of inadequate recovery from the 1974-75 recession and
the failure to adjust to longer-term structural changes.
Brazil adopted widespread import controls and export
subsidies for balance of payments purposes.
The United
States subsequently negotiated orderly marketing
arrangements for shoes and televisions from major
suppliers.
U.S. meat import quotas were re-introduced.
New restrictions were concentrated generally on
a few manufactured product groups:
textiles, clothing,
- 10 shoes, ships, steel, televisions, and other light
engineering products.
Imports into Western Europe and
North America of these goods from the developing nations
and Japan have grown at rates substantially exceeding
the expansion of trade in the same products within and
between Western Europe and North America.
It is thus
not surprising that the most frequently used restrictive
measures were the bilateral negotiation of voluntary
export restraints or orderly marketing arrangements,
rather than multilateral import restraints.
Where the United States has entered into OMAs or
taken safeguard actions, they have been selective in
nature, as emergency actions to avoid further sharp
increases in imports of sensitive products, while providing
a breathing space for domestic industries to adjust to
changing global trade patterns.
They have not resulted
in actual rollbacks of trade levels, even in textiles,
one of the most politically sensitive areas.
The United States has also argued that such arrangements must be temporary in nature, and that they must be
coupled with a real effort to adjust domestically.
We
have sought better international surveillance over the
use of these kinds of safeguard measures, and will continue
to seek an international safeguards code to assure that
safeguard practices are not abused as a new form of
protectionism in sensitive sectors.
- 11 Complaints of dumping and subsidy practices also
led to numerous investigations, culminating in either
new antidumping and countervailing duties or the waiver
of such duties pending the completion of the Multilateral
Trade Negotiations.
Although the extensive investigation
of such complaints can, if misused, distort trade through
the uncertainty they create, the duties actually imposed
do not constitute protection ger se.
Rather, they are
defensive rather than offensive measures designed to
redress the unfair trade practices of others, and thereby
encourage an efficient allocation of resources.
I would
therefore disagree with IMF statistics which cite the
quadrupling of U.S., Canadian, and EC import-restrictive
actions, including such duties, from 21 in 1974 to 94
in 1977 as evidence of rising protectionism.
In spite of the strong protectionist pressures which
certainly have arisen since 1975 —
and the restraints of
a bilateral nature negotiated in certain sectors to
safeguard domestic industries from rapid increases in
imports —
the Kennedy Round tariff reductions and the
major portion of the 1973-74 liberalization have remained
intact.
Indeed, Japan's Prime Minister Ohira agreed last
week to seek Diet approval for using the 1973 unilateral
tariff reductions as the new basis for further Japanese
tariff reductions in the Multilateral Trade Negotiations
(MTN).
Improved balance-of-payments positions have also
enabled a number of developing nations to liberalize
- 12 trade restraints.
Argentina and Chile have been most
notable in this regard.
Brazil also announced in early
1979 a decision to phase out by mid-1983 the 100 percent
prior deposit required on a variety of imports, as well
as its pervasive system of export subsidies which have
ranged as high as 40 percent on a number of manufactured
products.
Liberalization in the MTN
The recently concluded Multilateral Trade Negotiations
have provided the next major step forward in further reducing
traditional tariff barriers and regulating government
intervention in such areas as subsidies, government
procurement, standards, customs valuation, and import
licensing:
Industrial nations will make tariff cuts
averaging more than 30 percent on over $140
billion in trade in coming years.
In civil aircraft alone, duties will be
eliminated altogether on several billion
dollars worth of world trade.
—
Agricultural trade liberalization will benefit
some $4 billion in U.S. exports, to say nothing
of benefits for other countries.
—
We now have a code setting substantial new rules
on the use of subsidies, in the context of which
the United States will adopt an injury test in
our countervailing duty law.
- 13 The new government procurement code will open
to foreign bidding some $12 billion in U.S.
federal purchasing, and some $20 billion in
foreign government purchasing, which had not
previously been covered by the GATT at all.
—
We have a new code governing valuation of
imports for purposes of duty assessment and
other codes on standards, licensing, and
commercial counterfeiting which will address
issues which have increasingly restricted or
distorted international trade.
Finally, improvements in the GATT Framework
will provide a better system for resolving
disputes and a better international response
to the particular trade problems of developing
countries.
The world trading system will clearly register an
enormous net gain on the side of fairer and more open
trade as a result of these negotiations.
Outlook for the Future
The future outlook for world trade will be governed
by a number of factors, not least of which will be our
recent success in achieving international agreement
to further liberalize world trade.
Several problems,
however, may yet threaten to undermine this progress:
—
The massive increase in energy costs has yet to
work its way through the world economy.
The oil price
- 14 hikes add sharply to oil import bills and thus to trade
balance problems, for the United States as well as for
most other major nations.
Partly as a result of these higher energy costs
but partly as a result of other fundamental developments,
world growth rates are likely to be significantly lower
in the last quarter of the twentieth century than they
were during the third quarter.
Low growth will mean intensified pressures to
export and restrain imports in virtually all countries,
in an effort to maintain accustomed levels of employment
and production.
It also means that some industries are
caught with excess capacity, built in anticipation of
much more buoyant demand.
This is the fundamental problem
facing the steel sector in a number of countries.
—
Between 1963 and 1976, the developing countries
increased their share of world trade in manufactures from
4.8 percent to 8.2 percent.
They will be increasingly
formidable competitors across a wide range of manufactured
products in the years ahead.
They must now be encouraged
to take part in the evolving world economy by reducing
their own trade barriers.
Under the best of circumstances, it will take many
years to adjust to these new conditions.
Courageous
action will be required of governments, many of whom
will not be in strong positions to act decisively.
Electorates will, understandably, resist the real hardships which may frequently be required when adjustments
- 15 are undertaken.
Even a return to much fuller employment
would probably not eliminate the pressures to restrain
trade in this country, as indeed it did not at the turn
of this decade.
These adjustments do work —
witness the sharply
improved conditions in Italy, Britain, Mexico and Brazil
—
if undertaken with deliberation and determination.
Indeed, they are essential for the future health of both
the national economies involved and the world economy as
a whole.
I am confident that they will eventually be
adopted, and carried through to successful conclusion;
there is simply no other way.
But there will be continued
temptations, in a world of growing international interdependence, to try to avoid or at least defer the needed
internal measures by exporting the problem to someone else.
Protectionism will continue to present a challenge
to all nations.
I am optimistic, however, that the trend
is still on the right track.
With strong enforcement of
the new MTN agreements and continued efforts to resolve
problems in specific sectors through mutual cooperation,
I believe that we can maintain and further improve the
liberal world trading system in the decade ahead.
May 9, 1979
JOSEPH LAITIN
ASSISTANT SECRETARY (PUBLIC AFFAIRS)
Joseph Laitin was nominated as Assistant Secretary
of the Treasury for Public Affairs.by President Carter on
March 31, 1977, confirmed by the Senate on April 29, and
sworn in by Secretary W. Michael Blumenthal.
As Assistant Secretary, Mr. Laitin is responsible for
the public affairs activities of the Secretary and management
of all the public affairs policies, plans and programs of
the Treasury Department. He served in similar capacity as
Assistant Secretary of Defense in 1975, and was awarded the
Medal for Distinguished Public Service by the Department
of Defense.
Before joining the Treasury Department, Mr. Laitin was
with the Federal Aviation Administration, where he was
Assistant Administrator for Public Affairs and Director of
Information Services.
From 1963 to 1975, Mr. Laitin was Assistant to the
Director of the Office of Management and Budget in the
Executive Office of the President. In 1965-1966 he was on
detail to the White House as Deputy Press Secretary to the
President.
During the time Mr. Laitin was at the Office of Management and Budget (prior to 1970, known as the Bureau of the
Budget) he served on the staff of various Presidential
Commissions, including the National Commission on the Causes
and Prevention of Violence, Campus Unrest Commission and the
Selective Service Commission.
From 1953 to 1963, Mr. Laitin was a free lance writer,
his articles appearing in numerous national magazines. During
this 10-year period of self-employment, he was an instructor
at the Art Center School in Los Angeles and broadcasted
regularly for the CBS and ABC networks as a commentator and
reporter. He wrote, narrated and produced for CBS radio the
award-winning documentary "The Changing Face of Hollywood."
B-1590
-2Before going to Hollywood, Mr. Laitin was Chief
Correspondent for the' Research Institute of America in
Washington, D.C. from 1950 to 1952. Mr. Laitin was with
the Brooklyn Daily Eagle and the Standard News Association
before World War II. During the War, he was head of the
United Press economic staff in Washington, D.C, later
went to the Pacific Theater as a war correspondent for
Reuters. He covered the Japanese surrender on the USS
Missouri, the occupation of Japan and Korea, the war
crimes trials in Manila, then the Bikini atomic tests.
He later reported on the closing -weeks of the Nuremberg
trial and then covered some of the trouble spots in the
Carribbean and Latin America.
A native of Brooklyn, New York, Mr. Laitin and his
wife, the former Christine Houdayer of Paris, have two
children and reside in Bethesda, Maryland.
IMMEDIATE RELEASE
May 10, 1979
Contact:
Charles Arnold
202/566-2041
PRESIDENT CARTER APPROVES
INCREASE IN SAVINGS BOND INTEREST RATE
Secretary of the Treasury W. Michael Blumenthal today
announced that President Carter has approved an increase in
the interest rate paid by the Government on Series E and H
savings bonds. Bonds issued on and after June 1 will receive
6-1/2% if held to maturity, which will remain at 5 years for
E bonds and 10 years for H bonds. The current interest rate
is 6%.
The annual interest rate on outstanding E and H bonds and
U.S. Savings Notes (Freedom Shares) for the remaining period
to their next maturity will also be increased by 1/2%. The
improved rate will be effective for bonds and notes which
begin a semiannual interest period on and after June 1.
The interest rate increase will benefit the holderr of
about $81 billion in outstanding savings bonds and notes.
tfo action on their part is necessary to take advantage of
the higher rate.
The rate on the recently announced Series EE and HH bonds,
which will go on sale in January 1980, will also be increased
to 6-1/2%.
Azie Taylor Morton, Director of the U.S. Savings Bonds
Division and Treasurer of the United States, said that the
6-1/2% interest rate, coupled with the tax advantages available
to savings bond owners, represents a fair return and makes the
bonds more attractive as a long-term investment.
oOo
B-1591
FOR RELEASE ON DELIVERY
EXPECTED AT 10 A.M., EDT
FRIDAY, MAY 11, 1979
REMARKS BY THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE
THE BUSINESS COUNCIL
HOT SPRINGS, VIRGINIA
MAY 11, 1979
Once again, the energy issue has moved to the center of
American politics.
This has happened periodically — every few months or
so — since the Arab oil embargo of 1973.
Two things strike me as remarkable about this long and
rather turbulent history of political debate about energy.
This first is that the pace and intensity of the
political rhetoric has been so infrequently matched by
action. We have become great talkers about energy. But
until the last year or so, the government has done very
little constructive about the problem. Until President
Carter moved energy to the top of the nation's agenda in the
spring of 1977, most of the key issues were locked in
stalemate.
The second curiosity is that, despite all the
passionate political talk about energy, a majority of
Americans — or so the polls say -- continue to doubt that
our energy problems are real and serious. The preferred
view, apparently, is that the crisis is merely an artifact
of some undefined conspiracy between the government, big
business, and the media. The energy crisis emerged
contemporaneously with the deceptions of Watergate, and
during the waning months of the Vietnam War. The sour
suspicions of that period have trailed along after the
energy issue even since.
At any rate, these two phenomena — government in action and public apathy — have fed upon each other over
the years, making it formidably difficult for us to deal
intelligently with the underlying issues.
B-1592
-2We cannot afford this any longer. It is critical that
the American people understand that the ,energy crisis
strikes to the core of this nation's political and economic
security.
The key to the immediate problem is crude oil — its
cost and availability. The story can be told by a few
numbers. In 1970, the posted price of light Saudi Arabian
crude, the chief indicator of world oil prices, was $1.60
per barrel. Today the posted price is $14.54, an increase
of 708 percent. In 1970, the U.S. met 76.7 percent of its
crude oil needs out of its own production. Today, we meet
only 50 percent of our needs from our own production,
despite gains from Alaska, and our import bill is now
running at a rate of $50 billion per year. In 1970, 72.7
percent of our oil imports were supplied by Western
Hemisphere nations (primarily Canada and Venezuela). Today,
less than 20 percent of our imports come from these
countries.
Three times over the past 21 years — in 1958, 1975,
and 1979 — senior economic policy officials have examined
whether our national security is threatened by the volume
and character of our oil imports. In each case the answer
has been: Yes!
The national security elements are clear:
Because so much of the oil we use comes from
thousands of miles away, supplies are vulnerable to
interruption.
Increasing reliance on uncertain foreign sources of
oil puts at risk the independence and vigor of our
foreign policy.
As our oil import bills have skyrocketed, our export
growth has not been sufficient to balance our trade
accounts. Large trade deficits have been the
result. This puts downward pressure on the dollar,
and dollar depreciation can be extremely harmful to
the American people, increasing domestic inflation
and eroding real incomes. Excessive depreciation
also hurts the entire world economy, for a stable
dollar remains essential to world trade and finance-
-3Cartel control of over 50 percent of the world's oil
supply exacts an increasing drain on the real
resources of all the consuming nations, and subjects
their anti-inflation plans to unpredictable shocks.
Our increasing oil imports play into the hands of
the world oil cartel, adding to upward pressures on
world oil prices. This is no small factor: Our oil
imports today constitute 17 percent of world oil
production.
Finally, as escalating U.S. oil imports suggest,
this country is not yet making a determined and
creative transition to a world in which oil supplies
are scarce, expensive, and often unreliable. We are
continuing to use energy, and particularly oil, at a
far too lavish rate, and we are failing to make
those long-term investments in alternate energy
technologies that will be essential to our economic
and political security in the remaining years of
this century.
To extricate ourselves from all this requires unusual
courage and foresight by our political leadership. I
believe the President has met that test.
In running for the Presidency, Jimmy Carter put energy
issues near the center of his campaign. Upon assuming
office, he moved energy to the top of the nation's agenda.
In a deliberate, and remarkably selfless, act of political
leadership, he expended the normal popularity of the
so-called "honeymoon" to wrestle through the Congress a
major reorientation of our energy policies.
By failing to act, the Congress left in place great
economic deception: The system of oil price controls and
entitlements that have entangled our energy policy in
monumental redtape for 8 years.
This system of controls and entitlements is one reason
that the American people have not been able to grasp the
realities of the energy crisis. For the system has been
telling consumers and investors that oil is cheaper than in
fact it is.
-4-
The effects of the controls system have not been
trivial. To take one example: In February of this year, as
the Iranian crisis was unfolding, our domestic price
controls-and-entitlements program was providing to our oil
refiners and consumers an effective subsidy of $2.56 per
barrel to import oil, rather than to develop and use
domestic energy sources. That subsidy was more —
substantially more — than the price of a barrel of oil at
the start of this decade.
Consider what that means. On the verge of a dangerous
and impredictable world oil shortage, resulting from foreign
political upheavals beyond our influence, our energy laws
were working to stimulate oil imports, to promote oil
consumption, and to discourage domestic oil production.
There was a time, perhaps, when this nation could
afford to neglect its interests in this giddy fashion. That
time has passed.
This spring, once again, as in the spring of 1977,
President Carter has put the vital national interest in a
sound energy policy very much ahead of his personal
political interests.
The President has mandated an orderly, but decisive and
complete, dismantling of the oil price controls and
entitlements system. The job will be complete by October
1981.
A system that now requires, for its daily operation,
thousands of bureaucrats and volume after volume of
impenetrable regulations, rulings, and exceptions will be
put at last behind us. Eight years of highly divisive
political stalemate on oil policy will have been brought to
an end. For the first time in a decade, prices will tell
Americans, accurately, what it actually costs them to buy
oil on world markets. Better than any conceivable
government program, or any number of ringing speeches, this
simple step will bring forth from the American economy a
genuine inventiveness in conservation methods and in new
energy technologies.
Along with decontrol, the President has proposed a tax
on the windfall profits accruing to U.S. oil producers both
from the decontrol itself and from future real increases in
-5OPEC prices. The proceeds of this tax will form an Energy
Security Fund, to help finance new energy technologies, to
cushion the impact on the poor, and to promote mass transit.
As he fully expected, the President's program has faced
a great deal of emotional opposition, from different points
of view.
On one side, decontrol is anathema. In my view, the
arguments reveal a tenuous grasp of basic economics. The
arguments imply that oil — unlike any other good or service
— is virtually insensitive to price, and thus that
decontrol will yield negligible conservation and supply
efforts. The evidence is overwhelmingly to the contrary.
U.S. energy use per dollar of real GNP has fallen from 62
thousand BTU's to 56 thousand over the past eight years,
very substantially as a result of a rational adaption to
rising energy prices. And one need look only to the recent
enlargement of natural gas supplies, and the shortages of
unleaded gasoline, to see the effects of price incentives
and disincentives on the availablity of hydrocarbon energy.
Similarly, the production of so-called "old" oil has, over
the past 5 years, varied sharply with the price incentives
allowed under the controls system.
Critics of deregulation believe that the controls in
some sense "protect" American consumers from OPEC. This is
akin to the protection afforded an ostrich when he submerges
his head in the sand. The controls on domestic oil prices
do not make the OPEC oil we import any cheaper. They make
it more expensive -- by increasing our import demand for it
and by depressing the international value of the dollar.
On the other side, by contrast, the criticism of our
program has focused on the windfall profits tax.
I expect that some of you have misgivings about that
tax. Let me try to meet those concerns.
This tax is well designed and makes eminent good sense
from an economic point of view.
The tax does in fact aim at windfalls — not at those
increases in profit that are necessary to stimulate domestic
oil production.
-6I think you will agree that, in a decontrolled domestic
oil market, some of the profits of U.S. producers will
indeed be windfalls — in the straightforward sense that
actual profits will exceed the amounts required to stimulate
very rapid investment and production. This is largely
because the price of oil is set by a cartel of governments,
not by a normal competitive market. This is a sound reason
to capture a portion of domestic profits for public
purposes. Other oil producing nations have recognized this,
and have imposed a special tax or some parallal mechanism on
domestic oil profits.
The tax proposed by the President is skillfully drafted
to preserve the production incentives provided by decontrol
itself. I will not take your time with a detailed analysis
of all the provisions, but a few points deserve mention.
This is not a confiscatory tax. It is a 50 percent
tax, applied per barrel, on the inflation-adjusted extra
revenues that arise from decontrol and from future OPEC
price increases. The tax has a genuine bite, but it is not
extreme: Without the tax, producers would receive 43 cents
net from each dollar in increased revenues. With the tax,
they will receive 29 cents from each dollar. Depending on
the future course of OPEC prices, the tax will reduce by 30
to 45 percent the amount of money the industry would keep as
a result of decontrol.
At every point, the tax has been crafted to avoid
stifling production:
The base of the tax is adjusted for inflation, which
provides for recoupment of increased costs.
High cost oil, such as that from marginal wells and
the Alaska North Slope, receives carefully defined
exceptions.
The tax on so-called old oil encourages a maximum
outflow of oil from existing wells.
. The only permanent part of the tax is that which
assures an equitable sharing by the public in future
OPEC price increases.
Some in the oil industry have suggested that the tax
should be offset to the extent oil companies invest their
profits in new production. This seemingly plausible idea
—
-7which goes under the name of "plowback" — should get a
skeptical reception from the rest of the business community.
It would amount to a special subsidy only for existing
owners of oil properties to invest in oil production. This
would introduce an unhealthy discrimination against new
entrants. A plowback provision would also render the tax
subject to abuse and infinitely more complicated. And it is
simply not needed. The tax itself preserves high profit
incentives for investment in new production. A special
gimmick simply to increase the cash flow of existing oil
owners would not spur production and would turn the tax
itself into a sham.
The proceeds of this new tax will be well spent, spent
— I believe — more productively than if the revenues were
left, as unnecessary windfalls, with the oil companies. The
proceeds will flow into an Energy Security Fund, with three
broad purposes. First, the Fund will help cushion the
devastating impact of rising energy prices on the poor.
Second, the Fund will promote a necessary shift to
energy-efficient mass transit. Third, the Fund will help
subsidize the development of new energy technologies which
the private sector can bring forward rapidly only with an
initial boost from the government.
This brings me to a larger point, on which I would like
to conclude.
The President's program sets a sweeping new direction
for U.S. energy policy. The program recognizes that this
country needs
the initiative, inventiveness, and
expertise of private business to pull us out of the energy
crisis. Government's job is to correct inequities that may
arise — to ensure fairness — without in the process
derailing the whole enterprise, and also to provide
assistance on these frontiers of energy technology where
economic uncertainties occasionally hold back private sector
progress essential to the public interest.
But the main task is to get unnecessary government
regulation out of the way of private sector progress.
We have found -- and that is my larger message -- that
this is often the main task, in many areas of policy. The
President has pursued it with courage and consistency across
the whole spectrum of economic policy.
-8It is not only energy prices that the President has
decontrolled. He has pushed also for substantial
deregulation in the airline, railroad, trucking, and
commications industries. And he has taken unprecedented
steps to bring economic rationality, and simple common
sense, to bear in weighing the costs and benefits of
regulation in the health, safety, and environmental areas.
Along the same lines, the President has exerted
continuous, item-by-item pressure to restrain government
spending, to move us toward a balanced budget, and thereby
to prune back the government's share of our financial and
real resources.
This broadbased effort to contain the spending and
regulatory appetites of the bureaucracy has come at a very
high political cost for the President. This was not
unexpected. The President has pursued this hard struggle,
because, he is convinced that this is the only way to revive
the productivity and strength of this economy.
The results of these efforts will not show up quickly.
The long-term interests of the economy do not respond to the
political exigencies of an election cycle.
Washington, which lives by that cycle, expects that at
any minute the Administration will, like many of his
predecessors, throw aside its concern for the nation's
long-term future and relapse into the familiar scenario of
wage and price controls and uninhibited public spending.
Those betting on that scenario do not know this
President.
But I will not belabor the point. Let me note simply
that this decision on oil price decontrol was the most
closely examined and debated issue in the Administration's
two year history. It was seen by all of us as a watershed
decision, with implications across the whole sweep of
economic policy. The President has set his energy course by
the compass of sound, market-oriented economics — and that
compass will guide us across the entire landscape of
economic policy.
We need your help to hold our course. It is in your
interest, and that of the nation, to stand behind a
President with the courage to look beyond short-term
politics to the real economic interests of the nation.
oOo
For Release on Delivery
Remarks of the Honorable Anthony M. Solomon
Under Secretary of the Treasury for Monetary Affairs
before the
National Journal
International Trade and Investment Conference
May 11, 1979, 9:00 A.M.
You have asked "will the current international monetary
system serve the future international trade and investment
environment."
My answer is -- in the short run -- "yes", fundamental
changes have been introduced in recent years which give us
more workable monetary and credit arrangements. But in the
longer run, the present system will not necessarily meet
future needs. The international monetary system is undergoing, and must undergo, continuous evolution to adapt
to changing conditions. Several important -- and related -lines of evolution are now under consideration, responding
to concerns about the current system.
I would mention
three such concerns:
First is a cluster of concerns about the operations of
the international banking and credit system, and particularly
the Euro-currency market. Does it provide adequate credit,
or too much? Is it aiding international adjustment or
retarding it?
Is the market adequately supervised, or is
there a risk of imprudent banking practices?
Second is a concern that the large stock of dollars in
foreign hands, private and official, is destabilizing, and that
the international role of the dollar should be reduced in the
future in order to achieve greater stability in the international
monetary system.
Third, and in my judgment most important, is a concern
that our arrangements for international coordination of economic
policy may not keep up with the demands of an increasingly
interdependent world.
B-1593
- 2 -
International Banking
The marked expansion of the Euro-currency market in recent
years is often viewed with awe and apprehension. Some favor
greater official action to bring the market under tighter
control. In fact, the degree of official attention given this
market in recent years, and the degree of supervision and
regulation that actually exists, are much greater than generally
realized. Whether or not there is a case for further measures,
we should understand the major shifts that have occurred in the
world's needs for financing, and what the role of the Eurocurrency market has been.
In the early 1960's, payments imbalances among nations
were relatively small, with the developed countries as a
group running modest current account surpluses, transferring
net real resources to the developing countries, whose deficits
were largely financed by grants and loans of official develops
ment assistance, or. by private direct investment.
In the latter half of the 1960's, the U.S. balance of
payments came under strain, because of reduced current account
surpluses and large capital outflows. In part, these capital
outflows took the form of direct investment --as American
firms sought to maintain markets abroad by producing there.
Also, foreign governments and their citizens borrowed more in
our markets, to expand consumption and investment. Eventually,
to maintain the dollar's par value and the system of gold
convertibility, the U.S. imposed capital controls to deter
lending by U.S. residents and to encourage American firms to
borrow abroad, thus reducing the net capital outflow and resulting pressure on the dollar.
These controls gave a tremendous boost to the development
of offshore money markets -- the use of dollars by non-residents
for meeting the rising world demand for credit. Other national
markets were either too thin and undeveloped or, like those in
the U.K., imprisoned by controls. The international financial
market that emerged -- the Euro-currency market -- became so
efficient that even when the U.S. controls were removed, it
could compete effectively both in bidding for deposits and in
extending loans. Rather than withering away, it flourished.
- 3 In part, the comparative advantages of the Euromarket are
attributable to clear financial incentives. There are no
reserve requirements, no interest rate ceilings, and no credit
controls. In some cases, tax considerations favor doing
business in the Euromarket rather than domestic markets. But
other factors are equally important in explaining the market's
attraction and vigor: it has proven extraordinarily innovative
in developing new financial instruments to meet its customers'
needs; it has provided a focal point for intense competition
among the leading banks from each of a number of national
banking systems; and it has offered insulation from various
political risks, or at least an opportunity to diversify those
risks internationally.
The growth of the market has given rise to a persistent
debate: whether it is an engine of excessive credit creation
which aggravates world inflation, or essentially a highly
efficient intermediary reallocating funds from lenders to
borrowers. Certainly, a large part of new international lending
has been channeled through the Eruomarket because of its
attractions. Despite its growth, Euromarket credit to final
borrowers is still only a fraction of total funds raised in
domestic banking markets -- in the case of dollar credit, on the
order of 15 percent over the 1974-78 period. But it is a
growing fraction, and its relation to domestic and international
money and credit flows needs to be carefully assessed.
The growth of international banking activity has been due
not solely or mainly to the existence of the Euromarket but to
vastly increased international credit needs. In recent years,
and particularly since the oil price quadrupled in 1974, the
size of the aggregate current account imbalances which the
system must finance has risen dramatically. Aggregate current
account deficits rose from an annual average of $15 billion in
1971-73 to an average during 1974-78 of $80 billion annually -a total of $400 billion in five years.
Countries facing these sharply higher deficits needed credit
on an unprecedented scale. Without such credit, they would have
been forced to reduce their external deficits by imposing extremely
severe restrictions on domestic demand, or resorting to aggressive
trade and exchange rate behavior. Until last year, the OPEC
surplus countries provided most of that credit, and the international banking system served as the intermediary.
- 4Some contend that the Euromarket went too far -- that
it made credit too readily available and thus fostered excess
liquidity, excess demand and inflation. However, the role of
the Euromarket has been essentially that of an intermediary
and to a considerable extent borrowers and depositors would
have moved to national markets in the absence of the Euromarket.
Moreover, there was a genuine need for this credit, and I do
not believe that the world economy would have been better
served had the volume of credit been substantially less.
Even with the amount of credit that was in fact available,
the world experienced its worst recession in decades, and
recovery, for many nations, has been agonizingly slow.
Some individual countries have, of course, faced difficulty
servicing their increased external debts. Some neared the
limits of their capacity to borrow very quickly and were then
compelled to step on the brakes too hard. This poses difficult
problems for the countries and lenders concerned, and such
experiences will undoubtedly have a moderating influence on
both borrowers and lenders in the future. But it is not clear
that general controls on the Euro-currency market, even if
effective in reducing global credit expansion significantly,
would be an appropriate response to what in practice has been
a very selective and specific problem.
In the past year or so the pattern of international
financing has changed, with the shift of the U.K., Italy,
and France into current account surplus; the reduction of the
U.S. current account deficit; the decline in Japan's surplus;
and the dramatic decline in the OPEC surplus to less than
$5 billion in 1978 as a whole and near zero in the second half
of the year.
Unfortunately, the near-elimination of the OPEC surplus
last year was short-lived. The recent oil price decisions,
and reduced growth in OPEC import demand, are producing a
new and sharp increase in the surplus. Assuming that the
international credit mechanism continues to function, and
that oil importing countries are not forced to curtail domestic
demand dramatically, the OPEC surplus will rise to $25-$30
billion in 1979 and more in 1980 -- much more if there are
further significant increases in the price of oil. Even if
the Japanese surplus continues to decline substantially and
there is some reduction in the surpluses of other countries
such as Germany and Switzerland, world current account deficits
are likely to total something on the order of $80 billion in
1979 and possibly more in 1980, very large deficits indeed.
- 5We must anticipate continued growth of international
credit -- growth on a very large scale -- until these large
current account imbalances can be reduced. Official financing
must be adequate to meet critical needs but will not -- and
should not -- meet the bulk of the financing need. That will
be provided by the private markets. The private markets will
have to account for perhaps three-fourths of the total
financing needs, on the basis of the past trends. Thus we
must expect the size of these markets to continue to expand.
The economic problem is to allocate funds from surplus
to deficit countries. But in the process we must be sure
that these flows do not overburden the financial institutions
or threaten the banking system generally. The prospect of
continuing growth makes it all the more, important that
national authorities have adequate information and exercise
adequate control and surveillance over the operations of banks
in the market.
In recent years, the U.S. banking authorities -- the
Comptroller of the Currency, the Federal Reserve, and the FDIC -have taken a number of steps to improve the supervision of
foreign lending by U.S. banks -- including the operations of
their branches in the Euromarket. The new approach is designed
to promote appropriate diversification of bank portfolios and
to avoid excessive concentration of lending relative to a bank's
capital position. Special attention is given to bank management procedures for assessing risk and controlling exposure.
To support these efforts, new, comprehensive reports are being
collected from each U.S. bank doing business internationally.
The information provided shows a bank's exposure to each country
abroad, with detailed breakdowns by type of customer, type of
loan, and maturity. The reporting system gives bank examiners
a uniform basis for reviewing in detail a bank's internal loan
and deposit records. The approach is complemented by onsight
inspection at U.S. banks' overseas branches. Above all, the
supervisory system emphasizes the continuing need for banks
to take account of changes in economic conditions in countries
abroad in formulating their lending policies. To be sure,
no supervisory approach can guarantee that there will never be
a problem with a particular loan. But the emphasis on strong
management controls and adequate diversification should limit
potential adverse effects on the banking system as a whole.
- 6 The need for improved supervision has been recognized
by a number of countries, and many have felt that a cooperative
international approach could reinforce their own domestic
effortso There has been a significant expansion in the amount
of information collected through the Bank for International
Settlements, and new efforts are underway. The central banks of
all major countries meet regularly through the BIS, at the policy
level and the technical level, to exchange views on Euromarket
developments and to discuss supervisory techniques. These
efforts are being strengthened.
Nonetheless, we reocgnize that the Euromarket represents
a global system, and that the participants in that market manage
their positions from a global perspective. These markets
inevitably interact with domestic money and credit markets.
Therefore, we should consider whether additional measures are
needed to help assure that the Euromarkets do not work to
erode domestic money and credit policies, and that the markets
themselves remain strong and capable of fulfilling their
intermediary function. A variety of instruments — for example,
introduction of a minimum reserve requirement on Euro-currency
deposits -- could be considered that would make a contribution
to the strength and stability of the Euromarket, and to the
greater effectiveness of national and international monetary
policies. This is an area that deserves careful attention in
the period ahead. In.the meantime, the U.S. will continue
to work to assure that there is adequate information about
the Euro-currency
and supervision necessary to insure
International
Rolemarkets
of the Dollar
that the markets operate prudently.
The second area of concern -- the international role of
the dollar -- is related very closely to the concern about
international credit. The bulk of Euromarket activity, and
the bulk of private and official borrowing, lending and reserve
accumulation, takes the form of dollars. As these magnitudes
have grown by scale factors in recent years, so also has the
volume of dollars held by non-U.S. residents, whether in the
form of claims on the United States or dollar claims on the
Euromarket,
- 7The concern is whether the existence of large dollar balances
constitutes an important source of instability in the international monetary system. Particularly in the light of the
exchange market instability of recent years and the heightened
perception that external developments do make a difference to
the United States, this concern has given rise to various
proposals -- for funding or consolidating foreign official
dollar holdings, for increasing the role of the SDR in the
system, and for placing greater reliance on other currencies,
such as the Deutsche mark and the Japanese yen, in international
financial transactions and reserves.
It is clear that sudden shifts in ownership of dollar
balances can and sometimes do add importantly to pressures
and instability in the exchange markets. But there is substantial question whether the existence of large foreign-held
balances is the major part of the problem that has affected
the dollar. The period of dollar instability prior to last
November 1 undoubtedly was rooted in questions about our
underlying economic policies, performance and outlook; questions
about our will in mounting a coherent and effective attack on
problems of energy and inflation. There was during that period
some diversification by foreigners out of dollar holdings -mainly private but to some extent official. But that experience
also reaffirmed what we already knew -- that there is enormous
scope for capital movements and changes in the timing of payments
by American residents, leading to exchange market pressures quite
independent of an existing stock of foreign dollar balances.
The experience since November 1 -- involving large reflows into
dollars -- has taught that same lesson in reverse. Thus while
moves to reduce the international role of the dollar, particularly the reserve role, may have some positive impact on market
perceptions and behavior, I do not believe this approach
can get at the root cause of exchange market problems.
Consequently, the effort to strengthen the role of the
SDR -- and as part of that effort, discussion of a possible
substitution account in the IMF -- should be seen as part of
a long-term evolution of the system, an evolution which holds
out an ultimate prospect of greater order and stability, but
which is not directed to the immediate market situation.
I should stress that in this examination of structural
changes in the international monetary system, the U.S.
objective is not to perpetuate a particular international role
for the dollar. The dollar's present role is itself the
product of an evolutionary process -- a process that will
- 8 continue, and that may bring a reduction in the dollar's
relative role in the future. Indeed, some of the main
factors in the evolution of the dollar's role would appear
to suggest some gradual reduction.
First, the relative size of the U.S. economy has
declined substantially over the past two decades, from about
30 percent of the world's GNP in 1960 to about 23 percent
in 1978. I would expect the trend to continue to some
extent during the 1980's, as developing nations continue to
grow faster than the world's average, and the spread of
technology enables other nations to move closer to the
high levels of production and living standards enjoyed by
the United States.
Second, foreign capital markets have also expanded
relative to that of the United States
In 1964, the U.S.
capital market provided roughly $80 billion of net new credit,
as compared with less than half that amount in Japan and
Germany combined. By 1977, the figures had grown to about
$400 billion in the U.S., as compared with about $250 billion
in Japan and Germany. During the 1960's, no market other
than the U.S. could have handled issues of the size needed
by major international borrowers, some of which exceeded
$100 million. That is no longer the case. As an example,
the U.S. Treasury raised almost $3 billion on the German
market in a three-month period following the November 1
announcement.
But against these developments, the openness of the U.S.
market is not duplicated in other major countries. Most
maintain restrictions of one kind or another, applied with
varying degrees of severity.
Thus, while there have been significant changes in the
relative size of the U.S. economy and capital market, these
have not been paralleled fully by opening of foreign money
and capital markets. Yet it seems to me that this last
condition must be fulfilled if there is to be a significant
reduction in the dollar's international role. The SDR offers
potential for assuming a larger role in official reserves -and perhaps, in time, a role in private transactions. But
given the large volume of international credit that will be
needed in coming years, a reduction in the role of the dollar
in practical terms implies willingness of other countries to
open their money and capital markets, to match their heavier
weight in the international economic system. Some progress *
has been and is being made. More is needed.
- 9Economic Policy Coordination
The third major area of concern -- in my view the most
fundamental and most important one --is whether and how
quickly the international community can bring itself to
coordinate economic policies more effectively, to reduce
inflation rates and inflation differentials and to manage
domestic growth rates so as to bring about a better balance
in global economic relations.
I do not believe that the instabilities and tensions of
recent years can realistically be ascribed .in an important way
to defects in our international monetary arrangements per se.
They are more deeply rooted in the massive move toward
interdependence that has characterized the past three decades.
Progressive trade liberalization and heightened access to
international capital brought unparalleled progress to the
world economy. But as part of this process, national economies
became much more intertwined. The industrial and agricultural
structures of the advanced nations are now highly dependent
on foreign sources and foreign outlets. Trade flows,
now greatly liberalized, respond more quickly and more powerfully
to changes in incentives. Owners of capital have become much
more sensitive to opportunities to move money across national
boundaries and freer to do so. Exchange rates, and the
international monetary system more generally, have become
subject to much more immediate responses to disparities that
develop in national economic performance.
In short, the benefits of greater interdependence have
come at the price of greater exposure and vulnerability to
events elsewhere in the world. One practical implication of
greater interdependence is greater constraint on national policy
formulation. Today all governments are constrained to take
account of the effects of their policies on others; to factor
external developments into domestic policy formulation; and to
maintain consistency between their international economic
objectives and their domestic economic performance.
Such constraints have never been entirely absent. But
with the changes we have witnessed in the world economic
structure over the past three decades, they have become more
severe and more difficult to ignore. There is broad international
understanding of the meaning and implications of interdependence,
not only on an intellectual level but to some extent in practice.
We have over the years developed a variety of organizations to
facilitate international cooperation in many fields. The OECD
has served as a forum for discussion among the industrial
- 10 countries of economic policies and balance of payments
developments. The IMF has traditionally consulted with
member countries on broad economic policies, and has been
given important new potential for expression of policy
advice. The economic summits have opened a new range of
possibilities for coordination at the highest level among
the largest countries.
But we are still trying to work out the right organizational
framework for international coordination of national economic
policy -- and to make such coordination meaningful in translating
international consensus into domestic action.
We all face the imperative of cooperating and coordinating
to deal with the pressures of interdependence. The key question
is whether we can deal with these pressures in a constructive
and mutually beneficial way -- whether our ability to manage
meaningful domestic policy coordination on the part of sovereign
governments will keep up with the strains arising from our
increased interdependence. Evolution of the IMF's surveillance
role will provide a test. The IMF has been given potentially
important powers of surveillance and advice not only over
member countries' exchange arrangements, but over their domestic
economic policies as those policies relate to the international
adjustment process. These provisions afford a framework that
can be developed to provide a practical vehicle for policy
coordination -- if governments are prepared to give the Fund
the necessary power and influence.
Conclusion
I began this talk by referring to the question posed
by the organizers of this conference: whether the current
international monetary system will serve the future international
trade and investment environment. I believe that our international financial and monetary arrangements should and will
evolve, and our effort will be to see that they evolve in a
direction that is compatible with and supportive of a liberal
world trade and investment system. The current period of
relative monetary stability provides both a basis for confidence
and breathing space for unhurried consideration of ways to
strengthen our monetary arrangements. But the key question goes
well beyond improvements in our monetary arrangements -- it is
the need for governments to improve international economic
policy coordination, in recognition of their self-interest
in preserving our interdependent system. Meeting that need
is central to the maintenance
of an open and liberal trade and
oo 00 oo
investment environment for the future, and it must be the focal
point of our efforts.
Department of theTREASURY
IN6TQN,D.C.202
ELEPHONE 566-2041
FOR IMMEDIATE RELEASE
EXPECTED AT 10:50 A.M. EDT
FRIDAY, MAY 11, 1979
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SECOND ANNUAL CONFERENCE ON INTERNATIONAL TRADE
AND INVESTMENT POLICY
OF THE NATIONAL JOURNAL
WASHINGTON, D.C.
THE NEED FOR INTERNATIONAL COOPERATION IN THE
INTERNATIONAL INVESTMENT AREA
U.S.
Policy
U.S. policy with respect to international investment
is based on the premise that the total benefits from international investment are maximized if governments seek to
take no actions either to accelerate or hinder investment
flows into or out of their national territories.
We believe that intervention into investment by home
or host national governments may distort the efficient allocation of economic resources and thereby reduce the gains from
international specialization of industrial output and the
resulting gains from trade. Moreover, efforts by one
B-1594
- 2 -
government to tilt the benefits of international investment
in its direction through interventionist policies are
likely to prompt countermeasures by other governments, with
additional adverse effects on world economic welfare and
on overall international relationships. These effects
are similar to those created by tariff and nontariff
barriers to trade, export subsidies, and competitive
depreciation of a currency.
Hence the United States policy toward international
investment contains four important elements:
(1) the Government should neither promote nor
«
discourage inward or outward investment flows
or activities;
(2) the Government should avoid measures which
would give special incentives or disincentives
to specific investment flows or activities;
(3) the Government should avoid intervention in
the activities of individual companies regarding
their international investment; and
(4) the Government views investment flows to developing countries to be a matter of particular concern.
- 3-
The Nature of the Problem
This policy is tempered by the realities of today's
world.
it is clear that many governments actively inter-
vene in the investment process in an effort to garner
benefits for their national economies.
Indeed, many
state and local governments within the United States, and
occasionally our own Federal Government, have made such
efforts.
Such intervention takes many forms, but it can
combine the use of investment incentives and performance
requirements.
Incentives are generally used to influence
the locational decisions of individual firms.
Performance
requirements are imposed upon firms to ensure that they
contribute to the priority economic and social goals of
the host government.
These usually focus on local job
creation, transfer of technology to the local economy and
expansion of local value added and export levels.
These interventionist policies rest on an increasing
commitment to growth of new capital formation, a commitment
which the U.S. Government shares with other governments.
Coordinated international action to spur new capital
formation is a highly laudable objective, one which most
countries are pursuing.
- 4 -
What is troublesome, however, are some of the ways
in which governments are carrying out this objective.
Rather than adopting generalized approaches which will
increase total capital formation, governments often adopt
industry-specific, or even firm-specific, measures which
may only serve to redistribute existing investment or
divert to a different location investment that would
have been made in any event.
The recent Canadian offer of $68 million to the
Ford Motor Company to build a plant in Ontario instead
of Ohio is a case in point. So is the British enticement
of Hoffman-LaRoche, the giant Swiss pharmaceutical firm,
to locate operations in Britain with an incentive package
approaching $100 million. France this year offered the
Ford Motor Company an incentive package valued at a
reported $400 million to locate an automotive assembly
plant in Alsace-Lorraine, although the deal has apparently
fallen through. Advanced developing countries, such as
Brazil and Mexico, require foreign companies to produce
locally up to 100 percent of the value-added as a condition
of participation in their automobile industries — performance
requirements which are equivalent to zero import quotas on
parts and other imports and which are relaxed if and only if
- 5 -
the companies expand their exports.
Investment incentives
and performance requirements such as these have the effect
of shifting the location and benefits of investment across
national borders, thereby, in essence, exporting one
country's problem to another.
If these measures continue to'proliferate, conflicts
between governments may develop.
This would especially be
the case if the world economy were to go into severe
recession, and nations were to use investment incentives
and performance requirements as a means to try to transfer
the resulting unemployment in their economies to other
nations.
Under a floating exchange rate regime, the
resulting inflows might cause the offending nation's
currency to appreciate and thus to reduce its attractiveness
as a place to invest.
At its worst, a spiral of beggar-thy-
neighbor competition might develop, where intervention by
one government could stimulate emulative countermeasures by
others to the detriment of all. We believe that no crisis
of this nature will develop if we can develop a broad
consensus on an international economic system permitting
investment to flow across national boundaries according
to economic forces.
- 6 -
A major objective of U.S. policy, therefore, is to
achieve increased multilateral discipline on incentives
and other interventions, both to maintain an open investment environment and to avoid emulative countermeasures.
The 1976 OECD Declaration of International Investment
and Multinational Enterprises and related decisions deal
with aspects of the problem and represent an initial
multilateral effort at strengthening multilateral discipline
and increasing international cooperation on investment issues.
Bilateral investment treaties and treaties of friendship,
commerce, and navigation deal with some aspects of the
investment relationship. None of these, however,
constitutes more than a start at achieving international
cooperation in this area. International trade and
monetary affairs, by contrast, are governed by long-standing
rules and institutional arrangements embodied in the GATT,
in bilateral treaties, and in the Articles of Agreement of
the International Monetary Fund. Major improvements in the
trading rules have just been accomplished in the Multilateral Trade Negotiations. We believe that similar
cooperation on international investment should remain a
priority item on the international economic agenda.
- 7 -
The development of a basis for multilateral cooperation with respect to international investment has thus
become an important part of U.S. international economic
policy. We face a basic problem, however, in trying to
achieve cooperation in that most governments have not
yet recognized the need for increased international
cooperation to maintain open principles regarding international investment. In part, this is because direct
investment has become a major vehicle for international
economic exchange only in the last twenty years or so,
and its impact upon the international economy has thus
not been visible for as long a time as the impact of
trade flows and exchange rate changes.
A similar ambivalence exists within the United States.
Many of our own laws, regulations, and policies affecting
international investment and multinational firms have
been carried out unilaterally, without full consideration
of their international dimensions. Our own states and
localities often extend incentives which attract investors
from abroad as well as domestic investors. I have recently
discussed this issue in meetings with representatives
of state and local governments, under the auspices of the
Advisory Commission on Intergovernmental Relations. The
Commission is now studying the interaction between such
- 8 -
internal U.S. actions and the international investment
process, as part of its broader analysis of relations
among the states themselves regarding investment policies.
Similar sub-national issues regarding international investment policy also arise in other countries with federal
government systems, such as Canada.
Unaddressed, the underlying problems resulting from
governments' use of incentives and performance requirements
will likely get worse simply by virtue of the growing
volume of international'investment.
The large firms of
Japan and Europe increasingly are extending their investment activities into foreign lands along with their U.S.
rivals.
Some of the more, advanced developing countries
(e.g., Brazil, Mexico, Taiwan, Korea) have become hosts
to foreign investment on a large scale.
In addition,
some large firms based in these rapidly industrializing
nations have themselves become multinational, and hence
several of these nations are now home as well as host to
foreign direct investment.
And growing investments by
Germany and Japan in the United States promise to accentuate
our own position as the second largest host to foreign
investment, after Canada.
- 9-
If past experience concerning the international
interplay of national economic policies has taught us
anything, it should be that we need to identify and
devise means to address problems at an early stage —
before vested interests become so strong that a crisis
is required to bring forth appropriate international
action. Failure to take early action in the area of
trade, for example, led to trade wars and competitive
exchange rate devaluations during the 1930's, actions
which doubtlessly deepened and prolonged the Great
Depression. Only after the Depression actually occurred
were trade and monetary rules created that were designed
to prevent its recurrence..
In the case of international investment, we are not
yet to a point where vital interests have been sufficiently
damaged as a result of undesirable national competition
for international investment as to create a global crisis.
Even so, individual problems, such as those mentioned
above, have produced some clashes.
Developments to Date
It is therefore encouraging that progress is being
made on several fronts to deal with the problems I have
discussed. I noted earlier the 197 6 OECD investment
instruments. Additionally, the OECD is working on a Medium
- 10 -
Term Work Program on investment incentives and disincentives.
The first stage of this program will consist of an analysis
of the effects of such measures on the international investment process. We hope that this effort will result in
greater consensus among OECD member countries on ways to
deal with problems in this area.
I will in the meantime be chairing in June the first
meeting of the Investment Task Force of the Development
Committee, an intergovernmental group under the combined
auspices of the International Monetary Fund and the World
Bank. This task force is a newly created entity which will
provide a forum for subministerial-level representatives
of governments from a group of developing and industrialized
nations to discuss investment problems, and to search for
specific steps which might be taken to improve the contribution of direct investment to the development process.
The United States is currently engaged in talks with
Canada over the use of investment incentives in the automobile industry. It is noteworthy that the Canadian Minister
for Industry, Trade and Commerce, Mr. Horner, in March
called for discussions with the U.S. "on an urgent basis ...
to reach agreement to contain such investment incentives."
We hope that these talks will ultimately result in agreement
- 11 -
between our nation and our close neighbor to limit these
incentives.
The Shape of International Cooperation
To predict the form that international cooperation in
the investment area might ultimately take is difficult.
No matter what forum deals with this matter, several
intellectual and institutional problems would inevitably
have to be faced. For example, we might ask:
— When is an incentive legitimate as a means to
offset the disadvantage of investing in a
particular locale, and when does it exceed
that bound?
— When does an incentive actually induce a firm
to shift production from one nation to another,
as opposed to influencing where among several
sites within a nation it might locate?
— Can the investment issue be handled through the
GATT and other instruments and institutions of
trade policy, or does it call for separate or
additional responses?
We do not pretend to have clear answers to these
questions. Nonetheless, we believe that it is important
to try to distinguish an acceptable incentive from an
- 12 -
unacceptable one.
forth:
Two principles can be tentatively put
an undesirable investment incentive would be one
which would both
1) Cause industrial investment to be located in
the territory of the nation granting the incentive,
while in the absence of the incentive the investment
would go to some other nation's territory.
2) Distort the efficient allocation of resources as
between any pair of nations.
-It should be noted that, under these principles, measures
which are sometimes referred to as "incentives" but in fact
amount to the removal of government imposed disincentives
to investment would not be condemned.
Such exempt measures,
for example, would include broad-based tax reductions and
the liberalization of government regulations which affect
business.
These measures would constitute a move by govern-
ment toward a "neutral" role in investment decisions.
If one
government moves toward "neutrality," it should be above
criticism by other governments.
By contrast, direct or
indirect subsidies to a firm which are not compensatory in
nature —
including operating subsidies, subsidized loans,
free provision or payment of front end cash or noncash grants
to the firm —
would be covered.
- 13 -
We also believe that all incentives should be transparent and open to any potential investor. Thus, "tailor-made"
incentives which are offered only to a single, specific
investor or group of investors should be avoided, even if the
incentives are not in violation of the principles just stated.
Two categories of incentives may require special treatment. One encompasses incentives designed to draw investment
into disadvantaged or depressed regions of a nation.
The other covers incentives to research and development.
Arguments based on sound economic reasoning suggest that a
limited case might be made for direct subsidies in each of
these areas. While I will not review the arguments today,
special treatment for depressed regions and for research
and development may be necessary.
Dealing with performance requirements is as difficult
as dealing with investment incentives. In general terms,
it can be argued on economic grounds that any performance
requirement is undesirable unless it acts to offset some
imperfection in the working of the market.
The problem is to determine what, if any, imperfections
exist in a given situation and to determine if performance
requirements act solely to correct the deficiency. Such
a determination is particularly thorny in the context
- 14 -
of the so-called "North-South dialogue."
Performance
requirements are often justified as necessary to assure
that multinational enterprises meet local goals of host
governments. But abuses by multinational firms in developing nations, while they undoubtedly occur, are much
exaggerated, and we believe that the case for performance
requirements is overstated. It is true that performance
requirements are primarily designed to further the social
goals of developing nations, however, and we must therefore
be willing to be flexible in dealing with them on these
issues.
Whether or not we should seek to deal with these issues
in the context of the existing institutional framework for
trade, or in another new context, is an intriguing matter.
The recent Multilateral Trade Negotiations (MTN) succeeded
in establishing new international rules on government
practices which affect the investment area. For example,
agreement was reached on new international commitments
to prevent or limit the effects on trade of export and
domestic subsidy programs. Under the new MTN Subsidies/
Countervailing Measures Code, a signatory could take countermeasures if it determined that another nation's subsidy
program had caused material injury to one of the signatory's
- 15 -
industries because of subsidized exports.
In addition,
in the case of an outright export subsidy, any adverse
effect on another nation's trading interests would be
sufficient to justify countermeasures. Some of the
incentives currently used to attract foreign investment
would be covered under these provisions. Under the
new agreement, those countries whose production and trade
interests are harmed by other's subsidies, including
investment incentives, will have recourse to an internationally sanctioned means of dealing with the situation.
One might well ask why the entire problem of investment incentives cannot be,handled through these agreements
rather than through arrangements related directly to
investment policies. Part of the problem in doing so lies
in the fact that such incentives, rather than creating
trade, may destroy opportunities for trade by creating
import substituting investment and thus be hard to reach
via trade mechanisms.
More importantly, however, use of tools designed to
deal with actual trade flows would frequently represent a
case of "too little and too late" in responding to investment incentives. In 1973, for example, the United States
could respond actively to Canadian investment incentives
which lured a Michelin tire plant to Canadian soil only
after imports of tires from the plant began to enter the
- 16 United States.
built.
Action was needed before the plant was
Trade sanctions, such as countervailing duties,
have traditionally been taken after production is underway
and trade is established, long after millions of dollars
are invested in a facility and jobs are transferred from
one location to another.
When that kind of damage has
already been done, trade sanctions have been unable to
remedy the injury.
It is possible that the threat of a
countervailing action by another country would have some
deterrent effect on government subsidies, and we are now
studying how much of the investment incentive problem
can be met by the new GATT rules.
But whatever the agreed
mechanism, the important thing is to deal with competition
between governments at all levels.
Conclusion
As I have indicated, the groundwork for further international cooperation is now being laid.
At this point in
the discussions, the outcome is uncertain.
Those of us who are convinced of the need for additional
international action to deal with the problems arising from
governmental intervention in the investment process face
a difficult period of education and persuasion to overcome
the skepticism of those who as yet remain unconvinced.
We
must also solve the tricky substantive questions involved
- 17 in establishing criteria as to which incentives are acceptable
and which are not.
We will proceed, however, with the
mistakes of the past fully in mind and in the conviction
that these difficulties can and will be overcome.
For Release upon Delivery
Expected at 10:00 a.m. E.D.T.
Statement of
Donald C. Lubick
Assistant Secretary of Treasury for Tax Policy
Before the
Committee on Ways and Means
May 14, 1979
Mr. Chairman and members of the Committee:
We welcome the opportunity to present the
Administration's views on H.R. 3712. The bill would
generally prohibit the use of tax exempt bonds for
single-family housing.
We are pleased to give H.R. 3712 our full and
uncondititional support in all material respects. Over the
past few months, we have become increasingly concerned that
mortgage subsidy bonds are wasteful, expensive, and
inflationary. By 1984, they could cost the taxpayers of this
country as much as $10 or $11 billion a year. Most of this
money would be wasted; very little would go to those families
who actually need public assistance. At the same time, these
billions of dollars would add to inflation in the price of
housing and other goods and services. We believe that Mr.
Ullman, Mr. Conable, and the other distinguished sponsors of
H.R. 3712 have addressed these concerns in a sound and
responsible manner.
fo')sq$
2
Background
In the past few years, there has been an explosive
increase in the volume of tax exempt revenue bonds issued by
State and local governments for the purpose of making low
interest mortgage loans for single-family homes. The
Congress, the press, and the public have become increasingly
concerned about these bonds. Their use has been condemned in
publications of such diverse editorial opinion as The
Washington Post, The Wall Street Journal, and The New York
Times.
Because interest on these bonds is tax exempt, the bond
proceeds can be used to make mortgage loans at approximately
2 percentage points below conventional mortgage rates. The
security for the bonds is a pool of mortgage loans made with
the bond proceeds, and the bonds are serviced by principal
and interest payments collected from the individual
mortgagors. The bonds are not backed by the credit of the
issuer.
These mortgage subsidy bonds are part of a growing trend
of using tax exempt bonds for private purposes.
Traditionally, tax exempt bonds have been used almost
exclusively for essential public projects such as roads,
schools and municipal buildings. They have not been used for
such private purposes as single-family housing.
A few State housing agencies began to issue small
amounts of tax exempt bonds for single family housing in the
early and middle 1970's. Most other State agencies adopted
the practice in 1977 and 1978. However, the full extent of
the potential volume of these mortgage subsidy bonds was not
revealed until July of 1978. At that time, a major
municipality sold a $100 million issue for homebuyers having
annual family incomes of $40,000 or less. This was the first
instance in which an issuer other than a State housing
finance agency sold revenue bonds to make mortgage loans for
single family housing.
Other localities soon concluded that they too could
sponsor revenue bond programs at little or no cost to
themselves. Experienced investment bankers have prepackaged
plans that they can modify to fit the specifications of
nearly any locality. Local savings and loans handle the
administrative chores of processing loan applications,
selecting those that are credit worthy and collecting monthly
mortgage payments. Private insurance companies (or the FHA
or the VA) provide layers of security for the bondholders.
3
Finally, the locality itself is not responsible in the event
of default. The locality does not back the bonds in any way;
security for bondholders is provided solely by the mortgages
and mortgage insurance, and by reserve funds set up from bond
proceeds at the time of issuance. Because localities have no
responsibility and take no risk, they have every incentive to
issue as many mortgage subsidy bonds as the market will bear.
To say mortgage subsidy bonds are spreading like
wildfire is an understatement. During 1978, $622 million of
these mortgage subsidy bonds were sold by localities, and the
potential volume in 1979 is at least $3.8 billion. This
explosive growth has occurred even though only about a dozen
States currently have laws permitting localities to issue
revenue bonds for this purpose. We expect that the vast
majority of States will enact legislation authorizing
issuance of these bonds in the next few years. Even now,
enabling legislation has been introduced in many States.
The potential growth of mortgage subsidy bonds is
enormous. In 1978 approximately $176 billion of gross new
mortgage loans were made for single family housing. The
total of all mortgage subsidy bonds in 1978 amounted to less
than 3 percent of this volume. By way of comparison, the
total volume for 1978 of all municipal bond issues was
approximately $46 billion.
In 1968, Congress attempted to restrict the use of tax
exempt bonds to traditional public projects. These include
low income rental housing, but not single-family homes.
Low-income projects afford the basic necessity of shelter to
poor families. Single-family homes, by contrast, not only
furnish shelter but perhaps also represent the best
investment that most American families can make.
It is true that the present statute contains language
( residential real property for family units") broad enough
to permit tax exempt bonds for single family housing.
However, this was apparently an oversight. The statutory
language was written in 1968, at a time when housing bonds
were for multi-family projects; revenue bonds for single
family housing were virtually unknown until the middle
Cost
1970's.
There surely is no way to get something for nothinq if
certain homebuyers save money because of tax exempt bonds
these savings have to come from somewhere. And indeed thev
do — the taxpayers pick up the tab.
4
The total cost of mortgage subsidy bonds depends
directly on the volume of these bonds that are sold.
Therefore, our estimates of revenue loss are based on a range
of reasonable assumptions about the volume of bonds. If we
assume that the volume of bonds will be sufficient to finance
10% of home mortgages, the cost will be $470 million in 1981.
On the other hand, if the volume is sufficient to finance 50%
of home mortgages, we stand to lose $1.6 billion in 1981 and
$11.0 billion in 1984. In the longer run, we stand to lose
as much as $22.1 billion a year (expressed in 1984 dollars).
A study recently prepared for Congressman Reuss and the
Banking Committee by the Congressional Budget Office
estimated that mortgage subsidy bonds would finance about 8%
of all mortgages in 1984. In the short time that has elapsed
since the CBO study was released, it has become clear that
this estimate was far too conservative.
There quite literally are no natural limits on the
potential growth of mortgage subsidy bonds. Put simply, no
one wants 10% mortgage money when 8% money is available.
Thus, it is not unreasonable to expect that close to 40% or
50% of all home mortgages could eventually be financed with
tax exempt bonds.
Inflation
Mortgage subsidy bonds are highly inflationary for three
reasons. First, their cost adds considerably to the budget
deficit. The American people will perceive that we do not
take inflation seriously if we choose, in effect, to spend
billions of dollars annually on a new program of housing
subsidies for the middle class.
Second, mortgage subsidy bonds have a direct and
immediate impact on housing prices. By adding demand to a
housing market that has been overheated, these bonds could
have a substantial impact on the price of a home.
Third, mortgage subsidy bonds tend to frustrate monetary
policies designed to help bring inflation under control by
gradually cooling off the economy. Historically, the housing
market has been especially sensitive to high interest rates.
Consequently, when interest rates rose during previous
business cycles, demand for housing fell off and this helped
to stabilize the economy. During the most recent business
cycle, however, the housing market has been largely insulated
from the effect of higher interest rates. At first, money
5
market certificates issued by savings and loan associations
attracted a significant amount of additional capital to the
housing market. More recently, we have attempted to correct
the situation by reducing interest rates on these money
market certificates. However, mortgage subsidy bonds
threaten to defeat our efforts to have the housing market
contribute its share to cooling off the economy. They
insulate housing from high interest rates even more
effectively than money market certificates; not only do the
bonds attract capital, but they do so at below market rates.
Waste
Mortgage subsidy bonds are both wasteful and
inefficient. The case for mortgage subsidy bonds is based on
two premises: first, that middle class Americans need public
assistance to buy homes, and second, that tax exempt bonds
are the best way to provide that assistance. We believe that
both of these premises are incorrect.
The first premise seems to assume that the majority of
Americans need public assistance. This assumption turns the
world upside down. It seems elementary that public
assistance must be limited to those who could not otherwise
afford basic necessities. Public assistance for housing must
be limited to those families who need help if they are to
have a safe and decent place to live.
Fortunately, middle class Americans do not need public
assistance to buy homes. Even at the lower end of the middle
class, most Americans are able to afford their own homes.
For example, our most recent statistics show that nearly 2/3
of all families with incomes of between $10,000 and $15,000
own their own homes.
If mortgage subsidy bonds ever make any sense at all -and we don't believe that they do — it can only be when they
are used for families who have no other way to get a
mortgage. However, most of these families are necessarily
excluded from mortgage subsidy bond programs. In order to
attract investors and to obtain necessary insurance, mortgage
subsidy bonds can be used only for families who meet
conventional credit standards. In other words, if a family
qualifies for a mortgage loan at a local bank or savings and
loan association, then they can qualify for assistance under
a mortgage subsidy bond program. However, if the family is
not able to qualify for a conventional mortgage loan, then
they are almost certain to be shut out of the subsidy
program. Thus, families who do not have access to
conventional
these bonds. sources of credit are unlikely to benefit from
6
Moreover, mortgage subsidy bonds cannot possibly benefit
families in the lowest income groups because these families
simply are not able to afford their own homes. Consequently,
mortgage subsidy bonds do nothing for those most in need of
housing assistance.
The second premise is also incorrect. All tax exempt
bonds are inefficient in the sense that the average cost to
the taxpayers exceeds the savings to the issuer of the bonds.
This inefficiency is compounded in the case of mortgage
subsidy bonds because a significant portion of the bond
proceeds are not used to make mortgage loans, but instead are
wasted on lawyer's fees, underwriter's fees, reserve funds,
and other similar items. In addition, substantial
administrative fees must be paid each year. The net result
can be that of each $1.00 of cost to the taxpayers,
significantly less than 50jd or 6Ojz* is actually passed on to
homebuyers.
Additional policy considerations
Over a period of years, mortgage subsidy bonds could
result in substantial changes in the basic structure of our
economy and tax system. We would like to address a few of
the most important of these changes.
First, there would be a sizable shift in the allocation
of capital between housing and other sectors of the economy.
In particular, large amounts of capital would flow into the
housing sector at the expense of industrial plant and
equipment. This could only serve to aggravate the problems
we have had over the past 5 or 10 years in promoting capital
formation.
In this regard, it should be noted that existing Federal
policies do much to attract capital into the housing market.
For example, tax expenditures for single family housing
(i.e., deductions for mortgage interest and property taxes
and special capital gains rules) will alone amount to more
than $16 billion in fiscal year 1980. This is in addition to
extensive programs for mortgage insurance. It is doubtful
that we should do very much more to encourage capital
investment in housing at the expense of industrial plant and
equipment.
Mortgage subsidy bonds also have a direct effect on the
stock market. To a fair extent, stocks and tax exempt bonds
compete with each other for the same funds. Many wealthy
investors who can afford to take risks in the stock market
7
are attracted instead to tax exempt bonds. Mortgage subsidy
bonds could easily result in a doubling of the supply of tax
exempt bonds that comes to market. If they do, this could
frustrate many new and growing corporations in their attempts
to raise venture capital.
Second, there could be a substantial effect on the
market for tax exempt bonds. In the first quarter of this
year, mortgage subsidy bonds accounted for nearly 30% of all
new issues. This additional supply had a considerable impact
in driving up interest rates on tax exempt bonds, but H.R.
3712 has already brought these rates down. Compared to
interest rates generally, tax exempt rates have become very
low by historic standards as a result of the introduction of
H.R. 3712.
More precisely, it has been estimated that tax exempt
rates increase by between 4 and 7 basis points for each
billion dollars of mortgage subsidy bonds sold. As tax
exempt rates increase, it becomes progressively more
expensive for State and local governments to finance
essential public projects such as schools, roads, and other
public works. Some localities, especially those with a
weaker credit, may be denied access to the market altogether.
It has been estimated that each billion dollars of mortgage
subsidy bonds drives perhaps $100 million of conventional
municipal bonds off the market.
The impact on other tax exempt housing bonds will be
especially severe. It has been estimated that each billion
dollars of mortgage subsidy bonds will result in an increase
of between 11 and 14 basis points in the cost of tax exempt
financing for low and moderate income rental projects. Thus,
mortgage subsidy bonds will actually increase the cost of
shelter for those most in need.
In addition, if mortgage subsidy bonds are part of a
trend — and they would appear to be — radical changes could
be ahead for the tax exempt market. This market has been
increasingly diverted from its historic use for traditional
public projects. For example, revenue bonds now comprise
about 2/3 of the tax exempt market, while general obligation
bonds were predominant as recently as two or three years ago.
As the tax exempt market expands, there will be a
considerable change in the method of allocating capital
within our economy. Decisions about the allocation of
capital will be made increasingly by government, and not by
market forces.
8
This Administration has consistently recognized the need
for a strong and active tax exempt market so that State and
local governments can effectively carry their share of
responsibilities under our federal system. However, as the
tax exempt market swallows up an increasingly large share of
the sources of capital, its purpose is diluted and its
effectiveness is diminished.
Third, mortgage subsidy bonds raise substantial
questions about the role of government in our free enterprise
system. In many localities across the country, government
has gone into business in direct competition with local banks
and savings and loan associations. As a major newspaper has
noted, this development "carried to its logical, which is to
say political conclusion, . . . would put local governments
in full competition with private enterprise — the banks and
savings and loans. Those institutions could not win in such
a competition because of the income-tax quirk and might well
be replaced eventually by local governments as the source of
almost all mortgage money." (The Washington Post, April 21,
1979, page 14.) We do not believe that it would be healthy
to have government replace free enterprise in such a large
sector of our economy.
Fourth, a large increase in the volume of tax exempt
bonds would do considerable injury to the fairness of our tax
system. It would literally make it possible for wealthy
investors to escape taxes completely on billions of dollars
of income each year. We should not be making it any easier
Other
provisions
for the
rich to avoid paying taxes.
H.R. 3712 would continue to allow tax exempt financing
for rental housing, but would limit such financing to low and
moderate income projects. In some instances, tax exempt
financing has been used in connection with high rent projects
for the well-to-do. Therefore, we believe a limit of this
kind is necessary and appropriate. However, we are concerned
that the bill may go too far in limiting efforts to promote
economically integrated rental housing for low and moderate
income families.
The bill also would allow States to finance homes for
veterans with tax exempt general obligation bonds. We
believe that the Committee should eliminate this provision.
9
For the next several days, the Committee will be hearing
testimony from a number of witnesses who have sincere
concerns about various provisions of H.R. 3712. We
understand that members of the Committee may want to
accomodate certain of these concerns. For example, as noted
above, some economically integrated rental projects may
inadvertently have been affected. In addition, there is some
concern regarding transitional rules for financings that were
very far along on April 24. We would be glad to work with
the Committee and its staff in developing such changes as may
be necessary.
Conclusion
In concluding, we would like to return to the three
points that we made at the beginning of our testimony.
First, mortgage subsidy bonds are enormously expensive and
could eventually cost as much as $10 or $20 billion a year.
Second, they make it harder to solve this nation's number one
economic problem, which is inflation. And third, they waste
an enormous amount of money on public assistance for the
well-to-do. For these reasons, we are opposed to mortgage
subsidy bonds, and are in full agreement with Mr. Ullman, Mr.
Conable, and the carefully thought out legislation that they
have introduced.
o 0 o
Appendix A
Calendar Year Change in Tax Liability
Under H.R. 3712
"Projected Market Share
in 1984 of Single-Family
Mortgages Financed With
Tax-Exempt Bonds
(
$ in Millions
1979 : 1980 : 1981 : 1982
1983 • 1984
1,549
2,345
0.10
39
183
469
920
0.20
50
260
771
1,643
2,878 4,492
0.30
56
325
1,057
2,368
4,236 6,681
0.40
63
382
1,331
3,082
5,586 8,868
0.50
68
434
1,598
3,791
6,931 11,049
Office of the Secretary of the Treasury
Office of Tax Analysis
May 14, 1979
Appendix B
Long-Run Reduction in Tax Liability From
Tax Exemption of Mortgage Subsidy Bonds
(Excluding Veterans' Programs)
1984 Levels
(.$ in Millions)
Market Share of Single^Family
Mortgages Financed With
Tax-Exempt Bonds Under Current Law
0.10
Revenue Cost:
Current Law
4,413
0.20 8,826
0.30 13,239
0.40 17,652
0.50 22,064
Office of the Secretary of the Treasury
Office of Tax Analysis
May 14, 19 79
These figures reflect volumes of mortgages outstanding
financed with tax-exempt housing bonds at alternative projected
long-run shares of mortgage market. The projected end of 198 4
stock of all outstanding mortgages for single-family housing
is $1,678.3 billion.
May 9, 1979
DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
SALARIES AND EXPENSES
Introductory Statement of W. J. McDonald
Acting Assistant Secretary (Administration)
For Presentation to the Subcommittee on Appropriations
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to come before you today
to present the 1980 request for the Office of the Secretary
"Salaries and Expenses" appropriation. The Office of the
Secretary is requesting $30.9 million and 831 permanent positions for 1980, which is a decrease of $.2 million from the
authorized level proposed for 1979. In addition, $979,000
is requested to cover the Office of the Secretary civilian
pay act requirements for 1979.
The Office of the Secretary appropriation request
includes positions and funds to support the Secretary and
his staff of policy officials—which include officials and
their staffs engaged in tax policy formulation, economic policy
matters, legislative affairs, debt management, and legal
matters. Likewise, it includes the administrative support
activities which are an inherent part of the Office of the
Secretary.
This request, in keeping with the President's battle
against inflation, is lean and austere. The budget requests
\S%
-2an increase of 10 permanent positions and $560,000, plus
$858,000 in resources to maintain the current level of operations. These requested increases, however, are offset by
a reduction of 18 permanent positions and $1,596,000. Thus,
when compared with the level authorized for FY 1979, it
represents a net decrease of eight permanent positions and
$178,000.
Included in the program increases is a request for three
additional positions for the Assistant Secretary (Domestic
Finance). These positions are requested specifically to provide added analytical capability to the Office of Government
Financing. This office provides the Secretary and others
with technical assistance and financial and economic data on
matters related to government financing, public debt management, federal credit programs, and related economic and
financial problems. Specifically, the need for research and
analysis of the Treasury securities market has increased in
view of the large and continuing demands in the market as the
result of budget deficits and substantial refunding burdens.
Such research and analysis should lead to the development of
more efficient financing techniques and result in substantial
savings in interest costs.
-3Three positions are requested to carry out the responsibilities of the Assistant Secretary (Tax Policy). These
positions are needed to process the large amounts of data
required for sound policy decision in the following areas:
resolving fiscal and energy-related problems through the
tax system; the budget deficit; tax expenditure estimates;
the tax treatment of capital gains to stimulate investment
and economic growth; highway excise tax structures; and
Social Security and welfare reform.
I am requesting two additional positions for the
Assistant Secretary (Legislative Affairs). This staff is
quite small and unable to respond adequately to requests for
advice, counsel, and other legislative activities by Treasury
officials. The increased activity in areas of trade, tariff
and anti-inflation legislation necessitates close liaison
with the Congress, White House, and other executive departments
to keep abreast of priorities, activities, and attitudes, and
also to see that all parties are provided with the proper
information on which to base their decisions.
Two positions are requested to aid the General Counsel
in carrying out the statutory responsibilities assigned to
the Secretary for oversight of the U.S. rail transportation
-4system, including Conrail and the U.S. Railway Association.
Increasing demands in this area preclude the continuing
diversion of resources from other activities to work on rail
and transportation matters.
The Office of the Secretary computer center requires
$300,000 in 1980 to convert to a new leased computer system
and to affect improvements to the present computer site.
Approximately one-half of this amount will be required to
provide programming assistance, rental costs supporting
parallel operations and additional communication lines during
conversion. The remainder will be required to make space
alterations, provide new air conditioning units and make
electrical and fire renovations to the existing site.
Changes to the budget, other than the program increases
already mentioned, include an increase of $858,000 to maintain
the current level of operations. These funds provide for
increasing communication costs, within-grade salary increases,
space costs, the annualization of increased positions granted
in 1979, and similar costs for the ongoing current programs.
The budget increases are offset by a decrease of 18
permanent positions and $1,596,000 for program reductions,
primarily the items authorized for the repairs and improvements in 1979. The reduction includes 13 administrative
positions and 5 buildings maintenance positions.
-5Pursuant to Executive Order 12087, this committee
also has before it a supplemental request of $979,000 to
cover the Office of the Secretary civilian pay act requirements .
This concludes my prepared statement, Mr. Chairman.
I shall be happy to answer any questions you or other members
of your Committee may have.
••••••___^_l _p__l
Department of theJR[/\$URY
TELEPHONE 566-2041
WASHINGTON, D.C. 20220
May 14, 1979
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,000 million of 13-week Treasury bills and for $3,001 million
of 26-week Treasury bills, both series to be issued on May 17, 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 August 16, 1979
Discount Investment
Price
High
Low
Average
97.606
97.589
97.597
Rate
9.471%
9.538%
9.506%
26-week bills
maturing November 15, 1979
Rate 1/
Price
9.86%
9.94%
9.90%
95.233
95.209
95.218
Discount
Rate
9.429%
9.477%
9.459%
Investment
Rate 1/
10.07%
10.12%
10.10%
Tenders at the low price for the 13-week bills were allotted 4%
Tenders at the low price for the 26-week bills were allotted 76%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
$
43,610,000
4,117,975,000
24,350,000
50,675,000
22,615,000
37,910,000
311,865,000
46,290,000
18,905,000
49,245,000
19,575,000
220,365,000
$
61,145,000
$
43,610,000
2,363,975,000 : 4,595,870,000
12,165,000
24,350,000 :
30,520,000
50,675,000
23,585,000
22,615,000 :
32,525,000
37,910,000
242,770,000
168,665,000
36,960,000
27,290,000
20,055,000
9,105,000
37,615,000
49,245,000
11,085,000
19,575,000
226,880,000
168,445,000
$
44,225,000
2,452,470,000
12,165,000
29,800,000
23,585,000
32,515,000
132,290,000
15,480,000
8,855,000
37,615,000
11,085,000
174,240,000
26,310,000
26,310,000
Treasury
TOTALS
14,820,000
$4,978,200,000
: Received
14,820,000 .
$3,000,280,000a/ $5,357,485,000
a/Includes $515,175,000 noncompetitive tenders from the public.
b/Includes $367,315,000 noncompetitive tenders from the public.
^/Equivalent coupon-issue yield.
B-1597
Accepted
$3,000,635,00Cj/
Apartment of theTREASURY
ASHINGTON, D.C. 20220 TELEPHONE 566-2041
IMMEDIATE RELEASE
Ray 14, iy;y
Contact:
Charles Arnold
566-2041
STATEMENT BY DEPARTMENT OF THE TREASURY
Ihe U.S. Executive Director of the International Monetary Fund
(IMF) did not dissent from today's decision of the IMF to approve
requests from the Government of Nicaragua for balance-of-payments
financing totalling SDR 51.6 million, equal to about U.S. $66 million.
The U.S. position on these requests was based solely on economic
and financial criteria, in accordance with the long standing U.S.
policy that decisions in the IMF should be based only on economic and
financial considerations and uniformity of treatment for all members.
The requests consisted of three parts:
1. A request for a stand-by arrangement providing for drawings
up to SDR 34 million (approximately U.S. $43 million) between now and
the end of 1980 under Nicaragua's four credit tranches. Any IMF
member can qualify for such credit tranche drawings provided it has a
balance-of-payments need and presents to the Fund a stabilization
program giving substantial justification of the member's efforts to
overcome its balance-of-payments difficulties.
2. A request for a drawing of SDR 17 million (approximately U.S.
$22 million) under the Compensatory Financing Facility. A member
having a balance-of-payments need may draw under this Facility if
experiencing temporary shortfalls in its export earnings due to
circumstances largely beyond the member's control, and if the member
cooperates with the Fund in an effort to solve its balance-of-payments
problems.
3. A request of SDR 583,000 (approximately U.S. $740,000) under
the IMF Buffer Stock Facility. Members with balance-of-payments difficulties are entitled to draw under this Facility to help finance
contributions to international commodity buffer stocks which have been
approvea by the IMF -- in this case covering sugar. (Such buffer
stock arrangements are aimed at stabilizing the prices of primary
products) .
It was the judgment of the IMF Management and staff that the
request from Nicaragua met the technical criteria for drawings under
each Facility indicated above. The U.S. Government, after careful
review, concurred in this judgment. There was therefore no economic
basis on which to dissent from the IMF decision.
This position should not be construed as a political action, or
as directly or indirectly reflecting any change in the United States
concerns over events in Nicaragua. The Department of State is today
issuing a press statement on this matter.
o00o
B-1598
DepartmentoftheJREASURY
WASHINGTON, D.C. 20220
TELEPHONE 566-2041
Contact: Charles Arnold
202/566-2041
FOR IMMEDIATE RELEASE
Friday, May 11, 1979
STATEMENT BY THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
ON U.S.-CHINA CLAIMS/ASSETS AGREEMENT
The U.S.-China claims/assets agreement was formally
signed in Beijing on May 11 at 9:00 a.m. local time by
Commerce Secretary Kreps and Finance Minister Zhang Jingfu.
This continues the momentum begun during Secretary Blumenthal's
February 24 -March 4 visit when he negotiated and initialed
the agreement.
"We hope that this momentum will carry us through the
successful conclusion of bilateral trade and textile agreements
this month," said Undersecretary for Monetary Affairs Anthony
Solomon who accompanied Secretary Blumenthal to Beijing. "The
formal completion of the claims/assets settlement marks the
first crucial step forward in the normalization of our economic
relations — a process that, I am confident, can be rapidly
completed with this issue now behind us."
oOo
B-1599
Department of theTREASURY
HINGTON, D.C. 20220
TELEPHONE 566-2041
IMMEDIATE RELEASE
May 14, 1979
CONTACT: Charles Arnold
202-566-2041
TREASURY ANNOUNCES NEW RULES
ON SECURITY AUCTIONS
The Treasury Department announced today that it is
implementing two new rules concerning its offerings of
marketable securities. Decisions on these new rules were
reached in conjunction with the joint Treasury/Federal
Reserve Board study of futures contracts based on Treasury
securities.
First, effective immediately, the maximum award to any
single bidder in Treasury security offerings will be limited
to 25 percent of the total of the combined amounts of the
competitive and the noncompetitive awards to the public.
This modified a previous rule which allowed a single bidder
in a Treasury auction to receive as much as 25 percent of the
announced amount of the public offering. The new rule excludes
from the 25 percent calculation those Treasury securities
allotted to the Federal Reserve in exchange for maturing
securities held both for its own account and for the accounts
of foreign official institutions. It also excludes Treasury
securities allotted to the Federal Reserve for new cash
tenders on behalf of foreign official institutions.
This new 25 percent rule is needed because the proportion
of Treasury bill offerings accounted for by the competitive
plus noncompetitive award to the public has declined significantly in recent years. The Treasury Department expects
this change to eventually broaden the competitiveness of the
auction process and contribute to improved distribution of
new securities.
Second, beginning June 18, 1979, the Treasury will
require all bidders in its bill auctions to report on the
tender form the amount of any net long position in excess
B-1601
- 2 of $200 million in the bills being offered. This information
should reflect positions held at the close of business on the
day prior to the auction. Such positions would include bills
acquired through "when-issued" trading, and futures and forward
transactions as well as holdings of outstanding bills with
the same maturity date as the new offering, e.g. bills with
three months to maturity previously offered as six-month bills.
Also, a primary dealer bidding on behalf of a customer will
be required to submit a separate tender for the customer whenever the customer's net long position in the bill being offered
exceeds $200 million at the close of business on the day prior
to the auction.
This information will be taken into consideration by the
Treasury when awarding new bills. The Department's objective
is to reduce the potential for undue concentration of ownership in new issues and to contribute to improved distribution.
This new reporting requirement recognizes the rapid expansion
of trading in Treasury bill futures as well as "when-issued"
trading occurring between the offering announcement and the
auction date.
oOo
)epartmentoftheTREA$URY
INGTON, D.C. 20220
TELEPHONE 566-2041
FOR RELEASE AT 4:00
P.M.
May 15, 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 May 24, 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 $ 5,911 million. The two series offered are as follows:
9 1 - d a y bills (to maturity date) for approximately $2,800
million, representing an additional amount of bills dated
February 22, 197 9,
and to mature August 23, 197 9
(CUSIP No.
912793 2H 8), originally issued in the amount of $3,015 million,
the additional and original bills to be freely interchangeable.
183-day bills for approximately $2,900 million to be dated
May 24, 1979
and to mature November 23, 197 9
912793 2W 5) .
(CUSIP No.
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing May 24, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,479
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 m u l t i p l e , on the records either of the Federal
Reserve Banks and B r a n c h e s , or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, W a s h i n g t o n ,
D. C.
20226, up to 1:30 p.m., Eastern Daylight Savings time
Monday, May 21, 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 D e p a r t m e n t of the Treasury.
B-1602
-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 • r
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 6r 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 May 24, 1979,
in cash
or other immediately available funds or in Treasury bills maturin
May 24f 1979.
cash adjustments will be made for differenc
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.
DepartmentoftheTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 566-2041
Contact:
FOR IMMEDIATE RELEASE
May 15, 1979
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES FINAL DETERMINATION
IN COUNTERVAILING DUTY INVESTIGATION ON
VISCOSE RAYON STAPLE FIBER FROM SWEDEN
The Treasury Department today announced a final determination that Sweden is subsidizing exports of viscose rayon
staple fiber to the United States.
The Countervailing Duty Law requires the Secretary of the
Treasury to collect an additional duty equal to the subsidy
paid on merchandise exported to the United States.
As a result of its investigation, Treasury found that the
manufacturer of this merchandise received subsidies consisting
of payments made to encourage the continued employment of older
workers, and interest-free loans.
Since payments received under the older workers program
are currently offset by the extra expenses borne by the sole
Swedish producer of the product investigated, Svenska Rayon
AB, the rate of countervailing duty that applies is zero.
The interest-free loans to Svenska are provided for the
acquisition of machinery and equipment for the production of
"modal" fiber, which is superior to the prevalent form of
fiber, known as regular fiber. The subsidy payments limited
to the production of modal fiber are not considered to be a
benefit for the production of regular fiber.
The amount of the subsidy has been determined to be 8.6
percent of the f.o.b. value of modal fiber exported to the
United States.
The grant of funds under a third program devised to
stockpile raw materials and maintain extra production capacity
for national economic defense purposes was determined not to
constitute a subsidy. This determination is the result of
strict management control that prevents the use of stockpiled
fiber or mothballed machinery for commercial purposes.
Notice of this action appears in the Federal Register of
May 15, 19 79.
Imports of this merchandise from Sweden during 19 77 were
valued at about $2.1 million.
B-1603
o
0
o
^
OF
m
liwij
IGTON, D.C. 20220
TELEPHONE 566-2041
".w^^
1789
IMMEDIATE RELEASE
Kay 14, 1979
Contact: Charles Arnold
(202) 566-2041
TREASURY AND FEDERAL RESERVE MAKE
JOINT RECOMMENDATIONS ON FUTURES CONTRACTS
ON IREASURY SECURITIES
Ihe Ireasury Department and the Federal Reserve Eoard today
released joint recommendations to the Commodity Futures Trading
Commission (CFTC) on futures trading in Treasury securities.
The recommendations result from a study by the Ireasury and
Federal Reserve. Ihe study was initiated after Treasury Secretary K.
Michael Blumenthal and Federal Reserve Chairman G. Vvilliam Miller, in
October 1978 letters to the CF1C, expressed concerns over the possible
consequences of further rapid expansion in trading of Treasury futures
contracts.
In their October letters, Secretary Blumenthal and Chairman
Miller suggested a moratorium on new authorizations of Treasury
futures contracts until a Treasury/Federal Reserve study could be
completed.
A report summarizing the study's findings and the joint recommendations is attached. It was sent today to the CTFC.
Ihe Treasury and Federal Reserve recommend that:
1. Adequacy of Deliverable Supply
The C1FC should consider not just the width of the
maturity range defining issues eligible for delivery,
but also the number of already outstanding issues that
will move into that range as the contract approaches
delivery, the size of those issues, and their likely
availability in the secondary market (as suggested by
the length of time they have been outstanding and their
distribution by type of holder). These questions
should be addressed explicitly in the analysis prepared
for the Commission by its staff when new contract
designations are being considered. Studies of how the
prices of given issues vary relative to those of adjacent issues will help to shed light on this question of
availability.
In no case should the CFTC approve a contract that depends for its deliverable supply solely on a particular
security yet to be issued.
fchere contracts specify a relatively narrow maturity
range for the deliverable supply, approval should also
be withheld on new contracts if the deliverable supply
of already outstanding maturities consists of only
B-16QJL
-2small amounts of closely-held issues.
To assure that the exchanges regularly review the terms
of all outstanding contracts in relation to changes in
the structure of marketable Federal debt, the CFTC
should reestablish a "sunset" provision for new contracts requiring them to be reviewed and reauthorized
every few years.
Existing 1-year Bill Contract
Because its deliverable supply depends wholly on a
single new security not yet issued, the existing 1-year
bill contract should be modified to assure a broader
deliverable supply or, in the alternative, withdrawn.
Existing 3-month Eill Contract
Because the 3-month bill contract has become so well
established and so actively used in its present form, a
redefinition of deliverable supply at this juncture
seems unwarranted.
However, in view of the concerns expressed by market
participants that the 3-month contract has been vulnerable to squeezes under certain conditions, steps should
be taken to minimize these possibilities through
improved data collection and monitoring of interactions
between the futures and cash markets.
Potential Risks of Contract Proliferation
The CFTC should proceed gradually in authorizing additional contracts for financial futures. In the
untested intermediate-term sector, for example, a first
step might be to authorize only one note contract, on
one exchange, with a range of eligible maturities sufficient to provide a reasonable "market basket" of
delivarable supply. Further, the CFTC should not
designate contract markets on more than one exchange
for essentially identical contracts unless it has
entered into formal agreements with each exchange to
provide uniform reporting of contract positions to the
CFTC and to establish uniform emergency procedures that
would be implemented jointly and coincidently at the
request of the CFTC.
Safeguards for Investors
Further study of investor protection and exchanae regulation being conducted jointly by the CFTC, theTreasury, and the Securities and Exchange Commission
should proceed. Among the issues to be explored should
be appropriate customer suitability standards, margin
requirements, and positions limits.
In addition, the CFTC and the exchanges promoting
futures contracts should make clear securities are not
-3obligations of the U.S. Treasury. To avoid any confu
sion on this question, the exchanges should not use
pictures of the Treasury building or of Treasury
securities in their promotional material.
Ihe full study will be released later.
O00O
ICSI
THE SECRETARY OF THE TREASURY
WASHINGTON 20220
May 14, 1979
Dear Commissioner Stone:
In our separate letters dated October 19 and 25, 1978,
we expressed concerns over the possible consequences of
further rapid expansion in trading of Treasury futures
contracts and requested a moratorium on new authorizations
of such contracts until our staffs could conduct a thorough
study of the markets for Treasury futures. That joint
study has now been completed. The Treasury/Federal Reserve
recommendations stemming from it are enclosed for your
consideration, together with a summary of the study. The
full study itself will be separately provided to you.
We appreciate the assistance which you gave us in
this effort and your understanding of the important public
interest issues involved in futures markets based on
U. S. Government securities. We look forward to working
with you to assure the appropriate development of these
Sincerely,
markets.
W. Michael Blumenthal
Secretary of the Treasury
G. William Miller
Chairman
Board of Governors of the
Federal Reserve System
The Honorable
James M. Stone
Chairman
Trading
Commodity Futures
Commission
W.
2033 K Street, N. 20581
Washington, D. C.
Enclosure
TREASURY/FEDERAL RESERVE STUDY
OF TREASURY FUTURES MARKETS
Summary and Recommendations
May, 1979
Introduction
The rapid growth in recent years of futures trading in
U.S. Government securities raises a number of questions of
importance to the Treasury and to the Federal Reserve:
Does futures trading in U.S. Government securities
affect adversely the efficiency and integrity of
the underlying cash market for those securities?
Is the trading of futures contracts which depend
on deliverable supplies of Government securities
likely to constrain the Treasury in its debt
management decisions?
Will the exchanges and the Commodity Futures Trading
Commission (CFTC) be capable of maintaining effective surveillance of financial futures markets,
particularly as essentially duplicative contracts
trade simultaneously on several exchanges?
Is there a danger that unsophisticated investors
will not fully appreciate the risks inherent in
futures contracts whose names suggest the backing
of the U.S. Treasury?
The September 30, 1978, legislation (P.L. 95-405),
which renewed the authority of the CFTC to regulate futures
markets, directs the Commission to solicit the advice of the
Treasury and the Federal Reserve before authorizing any additional futures contracts that specify delivery of U.S. Government securities. The Act also requires the Commission to consider the impact of such futures trading on the debt management
requirements of the Treasury and on the efficiency and integrity
of the market for U.S. Government securities. Confronted with
the need to comment on several pending contract proposals, yet
-2lacking a body of research on which opinions could be firmly
grounded, the Secretary of the Treasury and the Chairman of the
Board of Governors wrote the CFTC in October, 1978, suggesting
an immediate Treasury-FRB study and requesting a moratorium on
new authorizations of Treasury futures contracts until the study
could be completed.
Since then the staffs of the Treasury and the Federal .
Reserve have conducted over thirty interviews with a wide
variety of participants in both the cash and futures markets for
Government securities. The findings from these interviews,
from current staff studies, and from previous studies of futures
markets are summarized below under three broad headings.
1. The potential benefits from these markets;
2. The potential problems which they might pose for
the efficient operation of the underlying market
in U.S. Government securities, for the Treasury
in its debt management, and for particular
categories of investors; and
3. Conclusions and recommendations.
The discussion of the findings is preceded by a brief introduction to the institutional background of financial futures. A
much more complete discussion of the potential strengths and
problems of futures markets is contained in a separate staff
study, which also includes a summary of the interviews with
market participants and a more extensive treatment of the
regulatory structure of the industry.
-3The Institutional Background
1.
The Product
A futures contract is an agreement to buy or sell a
particular good—traditionally, an agricultural commodity—on
some specified future date, but at a price determined now by
competitive bidding on the floor of an exchange.
Since late 1975,
futures contracts on a number of financial instruments have been
introduced, including ones based on 3-month and 1-year Treasury
bills, which trade on the International Monetary Market (IMM)
of the Chicago Mercantile Exchange (CME), and one based on longterm Treasury bonds, which is listed on the Chicago Board of
Trade (CBOT).
Applications by these and other exchanges for
additional contracts on Treasury securities are now pending
before the CFTC.
Some of them are essentially duplicative of the
bill and bond contracts, but others propose futures contracts
on Treasury notes ranging in maturities from two to seven years.
Trading volume in the 3-month bill and bond contracts
has grown rapidly, averaging over 4,000 contracts a day for
each.
(A single bill contract is for $1 million face value of
bills; each bond contract, for $100,000 par value of bonds.)
The number of contracts outstanding (the "open interest")
recently has been roughly 55,000 in the case of the 3-month bills
and 45,000 for the bonds.
Interviews with market participants
-4indicate that this trading activity has been largely speculative,
although there is evidence of hedging by investors seeking protection against the risk of interest rate changes.
(The diffi-
culty in distinguishing hedging from speculating is discussed
below).
Despite the heavy trading volume, typically only a
relatively small number of contracts culminate in actual delivery
on each maturity date, the remainder having been liquidated by
off-setting trades.
This pattern of few deliveries is common
to all organized futures markets, i.e., markets on which
standardized contracts for future delivery are traded on regulated
exchanges, which require all positions to be "marked to market"
daily.
By contrast, deliveries are the rule rather than the
exception for forward contracts, which are unregulated agreements
between two parties to exchange a good or security at an agreedupon price on some specified future date, and which can be
tailored to meet individual needs.
2.
Exchanges
Exchanges are nonprofit associations whose membership
is generally composed of individuals.
The privileges of
exchange membership include the right to trade on the floor
for one's own account, the right to collect a brokerage fee for
executing trades for others, and the right to vote for the
members of the governing body of the exchange.
The governing
-5ody—composed of both members and nonmembers—is ultimately
responsible for enacting and enforcing the rules of the exchange
and, thus, for much of the self-regulation of the futures industry.
Each exchange maintains a clearinghouse which acts
as a third party to every trade.
That is, the clearinghouse is
directly or indirectly the other party in every futures contract:
the buyer to every seller, and vice versa.
In this sense, the
exchange stands behind every contract.
Exchange members acquiring contracts for their own
account or for their customers must deposit assets with the
exchange equal to a certain proportion of their contractual
obligations.
Such deposits, which can take several forms includ-
ing cash, Treasury securities or, in some cases, a letter of credit,
are commonly referred to as margins.
They are, however, really in
the nature of a bond that guarantees eventual performance of
contract terms rather than a down-payment that limits the use
of credit to purchase a security.
The exchanges have exclusive
authority to set margin levels.
The equity value of the exchange member's margin account
will, of course, vary with the market price of contracts.
At the
end of each trading day the clearinghouse "marks to market"
each account—i.e., the effects of the day's price movement
are calculated.
If a loss is incurred which depletes the margin
-6account, the exchange member is notified and he must send a
certified check before the start of business the following
morning to restore the account to its required level.
The exchanges also require their members to obtain margins
from their customers.
These accounts are also marked to market, but
the procedures members use for their customers on margining and
marking to market do not have to be uniform.
3.
The CFTC
The Commodity Futures Trading Commission, established
in 1975, is composed of a Chairman and four other Commissioners
appointed by the President and confirmed by the Senate to
serve staggered five-year terms.
The CFTC has broad regulatory
authority over futures trading, and it must approve all futures
contracts traded on U.S. exchanges, ensure that the exchanges
enforce their own rules (which it must review and approve), and
direct an exchange to take any action needed to maintain orderly
markets whenever it believes that an "emergency," such as market
manipulation, exists. 1/
1/ A recent court decision in the case of the March 1979 wheat
contract on the CBOT, however, has raised important questions
to take e n ^ n * ^ °lthe C F T C ' S a u t h o r i t y ^ require^xchanges
to take emergency actions.
-7Potential Benefits from
Financial Futures
Futures markets can benefit society by (1) reallocating
risk to those mere tolerant of it, and (2) aggregating information
and making it available to everyone at a low cost.
This section
will describe how these services are provided by futures markets
and examine whether they could be provided just as well without
such markets, particularly in the case of financial futures.
Also, it will note some of the other uses for financial futures
beyond "hedging" and "speculating," as those terms are usually
defined in textbooks and in trade literature.
1.
Hedging and Speculating
An individual or institution whose business requires
holding inventories of any good, finished or in process, may
wish to be protected from the risk of adverse price movements
of the good in question.
A farmer might reasonably feel more
competent to grow crops than to forecast their prices.
A bank
might be better able to assess the credit worthiness of a small
business than to gauge what the cost of its own funds will be a
year in the future.
The farmer might want to protect himself
("hedge") against the risk of unfavorable price changes by locking
in now the prices at which he could sell his harvested crop at
some later date and the bank might want to hedge against the
risk of a rise in the interest rate it must later pay on its
CD's.
By the same token, individuals who have a preference for
-8risk bearing and who specialize in forecasting prices might be
willing to "speculate" by contracting now to buy the yet-to-beharvested crop or the planned future issue of CD's.
Speculat'ors, however, provide social functions other
than relieving hedgers of risk.
In order to survive, they must
devote substantial resources to the generation of information
concerning future events.
As they act on this information, they
transmit it to the public via the price system.
For example,
if their private information indicates that the world wheat
harvest will be poor, they effectively communicate that information as they bid up the price at which they contract now to buy
wheat from farmers at harvest time.
2. Advantages of Futures
The hedging and speculating activities described above
could take place even if there were no futures markets.
contracts could be negotiated on an individual basis.
Forward
Or, in the
case of the anticipated wheat shortage.speculators could buy
wheat from grain elevators and hold these stocks in inventory
themselves, thus speculating in the spot market.
But futures
markets permit these activities to be carried out more efficiciently.
The existence of a central market (the exchange) reduces
the search costs involved in bringing hedgers and speculators
together.
The fact that the exchangers clearing corporation interposes
-9itself between the contracting parties further reduces costs by
lowering the risk to each side that the other party will default.
By publicly providing up-to-the-minute price quotes on all trades,
futures markets permit the rapid and widespread dissemination
of the information possessed by individual speculators.
Finally,
purchase of a futures contract does not involve the inventory
costs associated with purchase of a commodity in the spot market.
However, these advantages are less important in the
case of financial futures.
A variety of forward contracts exist,
including "when-issued" trades of new securities, standby contracts (put options) on GNMA securities, and repurchase agreements.
Hedgers and speculators can be brought together efficiently
through the highly developed dealer network.
That same network
provides for the transmittal of the latest price quotes.
Also,
financial instruments do not require the storage and transportation costs required for tangible commodities.
Despite the availability of these alternative avenues
for hedging and speculating in financial markets, futures trading still has some distinct advantages, such as the role of the
exchange as guarantor of every contract.
Furthermore, short
sales of securities, though possible in the spot market, are
cheaper to execute in a futures market since the short does not
have to pay a fee to borrow the security.
The very fact that
financial futures have grown as rapidly as they have in the
- 10 presence of these alternatives suggests that there are cost
advantages to using futures contracts.
Whether financial futures markets increase the availability
of information is moot, since the yield curve in the spot market
already embodies the views which speculators hold regarding the
future course of interest rates.
But to the extent that finan-
cial futures markets encourage more speculation by lowering the
cost of doing so, they also lead to the production of a greater
amount of information than would otherwise be available.
In
other words, while the spot market yield curve may incorporate
all available information, that yield curve may itself be altered
by the existence of financial futures.
There is disagreement
among economists, however, as to whether the yield curve will
be "improved," i.e., whether it will more accurately anticipate
the actual future course of interest rates and whether the
additional information generated through futures trading will
represent an optimal use of society's resources.
3.
Other Uses for
Financial Futures
The dichotomy of hedging and speculating fails to
capture the variety of motivations for using futures.
Even the
distinction between hedging and speculating is itself often
unclear.
For example, the decision to incur the costs of
establishing a hedge may reflect one's forecast that prices
- 11 will move adversely and thus involve an element of speculation.
Furthermore, unless the maturity of the futures contract coincides exactly with the time when the crop is harvested or the
CD's are issued—to continue the earlier example—a hedged position
will not be a riskless one.
Nonetheless, hedging does reduce
risk exposure, and the fact that there are few "pure hedgers"
in the textbook sense operating in financial futures markets
need not imply that these markets are not being used to reduce
risks.
Financial futures may also be used for arbitrage
purposes.
An investor may at times find it profitable to, say,
sell a 6-month Treasury bill and replace it with a 3-month bill
and a tandem 3-month Treasury bill futures contract.
Such a
trade is "riskless" but it is not "hedging," 1/ On the other
hand, one may decide to speculate that the shape of the yield
curve will change by taking simultaneous long and short positions
in different delivery months for the same security.
While such
"straddles" are speculative, they typically involve less risk
than simple open positions.
The riskiness of these and other
trades can really be judged only in the context of one's entire
portfolio, not in isolation.
T7 It is arbitrage, in that it helps to drive futures and spot
market rates into proper alignment and in that the arbitrageur
knows his profits with certainty after consummating the
trade.
-12Potential Problems with
Financial Futures
The preceding section described some of the uses to
which financial futures can be put and some of the benefits—
both to individuals and to society at large—which can accrue
from these instruments.
In order to decide whether the develop-
ment of financial futures should be encouraged, however, it is
necessary to weigh the purported benefits against any potential
problems.
tified.
A variety of such potential problems have been idenThis section attempts to assess their seriousness.
1. The Impact on
Spot Markets
A basic concern has been that futures trading in Government securities will have a destabilizing effect on prices in
the spot market for these securities and that investors on whom
the Treasury normally relies to finance its debt may be dissuaded
from bidding in Treasury auctions if prices become less stable,
thus leading to higher yields or costs to the Treasury.
It is
important from a policy perspective to distinguish the case in
which destabilizing effects might arise even if futures markets
are perfectly competitive from the case in which a small group
of investors looms large enough in the markets to have a significant
impact on prices.
In the perfectly competitive case, the usual argument
for a destabilizing influence from futures goes as follows:
- 13 (1) futures trading encourages speculation by reducing the costs
involved; (2) speculators are likely to drive futures prices to
levels not justified by market fundamentals; (.3) wide price swings
in futures markets will be transmitted to spot markets via
arbitrage.
Whatever the intuitive appeal of such reasoning,
empirical studies of both agricultural and financial markets
have not been able to prove that there is greater price variability in spot markets during periods in which the good or security
in question was traded on a futures market.
A supplementary argument (again, in the competitive case)
stresses the danger that, should investors be unable to close out
futures positions because prices have already moved the daily
limit, they may try to cover their positions with offsetting
spot market transactions, thereby imparting additional price
variability to the spot market.
So far, Treasury bill futures
prices have never moved their daily limit.
Treasury bond futures
have done so on a number of occasions, but market participants indicated in interviews that this appeared to be essentially a response
to abruptly changed expectations about cash market prices.
They
did not believe there was any substantial spillover to the spot
market from events originating in the futures market.
Still a third possible avenue for futures to have a
destabilizing effect on spot prices is by drawing funds into the
- 14 futures market which would otherwise be used in the spot market.
The resulting thinness of the spot market could then make spot
prices prone to wider swings.
However, since securities dealers
generally use the futures markets in conjunction with the spot
markets, e.g., for hedging or for arbitrage, their activities
should not contribute to any such diversion of funds.
Moreover,
many of the speculative positions taken by individuals in futures
markets would probably have never been taken at all in the cash
markets, given the costs of carrying the actual securities.
There is a related concern sometimes expressed that
financial futures will divert funds from third markets, particularly the stock market.
But buying a futures contract, for
which securities in one's portfolio may be pledged as initial
margin, does not reduce the volume of funds available to underwrite real investments.
In sum, under the assumption of per-
fectly competitive futures markets, fears that futures trading
in financial instruments will disrupt the spot markets have
not been documented.
These fears cannot be so lightly dismissed once the
competitive assumption is relaxed, however.
In speaking of
possible ways in which prices (futures or spot) could be distorted, no distinction will be made between a "squeeze" and a
"corner."
According to the CFTC Glossary, a "corner" means
- 15 controlling enough of a commodity so that its price can be
manipulated, while a "squeeze" refers to a situation in which
those who are short cannot repurchase their contracts except at
a price substantially higher than the value of the contract in
relation to the rest of the market.
These definitions are
inexact, and do not necessarily have any legal significance.
The possibility of either a corner or a squeeze in the
case of the 3-month bill, for example, arises from the fact that
the futures contract can be satisfied
only with a single maturity,
over which command of the available supply is not beyond the
resources of a large securities dealer.
The "available" supply
may be considerably smaller than the total supply to the extent
that a substantial portion of each auction goes to the Federal
Reserve and to foreign central banks and other noncompetitive
bidders who are not likely to be sensitive to price changes in
deciding whether to resell.
In some auctions during the last
year, the Fed and foreign official accounts absorbed all but
about $1 billion of the new 3-month issue.
On, say, a $3 billion issue, an individual dealer could
take $750 million and still stay within the Treasury guideline
of not alloting more than 25 per cent to a single bidder.
If,
in addition, a dealer also took a sizable long position in the
futures market, bought the new 3-month issue on a "when-issued" basis
from others bidding or planning to bid in the auction, and had previously
- 16 acquired a long position in the outstanding deliverable bill
(auctioned originally as a 6-month issue), he might well be able
to build a long position in the new bill that actually exceeded
total auction awards to investors other than the Federal Reserve
and foreign official accounts.
Interviews with market participants suggested that
dealer positioning strategies of this kind may have succeeded
in squeezing the secondary market price on one or two new bill
issues during 1978.
While market estimates of the resulting
distortion in yield in those operations range from 10 to 40
basis points, such judgments cannot be effectively tested, due
to the many other special factors that were influencing supplydemand relationships in the cash bill market at the same time.
It should be noted, though, that observed spreads among immediately
adjacent bill maturities did not widen to these proportions.
The Treasury bond contract differs from the bill contract in that an entire "market-basket" of securities is eligible
for delivery.
Although the basic trading unit is a bond with a
$100,000 face value at maturity and an 8 per cent coupon, any
Treasury coupon issue can be delivered if it has at least 15
years to maturity (or to first call).
The contract's settlement
price is adjusted if other than 8 per cent coupons are delivered.
Possibilities for the manipulation of Treasury bond
prices, through joint action in the cash and bond-futures market,
- 17 appear to be minimal, given the sizable number of issues deliverable under the current contract.
While the market-basket approach
thus reduces one major potential problem of financial futures,
it also reduces one of the major benefits—that is, the uncertainty created as to which issue will ultimately be delivered
makes the contract less useful for hedging.
In the case of long-
term bonds, this problem may be more hypothetical than real,
given the flatness of the yield curve at the long end.
However,
it may pose a problem for the use of the market-basket approach
in the intermediate portion of the maturity spectrum, where
some of the proposed new contracts fall.
2.
Constraints
on Treasury
The central point to emerge from the above section is
that, in the face of a relatively small deliverable supply of
the security specified in a futures contract, the possibility
of corners or squeezes leading to disruptive price movements in
the spot market is a real one.
The Treasury, in turn, could be
hurt in the longer run if investors began to shun the market for
its debt because of such factors.
While the Treasury has the
ability to prevent a squeeze by issuing more of the deliverable
security, the Treasury should not be so constrained in its
debt management decisions by problems in markets for financial
futures.
If new contracts were approved for Treasury notes, the
chances of problems arising that would make the Treasury feel
- 18 constrained in its debt management actions might well be increased.
Notes are not issued every week as bills are, and the outstanding
supply in the proposed contract maturity ureas is not as great
as for the bond contract.
Were there futures contracts on, say,
a 4-year note, trading now with maturities extending into 1981,
the question would arise whether the Treasury ought to feel
obligated to plan to issue such securities two years from now.
An appreciation of the Treasury's need for flexibility
in debt management can be gained by considering the different
problems which it faces at times of large deficits and of small
ones (or of surpluses).
With a rapidly expanding debt in recent
years, the Treasury shifted from bill financing to regular
intermediate note issues to raise new money as it sought to avoid
a rapid build-up in the supply of short-term debt, which would
have resulted from the combination of deficit financing and
shortening of the outstanding debt with the passage of time.
A large increase in a bill offering taken to forestall a
squeeze in a bill futures contract would be at cross-purposes with
this goal.
As the rate of growth of the debt shrinks, on the
other hand, as budget deficits decline, the Treasury may interrupt
or terminate some of its regular offerings in the intermediate
note area.
In fact, the Treasury interrupted the 5-year note
cycle and certain other note issues in recent quarters, because
of declining cash needs.
- 19 Market participants have generally argued that the
Treasury should not feel constrained to tailor its debt offerings to the requirements of futures markets,
But the Treasury
cannot be unconcerned with the possibly disruptive effects of
its actions on the Government securities markets.
Whether the
Treasury could feel free to ignore the needs of futures markets in
making debt management decisions, thus, would depend on (1) how
effectively the exchanges meet the requirements of the Commodity
Exchange Act and the CFTC guidelines regarding the adequacy of
deliverable supply and (2) how futures markets react to such
things as abrupt changes in the size of deliverable supplies.
A key consideration is the ability of the exchanges to cope with
situations of that kind.
The exchanges do have specific rules
and procedures for dealing with such emergencies, but the question
is how aggressively they would implement them.
3.
Possible Dangers to
Specific Groups of Investors
The bank regulatory agencies must naturally be concerned
with the dangers that
financial futures might- pose for banks
which deal in these instruments.
There is evidence that finan-
cial futures can be used by banks effectively to hedge portions
of their portfolios against interest rate risk.
The difficulty
is in determining whether a given bank's futures position acts
to reduce or increase interest rate risk (i.e., whether the
- 20 position constitutes a hedge or is speculative).
Such a deter-
mination cannot be made by looking at a futures transaction in
isolation, or even by viewing a futures transaction
a corresponding cash position.
along with
Rather the risk of a futures
position must be judged against the interest rate risk of the bank
as a whole (including the risk of off-balance-sheet commitments)
and not relative to any single transaction.
No bank has yet failed or required supervisory attention
as a result of involvement in financial futures.
However, trading
in forward, and standby contracts for GNMA securities has
threatened the solvency of some banks, and injudicious trading
in commodities futures was the proximate cause of the failure
of a foreign banking subsidiary of a large U.S. bank.
Caution
should be used in drawing inferences based on these experiences.
The forward market, which lacks the nark-to-market procedure
of futures, allows large gains or losses to accrue without the
discipline of daily margin settlements.
And the bank failure
associated with commodities futures involved a large number of
questionable banking practices.
Apart from banks, small investors are another specific
group for whom financial futures may cause problems.
One fear
is that these investors will not distinguish futures contracts
on Government securities from the underlying securities themselves.
-21Additionally, such participants may not recognize that the highly
leveraged nature of futures can make them extremely risky.
In
such circumstances, unsophisticated investors can become especially
vulnerable to aggressive, if not ill-advised, selling tactics
by brokerage firms promoting futures.
While these dangers may
be real ones, once again it is important to add that organized
futures markets have more built-in safeguards for small investors
than do forward markets.
Conclusions and
Recommendat ions
Given the particular concerns that prompted the Treasury/
Federal Reserve study of markets for Treasury futures, the resulting
conclusions and recommendations are focussed on three principal
issues:
(1) the adequacy of deliverable supply for existing and
proposed contracts; (2) the problems that might develop from a
rapid proliferation of contracts for Treasury securities in general,
and of substantially similar contracts on more than one exchange
in particular; and (3) the additional safeguards that might be
needed to protect the growing number of investors being encouraged
to participate in Treasury futures transactions.
On each of these
issues, recommendations are first listed and then explained.
- 22 -
1.
Adequacy of
Deliverable Supply
Proposed new coupon contracts. When reviewing requests
for new futures contracts in Treasury coupon issues, it is recommended
that the CFTC adhere to the following general guidelines on deliverable supply.
—The CFTC should consider not just the width of
the maturity range defining issues eligible for
delivery, but also the number of already outstanding issues that will move into that range
as the contract approaches delivery, the size
of those issues, and their likely availability
in the secondary market (as suggested by the
length of time they have been outstanding and
their distribution by type of holder). These
questions should be addressed explicitly in the
analysis prepared for the Commission by its staff
when new contract designations are being considered.
Studies of how the prices of given issues vary
relative to those of adjacent issues will help to
shed light on this question of availability.
—In no case should the CFTC approve a contract
that depends for its deliverable supply solely
on a particular security yet to be issued.
—When contracts specify a relatively narrow
maturity range for the deliverable supply,
approval should also be withheld on new contracts
if the deliverable supply of already outstanding
maturities consists of only small amounts of
closely-held issues.
—To assure that the exchanges regularly review the
terms of all outstanding contracts in relation to
changes in the structure of marketable Federal
debt, the CFTC should reestablish a "sunset"
provision for new contracts requiring them to
be reviewed and reauthorized every few years.
- 23 The IMM has stated that the substantial variability of the
Treasury yield curve in the intermediate maturity range would create
major market uncertainties concerning the value as a hedge of any
new note contract that specified a broad "market-basket" of deliverable supply.
For this reason it has restricted the definition of
deliverable supply for its proposed 4-year note contract to issues
with maturities ranging from only 3-years and 9-months to 4-years
and 3-months.
While the exchange acknowledges that this relatively
narrow band of deliverable maturities might create some risk of an
occasional shortage in deliverable supply, it asserts that if such
a development should occur, this would not represent a significant
problem.
Exchange officials note that they operate under explicit
rules for dealing with deliverable supply shortages, are perfectly
prepared to use these procedures when needed, and can require
settlement of a contract in cash if this becomes necessary.
Con-
sequently, they see no reason why an unexpected shortage in
deliverable supply should disrupt the cash market, or exert special
pressure on the Treasury or the Federal Reserve to deal with the
shortage.
At the same time, they are concerned that any significant
broadening of the deliverable supply for the 4-year note contract
would substantially reduce its appeal to investors as an instrument
for hedging.
- 24 Notwithstanding this IMM contention, the record of
commodities exchanges in dealing with deliverable supply shortages
in non-financial commodities has been inconsistent.
Contracts in
Treasury futures pose special problems, since shortages in the
deliverable supply can develop with little warning close to the
contract delivery date.
For example, if an auction of an expected
issue were suddenly canceled or substantially reduced in size only
a few days before contract delivery, a squeeze on the deliverable
supply could develop very unexpectedly.
If the deliverable supply
were eliminated completely, the exchange would be forced to call
for an emergency measure such as settlement in cash.
But if the
supply were simply reduced significantly below expectations, the
exchange and the CFTC might be inclined to temporize, leading to
sharp adjustments in cash market rates.
In such a situation, the
Treasury could be placed in the difficult position of deciding
whether to follow through on, or forego, a debt management action
which would significantly reduce the deliverable supply of a
maturing futures contract.
The risk that squeezes in futures markets might develop
and inhibit Treasury debt management flexibility would be reduced
if contracts authorized by the CFTC involving delivery of intermediate-term securities were required to adopt a suitable "marketbasket" approach to deliverable supply.
The fact that some
- 25 exchanges plan to use this approach on their proposed intermediateterm contracts suggests that they do not see it as a major defect
in the contracts.
Existing 1-year bill contract.
—Because its deliverable supply depends wholly
on a single new security not yet issued, the
existing 1-year bill contract should be
modified to assure a broader deliverable
supply or, in the alternative,withdrawn.
The existing contract in 1-year Treasury bill futures
entails a significant risk of an insufficient deliverable supply
because the only issue eligible for delivery is the newly auctioned
1-year bill. Thus, for any given 1-year auction, there is no
certainty as to the amount of, or even the issuance of, the bill
until about a week before delivery on the futures contract. Any
Treasury decision not to roll over,or to reduce significantly the
size of the new bill consequently produces an immediate deliverable
supply problem, only shortly before the contract delivery date.
The recent postponement of the Treasury's April yearbill auction (necessitated by the Congressional delay in extending
the Federal debt ceiling) provided an example of how unforeseen
developments can arise shortly before delivery. As a result of
that postponement, the IMM was forced to limit trading in the April
futures to transactions for closing out positions and to introduce
a standby emergency procedure for cash settlement. At the last
moment, the Treasury did finally issue the bill, before cash
settlement became necessary.
- 26 Since trading in the year-bill futures contract has
generally been quite light, and the open position in the April
maturity was small, the delay in making settlement exerted no
evident deleterious effect on the cash market.
But the experience
did dramatize the extreme vulnerability of any contract that relies
for its deliverable supply solely on a security yet to be issued.
The deliverable supply of the 1-year bill contract might
be expanded, for example, by making the previous 1-year issue,
already outstanding, deliverable as well.
However, any broadening
of the maturities in the supply base would make the contract somewhat less efficient as an instrument for hedging.
With contract
months for 3-month bill futures now running beyond one year, it
appears that investor needs to hedge against potential changes in
short-term rates can be reasonably well accommodated in that more
liquid market.
Thus, a withdrawal of the 1-year contract would be
an alternative resolution of this potential problem.
Existing 3-month bill contract.
—Because the 3-month bill contract has become
so well established and so actively used in its
present form, a redefinition of deliverable
supply at this juncture seems unwarranted.
—However, in view of the concerns expressed by
market participants that the 3-month contract
has been vulnerable to squeezes under certain
conditions, steps should be taken to minimize
these possibilities through improved data
collection and monitoring of interactions
between the futures and cash markets.
- 27 Some market participants perceived particular instances
where, in their judgment, the deliverable supply for the 3-month
bill contract was squeezed.
The particular conditions that were
cited for creating this possibility were a combination of restricted
market supply (resulting from heavy pre-emptive demands in the
auction for new 3-month bills from both the Federal Reserve and
foreign central banks), and strong interest-inelastic investor
demands to hold the deliverable bill (because it fit their particular
maturity needs).
Although some market participants assert that
the margin of interest-sensitive investors willing to sell the
deliverable bill and switch to higher yielding alternatives is
always sufficient to deter any serious manipulation of bill futures
prices, the risk of a squeeze seems real enough to suggest the
implementation of additional steps that will further minimize this
possibility.
During the month before delivery, the CFTC should routinely
collect data on cash and forward positions in the deliverable issue
from any entity which has large open positions in the futures contract.
The CFTC has already indicated that in special situations,
when requested by the Treasury or the Federal Reserve Board, it
would be prepared to provide data on a strictly confidential
basis showing any large positions in specific futures contracts
approaching delivery that are held by Government securities dealers
who report to the Federal Reserve.
This information will help to
supplement the more general data on positions in futures and forwards
- 28 that the Federal Reserve soon expects to obtain on a daily basis
from its reporting dealers.
Knowledge that these improved reporting
and surveillance procedures are in place should place a further
constraint on any major market participant who might otherwise be
tempted to try to exert a squeeze on the deliverable supply.
In addition, since the percentage of Treasury bill
offerings accounted for by the combination of competitive and
private noncompetitive awards has declined significantly in recent
years, the Treasury has decided to modify a rule which until now
has allowed allotment to a single bidder in a Treasury auction of
as much as 25 per cent of the announced amount of the public
offering.
The new rule will permit a maximum allotment to any
single bidder of up to 25 per cent of the combined amounts of the
competitive award and the private noncompetitive award.
This new
base excludes Treasury securities allotted to the Federal Reserve
in exchange for maturing securities held both for its own account
and for the accounts of foreign official institutions.
Over time this rule modification should broaden the
competitiveness of the auction process and contribute to improved
distribution of new security issues.
The new rule applies to all
Treasury security offerings.
The Treasury will also require bidders in its bill
auctions to report on the tender form any net long position of
more than $200 million taken prior to the auction in the bill
being offered.
Such a position would include bills acquired
- 29 through "when-issued" trading and futures and forward transactions,
and (in auctions of new 3-month bills) holdings of the outstanding
bill (auctioned previously as a 6-month issue) that carry, the same
maturity as the new bill.
These data will be taken into considera-
tion by the Treasury when awarding new bills in order to reduce
the potential for undue concentration and to contribute to improved
distribution.
This new reporting requirement recognizes the rapid
expansion of trading in Treasury bill futures, as well as bill
trading on a "when-issued" basis occurring between the announcement and offering dates on auctions.
The alternative of having the Treasury or the Federal
Reserve act directly to modify potential squeezes on the deliverable
supply of 3-month bills—either through a Treasury increase in the
size of the new bill auction, or Federal Reserve sales of the outstanding issue from its portfolio—is not acceptable.
While there
may be occasions when the Treasury should add to the share of its
marketable debt represented by 3-month bills, such actions ought
to be taken only as needed to implement the Treasury's general
debt management objectives; they should not be initiated to help
resolve the particular needs of the commodity exchanges.
Similarily, the Federal Reserve should not be expected
to sell 3-month bills from its portfolio to help counter a developing
market shortage in the issue deliverable on the maturing bill
- 30 futures contract.
Since the early 1950's the Fed has consistently
avoided intervention in the Government securities market for the
purpose of adjusting spreads between yields on closely adjacent
issues. Earlier experience had shown that any pattern of Federal
Reserve market intervention initiated for purposes not clearly
seen to be for the implementation of monetary policy tended to
create uncertainties about what the System was trying to do, and
how its substantial market power would be used to influence prevailing rate relationships. There is a risk that when confronted
with such uncertainties dealers and other market professionals
will become less willing to take positions in Treasury securities
and to operate on reasonable price spreads—thus, reducing the
general efficiency of the market.
2. Potential Risks of
Contract Proliferation
In view of the differences in self-regulation among the
various commodity exchanges and the limited staff resources available to the CFTC for monitoring and surveillance, it is recommended
that:
—The CFTC proceed gradually in authorizing
additional contracts for financial futures. In
the untested intermediate-term sector, for example,
a first step might be to authorize only one note
contract, on one exchange, with a range of eligible
maturities sufficient to provide a reasonable "marketbasket" of deliverable supply. Further, the CFTC
should not designate new contract markets on more
than one exchange for essentially identical contracts
unless it has reached formal agreements with the
exchanges involved to provide uniform reporting of
positions in such contracts to the CFTC and to establish uniform emergency procedures that would be implemented jointly and coincidently at the request of the
CFTC.
- 31 A gradual approach would give the CFTC time to enhance its surveillance capacity and would help to demonstrate whether an intermediate note contract, designed conservatively, could elicit an
active investor interest without increasing the potential for a
squeeze on the deliverable supply.
Even under the best circumstances, the extension of
trading in Treasury futures to new maturity sectors and to additional
exchanges would require careful, step-by-step implementation and
close surveillance of results. In the circumstances that exist,
the task appears to be more complicated, since some exchanges have
less clearly defined rules than others, and the philosophies with
which they implement these rules vary. In addition, for the CFTC
to provide the close surveillance that would be required to do an
effective job of monitoring additional, essentially duplicative
contracts on several exchanges, it would apparently need an
expansion of staff with expertise in financial markets.
Uncertainties about the adequacy of deliverable supplies
produced by the prospect of contract proliferation are greatest
for the proposed intermediate-term contracts, since none of these
is yet trading. Nevertheless, pending requests for additional
bill contracts also raise similar questions. The proposed AMEX
bill contract seeks to minimize competition for deliverable supply
with the existing IMM contract by making bills maturing in the
first month of the quarter eligible for delivery—rather than
those maturing in the third month, as is the case of the IMM
- 32 contract.
However, the IMM in its contract designation has authority
to trade additional months.
Also, the 3-month and 1-year bill
futures contracts being requested by Comex specify issues for
delivery that would be substantially overlapping with the existing
IMM contracts.
It can be argued, in principle, that the combined
demands for delivery generated by several overlapping futures
contracts will not be significantly greater than those generated
where only a single contract is being offered.
But it seems more
likely that a proliferation of contracts would lead, in practice,
to enlarged total demands for delivery.
In their requests for
additional contracts, the exchanges seeking CFTC approval of overlapping contracts have asserted that they do not believe a proliferation would diminish trading volume on existing exchanges,
since they expect their marketing and promotional activities to
expand overall demand.
A larger demand for deliveries would mean that there
would be a correspondingly larger volume of short positions outstanding just prior to delivery date.
This might in turn be viewed
as an added potential for profiting from a market squeeze, particularly if market participants thought they could build up a
relatively large long position on several exchanges, without
attracting the same attention that a similar total position would
attract if it were concentrated on a single exchange.
To guard
against this possibility the CFTC, before permitting contract
- 33 proliferation should have in place procedures that assure regular
checking of positions being taken by particular operators on more
than one exchange.
This may require reporting of smaller position
totals on single exchanges than is now the case.
If the CFTC were to authorize essentially similar
contracts on several exchanges at about the same time, it would
be important to assure that consolidated position data reported
from these exchanges was carefully evaluated, and that, in cases
where emergency procedures had to be implemented, identical procedures were implemented on each exchange at the same time.
There
can be no assurance that exchanges will respond to a given emergency
in a coordinated manner unless the CFTC by written agreement is
authorized to require such action.
Specifically, the CFTC should
specify by agreement with the relevant exchanges identical emergency
procedures for essentially comparable contracts—including rights
of substitution, changes in margin and other measures to encourage
a liquidation of open interest, and, if need be, a suspension of
trading.
Such procedures should also be given greater publicity,
so that market participants could gain a better understanding of
them.
This would also avoid a competitive devaluation of self-
regulatory standards.
- 34 3.
Safeguards
for Investors
In view of the rapid growth in Treasury futures and the
potential for widespread participation by individual investors:
—Further study of investor protection and
exchange regulation beine conducted jointly
by the CFTC, the Treasury, and the Securities
and Exchange Commission should proceed. Among
the issues to be explored should be appropriate customer suitability standards, margin
requirements, and position limits.
—In addition, the CFTC and the exchanges
promoting futures contracts should make
clear that futures contracts based on Government securities are not obligations of the
U. S. Treasury. To avoid any confusion on
this question, the exchanges should not use
pictures of the Treasury building or of
Treasury securities in their promotional
material.
The posting of margin and daily marking to market are
important aspects of futures exchanges that are designed to protect
all participants. Such safeguards substantially reduce the credit
risks associated 'with transactions for future delivery, are helpful in encouraging good management control, and significantly
reduce the likelihood that harmful situations will develop. Unfortunately, however, the existing reporting system on particular
transactions does not appear sufficient to preclude unethical
practices from occasionally occuring within a trading day. Serial
tapes, which record the prices and quantities of all transactions
as they occur, would help to eliminate the potential for such
- 35 abuse.
Hence the CFTC should continue to encourage the use of serial
tapes by the exchanges.
As existing contract markets for Treasury futures expand
and additional contracts are offered, it seems quite likely that a
growing range of participants will be attracted to these markets—
some of whom may not have particularly strong financial positions.
Existing safeguards and procedures, including the taking of margin
and daily marking to market, appear to afford adequate protection
for those involved in most cases.
However, although clearing members
are required by the exchanges to post margins and mark-to-market, they
are not required to use uniform margin and marking-to-market procedures for their own customers.
Thus, in some cases, individual cus-
tomers and/or clearing members may be exposed to undue risk.
Some firms, have, nevertheless, established customer suitability standards of their own and have required considerably larger
margin on certain types of accounts for which they undertake transactions.
Additional efforts in this direction—and perhaps the
development of more formal suitability standards—should be encouraged.
Some participants have indicated that they were contacted
by over-zealous representatives of firms that were active in the
marketing of futures who appeared to have an insufficient understanding of futures transactions.
At present this does not appear
to be a serious problem, and it is an expected outcome when one
market is expanding rapidly at a time when profitability and
- 36 employment in other financial markets have been steady or shrinking.
It does seem appropriate, however, for the CFTC and the exchanges
to explore approaches that could strengthen the surveillance of
smaller dealer firms.
Periodic reviews of general sales and
marketing techniques could also prove beneficial.
And it seems
appropriate for the CFTC and the exchanges to undertake a program
that would inform the public about the risks associated with such
highly leveraged transactions, since these may not be sufficiently
emphasized by private firms and individual salespersons.
Such a
program would also be helpful in clarifying emergency procedures
and reasons for their possible implementation.
G P O 941 603
FOR IMMEDIATE RELEASE
REMARKS BY
THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE
THE NEW YORK STATE BANKERS ASSOCIATION
WASHINGTON, D.C.
MAY 15, 1979 — 12:30 P.M.
I am pleased to have this opportunity to speak to
you today. Your annual visit to Washington is always
a welcome event, for it provides a chance to exchange
views on the issues of the day — and there is no dearth of
issues to discuss today. They grow in number, significance
and complexity each year. Each suggested change in the
established order of banking tends to challenge something
else in the order. Thus one industry group argues for
greater freedom to expand and compete; that conflicts with
another industry group that argues for the preservation
of the status quo amid claims of unfair competition. Meanwhile, one consumer group presses for greater protection
for its members, while another asks that a greater return
be permitted on its investment in the system. Thus, it is
not unusual for an issue in the regulated environment of
banking to become a three- or four-way contest among those
with inconsistent claims upon the system. A number of
issues of that type have been carried over unresolved
- 2 from last year, even though last year produced a prodigious
amount of banking legislation.
The House Banking Committee has already turned to a
' major piece of unfinished business from last year: the
Federal Reserve membership issue. Unfortunately, the
prospects for agreement on this important issue remain
cloudy, but we shall hear more of it even as the House
turns its attention to other banking issues.
Mr. St Germain's subcommittee has set hearings this
month on the question of restricting bank holding company
activities and on the question of bank underwriting of
revenue bonds, issues carried over from the last session.
In addition, there are some new issues that the subcommittee
hopes to address. The recent decision of the U.S. Court
of Appeals for the District of Columbia invalidating the
automatic transfer program inaugurated by the regulators
and the credit union share draft has inspired the Congress
to consider these questions directly. Similarly, various
members of Congress have expressed interest in reviewing
the federal regulators' new "small saver" proposals.
The Treasury has a role to play in the debates surrounding these and other banking issues. From my perspective,
that role is to provide the long and the broad view on the
- 3 endless succession of financial issues.
That may sound
a bit Olympian coming from anyone in Washington — where
180° changes in course are an established strategem — but
we can no longer afford the luxury, if ever we could, of
addressing change solely through the resolution of short-term
conflicts. Consideration of long-term costs and orderly
evolution are vital to our economic health.
If the history of the last decade or so suggests
anything, it is that we have not been keenly enough aware
of the long-term inflationary impact of legislative decisions.
This Administration has been laboring for two years — in
the footsteps of its predecessors — to contain the course
of inflation, and in that process we have learned something
of the frustration that comes from trying to address a
problem that has been years in the making. One thing is
very clear: inflation is a long-term problem — that
requires a long-term solution; or, more accurately, a
long-term set of solutions.
An historian friend told me a few weeks ago to take
solace from the knowledge that inflation has traditionally
been a heavy burden and not easily dealt with. He pointed
out that Lord Treasurer Weston, whom King Charles I appointed
in 1630, had a particularly uninspiring record. At one of
his first meetings as a member of the English Privy Council,
- 4 Weston's attention was drawn to an octogenarian servant
of the crown who was in dire distress. His name was
Julius Caesar. This Caesar had been granted a pension
by Queen Elizabeth in 1600, but now in 16 30 inflation had
reduced its purchasing power by about two-thirds. Something
must be done for Caesar, Weston's colleagues told him.
Weston took note of the matter by scribbling the
words "Remember Caesar" on a piece of paper which he stuck
in his pants pocket as a reminder. But on reaching home
he changed his trousers, and it was not for several weeks
that he again put on those he had worn at the Council
meeting. By that time he had forgotten about the poor
pensioner. "What could the reminder mean?" he asked
himself. With a shock he realized that the Ides of March
were upon him. His predecessor, Buckingham, had been
assassinated. So Weston took prompt action and had a
guard posted around his house.
I trust that this Administration has been more successful in identifying inflationary problems than was the Lord
Treasurer Weston, but the results thus far suggest that
this nation is far from a permanent solution. Recent figures
continue to be disheartening.
- 5 The rate of advance in prices in recent months is
running far above acceptable levels. Consumer prices
rose over the first three months of 1979, at an annual
- rate of 13 percent. This compares with a 9 percent rise
in 1978 and just under 7 percent during 1977.
In part, the recent bad news on the inflation front
reflects unfavorable developments in farm and food prices.
But acceleration has also been taking place across a broad
range of other prices. Home ownership costs, apparel
prices, automobile prices, wholesale prices and prices
for intermediate and crude materials -- all have been
rising at an increasing rate. It is not unlikely that
there will be more bad price news in the months to come.
We do expect some abatement in the rate of inflation
this year, but we also recognize that a significant and
enduring reduction in the inflation rate requires persistent
application of restraint. There is just no quick cure for
an inflation that has been building for over a decade and
that has woven itself into the economic and social fabric
of our society. As you know, this Administration is
committed to budgetary restraint as one of the best tools
available for curbing inflation. The austere budget for
- 6 FY 1980 proposed by the President will reduce the Federal
Government's share of demand placed on our physical and
financial resources. This will help to limit the possibility
-- of a resurgence in aggregate demand. This fiscal restraint
accompanied by monetary restraint is a necessary environment
for the program of voluntary wage/price guidelines for both
labor and industry.
This Administration has also focused on a goal that
should be of particular interest to you. It is the goal
of reducing the cost and complexity of regulation. As I
suggested earlier, the Federal Government has for many
years been making decisions about the structure, form and
behavior of regulated industries with little systematic
appreciation for the long-term real costs involved. That
is changing.
The clearest evidence of this change can be found
in the recent trend toward deregulation of industries
that have grown up under the protective umbrella of
regulation. The airlines, trucking and telecommunications
industries are examples. At the same time there is a
trend toward reducing the costs of regulation where
regulation is accepted as a necessary element in an
industry. We will see more of both trends in the area
of regulated financial institutions.
Market forces as well as regulatory initiatives have begun to
- 7 erode the artificial barriers to competition that have
insulated many financial institutions. To be sure, the
regulators have suffered some judicial reverses in their
efforts to remove competitive restrictions on financial
institutions, most notably the recent decision invalidating
automatic transfers. If not reversed on appeal, Congress
must address the consequences of that decision. While I
do not underestimate the difficulties of legislating a response,
I am heartened by the fact that market forces are creating
their own imperatives for change. This is true not only for
the prohibition of payment of interest on demand deposits,
but also for deposit interest rate ceilings generally.
The spectacular growth of money market mutual funds
and the advent of cash management accounts with check writing
privileges, such as that offered by Merrill Lynch, mean that
financial institutions can no longer operate in the closed
environment of rigidly regulated ceilings. These thoughts
have been reflected in some of the recommendations that the
Regulation Q Task Force has sent to the President. While I
cannot predict what the President's actions on the recommendations
will be, I do feel confident that the trend toward dismantling
economic regulation in this area will continue.
- 8 This is not to suggest that banking can be completely
deregulated. The lessons of history underline the importance
of the solvency and soundness of our banks and mandate
continuance of significant restrictions. And the trend in
recent years toward regulation of a social character may
also continue. The Truth-in-Lending Act, the Community
Reinvestment Act, and the proposed financial privacy bills
attest to an abiding Congressional concern for the consumer
and the community. These are bipartisan concerns that are
not likely to be reversed. But the trend is toward closer
examination of the process, and my suggestion to you is to
involve yourselves fully in this process. It is too late
to cite the costs and difficulties of implementing legislation
after it is on the books. Detailed analysis of a bill
must begin at the outset of the process. You must provide
the Congress in advance with the information necessary to
make an informed judgment on the costs and benefits of these
proposals.
There is one recent example that makes this point
dramatically. As part of the omnibus bank bill last year,
Congress enacted a privacy provision regulating access by
federal government agents to bank records. The Treasury was
deeply involved in the drafting of these provisions. We
- 9 sought to minimize their impact by providing for reimbursement
to the banks and by limiting possible civil liability of banks
to their clients. At the same time, we argued against a
provision that would require banks to provide a one-time notice
under the Act to their present and past customers. We were
unsuccessful, and the Congress enacted a bill with this provision.
Only after the bill had been signed into law, did the banking
industry develop estimates that it might cost as much as a
billion dollars to comply with this provision. When presented
with this information, the Congress acted quickly to remove the
provision through separate legislation. I wish I were sure
that there are not other costly provisions in the bill where
the results are less dramatic and where modification now will
prove less tractable.
The regulators also must play a part in containing the
burden of regulation. Duplicative and excessive regulation
are needless costs. We must urge the regulators to exercise
their discretion, wherever possible, to minimize the regulatory
burden. The banking bill of last year has provided us with an
important institutional mechanism to aid this effort. The
bill calls for a Financial Institutions Examination Council,
the mandate of which is to achieve uniformity in the examination
and supervisory process. I trust you will do your part in
- 10 urging the regulators to take the opportunity presented by
the Council to produce a system that is as cost effective and
efficient as possible. ~
There are other efforts also being made to achieve
greater efficiency in the regulatory sphere. The Regulatory
Council, as established by a Presidential Directive, represents a more comprehensive attempt to order the regulatory
process. The Council consists of most Executive Branch
agencies with regulatory powers as well as many of the
independent agencies such as the Federal Reserve Board and
the FDIC. Besides publishing the semi-annual calendar of
proposed major regulations, the Council is investigating
areas where duplication and overlap exist in regulatory
schemes. The Council is now considering several projects
that will bring it squarely into the area of bank regulation.
As a further measure the Administration has proposed
a regulatory reform bill which would, among other things,
require all agencies, including independent agencies, to do
a cost-benefit analysis of proposed major regulations. It
would further require those agencies to choose the least costly
alternative or explain why a more costly alternative was
selected. Several other proposals, with language generally
weaker than that of the Administration's bill, have been
offered in the Congress. The fate of these bills is
- 11 uncertain. Your voices ought to be heard in the debates
in which the issues will be resolved.
There is work sufficient for all of us in improving
our regulatory system.
In the most fundamental sense,
this is simply the task of making government work.
As
such, we all have a stake in this effort—and we will all
stand to be winners if it succeeds.
TREASURY ANNOUNCES THIRD-QUARTER
1979 TRIGGER PRICES
The Treasury Department today announced a decrease
percent in trigger price bases and extras for the major
products covered by the Trigger Price Mechanism (TPM).
announced a slight increase in the freight component of
price.
of 1.4
steel mill
Treasury also
the trigger
Trigger prices are based on the full cost of production of the
world's most efficient group of steel producers, the Japanese steel
companies. Each quarter, the Treasury Department updates those
estimated costs to reflect changes in these companies' cost of production. The TPM was designed to enable Treasury to carry out its
responsibilities under the Antidumping Act rapidly and effectively.
The TFM 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 Treasury's estimated total production costs, which had increased by 10 percent because of yen appreciation. For the second quarter, the band was used to maintain
trigger prices at their first-quarter levels, 1.2 percent above estimated
production costs. For the third quarter, 1.8 percent of the band is used
to reduce the 3.2 percent decrease in trigger prices dictated by the
current cost estimates to a 1.4 percent decrease.
The third-quarter production cost estimates are based on Treasury
Department monitoring of Japanese costs, including recent cost submissions from Japan's Ministry of International Trade and Industry.
The third-quarter cost estimate reflects a 212 yen/dollar exchange rate
(the average for the period March 5 through May 4 ) , applied to the yendenominated production costs. For the second quarter a 197 yen/dollar
exchange rate was used (the average for the period December 11 through
February 9 ) .
For the major steel mill products, the average cost of production
per net ton of finished product is estimated to be $341.08, 3.2 percent
lower than the average second-quarter trigger price level.
O
B-1605
-2For products produced by the electric furnace companies, thirdquarter trigger prices will increase by amounts varying from 1.6
percent.to 2.5 percent, depending on the product. The prices reflect
an update of costs, which included about a 15 percent increase in the
cost of: scrap, the yen depreciation, and use of 1.8 percent of the
flexibility band. Treasury's estimate of the production costs of the
electric furnace products ranged from 0.2 percent below to 0.7 percent
above second-quarter trigger price levels.
The trigger base prices and extras of stainless steel wire will
decrease 6.2 percent reflecting production costs which are 8.0 percent
below the second-quarter trigger price levels and the use of 1.8
percent of the flexibility band.
TPM freight rates will increase, principally because
of increases in fuel costs to Japanese shippers. All TPM
freight rates will increase $1 for steel mill products entering
West Coast ports and $2 for each of the other port areas.
Part I
DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
NOTICE
Imported Steel Mill Products Trigger Price Mechanism:
• Third-Quarter 1979 Revision of Trigger Prices
The Treasury Department hereby announces steel mill
product trigger prices for the third 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 accordingly.
Third-quarter trigger base prices and extras for steel mill
products of the integrated steel producers, which account for
about 90 percent of U.S. steel mill product imports, are 1.4
percent lower than their second quarter levels.
The cost estimates for the third quarter, on which trigger
prices are based, are calculated using a 212 yen/dollar exchange
rate (whereas the second quarter cost estimates are based on a
197 yen/dollar exchange rate). The resulting decrease in
Japanese steel production costs is partially offset by increases
in the cost of raw materials and labor.
The TPM includes a "flexibility bandr: of 5 percent to
moderate price fluctuations, particularly those due to exchange
rate changes. This band was used in the first quarter of 1979
to establish trigger prices at 3 percent below Treasury's
estimate of production cost, which had increased 10 percent.
In the second quarter, the band was used to maintain trigger
prices at their first-quarter levels, or 1.2 percent above the
production costs estimated for the second quarter. For the
third quarter, 1.8 percent of the flexibility band is used to
reduce the 3.2 percent decrease in trigger prices dictated by
the current cost estimates to a 1.4 percent decrease.
The trigger base prices and extras of the steel mill
products of the electric furnace producers will increase by
2.5 percent for Group A products, 2.2 percent for Group B
products, and 1.6 percent for Group C products.1/ These prices
reflect cost increases of 0.1 percent and 0.4 percent for Group A
and Group B products, a cost decrease of 0.1 percent for Group C
products, and the use of 1.8 percent of the flexibility band
for each of these three groups.
1/See Table 2 for a listing of which products are included In
each_of Groups A, B and C.
- 2 -
The trigger base prices and extras of stainless steel wire
will decrease 6.2 percent reflecting production costs which are
8.0 percent below the second-quarter trigger price levels and
the use of 1.8 percent of the flexibility band.
I. Integrated Producers
To determine third-quarter trigger price levels, Treasury
estimated the dollar cost of producing steel in Japan using
a 212 yen/dollar exchange rate. The 212 yen/dollar rate is
the average rate for the period March 5 through May 4, 1979,
the two-month period immediately preceding the calculation of
third-quarter trigger prices. The 212 yen/dollar exchange
rate compares to the 197 yen/dollar exchange rate used for
second quarter estimates of production costs, and by itself
would have caused approximately a $19, or 5 percent, decrease
in the cost estimate.
However, the price Japanese steel producers must pay for
raw materials and labor has substantially increased and offset
by $11, or 2.8 percent, the effect of the yen's depreciation.
Forty percent of the cost increase in raw materials results
from increases in the prices of coal and fuel oil, and most of
the other 60 percent reflects an increase in the price of iron
ore. Labor costs increased 5 percent reflecting Japanese steel
industry's 1979 wage settlement with the labor unions.
As shown in Table 1 below, the combined effect of the yen's
depreciation and the increase in the price of raw materials and
labor is an $8 decrease in the cost per metric ton of finished
steel mill products ($7 per net ton).
The resulting base prices for products produced by integrated producers are shown in Table 3.
II. Electric Furnace Products
Treasury estimated the costs of producing electric furnace
products for the third-quarter trigger prices based on a recent
cost submission from Japan's Ministry of International Trade
and Industry (MITI) and a 212 yen/dollar exchange rate. The
MITI submission on electric furnace products completely updates
the information MITI had previously provided on electric furnace
production costs.
Other than the exchange rate change, the only cost change
having a major impact on the production costs of these products
is a* 15 percent increase in the cost of scrap. 2/ Scrap currently
2/In the United States, the price of steel scrap for export
has risen more dramatically in recent months. However, U.S.-;
originated steel scrap accounts for less than 10 percent of
the scrap needs of the Japanese electric furnace mills. The
overall rise of scrap cost to the Japanese electric furnace
produi£gjcs-.ha-av thus been more moderate.
-3TABLE 1.
Japanese Production Cost Estimates
Integrated Steel Producers
Second and Third Quarters, 1979
(U.S. dollars per ton of finished product)
Second Quarter
(197 ¥/$)
Basic Raw Materials
Third Quarter
(212 ¥/$)
$119.03
$124.68
Other Raw Materials
72.21
67.10
Labor
94.07
91.80
Other Expenses
28.65
26.62
Depreciation
29.72
27.62
Interest
25.96
24.12
Profit 1/
25.12
24.82
(10.82)
(10.79)
Yield Credit
Total Cost $/MT
$383.94
$375.97
Total Cost $/NT $348.31 $341.08
1/Profit = .08 (Raw materials plus labor plus other expenses).
-4accounts for about half of the cost of these products. Other
cost changes with less impact include a negotiated -increase in
labor wages of 3.2 percent with offsetting decreases in labor
usage rates, increased charges for electricity and fuel oil,
and generally decreased interest cost due to lower debt levels.
Table 2 below shows, for electric furnace products, second and
third quarter estimated production costs per metric ton by
cost element and total estimated cost per net ton.
The resulting base prices for products produced by electric
furnace producers are shown in Table 3.
III.
Stainless Steel Wire
Treasury adjusted its estimate of Japanese stainless
production costs to a 212 yen/dollar exchange rate base. This
results in a roughly 8 percent cost reduction.
Japanese
stainless steel production costs are IQO percent yen-denominated
(the production costs of integrated producers are only about
two-thirds yen-denominated); hence, changes in the dollar-value
of Japanese stainless steel production costs approximately equal
changes in the yen/dollar ratio.
Stainless steel wire trigger prices were first
published only in January 16, 1979, after an extensive
Treasury study; consequently, the input prices used to
estimate stainless steel production costs are still current
and no cost adjustments, other than the exchange rate
adjustment, are necessary.
The resulting base prices for stainless steel wire
are shown in Table 3.
IV.
Freight
MITI also submitted an update of freight costs from
Japan to the United States. Principally because of increases
in fuel costs to Japanese shippers, TPM freight rates will
increase. All TPM freight rates will increase $1 for steel
mill products entering West Coast ports and $2 for each of the
other port areas.
TABLE 2
Japanese Production Cost Estimates: Electric Furnace Products
Second and Third Quarter 1979
(U.S. dollars per metric ton of finished product) »'
Group A 1/
Group B
2/
Second
Quarter
Third
Quarter
Second
Quarter
Basic Raw Materials
'SI 5 7. 81
$168.08
$169.92 $182."2
Other Raw Materials
34.76
33.72
Third
Quarter
41.08 36.34
Group n 3 /
Second
Quarter
Third
Quarter
$156.74
$168,52
37.55
33.13
Labor
30.80
28.17
35.05
30.74
24.56
22.28
Other Expenses
12.25
11.20
14.96
17.23
15.45
13.55 i
Depreciation
6.67
7.00
8.48
9.65
6.82
Interest
4/
Profit-'
Scrap Credit
7.47
6.33
10.69
7.25
6.86
6.34
6.35
18.85
19.29
20.88
21.37
18.74
19.00
(2.83)
(2.93)
(3.19)
(2.51)
(2.79)
(2.68)
Total $/MT
$265.78
$270.86
$297.87
$302.89
Total $/NT
$241.11
$245.72
$270.23 $274.78
$263.93
-^Group B products are hot rolled strip from bar mills; merchant quality flat bars,
hot rolled round bars, squares, and round cornered squares; and bar size channels
-'Vrofir=.08 (Raw materials i labor = other expenses).
$266.49
$239.44 $241.76
-Group A products are equal angles, unequal angles, channels, and I-beams.
—Group C products are concrete reinforcing bars, plain and deformed.
en
I
PRODUCT BASE PRIORS FOR SilrPMENTS EXPORTED DURING THIRD QUARTER 1979
(All Base Prices Decreased 1.4% Unless Otherwise Notedl
Second Quarter Third Quarter
Page */
Product
~ ~
1979 Base Price
($/Metric Ton)
,1979 Base Price
($/Metric Ton)
2-1 Wire Rods Commercial Quality AISI 1008 5.5mm 315 311
2-2
Wire Rods Welding Quality AIST 1008
316
312
2-3
Wire Rods High Carbon AISI 1065 5.5 nun
366
361
2-5
Wire Rods Cold Heading Quality AISI 1038 12.7 mm
378
373
2-7
Wire Rods Cold Finished Bar Quality
378
373
2-9
Spheroidized Annealed Mo Alloy Steel Wire Rod
552
544
ATSI 4037 5.5 mm to 13 mm
2-13
Spheroidized Annealed Si-Mn-Cr High Carbon Steel
529
522
Wire Rod ATST 52100 5.5 mm to 13 mm
2-15
Spheroidized Annealed High Carbon Cr Steel Wire
607
599
Rod ATST 52100 5.5 mm to 13 mm
3-1
Wide Flange Beams and Bearing Piling ASTM A-36
306
302
12" x 12"
3-4
Standard Carbon Steel Channels ASTM A-36 **
274
281
3-6
Unequal Leg Carbon Steel Angles ASTM A-36 **
288
295
3-8
Equal Leg Carbon Steel Angles ASTM A-36 **
259
265
3-10
Standard Carbon Steel "I" Reams *VSTM A-36 **
315
323
4-1
Sheet Piling ASTM A-328 Arch Web PDA-27
346
341
5-1
Steel Plates ASTM A-36 1/2" x 80" x 240"
316
312
6-1
Heavy Carbon Steel Rails ARFA 115, 132 or 136
352
347
6-3
Light Rails 60 lbs./yd.
346
341
6-5
Tie Plates
353
348
8-1
Plain and Deformed Carbon Steel Concrete
255
259
Reinforcing Bars ASTM A-615 ****
9-1
Mot Rolled Carbon Steel Bar Size Channel
381
389
ASTM A-36 ***
*/
Page references are to the First and Second Quarter Trigger Price Manual published by the Department
—
of the Treasury, April, 1979. The first figure of each page reference corresponds to the AISI product
category of that product.
**/ Electric Furnace, Group A. The increase from Second to Third Quarter is 2.5%.
****/ Electric Furnace, Group B. The increase from Second to Third Quarter
is 2.2%.
****/Electric Furnace Group C. The increase from Second to Third Quarter is 1.6%.
^
Table
3
(Continued)
Page */ Product
Second Quarter
1979 Base Price
($/Metric Ton)
Third Quarter
1979 Base Price
($/Metric Ton)
11
10-1
10-3
10-5
10-7
11-1
11-6
12-1
12-2
12-3
12-5
12-7
14 I
14 6
14-8
14-13
14-16
14-22
*/
~
***/
402
Rolled Carbon Bars Special Quality AISI
1045 40 mm round x 4 meters
318
Merchant Quality Hot Rolled Carbon Steel
Squares and Round Cornered Squares ASTM-36
or ATSt 1020 ***
318
Merchant Quality Hot Rolled Carbon Steel
Round Bar ASTM A-36 or ATSI 1020 ***
289
Merchant Quality Carbon Steel Flat Bars ASTM
A-36 or AISI 1020 ***
463
Hot Rolled Ni-Cr-Mo Alloy Steel Round Bar
ATST 8620 40 nun
517
Spheroidize Annealed High Carbon Cr Steel
Round Bar ATSI 52100 40 nun to 100 mm
464
Cold Finished Carbon Steel Round Bar ATST
1008 through 1029 10.05 mm (3/4")
524
Cold Finished Round Steel Bar (Free Cutting Steel550
Sulfur) ATST 1212 through 1215, 19.05mm (3/4")
Cold Finished Round Steel Bar (Free Cutting Steel463
Lead) AISI 12L14 and 121.15 19.05 mm (3/4")
Cold Finished, Ni-Cr-Mo Alloy Steel Round Bar
517
AISI 8620, 40 run
Cold Finished Spheroidized Annealed, High Carbon
517
Cr Steel Round Bar, ATST 52100, 50100, 51100
Electric Resistance Welded Carbon Steel Pressure
Tubing for use in Boilers, Heat Exchangers,
350
Condensers, Etc.
368
Continuous Butt Welded Standard Pipe
Electric Resistance Welded Pine, Excluding Oil
446
Well Casing, Without Coupling
385
Submerged Arc Welded Pipe
Electric Resistance Welded Structural Tubing to
355
ASTM A-500 Grades A, B f, C
Electric Resistance Welded Standard Pipe ASTM
Page references
to the First and Second Quarter Trigger Price Manual published
A-120 are
(A-53)
of the Treasury, April, 1979. The first figure of each page reference corresponds
category of that product.
Electric Furnace, Group B. The Increase from Second to Third Quarter is 2.2%.
396
325
325
295
457
510
458
517
•
542
457
510
510
345
363
440
380
350
by the Department
to the AISI product
Page */
14-24
14-26
14-30
14-32
15-1
15-4
15-7
15-10
15-13
15-15
15-17
15-43
15-45
15-48
15-49
15-50
15-52
J]
~~
'roduct
Electric Resistance Welded Standard Pipe ASTM
A-120 (Larger Sizes)
Piling Pipe ASTM A-252
Electric Resistance Welded Hot Dipped Galvanized
Fence Pipe and Tubing in Plain Ends
ERW Mechanical Tubing ASTM A-513
Seamless Carbon Steel Oil Well Casing, Not
Threaded, up to 7" in Outside Diameter
Seamless Carbon Steel Oil Well Casing, Not Threaded,
7 inches and over in Outside Diameter
Seamless Carbon Steel Oil Well Casing, Threaded and
Coupled, 7 Inches and over in (Xitside Diameter
Seamless Carbon Steel Oil Well Casing, Threaded
and Coupled, up to 7 Inches in Outside Diameter
Electric Resistance Welded Carbon Steel Oil Well
Casing, Not Threaded
Electric Resistance Welded Carbon Steel Oil Well
Casing, Threaded
Seamless Carbon Steel Pressure Tubing Suitable for
use in Boilers, Superheaters, Heat Exchangers,
Condensers, Refining Furnaces, Feed Water Heaters,
Cold Finish
Seamless Carbon Steel Oil Well Tubing EHE With
Threading and Coupling
Seamless Carbon Steel Line Pipe
Hot Rolled High Carbon Cr Steel Tube Suitable for
Use in Manufacture of Ball or Roller Bearings
AISI 52100 60 mm to 100 mm
Cold Rolled High Carbon Cr Steel Tube Suitable for
Use in Manufacture of Ball or Roller Bearings AISI
52100 60 mm to 100 mm
Seamless Stainless Steel Round Ornamental Tube ATST
TP 304, 1 1/4 x 0.049"
Seamless Stainless Steel Square Ornamental Tube AISI
TP 304, 1 1 / 2 x 1 1/2 x 0.065"
Second Quarter
1979 Base Price
($/Metric Ton)
Third Quarter
1979 Base Price
($/Metric Ton)
355
350
347
342
350
355
458
464
429
435
431
425
489
482
494
487
388
383
oo
458
452
831
819
651
642
443
631
437
622
938
925
2128
2098
2319
2287
Page references are to the First and Second Quarter Trigger Price Manual published by the Department
of the Treasury, April, 1979,. The first figure of each page reference corresponds to the ATST product
category of that product.
Table 3
(Continued)
Page */
Product
Second Quarter
1979 Base Price
($/Metric Ton)
Third Quarter
1979 Base Price
($/Metric Ton)
»
467
474
Cold Heading Round Wire ATST 1018 Killed 0.192"
Hard Drawn
530
538
16-1
Cold Heading Drawn from Annealed Rods
542
550
16-1
Cold Heading Drawn from Spheroidized Annealed Rods
546
554
16-1
Cold Heading Anneal in Process
556
564
16-1
Cold Heading Spheroidize Anneal in Process
589
597
16-1
Cold Heading Anneal in Process and Drawn from
Annealed Rods
599
607
16-1
Cold Heading Spheroidize Annenl in Process and
Drawn from Annealed Rods
530
538
16-1
Cold Heading Anneal at Finish Size
542
550
16-1
Cold Heading Spheroidize Anneal at Finish Size
572
580
16-1
Cold Heading Anneal at Finished Size and Drawn
•
from Annealed Rods
585
593
16-1
Cold Heading Spheroidize Anneal at Finished Size
and Drawn from Annealed Rods
384
389
16-4
Bright Basic Round Wire ATST 1008 08 Gauge Rimmed
483
490
16-5
Galvanized Tron Round Wise ATST Type T Coating
536
544
//8 Gauge
16-8
522
529
Round Baling Wire 14.50
16-9
Cold Finished Spheroidized Annealed, Si-Mn-Cr
544
552
16-11
High Carbon Steel Wire AISI 9254
Cold Finished Spheroidized Annealed Mo Alloy
814
826
16-13
Steel Wire ATST 4037, 5.5 mm to 13 mm
High Carbon Cr Steel Wire in Coil ATSI 52100, 50100,
51100, Suitable for use in manufacture of
480
487
16-15
ball or roller bearings.
Upholstery Spring Wire Automatic Coiling and
513
506
16-16
Knotting Type
516
509
16-17
Mechanical Spring Wire ASTM A-227 and A-648
Oil Tempered Steel Spring Wire ASTM A-229
7
Page references are to the First and Second Quarter Trigger Price Manual published by the Department
of the Treasury, April, 1979. The first figure of each page reference corresponds to the ATST product
category of that product.
16-1 -.
Table 3
(Continued)
Page */ Product
Second Quarter
1979 Base Price
($/Metric Ton)
Third Quarter
1979 Base Price
($/Metric Ton)
i
16-18
16-19
16-20
16-21
16-25
16-28
19-1
20-1
21-1
22-1
23-1
25-1
25-2
26-1
26-3
26-5
27-1
27-4
29-1
29-3
32-1
*/
Carbon Steel Valve Spring Quality Wire ASTM A-230
Automobile Tire Bead Wire
Galvanized Core Wire for A.C.S.R. ASTM B 498 Class "A"
Stainless Steel Annealed Wire Grade 301****
Stainless Steel Hard/Spring Wire Grade 301****
Stainless Steel Soft/Intermediate Wire Grade 301****
Field Fence
Wire Nails Bright Common 20d tf 6 13/32 x 4"
Barbed Wire 2 Ply, 12.50
Black Plate ASTM A625-76 0.0083" x 34" x Coil
Electrolytic Tin Plate SR-25/25 75L x 34" x C
Hot Rolled Steel Sheets ASTM A-569 0.121" x 48" x Coil
Hot Rolled Steel Band ASTM 569 0.121" x 48" x Coil
Electrical Steel Sheets Grain Oriented M-4 0.012" x
33" x C
Electrical Steel Sheets Non Oriented M-45
0.018" x 36" x C
Cold Rolled Sheets ASTM A-366 1.0 m/m x 48" x C
Electro Galvanized Sheets EGC 10g/M^ 1.0 m/m x 48" x C
Galvanized Sheet ASTM A525G90 0.8 m/m x 48" x C
Hot Rolled Carbon Steel Strip Produced on Bar Mills
Cut Lengths ***
Hot Rolled Carbon Steel Strip Produced on Sheet Mills
Coils Only
Tin Free Steel Sheets SR 75L x 34" x C
859
602
642
2073
2073
2073
587
454
618
407
551
280
268
1183
847
594
633
1944
1944
1944
579
448
609
401
543
276
264
1166
i
638
629
351
415
417
323
346
409
411
330
274
270
472
465
Page references are to the First and Second Quarter Trigger Price Manual published by the Department
of the Treasury, April, 1979. The first figure of each page reference corresponds to the AISI product
category of that product.
***/ Electric Furnace, Group B. The increase from Second to Third Quarter is 2.2%.
****/Stainless steel wire. The decrease from Second to Third Quarter is 6.2%.
—
g
-11-
' /Rober- H. Mundheim
Dated:
:.i^,
__ cv
^7^)
Part II
DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
NOTICE
New and Adjusted
Trigger Base Prices and "Extras"
for Imported Steel Mill Products
I am hereby announcing (1) new trigger base prices and
"extras" for products not previously covered by the Trigger
Price Mechanism and (2) adjustments to, and additional "extras"
for products for which trigger prices have been previously
announced. Attachment 1 lists the specific product involved
and describes the action being taken. These trigger prices
will be used by the Treasury Department in monitoring imports of
these products under the trigger price mechanism. Accordingly*
a number of pages in the Steel Trigger Price Handbook are being
reissued to reflect these actions.
Description of the trigger price mechanism may be found
in the "Background" to the proposed rulemaking (42 F.R. 65214)
and the final rulemaking (43 F.R. 6065) which amended regulations to require the filing of a Special Summary Steel Invoice
(SSSI) with all entries of imported steel mill products.
These base prices, and extras, and adjustments are based
upon information made available to the Treasury Department
by the Japanese Ministry of International Trade and Industry
(MITI), as well as other information available to the Department .
The trigger prices published on the attached pages are
expressed in terms of second quarter prices. For shipments
exported in the third calendar quarter, these prices should
be adjusted to reflect third quarter price changes published
simultaneously today.
All the trigger prices being announced here will be used
by the Customs Service to collect information at the time of
entry summary on shipments of the products covered which are
exported after the date of publication of this notice. However*, the following rules will be applied to entries of these
products covered by contracts with fixed price terms concluded
before the publication date of this notice.
-21.
Contracts with fixed price terms between unrelated
parties: If the importer documents at or before the
time of entry summary that the shipment is being
imported under such a contract with an unrelated party,.
the entry will not trigger an investigation even if
_
the sales price is below the trigger price, provided
that product is exported on or before June 30, 1979.
However, failure to initiate an investigation will not
diminish the right of affected interested persons to
file <a complaint with respect to such imports under the
established procedures for antidumping cases.
2. Contracts between related parties: If the importer
documents at the time of entry summary that the shipment is to be resold to an unrelated purchaser in the
United States under a contract with fixed price terms
concluded before the publication date of this notice,
the entry will not trigger an investigation even if
the sales price is below the trigger price, provided
that product is exported on or before June 30, 1979.
While these sales will not as a rule trigger a self-initiated
antidumping investigation, information concerning such sales
will be kept as a part of the information in the monitoring
system and will be available in the event that an antidumping
petition is filed with respect to such products sold by that
producer or the Treasury Department decided to self-initiate
an antidumping investigation of such products based upon subsequent sales.
C-<~_~-*'-
Robert H. Mundheim
General Counsel
<a7Q
Dated:
TftSf
Attachment I
ADJUSTMENTS
TABLE. OF PRODUCT ADDITIONS AND
AISI Catcgory/T.P. Handbook
Page Number and Product Description
Type of Action
Description of Action
2-6 Wire Rods, Cold Heading
Qua 1i t y
Extended Coverage
Added grade 1108
2 8 Wire Rod, Cold Finished Bar
Quality
Extended Coverage
Added grade 1115, 1118
5-10 Plate
Correction
Corrected Pickled and Oiled Extra
14-9 ERW Pipe, Excluding Oil Well
Ca-ing Without Coupling
Correction
Corrected Grade and size extra
14-26, Piling Pipe
14-27, 14-28, 14-29
Extended Coverage
Added large pipe sizes, for ERW and
SAW Piling Pipe
14-33 ERW Mechanical Tubing
ASTM A 513
Correction
Corrected size extras
15 44 Seamless Carbon Steel Oil
Well Tubing EHE with
Threading and Coupling
Correction
Corrected size and grade extra
16-2 Cold Heading Round Wire
Extended Coverage
Added grade extras
19-1 Field Fence ASTM-A 116
Correct ion
Added note on insurance
21-1, Barbed Wire
21-2
Extended Coverage
Added coating and size extras
1G-32
Extended Coverage
Clarified packaging extras
Stainless Steel Wire
2-6
Rev. Mav 19"9
WIRE RODS - COLD HEADING QUALITY
Extra (Sizes/Grade) Per Metric Ton
GRADE
SIZES
(AISI NUMBER)
7/32" thru over 35/64" 39/64" to 3/4"
35/64
to under 39/64" under 3/4"
1005, 1006, 1008
1010, 1011, 1012 Minus $26
1015
(Rimmed Steel)
and over
$35
$19
MIL
$47
$34
$ 9
$48
$34
$10
1015, 1016, 1017
1018, 1019, 1020
1021, 1022, 1023 Minus S
1025, 1026
$62
$47
$24
1029, 1030, 1035
1037, 1038, 1039
1040, 1042, 1043
$48
$35
$T
86
91
73
72
77
57
46
50
35
Minus 6
48
34
10
NIL
13
10
66
77
59
52
62
45
27
37
21
36
84
70
45
1015, 1016, 1017 Minus $26
1018, 1019, 1020
1021, 1022, 1023,
1025, 1026
(Rimmed Steel)
1005, 1006, 1008
1010, 1011, 1012,
1013
Minus S 8
(Killed Steel)
NIL
22
27
24
10B18 10B21
10B22 10B23
10B30
1108, 1110
is::
15:4
'1541
15B41
•
Tolerance Extra
If bar tolerances are specified or required for over 35/64" to
under 3/4" ... Pi u s $12/M.T.
2-8
Rev. May 1979
WIRE RODS-COLD FINISHED BAR QUALITY
Extras (Sizes / Grade) Per Metric Ton
SIZES
GRADE
(AISI NUNBER)
7/32" Thru Over 35/64"
39/64" To
35/64" to Under 39/64" Under 3/4"
3/4" and
Over
1015, 1016, 1017
1021 i K lolS" *^W $25 *10 Minus $12
1025! 1026*
1029,1030,1035
1037, 1038, 1039
122?' J E M 0 4 3
MlH-LL*21
$26
$10
Minus $10
43
28
34
36
19
18
10
13
34
10
1044, 1045, 1046,
1049 1050
1117, 1115, 1118 Minus $ 6 57
1141
2
1144
2
1151
4
1212,1213,1215
Minus $ 2
43
48
50
48
10L18 Minus $18 58 44Mi- nus
20 $18
NIL
10L38, 10145
58
48
34
10
11L17
$25
17
11L37
17
12L14, 12L15 17 67 53 28
91
64
64
77
49
50
26
Tolerance Extra.
If Bar Tolerances are specified or required for over 35/64" to
under 3/4" -- plus $12 per metric ton.
3 - OTHER EXTRAS
Description
Killed
Fine Grain
Charpy
+4CAF & up
L
T
L & T
under +4CAF
L
T
L & T
Normalize
Quench & Temper
Normalize & Temper
U.S.T.
A578 L2,
A435, A578 LI
(9" or higher grid)
(over 1/2")
(under 9" grid or 100%
scanning)
(over 3/4")
Checker
Pickled & Oiled
Up to 0.172" Thickness
Over 0.172" Thickness
Others
(over 3/4")
14-9
Rev. May 1979
BASE PRICES INCLUDING OD/WT AND GRADE EXTRAS (S/M.T.)
ELECTRIC RESISTANCE WELD PIPE, EXCLUDING OIL WELL CASING,
WITHOUT COUPLING
O.D. "WJ.
A53 & API 5L
GRADES A & B
API
X42 X46
5LX
X52
Grades
X56
X60
2-3/8
.154
.218
412
423
424 435
434 448
449
460
460
472
473
486
2-7/8
.203
.276
401
422
412 424
424 435
436
449
449
460
460
473
3h
.216
.300
389
401
402 413
412 424
425
436
436
449
449
460
4
.226
.318
389
401
402 413
412 424
425
436
436
449
449
460
4h
.125
.141
.156
.172
.188
.203
.219
.237
.337
394
389
389
389
389
389
389
389
401
412
402
402
402
402
402
402
402
412
425
413
413
413
413
413
413
413
424
436
425
425
425
425
425
425
425
414
449
436
436
436
436
436
436
436
449
460
449
449
449
449
449
449
449
460
5-9/16 .156
.188
.219
.258
.375
385
385
385
385
395
395
395
395
395
407
407
407
407
407
419
419
419
419
419
431
430
430
430
430
443
442
442
442
442
454
396
395
385
385
385
385
385
385
385
385
395
407
407
395
395
395
395
395
395
395
395
407
419
419
407
407
407
407
407
407
4C7
407
419
431
431
419
419
419
419
419
419
419
419
431
443
443
430
430
430
430
430
430
430
430
443
454
454
442
442
442
442
442
442
442
442
454
6-5/8
A
.125
.141
.156
.172
.188
.203
.219
.250
.280
.375
.432 •
14-26
Rev. Mav 19"9
Piling Pipe
.ASP!
A-252, ERK and SAW
AISI Category 14
Tariff Schedule Number 610.32 0.3* per lb.
1st and 2nd Quarter
Base Price Per Metric Ton
$347
Charges to CIF Ocean Freight Handling Interest
West Coast See Freight $9 $6
Table p. 14-1
Gulf Coast
5
8
Atlantic Coast
4
9
Great Lakes
4
11
Insurance: 1% of base price + extras + ocean freight.
Extras:
Outside diameter/wall thickness by grade.
Rev. May 1979
Base Prices Including OD/WT and Grade Extras ($/M.T.)
Piling Pipe ASTM - A-252
W.T.
Grades 1, 2
Grade 3
.125
.141
.156
.172
.188
.203
.219
.250
.280
.375
.432
373
373
362
362
362
362
362
362
362
362
373
395
395
384
384
384
384
384
384
384
384
395
8-5/8
.125
.156
.172
.188
.203
.219
.258
.277
.312
.322
.344
.375
.500
357
357
357
347
347
347
347
347
347
347
347
347
357
378
378
378
367
367
367
367
367
367
367
367
367
378
10-3/4
156
172
188
203
219
250
279
307
344
365500
357
357
357
347
347
347
347
347
347
347
357
378
378
378
378
367
367
367
367
367
367
378
172
188
203
219
250
281
312
330
344
375
406
500
357
357
347
347
347
347
347
347
347
347
347
357
378
367
367
367
367
367
367
367
367
367
378
1
Rev. M
Prices Including OD/WT and Grade Extra f?/M.7.^
Piling Pipe ASTM A-252 - ERW
W.T.
Grades 1, 2
Grade 3
.188
.203
.219
.250
.281
.312
.344
.375
.438
.500
357
357
347
347
34 -!
347
347
347
347
357
378
378
367
367
3636"
36"
367
36"
378
.188
.203
.219
.250
.281
.312
.344
.375
.438
.500
357
357
347
347
347
347
347
347
347
357
378
378
36"
367
367
367
367
367
367
378
.219
.250
.281
.312
.344
.375
.438
.500
357
347
347
347
347
347
347
357
35"
34"
347
347
347
347
347
357
.219
.250
.281
.312
.344
.375
.438
.500
357
347
347
347
347
347
34"
357
357
347
347
347
347
34"
34"
35"
'
14-29
Rev. May 1979
Base Prices Including OD/WT and Grade Extra ($/M.T.)
Piling Pipe ASTM - A - 252 - SAW
O.D. 16" 18" - 24" 26" - 48"
Grades 1,2 461 448 435
Grade 3 48" 474 461
14-33
May
1979
i
ERW MECHANICAL TUBING ASTM-A-513 TYPE 1 AWHR
Base Price Including OD/WT Extras
3/4
I kl/i }=ltl ki/i ? hU* lrll± 2r2Zi hUl ?z2I± } hlil hill*. <L_i/2.
0.049 789 719 672
"
""" ___
0.065 765 650 650
603
603
--;-;
--; "'
0.083 672 650 603
557
533 511 511
511
487
487
487 487 --0 095 672 603 603
533
511 487 487
487
487
463
463 463 463 --0.105 650 580 557
511
487 487 487
463
463
463
463 463 463 463 --—
0.109 650 580 533
487
463 463 463
463
463
463
463 44
463 463 487 --n \?0 650 580 533
463
463 463 463
463
463
441
441 441 441 441 487 533
n*!;2
ofln o!3
463
463 463 463
441
441
441
441 441 441 441 463 487
ul34
58u533
463
463 463 463
441
441
441
441 441 441 441 463 487
Ollt
—
580 533
463
463 463 463
441
441
441
441 44] 441 441 441 463
0 148 —
--- 533
463
463 463 463
441
441
441
441 441 441 441 441 463
°0' 50
557
487
463 463 463
441
441
441
441 441 441 441 44
463
0 65
557
487
463 463 463
463
441
441
441 441 441 44
441 441
0* 80 557
511
463 463 463
463
441
441
441 441 441 441 417 417
nooo --533
463 463 463
463
463
441
441 417 417 417 4 7 417
n ool
533
487 487 487
463
463
441
441 417 417 417 417 417
0 220 557
487
487 487
463
463
441
441 417 417 417 417 417
n ?™
—
511
511 511
487
487
463
463 441 441 441 441 441
0 959 II557
557 557
511
487
463
463 441 441 441 441 441
JJ OQ?
—
—
—
463 463 441 441 441
0.-*84
'
4 6 3 463 4(>3
4B7
w
0.300
Intermediate wall thickness will be priced on the next heavier wall shown.
15-44
Rev. Mav
BASE PRICES INCLUDING OD, GRADE EXTRAS
($/MT)
SEAMLESS CARBON STEEL OIL WELL TUBING
EUE WITH THREADING AND COUPLING
TSUSA
610.49
H40
J55
K55
N80
C75
L80
L90
Others
80-85
PI 05
Others
90
and up
2 3/8" and under
716
911
1101
2 7/8 - 4"
651
827
996
AISI
15
Grade
Outside Diameter
(inches)
1979
Rev.
GRADE EXTRAS -FOR COLD HEADING WIRE
S Extra ,/M.T.
Grade 1st and 2nd Quarter
AISI 1006 Killed
through 1022 Killed Steel
AISI 1010 Rimmed Steel -15
AISI 1038 Killed Steel +19
AISI 10B18 10B21 Killed Steel +24
AISI 10BZ2, 10B23 Killed Steel -24
AISI 10B30, 10B35 Killed Steel +30
AISI 15B36, 15B41 Killed Steel +40
Base
16-2
Mav 19"9
19-1
Rev. March, 1979
FIELD FENCE A.S.T.M. A-116
Category AISI
19
Tariff Schedule Number 642.3570 0.l£ per lb.
1st and 2nd Quarter
Base Price per Metric Ton
#11 Gauge Galvanized Wire $587
Charges to C.I.F.
Ocean Freight Handling Interest
West Coast $43 $9 m
Gulf Coast
51
5
Atlantic Coast
56
4
Great Lakes
61
4
Insurance: 1% of base price + extras + ocean freight
Extras
Size Extra
% Metric ton
Stay Wire Spacing
Filler Wire Size 6" 12"
til -,„
#12-1/2
Base M1nus
*3
16
$13
14
14
17
:i-i
Rev. Mav 1979
EARBED WIRE 2 ply
12.50 GAUGE
Category AISI 21
Tariff Schedule Number
642.0200 Free
1st and 2nd Quarter
Base Price per Metric Ton
Charges to CIF
West Coast
Gulf Coast
Atlantic Coast
Great Lakes
$618
Ocean Freight
$43
51
56
61
Handling
Interest
$9
5
4
4
Insurance 1% of base price + extras + ocean freight
Extras
1.
Coating
2.
Size Extras
$9
12
12
14
Rev. _ May
BARBED HIRE
#
1."
2.
EXTRAS
Coating Extra
Regular Coating
S/M.T.
Size Extra
S/M.T.
Minus $54
12 1/2
Base
13
$5
13 1/2
$10
14
$15
16-32
Rev. March, 1979
TOLERANCE EXTRAS
Standard: AISI or JIS Specification
Diameter Tolerance
Standard
J
Not less than 1/2 standard
Closer than 1/2 to 1/4 standard
Closer than 1/4 standard
Straightening and Cut to Length Extras
gi2e Ra^e
.703" - .595"
.594" - .501"
.500"
.499" - .375"
.374" - .3125"
.3124" - .170"
.169" - .099"
.098" - .051"
.050" - .032"
Length
Under 12"
12" to under 18"
18" to under 24"
24" to under 30"
30" to under 36"
36" to under 48"
48" to under 60"
60" to under 72"
72" to under 120"
120" to under 168"
168" to under 192" 33
192" to under 216"
216" to under 240"
240"
264"
240" to
to under
under 264"
264"
unde 288"
264" to
to under
288" to 316"
Packaging Extras
T__pe
UUUW"Bundle
Wooden Boxes
Fibre Drums
Coi I Carriers
Spools
I \tr\Lm\
Both Spools and Wooden Boxes
Sizes .020 and greater
Sizes under .020
IZffil"
ei1c
5116
25% of size extra
50% of size extra
Dollar^er MT
104
104
131
131
236
590
1706
1968
Dollar per MT
_*
59
59
39
39
39
\\
*\
f
JJ
**
;"
f
|°
Dollar per MT
29
ft-.
°'
°;
29
—
-CI———--------—--
145
87
232
Attachment
1 (continued)
ATSI Category/T.P. Handbook
Pago Number and Product Description
Type of Action
Rescript ion of Action
2S-1
Mot Rolled Sheet
IVI el ion
Deleted Theoretical Minimum weighing
extra; Treasury will adjust the invoice
price compared to the trigger pi ice so
that the invoice price reflects actual net
weight, not the theoretical minimum weight.
When sheet is sold based on IMW, the actual
and the T*fV weight should be shown for each
line in column 16 of the SSS1.
Cold Rolled Sheet
Correct ion and
Deletion
Corrected width, length and thickness
dimensions; deleted theoretical minimum
weighing extra. See above, hot rolled sheet.
27-3
I dectro-Galvanized Sheet
Relet ion
Deleted theoretical minimum weighing extra;
sec above hot rolled sheet.
27-S
27-7
Galvanized Sheet
P.x tended Coverage
Added Culvert Stock and Copper extra;
deleted theoretical minimum weighing extra.
Sec above, hot rolled sheet.
26 7
Other Extras
1. Quality-Drawing Q-Rimroed
Killed
2. Structural-A570 D/E
3. Chemistry (Carbon Range)
0.26% to 0.34c,
0.35S & up
4. High Strength Carbon Steel
YP 45,000 to 50,000 P.S.I.
YP 50,000 P.S.I. & up
5. High Strength Low Alloy Steel
D-A607-G45
50
55
D-COR-TEN A
26-6
Rev. March, 1979
EXTRAS FOR COLD ROLLED STEEL SHEET
•WIDTH & THICKNESS
_
____,
T h i c k n e s s , W i d t h ,
Inches,
IT.flS7<W.12S
244W<36
23
36<W<45
2nn
0.083<T<0.097
0.064<T<O.O83
28
24
21
21
0.054<T< 0.064
24
O.028£j<0.054
UNIT:
US$/MT
Inches
45<k<60
T2
21
6&y<72
2B-
9
4
19
15
28
24
17
0
9
24
26
17
C
17
30
0.023<T<0.028
43
34
19
24
38
0.019<T< 0.023
61
56
46
52
56
Q14.T<0.019
82
77
67
70
60<IK.63
•CUT LENGTH
Length, Inches
Thickness,
Inches
Width,
Inches
24*L*42
42*L&60
60*L*144
24__w__72
23
H>
22
25
0.028<T<0.064 24<W<72
T < 0.028 24<V;772
24
27
22
26
20
24
22
26
OFT
144<L
*C0JL WEIGHT
GROSS MAX 10,000 lbs & OVER
GROSS MAX 10,000 lbs UNDER
NONE
2
DULL
NONE
COMMERCIAL BRIGHT
17
EMBOSSED
42
•FINISH
NON GEOMETRIC
»
• GEOMETRIC
53
Rev. May
26-7
1979
•SURFACE TREATMENT
GREASED EDGES
1
SPECIAL CLEANLINESS REQUIREMENT
Thickness, Width, Inches
Inches
0.021__T
T<0.020
W<36
9
-
36__W
•
5
9
*•QUALITY
COMMERCIAL.'.
NONE
DRAWING
12
•DEEP DRAWING
30
FULL HARD (ROCKWELL HARDNESS B-84 MIN)
NONE
1/4 HARD
15
1/2 HARD
15
STRUCTURAL (PHYSICAL) - CARBON STEEL
18
TWO PRIME SIDES
18
CLASS II
MINUS..11
•CHEMISTRY
COPPER BEARING
12
RESTRICTED CHEMISTRY
N
•QUANTITY EXTRA
10 S/T<Q<10 S/T
•RESTRICTED TOLERANCE
•OTHERS ,.. .N
8
N
Rev. Mav
27-3
1979
(2) LENGTn
60'£Lil68"
18
L<60"
20
0.06 OZ/FT* on each side
+5
0.03
n
BASE
0.01
u
-2
(4) CHEMICAL TREATMENT
Phosphated
Base
Chromated
-2
Oiled
-2
(5) QUALITY
Commercial
BASE
Drawing
Subject to Negotiation
Drawing, Special Killed
Physical (TS, YP, HRS, etc.)
14
(6) PACKING
Coil
4ST UNDER
Sheet
3ST UNDER
( 7) OTHERS
Subject to Negotiation
Subject to Negotiation
27-5
Rev. March, 1979
EXTRAS FOR GALVANIZED STEEL SHEET
1. PRICE BASE
QUALITY
COMMERCIAL
SIZE
GSG23 (UNDER .032" THROUGH .029") x OVER 42" THROUGH 48" xCOIL
COATING
G90
WEIGHING:
ACTUAL
2. EXTRAS FOR OTHER THAN PRICE BASE PRODUCTS (UNIT: US$ PER M/T)
(1) THICKNESS/WIDTH/COATING
THICKNESS
INCHES)
7FR thicker
.129 - .116
.115 - .101
.100 - .086
.085 - .075
j.074 - .067
i .066 - .061
{.060 - .055
.054 - .049
j.048 - .043
1.042 - .038
f .037 - .035
.934 - .032
.028 - .026
(UNDER
.025 -.032
.023
through
.029
.022
- .021
i
.020 - .019
.018 - .017
.016
.015
.014
.013
L
WIDTH (INCHES)
COATING
24<W<30 303K36 36SWiA2 42<W>48 i 48-W*6Q 0.6 oz/Ft*
^-81
^81
3T
3T
-64
-66
-66
-66
-66
-61
-63
-63
-63
-63
-58
-58
-62
-58
-62
-45
-45
-47
-45
-47
-42
-42
-45
-42
-45
-40
-40
-42
-40
-42
-13
-29
-29
-31
-29
-31
-15
-26
-26
-28
-26
-28
-18
-22
-22
-24
-22
-24
-18
-17
-17
-19
-17
-19
-19
-3
-5
-7
-5
-7
-19
0
-1
-3
-1
-3
-22
5
2
0
2
BASE
-22
11
5
3
-23
5
3
30
-23
19
18
19
22
40
-24
26
26
26
30
-24
39
39
39
49
-26
47
47
47
64
-26
61
71
61
83
-26
72
87
72
97
88
89
102.NEGOTIATION
WIDTH UNDER 24" 84
SUBJECT TO
101
95
95
107
Culvert Stock
Thickness (Inches)
[INCHES)
0 .159 and thick
0 .158 - 0.129
0 .128 - 0.101
0 100 - 0.072
0 071 - 0.057
0.056 - 0.046'
$14
15
19
25
30
38
"560"
"3T
-2
-2
-2
-3
-3
-5
-5
-6
-6
-7
-7
-8
-8
-n
-n
-15
-15
-17
-17
-19
-19
-19
27-7
Rev. Mav 1979
(5) QUALITY
COMMERCIAL
LOCK FORMING
DRAWING
DRAWING SPECIAL KILLED
STRUCTURAL
GRADE A
" B and C
M
D and E
BASE
NONE
13
31
3
6
15
(6) QUANTITY
20ST4W
15STiW-20ST
10ST__W*15ST
BASE
1
.3
(7) OTHERS SUBJECT TO NEGOTIATION
(8) CORRUGATING S22
(9) COPPER EXTRA
$8
FOR IMMEDIATE RELEASE
May 15, 1979
CONTACT: Charles Arnold
202-566-2041
TREASURY ANNOUNCES RESULTS OF GOLD SALE
The Department of the Treasury today announced that
750,000 troy ounces of fine gold were sold to 6 successful
bidders at an average price of $254.92 per ounce.
Awards were made in 30 0 ounce bars whose fine gold
content is 89.9 to 91.7 percent at prices ranging from $254.62
to $255.47 per ounce. Bids for this gold were submitted by
18 bidders for a total amount of 2.4 million ounces at prices
ranging from $249.12 to $255.47 per ounce.
Gross proceeds from the sale were $191.2 million. Of
the proceeds, $31.7 million will be used to retire Gold
Certificates held by Federal Reserve Banks. The remaining
$159.5 million will be deposited into the Treasury as a
miscellaneous receipt.
The list of the successful bidders and the amount awarded
to each is attached. The General Services Administration will
release information on the individual bids made by all bidders,
and the details of the individual awards to successful bidders.
The current sale was the thirteenth in a series of
monthly sales being conducted by the General Services
Administration on behalf of the Department of the Treasury.
The next sale will be held on June 19 at which 750,000 ounces
of gold will be offered in bars whose fine gold content is
89.9 to 91.7 percent. The minimum bid for these bars will be
300 fine troy ounces.
oOo
B-1606
OUNC
BANK LEU LTD.
NEW YORK
180
NY
CREDIT SUISSE 2400
ZURICH
SWITZERLAND
DEGUSSA 3300
FRANKFURT
GERMANY
DRESDNER BANK AG 6525
NEW YORK
NY
REPUBLIC NATIONAL BANK OF NY 3000
NEW YORK
NY
SWISS BANK CORP. 6000
ZURICH
SWITZERLAND
°
FOR IMMEDIATE RELEASE
May 16, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES WITHHOLDING OF
APPRAISEMENT ON MARINE RADAR SYSTEMS
FROM THE UNITED KINGDOM
The Treasury Department today said it has determined that
marine radar systems from the United Kingdom are 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 Commission's decision is affirmative, dumping duties wi 11 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.)
Appraisement in this case will be withheld for six months
beginning May 17, 19 79. The weighted-average margins of sales
at less than fair value in this case were 2.72 percent.
Interested persons are being offered the opportunity to
comment on this action.
Imports of marine radar systems from the United Kingdom
during 19 78 were valued at about $3 million.
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.)
Notice of this determination will appear in the Federal
Register of May 17, 1979.
o
B-1607
0
o
department of theTREASURY
WASHINGTON, D.C. 20220
TELEPHONE 566-2041
For Release Upon Delivery
Expected at 2:00 p.m.-
STATEMENT OF
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ENERGY AND POWER OF THE
HOUSE INTERSTATE AND FOREIGN COMMERCE COMMITTEE
May 17, 1979
Mr.
Chairman and members of this distinguished Subcommittee:
Today I come before you to discuss our nation's energy
crisis — particularly as it relates to crude oil.
Nature of Our Energy Problem
This nation faces energy problems that strike to the
core of our political and economic security, and affect the
very stability of our society. The central problem is the
availability and cost of crude oil. The story can be told
by a few numbers. In 1970, the posted price of light Saudi
Arabian crude, the key indicator of world oil prices, was
£1.60 per barrel. Today the posted price is $14.54 per
barrel, a nominal increase of 708 percent. In 19 70, the
U.S. met 76.7 percent of its crude oil needs out of its own
production. Today, we meet only 50 percent of our needs
trom our own production despite gains from Alaska. In 1970,
12..1 percent of our oil imports were supplied by Western
Hemisphere nations (primarily Canada and Venezuela).
Today, less than 20 percent of our imports come from these
countries. In 1970, our oil import bill was $2.9 billion.
We now expect our 1979 oil import bill to be about $52
billion.
In 1958, 1975, and 1979, senior economic policy officials
carefully examined, under Section 232 of the Trade Expansion
act and its predecessor, whether our national security is
threatened by the volume and character of our oil imports
In each case the answer has been: Yes!
B-1608
- 2 The national security elements are clear:
° Because so much of the oil used in the United States
originates thousands of miles away, supplies are
vulnerable to interruption for a variety of causes. As
the oil embargo of 1973 and subsequent energy shortages
have illustrated, interruptions in energy supplies
seriously disrupt our economy.
° As our oil import bills have skyrocketed, our export
growth has not been sufficient to balance our trade
accounts. Large trade deficits have been the result,
with the consequent risk of dollar depreciation.
Excessive dollar depreciation can be extremely harmful
to the American people because it increases domestic
inflation and erodes personal income. Excessive dollar
depreciation also hurts the entire world economy
because the dollar is the dominant currency in world
trade and finance.
° If we continue to rely more and more on uncertain
foreign sources of oil, the independence and-vigor of
our foreign policy is put at risk.
° Cartel control of over 50 percent of the world's oil
supply exacts an increasing drain on the real'resources
of the consuming nations. It jeopardizes their economic
security and ability to plan their,economic futures.
With world prices dictated by political forces, rather
than by free markets, sensible inflation control
becomes extremely difficult for the consuming nations.
0
Our increasing oil imports play directly into the hands
of the world oil cartel and add to upward pressures on
world oil prices. Our oil imports today constitute 17
percent of world oil production. Absent increases in
non-OPEC energy supplies, or a reduction in world oil
consumption, rising U.S. oil imports will directly
tighten the world market and undercut efforts to
encourage responsible and moderate oil policies by the
OPEC nations.
° Finally, as escalating U.S. oil imports suggest, this
country is not yet making a determined'and "creative
transition to a world in which oil supplies are scarce,
expensive, and often unreliable. We are continuing to
use energy, and particularly oil, at a far too lavish
- 3 rate, and we are failing to make those long-term
investments in alternate energy technologies that will
be essential to our economic and political security in
the remaining years of this century.
These are enormous problems. President Carter, to his
everlasting credit, has chosen to address them. Last year,
with the National Energy Act, we took major strides to
correct imperfections in our coal, natural gas, conservation, and utility rate policies. But the core issue —
crude oil policy — was not resolved at that time. By
failing to act in this area, we left in place a system of
price controls and entitlements imposed on domestic oil
productio which aggravates our energy problems.
The system originated with the comprehensive wage and
price controls instituted by the Nixon Administration in
1971 and has operated in its present form since 1973. The
system has grown steadily more complicated and, at the same
time, has intensified our energy problems. It does so by
disguising from the American people — consumers, investors,
and industry alike — what we are all really paying for oil.
Because of it, we use and import more oil than we should; we
produce less domestic oil than we should; and we neglect to
make economically sensible and necessary investments in
alternative energy sources and technologies.
The oil pricing system sets various ceiling prices for
the domestic production of oil. Lower-tier oil — production
from fields in operation in 1973 — is generally capped at
about $6 per barrel. Upper-tier oil — production from
fields placed in operation since 1973 — is capped at
approximately $13 per barrel. The system also requires
refiners to make payments --known as "entitlements" — to
each other so that each refiner pays the same average price
for a barrel of oil, regardless of the source of supply.
The results of these controls and regulations are
rather obvious:
° The average price of oil to refiners, and thus to
individual and industrial consumers of oil, is substantially less than the world price. For example, in
February of this year, the country was facing a price
of $15.80 a barrel for imported oil on the world
market. But the controls-and-entitlements system
established an average refiner price of $13.24 per
barrel, regardless of source. As a consequence there
was an effective, federally-mandated subsidy of $2.56
- 4 per barrel to import oil, rather than use domestic oil,
and a like subsidy to consume oil, rather than to
conserve it or use some alternative form of energy,
such as coal, natural gas, or solar energy.
° The incentive to produce oil domestically is artificially depressed. About 40 percent of domestic oil
has been subject to the lower-tier cap of about $6 per
barrel, and another 30 percent to the upper-tier cap of
about $13 per barrel. Compared to a world price of
$15.80 per barrel in February, these controls constituted a straightforward signal to oil owners to
invest in more profitable ventures, either here or
abroad.
In brief, since the OPEC-generated explosion of oil
prices in 197 3, the U.S. has been operating a program that
encourages oil consumption and imports and discourages
domestic oil production and the development of new energy
sources. Although this has been done in the name of "protecting" the consumer, it has had precisely the opposite
effect. By discouraging investments in domestic oil production and development of alternative energy sources, by
enlarging the trade deficit and weakening the dollar, and by
tightening world oil markets, these price control policies
have added to upward price pressure not only on world oil
prices but also on the general price level of all goods and
services. Far from protecting the consumer, the domestic
oil control system has instead served to aggravate inflation.
The President's Program
The President has recently addressed the critical
problems created by our dependence on oil imports in the
following ways.
° BY agreeing with our allies in the International Energy
Agency to reduce U.S. imports (by the fourth quarter of
1979) by up to 1 million barrels a day below levels
expected prior to the 1979 OPEC price increases. This
action — a n d similar actions by our allies -- should
moderate future increases in world oil prices, reduce
our trade deficit and strengthen the dollar.
0
By phasing out price controls on domestic crude oil.
This ends the subsidy to consumers of oil, encourages
conservation and substitution of other energy sources,
and provides appropriate incentives to expand domestic
oil production.
- 5 ° By proposing a windfall profits tax. This captures for
the U.S. Treasury some of the excessive profits from
existing oil wells and a portion of future windfalls
generated by OPEC price increases, and creates a
mechanism through which the U.S. can offset the effects
of decontrol on the poor, encourage energy efficient
mass transit and further its efforts at developing
alternative energy sources.
The Decontrol Program
The key element in the President's program is the decontrol of crude oil prices. The route chosen will delay as
much of the inflationary impact of decontrol until 1981 or
1982 as is practicable while maximizing the incentive to
increase production in 1979 and 1980.
The major features of the decontrol program adopted by
the President are:
0
Producers of lower-tier oil (also called "old" oil)
will be allowed to reduce the volume of output they are
required to sell as old oil by 1-1/2 percent each month
in 1979 and 3 percent each month from January, 1980 to
September, 1981, determined from new control levels
established as of January, 1979. This means that a
property whose old oil control level is 100 barrels a
--•• day in January, 1979 will be required to sell as old
oil only 82 barrels a day in December, 1979, and 46
barrels a day in December, 1980. Production above
these levels may be sold as upper-tier oil.
° The price of upper-tier oil will be phased up to the
world price beginning on January 1, 1980 and ending on
October 1, 1981.
0
As of June 1, 1979, newly discovered oil will be
decontrolled, as will that volume of production from
any oil field that results from introducing tertiary
recovery programs.
° Production from marginal wells — that is, wells
producing less than specified amounts of oil in 1978 -will be allowed to sell at the upper-tier price beginning June 1, 1979.
A key aspect of this program is the decontrol of old
oil. From 1976 to 1978, oil price regulations gave the
lowest return to those producers who made the greatest
- 6effort to increase production after the 1973 embargo, while
giving the highest return to those producers who did the
least to meet the national need after 1973. The decline
rate change for lower-tier oil announced by the President
eliminates the disincentive to produce from old oil fields,
since the profit earned from increased production in old oil
properties will be the same as from investments in new oil
properties. From the standpoint of production incentives, a
rapid decline rate is the most efficient method of decontrolling lower-tier oil.
A second critical element in the President's program is
the decontrol of newly discovered oil and incremental
production which results from the completion of tertiary
recovery projects. No longer will exploration for new
reserves in untapped areas be discouraged by a stifling
system of price controls.
Further, the incentive to invest
in tertiary projects which involve risky efforts to apply
expensive, experimental procedures to the recovery of
additional oil from depleted reserves will be as great as
the incentive to explore for newly discovered oil. This is
as it should be in a competitive economy.
The Windfall Profits Tax
Decontrol is an essential step toward a sensible national energy policy. However, decontrol will create some
windfall profits since, in many instances, the world price
exceeds that necessary to induce rapid production and
discovery. To recapture some of these windfall profits,
while at the same time preserving production incentives, we
have proposed a tax of 50 percent on the windfall profits
per barrel generated by decontrol and by future OPEC price
increases. An additional portion of the windfalls will
automatically be recovered through existing federal income
tax laws.
Our tax involves a 50 percent levy on three bases: the
windfall profits from moving lower-tier oil to the upper
tier; the windfall profits from moving upper-tier oil to the
world price; and the windfall profits from future real
increases in the world price.
A. Lower-tier
The tax on old oil would be equal to 50 percent of the
difference between the price at which the oil is sold and
- 7 the control price of the old oil. The control price is
currently about $6.00 per barrel and is to be increased by
inflation.
The Administration's tax on old oil is imposed on production which most likely would have come forth had controls
remained in effect, so that genuine increases in production
from old oil properties are not taxed. Specifically, the
tax applies only to that volume of lower-tier oil freed to
the upper tier under decontrol which exceeds the volume of
oil which would be freed under a 2 percent decline rate
after January 1, 1980.
The decontrol plan uses a 3 percent decline rate while
the windfall profit tax uses a 2 percent rate. The difference is dictated by economics. As I noted above, a 3
percent decontrol decline rate was required to provide the
incentive of replacement cost pricing for old oil properties
and also to allow for a smooth transition to complete
decontrol in 1981. Had a lower decline rate been employed,
the "gap" when complete decontrol is required in 1981 would
have been larger and the inflationary shock in 1982 greater.
J
However, the 3 percent decline rate exceeds the actual
decline rate observed in almost every oil field. Thus, a 2
percent decline rate was selected for tax purposes as being
closer to historical experience. Using a lower decline rate
than 2 percent for tax purposes would obviously increase the
amount of old oil subject to tax, but would risk discouraging production to some extent. The 2 percent decline for
tax purposes represents a reasonable balance between capturing windfalls and assuring maximum production.
B. Upper-Tier
The tax on upper-tier oil will be equal to 50 percent
of the difference between the price the oil sells for and
the inflation adjusted price of upper-tier oil. The tax
would begin phasing out in November, 1986, and would disappear by January, 1990. The upper-tier tax will have
little if any adverse impact on production of upper-tier oil
since the control price was close to the world price before
the recent OPEC surcharges.
The upper-tier tax is phased out in order to simplify
the windfall profits tax at a point in time when fine
distinctions are no longer needed. Computing the upper-tier
tax requires reference to the last vestiges of price controls. Since revenue from the upper-tier tax will decrease
- 8substantially after 1985 as the volume of upper-tier oil
diminishes, we decided to phase out the upper-tier tax after
1986.
The upper-tier tax excludes new production, incremental
tertiary production and any oil subject to the lower-tier
tax.
C. Uncontrolled tier
The upper- and lower-tier tax bases will cover about
two-thirds of U.S. production. The remaining third is
composed of output from the Alaskan North Slope, stripper
wells (wells that produce less than 10 barrels a day for a
12-month period), newly discovered oil and incremental
production resulting from the introduction of tertiary recovery procedures in old oil fields. These categories of
production are now either decontrolled or effectively decontrolled, and thus are able to earn the world market
price.
The third base of the windfall profits tax applies to
this uncontrolled oil (other than Alaskan North Slope oil)
to the extent not subject to the lower-tier or upper-tier
tax. The 50-percent tax would be imposed on the difference
between what the producer receives, and a base price of $16
per barrel as of January.1, 1980. The base would be adjusted for domestic inflation occurring after 1979. Eventually, the decontrolled tier tax would apply to all other
domestic oil, as it is decontrolled.
A number of questions have been raised concerning the
$16 per barrel base price for the uncontrolled tier tax.
The $16 figure is based on the estimated world price which
would be in effect as of the first quarter of 1980 as a
result of the December, 1978 OPEC price announcement. The
base price was calculated to allow for uncertainties about
the difference between the posted price of Saudi Arabian
marker crude, and transportation costs, quality differentials
and other relevant factors. By choosing $16, most domestically produced uncontrolled crude oil would pay no tax
unless OPEC were to raise its prices in excess of inflation.
Second, it has been suggested that the $16 base be
increased because recent OPEC surcharges have already
increased the price of oil. However, the President's
windfall profits tax proposal is designed to prevent domestic
producers from benefiting from just these kinds of sudden
- 9 price increases. There is no rational reason for exempting
the profits domestic producers are realizing from these
surcharges from the windfall profits tax.
Third, it has been argued that since the tax on the
uncontrolled oil tier is permanent, the United States is
permanently condemning producers to a lower price at home
than they might realize abroad, and that the United States
will produce less oil than would be produced in the absence
of a permanent tax.
It is simply not true that producers can earn even more
abroad than they can at home if the uncontrolled tier tax is
enacted. In every other producing country, increases in the
price of oil have immediately been accompanied by increases
in taxes on producers or by nationalization. Either action
deprives the producer of the increased revenues.
Moreover, those who argue that we will lose a small
amount of domestic production due to the uncontrolled tier
tax fail to recognize the risk of imposing no tax at all.
Political forces will not allow complete and permanent decontrol of oil so long as we face an unqualified threat of
embargoes and sudden price increases. In the absence of a
permanent tax, a future'surge in oil prices may compel a
return to regulation. It is preferable to risk sacrificing
the very small potential supply response in order to avoid
such a situation. By imposing a permanent tax with a base
which is adjusted for inflation, I believe we will, in the
long run, allow producers to receive approximately the same
price as is received outside the U.S. but with standby
protection that will prevent them from receiving sudden
windfall profits due to increases in prices as a result of
anti-competitive cartel practices.
D. Further comments
I would like to respond to some of the general questions
that have been raised about the President's windfall profits
tax proposal.
It has been suggested, and I believe misleadingly so,
that the Administration has proposed a "weak" tax. This is
not so. Our goal is to capture windfalls without prejudicing production incentives. This we have done.
There are almost no exceptions to the upper-tier tax.
The only exception to the uncontrolled-tier tax is the welljustified exclusion for Alaskan North Slope oil. The
- 10 exceptions to the lower-tier tax are geared to ensure
maximum possible production from domestic sources, and. old
oil exempt from the lowest-tier tax is subject to the uppertier tax. Furthermore, the uncontrolled tier tax is permanent, and captures half of all increases in oil.industry
revenues which are due to price increases beyond* that which
would be allowed solely by inflation.
Absent our windfall profits tax, producers would
receive $0.43 net from each dollar increase in revenue.
With the tax, the producer's take drops to $0.29 per dollar.
Assuming oil prices do not increase in real terpis oeyond
1979, the tax reduces by 30 percent the amount of money
which the oil industry would actually keep as a result of
decontrol. If oil prices were to increase in-real terms,
say, by 3 percent per year, the tax would reduce industry
revenues from decontrol by 40 to 45 percent.,?
Assertions that the tax is weak have in some instances
been based on misleading comparisons. For example, comparisons are made between the gross revenues' generated from
decontrol — before payment of any additional production
costs and any taxes —,and the net federal tax receipts due
to the windfall profits tax. These types of comparisons
fail to take into account the automatic effect of other
taxes and the increased expenditures for greater oil output.
The proper comparison is between producer and royalty
revenues with and without the windfall profits tax.-. Under
this analysis, producer and royalty revenues are 3Q, to 45
percent lower with the windfall profits tax than without it.
It has also been said that the windfall profits tax
denies capital required for further exploration. Such
arguments are without economic foundation. The economic
incentive is provided by .the price Of newly discovered oil,
not by the cash flow from existing production. The argument
for increased cash flow is untenable. It would lead to a
cheap source of capital for those now engaged in the exploration for oil and gas while new entrants must pay the
market price for capital. This is inconsistent with a
competitive economy, because it would further impede, entry
by non-oil firms into oil production and thus reduce competition. Moreover, providing "free" capital means that the
investment basis in oil property is reduced. To be consistent, the "cash flow" advocates should demand that such
oil be sold at a lower price -- or perhaps given away —
since the investment has already been recovered.
- 11 A variation on the "cash flow" argument is plowback.
Plowback is an offset against the windfall profits tax for
certain oil-related investments. Plowback should be recognized for what it is: a subterfuge for repealing the
windfall profits tax. This tax is being sought in part
because some of the increased profits from decontrol are
windfalls that do not lead to appreciably increased domestic
oil production. Likewise, plowback — which is merely a
reduction in the tax — will not necessarily add to domestic
oil production.
Proponents of plowback argue that it provides a useful
subsidy for domestic oil production. However, as a subsidy,
plowback is deficient. Since plowback would be limited only
to present owners of oil, it would provide no incentive to
new entrants into production. This would discourage competition in the industry and encourage concentration.
Moreover, plowback subsidies would be distributed only to
the owners of interests in the oil, such as royalty holders.
Not all owners produce oil, and it is production, not mere
ownership, which should be encouraged. In addition, plowback would require complex and arbitrary definitions of
threshhold or base period investment levels and of qualifying
investments, leading to interminable administrative disputes
and litigation.
Finally, some have challenged the windfall profits tax
proposal on the basis that we subject no other windfall to a
special tax. This argument ignores the' very special circumstances of the domestic oil industry. Windfalls are most
commonly found among commodities, such as oil. In most
cases, however, competition and the legal structure of the
market rest within the authority of the United States. This
is simply not the case with respect to oil prices. The
windfalls are attributable to the action of a foreign
cartel, totally outside the legal control of the United
States. There is simply no sound reason why we must stand
idly by and permit windfalls to be reaped in the United
States because of actions taken by a foreign cartel.
Energy Security Trust Fund
The President has proposed to convert windfall profits
derived from OPEC pricing into the direct advancement of
energy technology, the development of energy efficient mass
transit, and for assistance to those least able to afford
energy price increases attributable to decontrol. This will
be done through the Energy Security Trust Fund.
- 12 The Fund will consist of the proceeds of the windfall
profits tax, and increased federal income taxes attributable
to decontrol during the deregulation period. The Fund is an
addition to, and not a replacement of, existing Department
of Energy funding.
The cost of all Fund programs will be limited to Fund
resources. The new programs will be undertaken only if the
windfall profits tax is enacted. The cost of any new energy
tax expenditures will be charged against Fund receipts in
order to control these subsidies more effectively. All
spending programs financed from the Fund will be subject to
annual authorization and appropriation.
Given available
funds, additional initiatives may be undertaken to reduce
U.S. oil import dependence.
The Treasury Department will be responsible for holding
the Fund, and for estimates of revenues and tax expenditures.
On the basis of these estimates, and estimates made by OMB
of other demands on the Fund, the extent of Fund resources
available will be determined.
Economic Impacts
We estimate that the additional inflation resulting
from phased decontrol compared to retaining controls indefinitely amounts to about 0.1 percent in 1979 and averages
0.2 percent a year over the next three years. By 1982, the
level of the consumer price index will be approximately 0.75
percent higher with phased decontrol than if controls had
been retained indefinitely.
These estimates assume that OPEC prices rise only as
fast as world inflation. If world oil prices increase
faster than world inflation, the inflationary impact of
decontrol would be slightly greater. For example, if world
oil prices increase 3 percent a year faster than world
inflation, the level of the consumer price index will be
approximately 0-9 percent higher by 1982. Thus, the inflationary impact of decontrol is not very responsive to faster
OPEC price increases. This is because price controls govern
only a third of all U.S. oil consumption. The remaining
two-thirds (imports, stripper production, and Alaskan oil)
are already free to receive the world price.
These inflation estimates are based only on quantifiable
decontrol effects, such as the higher prices of gasoline,
heating oil, and goods manufactured from petroleum, and the
- 13 induced impact on prices resulting from wage increases
caused by cost of living adjustments made in response to the
additional inflation. The estimates do not include any
effects from reduced prices of non-energy imports due to the
strengthening of the dollar, and from the lower oil prices
which would result from future world oil price moderation
due to reduced U.S. demand. The excluded effects are simply
not quantifiable. Since the nonquantifiable elements
suggest lower inflation impacts, it is probable that our
numbers overstate the effect of decontrol on inflation.
Decontrol will restrain aggregate demand and economic
growth slightly over the next two years — by perhaps 0.1
percent a year. In later periods, fiscal and monetary
policy can be adjusted to the needs of the economy as they
develop, taking into account the specific economic impacts
of decontrol and expenditures from the Energy Security Trust
Fund.
The Department of Energy estimates that, relative to
continued price controls, the President's program will
reduce oil imports by about 370,000 barrels per day in 1981
and 950,000 barrels per day by 1985, assuming OPEC prices
increase only with worldwide inflation. Should OPEC raise
prices at a rate in excess of worldwide inflation, the oil
import savings would be greater. DOE has estimated that
imports would be reduced by 440,000 barrels per day in 1981
and 1,100,000 barrels per day in 1985 under a case where
OPEC raised its prices at a rate which was 3 percent per
year greater than worldwide inflation.
Conclusion
The U.S. faces a severe energy problem today despite
recent corrective measures. At the root of our present
energy problem is the price of oil. In the past we have
refused to address this problem because of the windfall
profits involved. We can no longer afford to avoid the
issue. By artificially supressing the price of oil, too
much oil is consumed and too little produced; other efforts
to solve our energy problem are frustrated; and less incentive to switch to other fuels or to conserve energy is
provided.
President Carter has recognized this dilemma. He has
acted to decontrol crude oil prices permanently by the end
of 1981. He has also addressed
o in
0 an
o effective manner the
issue of windfall profits created by decontrol.
For Release Upon Delivery
Expected At 2:00 p.m. E.D.T.
STATEMENT OF
JOHN M. SAMUELS
TAX.LEGISLATIVE COUNSEL
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE OF HOUSING AND COMMUNITY DEVELOPMENT
OF THE
HOUSE COMMITTEE ON BANKING FINANCE AND URBAN AFFAIRS
Thursday, May 17, 1979
Mr. Chairman and members of the Subcommittee:
We welcome the opportunity to present the Treasury's
views on guarantees of certain tax exempt hospital bonds by
the Department of Housing and Urban Development.
HUD has recently decided not to allow GNMA mortgagebacked securities to be used as collateral for certain tax
exempt bond issues. The HUD decision affected a new kind of
financial arrangement under which tax-exempt bonds were
backed by a GNMA guarantee. The guarantee was obtained
indirectly, by pledging GNMA mortgage-backed certificates as
collateral for tax-exempt revenue bonds. Because this
device, generally known as "combination financing," raised
serious questions of tax policy and debt management, the
Treasury Department requested HUD to review its policy with
respect to such arrangements. As a result of this review,
HUD announced on March 29, 1979 that it would no longer
B-1609
2
approve GNMA guarantees in the case of combination financing
arrangements proposed for hospitals and certain housing
projects. The Treasury believes this decision was correct
and fully supports it.
The double benefit of a Federal guarantee and an income
tax exemption for these State and local bonds represented a
fundamental departure from longstanding Federal policy.
Combination financing effectively accorded certain tax-exempt
State and local government bonds the extraordinary benefit of
the backing of the full faith and credit of the United
States.
Last year, the Congress rejected this double benefit —
both a tax exemption and a federal guarantee — in the case
of the New York City Financial Assistance Act. The Congress
determined that it was inappropriate to provide New York City
with this double benefit, even in connection with a program
necessary to assure the City's financial survival. In the
case of a typical combination financing, where much less than
financial survival is at stake, this double benefit is still
less appropriate.
Federally backed tax-exempt obligations create
potentially serious problems of Federal debt management. The
double benefit of an income tax exemption and a federal
guarantee creates a security that is superior to the
obligations of the United States itself. Proliferation of
such issues could seriously interfere with the marketing of
U. S. Government debt obligations, particularly if this
financing technique were to be adopted in connection with
other federal guarantee programs.
Combination financing also presents serious problems of
tax policy. The revenue loss to the Treasury substantially
exceeds the interest savings to hospitals and other municipal
borrowers. On the average, each $1.00 of interest savings to
the tax-exempt issuer will cost the Treasury $1.33. This
inefficiency is perhaps best illustrated by an example. In
recent months, the yield on high grade taxable securities has
been about 10%, and the yield on tax exempt bonds of similar
quality about 7%. This means that the tax-exempt issuer is
paying 70jzf in interest rather than $1.00, and realizes a
savings of 30jzf by borrowing in the tax exempt market.
Currently, the average marginal tax bracket for holders of
tax-exempt bonds is approximately 40 percent. The income tax
3
exemption therefore costs the Federal government 40£ in
foregone tax revenues for each 30/zf saved by the issuer in
debt service costs. Put another way, this means that the
Federal Government spends $1.33 for each $1.00 in issuer
savings.
Combination financing arrangements tend to be even more
inefficient than tax-exempt financing in general. The stated
public purpose of these collateralized bond issues is to
reduce hospital debt service costs. However, in a number of
these proposals, only a portion of the interest savings would
actually be used for this purpose. Instead, a substantial
fraction of the savings would be captured by the issuing
authority, by existing mortgage holders, or both. Only a
portion of the total savings would actually be passed on to
the hospital itself. In these transactions, which may be
designed primarily to secure an investment profit, the public
value of the transaction is diminished and the inefficiency
greatly increased.
We are particularly concerned about refinancings of
outstanding GNMA certificates. For example, assume that a
hospital sold a GNMA certificate several years ago. Because
of market conditions when it was sold, the certificate bears
interest at a rate of 9%. However, the certificate would
trade on the secondary market today at a discount, producing
a yield of 10%. In the refinancing transaction, a public
authority sells tax exempt bonds at a yield of 7%. The bond
proceeds are then used to purchase the GNMA certificate
which, as noted above, has a market yield of 10%. Thus, the
transaction produces an investment profit of 3% each year
(i.e., the difference between the 7% interest rate on the tax
exempt bonds and the 10% market yield on the GNMA
certificate). This investment profit might be divided
between the hospital, the public authority, and the original
holder of the GNMA certificate.
To continue the example, the holder of the certificate
is paid the par value, even though the certificate would
trade on the secondary market at a discount. In this way,
the holder of the certificate receives 1 percentage point of
the annual investment profit. In addition, the stated
interest rate on the certificate is reduced to 8%. As a
result, the hospital also receives 1 percentage point of the
investment profit. Finally, the remaining 1% of the
investment profit goes to the public authority. Thus, the
4
investment profit is shared by the original holder of the
certificate, the issuing authority, and the hospital.
Because the hospital receives only a fraction of the
investment profit, this kind of refinancing transaction is
particularly wasteful.
Moreover , we have reservations about the tax exempt
status of the bonds in this type of transaction. The
Internal Revenue Service is presently studying the tax status
of these bonds under existing statutes and regulations, and
we expect that they will publish a ruling on this question
within a few months.
An income tax exemption for interest paid on State and
local government bonds also creates serious inequity within
the Federal income tax system because of the benefit bestowed
on taxpayers at the highest income levels. The bonds must
carry a yield high enough to attract taxpayers in the 30
percent bracket. This high yield results in a windfall to
higher bracket taxpayers.
When the supply of tax-exempt bonds increases,
tax-exempt interest rates must also generally increase.
Higher tax-exempt financing costs compound both the
inefficiency and the inequity of tax-exempt financing. The
savings of the issuer are diminished, and the average cost to
the Federal Government per dollar of issuer savings is
increased.
The volume of GNMA backed debt that could potentially be
refinanced using the combination device is quite large.
Hospitals are not the only institutions involved. GNMA
guaranteed certificates are also backed by FHA insured
multifamily housing mortgages. The amount of GNMA guaranteed
hospital and multifamily housing indebtedness presently
involved is approximately $2.35 billion. New issues of GNMA
backed securities could substantially increase this amount.
We believe that transactions of this magnitude could have a
substantial adverse impact on Treasury revenues.
Federally guaranteed tax-exempt bonds also represent a
serious threat to the tax-exempt market. They are superior
to all other State and local government bonds because they
are virtually risk-free. An influx of such bonds onto the
market would tend to drive up municipal Interest rates and to
crowd out conventional tax-exempt bonds designed to finance
roads, schools, municipal buildings, and other essential
public projects.
5
Finally, some hospitals have argued that combination
financing should be encouraged as a hospital cost containment
measure. This argument is without merit. The primary
purpose of hospital cost containment is to hold down the real
costs of hospital care, not merely to disguise increases Tn
hospital service charges by shifting some costs to the
taxpayers of the country as a whole. Moreover, to the extent
that combination financing appears to reduce hospital costs
without really doing so, it could actually hamper the efforts
of the Administration to achieve effective controls.
For the above reasons, we fully support HUD's decision
to withhold GNMA guarantees from combination financing.
o 0 o
FOR RELEASE AT 4:00 P.M.
May 16, 1979
TREASURY TO AUCTION $2,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,250
million of 2-year notes to refund '$1,848 million of notes
maturing May 31, 1979, and to raise $402 million new
cash. The $1,848 million of maturing notes are those held
by the public, including $700 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
$239 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.
oUo
Attachment
B-1610
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED MAY 31, 1979
May
16, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date • May 31, 1981
Call date
Interest coupon rate
$2,250 million
2-year notes
Series T-1981
(CUSIP No. 912827 JR 4)
No provision
To be determined based on
the average of accepted bids
Investment yield To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
•
November 30 and May 31
Minimum denomination available
$5,000
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
Yield auction
None
Noncompetitive bid for
$1,000,000 or less
Acceptable
Tuesday, May 22, 1979,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
Thursday, May 31, 1979
b) check drawn on bank
within FRB district where
submitted
Tuesday, May 29, 1979
c) check drawn on bank outside
FRB district where
submitted
Friday, May 25, 1979
Delivery date for coupon securities. Wednesday, June 6, 1979
FOR IMMEDIATE RELEASE
May 17, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY TO START ANTIDUMPING
INVESTIGATION OF PORTABLE
ELECTRIC TYPEWRITERS FROM JAPAN
The Treasury Department today said it will start an
antidumping investigation of imports of portable electric
typewriters from Japan.
Treasury's announcement followed summary investigations
conducted by the U. S. Customs Service after receipt of a
petition filed by SCM • Corp. alleging that firms in Japan
are dumping this merchandise in the United States.
The petition alleges that these imports 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 November 18, 1979.
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 May 18, 1979.
Imports of portable electric typewriters from Japan
in 1978 were valued at $55.8 million.
o 0 o
B-1611
FOR RELEASE ON DELIVERY
txpected at 1:00 P.M. EDT
REMARKS BY
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE
NATIONAL COUNCIL FOR U.S.-CHINA TRADE
WASHINGTON, D.C.
MAY 17, 1979
Mr. Ambassador, President Phillips, distinguished
members of the National Council for U.S.-China Trade:
It is a great pleasure to address this esteemed group
on the occasion of its Sixth Annual Membership Meeting. I
remember vividly the early discussions leading to the
establishment of the Council in which I played an active
part. You have come a long way since those days. And no
year has been as momentous as this past one. For this past
year has seen a sea-change in our economic relations with
China.
On December 15 of last year the President made his
historic announcement concerning normalization of diplomatic
relations with the People's Republic. At the dawn of the
new year Deng Xiaoping visited Washington and issued with
President Carter a communique setting out, among other
priorities, an intention to negotiate trade, shipping and
aviation agreements and to get on with the business of
bilateral commerce. In late February a Treasury delegation
travelled to Beijing where we began to lay a foundation. We
opened our Embassy and negotiated and initialled a
claims/asset settlement. We initiated discussions on trade.
And we established the U.S.-China Joint Economic Committee
to oversee and coordinate the expansion of our bilateral
economic relationship.
Now, in this past week, Secretary Kreps has signed the
claims/assets accord and has initialled an MFN trade
agreement. She has negotiated four science and technology
agreements and an accord on trade exhibitions. And
negotiations on textiles, maritime and civil aviation
agreements are in the works.
B-1612
-2In less than six months we have gone from zero to full
speed ahead in our bilateral economic relations with China.
We have substantially bridged the gap that has
separated the U.S. and the PRC for two decades.
So, where does this leave us? Specifically, what are
the prospects for American firms who wish to do business
with and in China?
To answer that question requires that we assess:
a) the current domestic situation in China;
b) the status of the competition;
c) the political and economic wherewithal of the
private and public sectors at home. Let me review
these for you in turn.
The Situation in China
The speed with which the obstacles to a more normal
bilateral economic relationship are being overcome pales
when compared to the pace of change that has occurred
domestically in China. In the past year the new Chinese
leadership has attempted some remarkable transformations.
On the economic side, the Four Modernizations has
become the national goal. The people have been exhorted to
"act in accordance with economic laws"; to stress practical
economic considerations. New party organizers and non-party
intellectuals and technicians have been brought in to
implement the new economic plan. And government
bureaucrats, students and workers are being given a vested
interest in economic progress.
The National People's Congress early last year approved
a highly ambitious ten year plan. In agriculture, the plan
calls for increased investment, increased incentives, and a
decentralization of the decision making process. In
industry, the intent is to modernize the nation's industrial
plants through the acquisition of western machines and
technology for production of petrochemicals, synthetic
fibers, metals, transportation and communication. The
Leadership has also relaxed constraints which had previously
inhibited the application of foreign methods. Most striking
-3amongst these relaxations has been the decision to consider
a variety of investment schemes. When I was in Beijing, the
Government made it clear that they were fully open to
alternatives such as joint ventures, barter and product
payback deals, long term credits, and government-togovernment loans to finance modernization.
There has of late been some "readjustment" of these
efforts. There has been debate on economic priorites: some
of the more ambitious goals have been scaled down and there
has been a partial reemphasis on agriculture and light
industry. Still the Chinese tell us, and we believe them,
that they are "firm and unshakable" in their drive to
modernize. Indeed, the Foreign Trade Minister, Li Qiang,
summarized the situation recently by saying that "the
readjustment of our economy undertaken at the moment is
exactly for the purpose of concentrating our efforts on the
most needed projects and widening the pace for the Four
Modernizations."
It is not really surprising that this kind of
readjustment takes place. The Chinese stated frankly from
the outset that their plans were ambitious and we, for our
part, warned our business interests against unrealistic
expectations. Still, in a manner akin to those who watch
and read so much into the weekly changes in the money
supply, the new China watchers have begun to read something
fundamental into every new piece of evidence emanating from
China, be it the sales figure for the Canton Fair or this or
that poster on Democracy Wall. The point I suppose we all
agree on is this: China is embarked on a rapid path of
change. Adjustments and threats to endurance are
inevitable. As with most such efforts, the potential return
is great. But so equally is the risk.
Mr. Ambassador, I know you won't mind my saying that
there are risks in any attempt of change. We know this well
from our own attempts to change the inflation psychology of
our own economy. No one can assess the risks entailed in so
fundamental and unorthodox an attempt as that being made by
Vice-Premier Deng and Chairman Hua. Investors must make up
their own minds as to whether or not a process of
development like this one, once underway, can be stopped; or
whether a political effort of this basic nature, once
embarked on, can ever be reversed; or whether the people
will have the patience to stay the course and accept the
strains and setbacks that are inevitable.
-4-
The domestic situation in China tells us that we must
approach investing and doing business there with a sense of
realism and proportion. Obviously, profitable business can
be done in China and we are eager for it. But for some time
to come business will have to be done under conditions of
uncertainty. This is a fact.
The Competition
This does not mean that there is lack of room for an
expansion of America's market share in China. Others have
done quite well in the current trading environment and have
strong expectations for the future. Let me describe briefly
where we stand relative to the competition.
The U.S. ranks well behind Japan and Europe in trade
with China. In 1978 China imported a little over $10
billion of goods from abroad; the U.S. supplied only eight
percent of this total. In that year China exported goods
totalling almost $10 billion, of which the U.S. imported
three percent. Our total share of two way trade with China
is a slim six percent. This compares with 25 percent for
Japan and 18 percent for the European Community. We can and
we must do better.
In seeking to expand our position, we must contend with
the following competitive situation:
We must compete against Japan. In 1978, Japan
captured, by value, half of the $7 billion worth of
contracts signed by the Chinese. The Japanese and Chinese
have signed a long-term trade agreement which has been
extended through 1990 and aims to increase two-way trade to
$40-60 billion. In addition, the Japanese government and
private banks have been discussing a variety of long and
short-term facilities to finance this trade- Just
yesterday, for example, Japanese private banks signed a
four-and-a-half year syndicated loan to China of $2 billion
denominated in dollars. And they announced short-term loans
totalling $6 billion.
We must compete with West Germany, who does not
have a bilateral trade agreement, but already sells $1
billion in exports to China.
-5—
We face competition from France and the United
Kingdom, who each recently entered into trade agreements
with China which call for bilateral trade to approach the
$14 billion mark by 1985. To finance purchases under the
agreement, both France and the United Kingdom have
officially backed $7 billion and $5 billion respectively in
credit commitments.
— And there are others. The European Community
collectively signed a five year nonpreferential trade
agreement with China in April of 1978. And Italy has been
discussing a trade agreement with China and is reportedly
considering extension of an officially backed line of credit
for $1 billion.
It is possible that the expectations of all of these
governments are exaggerated. Still, the bottom line is that
we are behind in our economic and trade relations with
China. We must move quickly to get ahead. The businessmen
in this room know how hard it is to do so — how hard it is
to compete against others with sizeable leads in market
share. Nevertheless, I am confident that we can
substantially increase our share of the Chinese market.
Business and Government Effort
In part this confidence is bred of what I have
experienced first hand: the Chinese understand the
superiority of American technology and managerial skills.
There is no doubt that China intends to tap into our
strengths in these areas. This was made clear to me on my
recent trip. The Chinese like American businessmen. They
trust them. They are fully knowledgeable of the abilities
of our oil companies, our mining firms, our builders, our
manufacturers, our consultants.
Secondly, as I hope I made clear in my introduction,
the Carter Administration is doing its utmost to encourage
business with China. We have settled the claims issue so
that Chinese deposits, ships, planes and goods can enter the
U.S. without fear of attachment. We have initialled a trade
agreement which provides for patent protection, for the
facilitation of business and importantly, for the eventual
extension of Most Favored Nation status to China. We have
set up a Joint Ministerial Committee to facilitate the
clearing away of remaining obstacles.
-6There can be no question of the Administration's
resolve to enhance the business community's involvement in
China. Nor, judging from the wave of American businessmen
visiting China and the mushrooming of
"doing-business-in-China workshops", can one doubt the
business community's interest in this new market.
Still, there are significant obstacles which we must
overcome.
The first is principally a matter between private U.S.
firms the Chinese Government. In his meeting with Mrs.
Kreps, Deng Xiaoping joked that one of the great problems we
have in fostering bilateral trade is that China has too few
laws and the United States too many lawyers. Actually this
is no small matter. The Chinese are genuinely perplexed
about our preoccupation with the law. To satisfy U.S.
investors, and other investors as well, they must finalize a
commerical code. Acceptable groundrules must be laid down
on taxation, on protection from expropriation, on profit
remittances, on dispute settlement and on myriad other
concerns common to joint ventures and the other new forms of
investment being contemplated by Beijing. Alternatively,
the American business community might have to learn to take
risks which the absence of traditional guarantees present,
much as the Japanese and others have done. It will no doubt
take time before the new operating procedures required of
the Chinese Government and the American private sector are
worked out to everyone's comfort.
A second problem relates to the extension of
Export-Import Bank credits to China. As most of you know,
Eximbank lending is covered by the restriction of the
Jackson-Vanik Amendment. And under the Export-Import Bank
Act the Bank cannot extend credits to Communist countries
without a Presidential determination that it is in the
national interest to do so.
We believe that we can get over these legal hurdles.
But even as we do so, we will confront two problems. The
first is that the PRC has a $26.5 million debt (principal
amount) to the Eximbank that must be repaid. As Ambassador
Chai knows, I briefly outlined our position on this matter
to his government while I was in Beijing: until this
official claim is negotiated, it is unlikely that the
Export-Import Bank will be able to justify the extension of
any new loans.
-7-
Second, the Bank's budget for FY 1979 is substantially
allocated, without an addition to the Eximbank budget it is
unlikely that credits can be extended before October of this
year.
The point is that we can't look to the U.S. Government
to provide a great deal of financial resources this year. I
know that this is a sensitive issue and the cause for
complaint, but those are the facts, despite the nature of
the competition and despite the new willingness of China to
take in our business.
This does not mean that credit is unavailable. The
Chinese have begun to tap the international market.
A five-year $750 million untied Eurodollar loan is
being negotiated with a syndicate headed by a Canadian bank.
Another five-year $175 million general purpose loan
has recently been arranged for China by two European, banks.
Chase Manhattan recently announced a $30 million
loan to finance the initial stage of a $250 million trade
center in Beijing.
And just recently, China has obtained a commitment
for a $500 million loan from an Arab consortium.
Concomitantly, U.S. banking activity in China has
picked up dramatically. Fourteen U.S. banks now have
established full correspondent relations with the Bank of
China. And three have been given permission to set up
representative offices. Given China's preference for
dollar-denominated loans, I expect these and other U.S.
banks will expand their banking operations in China.
In short, private sector resources are growing, if not
yet plentiful. We acknowledge that a lack of Ex-Im
financing will place us at a disadvantage for the immediate
future — for 1979. But that disadvantage should hopefully
be minimized by private credits.
Conclusion
In conclusion, let me summarize the situation as I see
it. To succeed in the Four Modernizations, China must
attract investment. To succeed in attracting American
-8investment, business must be assured of a stable
environment, government efficiency and working commercial
codes of conduct. To facilitate that investment the U.S.
and Chinese Governments together must continue to move
expeditiously toward final ratification of the trade
agreements, completion of the textile, aviation and shipping
agreements, and a resolution of the Eximbank issue. But
that will not be enough. American banks and American
businesses must be willing to invest a great deal of time
and incur a substantial amount of risk in order to enter
China and gain market share. The process will be an arduous
one. But the rewards will undoubtedly be great.
FOR RELEASE AT 4:00 P.M.
May 17, 1979
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $2,750 million, of 364-day
Treasury bills to be dated May 29, 1979,
and to mature
May 27, 1980
(CUSIP No. 912793 3H 7 ) . This issue will
provide about $272
million new cash for the Treasury as the
maturing issue is outstanding in the amount of $2,478 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing May 29, 1979.
The public holds
$1,089 million of the maturing issue and $1,389 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 Banks, 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 $5,000 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 Daylight Saving time,
Wednesday, May 23, 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-1613
-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 -1
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 weighted average 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
May 29, 1979,
in cash or other immediately available
funds or in Treasury bills maturing May 29, 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.
-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.
/5
For Release Upon Delivery
Expected at 9:00 a.m.
STATEMENT OF
DANIEL I. HALPERIN, DEPUTY ASSISTANT SECRETARY
OF THE TREASURY (TAX LEGISLATION)
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT OF THE
SFNATE FINANCE COMMITTEE
MAY 18, 1979
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to present the
Treasury Department's views regarding two bills: S. 10 0,
which would amend the Internal Revenue Code to provide a
deduction for reforestation expenses and would establish a
reforestation trust fund within the Treasury, and S. 394,
which would allow certain authors and artists performing
services under contract with a corporation to elect to be
treated as employees of the corporation for certain purposes.
S. 100
Deduction of Reforestation Expenditures
S. 100 would amend the Internal Revenue Code to allow a
deduction of up to $10,000 per year for qualified reforestation expenditures.
The Administration opposes S. 100.
The timber industry, one of the most tax-favored
domestic industries, is favored under the federal income tax
laws in three significant ways.
B-1614
- 2 First, under current law, a taxpayer may elect to treat
the cutting of timber as the sale or exchange of a capital
asset. Thus, the revenue from the sale of timber is taxed
at preferential rates while the revenues of other product
manufacturers and producers are taxed as ordinary income.
Taxation at capital gain rates reduced the taxes of the
industry by an estimated $350 million in 1978. Taxes on the
timber industry were reduced by $4 0 million in 1973 when
Congress cut the corporate alternative tax rate on capital
gains from 30 to 28 percent. In percentage terms this
reduction in the capital gains rate was nearly 1.5 times the
reduction in the overall corporate tax rate.
Second, costs incurred in connection with growing and
carrying timber (after the reforestation period) are currently
deducted against ordinary income. These costs represent
approximately three-fourths of the total cost of raising
timber.__/ This is in contrast to the general principle that
an expenditure is not currently deducted if it is related to
the purchase or production of an asset that will provide a
benefit beyond the year the expenditure is made. Thus,
plant and equipment costs are depreciated over the periods
these assets are used in a business. Similarly, the cost of
producing inventory for resale is not currently deducted but
is reflected in income as an offset against the selling
price of the goods in the year of sale.
The timber industry currently enjoys significant exceptions
from this basic tax principle. For example, timber stand
improvements such as brush control, thinning, pruning and
shaping of trees, and costs incurred in controlling insects
and disease, are treated as annual expenses although the
amounts paid for these activities add to the long-term value
of the timber. If the increase in the value of standing
timber is not recognized until the timber is sold or cut,
then the costs of earning that income should be capitalized
so that income and expense are properly matched.
The third element of the current timber tax subsidy is
the conversion of ordinary income into capital gains. This
conversion is a result of the first two subsidies described
above: capital gains treatment of timber income and the
current expensing of the costs of growing and carrying
timber. Such expenses are currently deducted against other
ordinary income of the timber company, such as from logging
- 3 or manufacturing, while the revenue ultimately produced by
these expenses — the sale of timber — is taxed at the
capital gains rates. The effect is as if the cost of the
purchase of securities was currently deducted against wage
income while the capital gain treatment on sale applied not
only to profit but to nearly the entire proceeds of the
sale.
In addition, timber growing receives special treatment
under the Internal Revenue Code provisions relating to the
minimum tax on tax preference income. The 1976 changes to
the minimum tax for corporations increased the minimum tax
rate from 10 to 15 percent, and eliminated both the carryover
of regular tax as an offset to future preference income and
the $30,000 exemption from the minimum tax. Timber was not
subject to these changes, and we estimate the revenue loss
from this special treatment to be $20 million.
These four items — capital gain treatment of income,
mismatching of income and expense, conversion of ordinary
income into capital gains, and the special minimum tax provisions — give the timber growing industry a substantial
tax subsidy. A recently published .study completed by the
Treasury's Office of Tax Analysis—/ estimates that these
special tax preferences are equivalent to a direct cash
subsidy of 35 to 43 percent of the value of standing timber.
The effect of these substantial tax subsidies also may
be characterized as providing a negative income tax to the
timber industry. As a result, an investment which is unprofitable before taxes yields an after-tax profit equal to
the net tax savings.3/
In light of the substantial subsidy already provided
to timber growing in the tax law, we believe a further
subsdiy in the form of deductions for reforestation expenditures cannot be justified.
Reforestation Trust Fund
S. 100 would also require the Treasury to establish a
Reforestation Trust Fund to be segregated from the general
fund of the Treasury. The bill would appropriate uu to $30
million a year to the trust fund during a seven-year period
under the tariff schedules relating to imports of wood and
wood-related products.i/ The amounts held in the Trust Fund
- 4 would be available to meet the obligations of the United
States in eliminating and preventing a backlog in the
reforestation of the National Forest System to the extent
that amounts otherwise appropriated for any year are not
sufficient to meet such obligations.—' At the end of the
seven-year period, any amounts remaining in the Trust Fund
would be returned to the Treasury's general fund.
The Treasury Department is opposed to this part of the
bill. The tariff rates on timber and timber products have
been set to provide a determined level of aid to the domestic
timber growing industry. Applying part, or all, of the
tariff proceeds to reforestation work rather than using the
proceeds for general governmental expenditures would enhance
the effect of the tariff in benefitting the domestic industry.
This would conflict with our Government's policy of negotiating
for the reduction of quasi-tariff barriers to international
trade. In any case, it would not be appropriate to single
out those industries which are already protected by tariffs
for additional benefits to be paid for from the tariff
revenues. Industries without tariff protection, or nominal
tariff rates on their products, could be given similar
benefits only by specific appropriations from the general
fund.
S. 394 — Authors and Artists as Employees
S. 394 would allow certain authors and artists under
contract who were participants in a corporation's employee
pension, profit-sharing or annuity plan, to elect to be
treated as employees for all purposes under the Internal
Revenue Code except for the Federal Unemployment Tax Act (FUTA).
The bill is intended to benefit the New Yorker magazine
which has treated the individuals in question as employees
for purposes of its retirement plans but not for withholding
of income or FICA taxes or the payment of the employer's
share of FICA and FUTA.
The New Yorker magazine has arrangements with certain
artists and authors for payment of compensation based on
work accepted. Under these agreements, the artists generally
agree to offer their work first to the New Yorker or to use
their best efforts to produce suitable work. Apparently,
most of these authors and artists derive the greater part of
their earned income from the Mew Yorker. In 1977 the IPS
held on reexamination of the corporation's pension plan that
these authors and artists were not employees and
- 5 therefore could no longer participate in the corporation's
retirement programs.
As you are aware, the Treasury and IRS have been
reexamining the issue of classification of individuals who
provide services for purposes of employment taxes and income
tax withholding. While we have not completed that study, we
think it is reasonable for the individuals with the workina
relationship of the authors and artists in question to be
treated as employees. Accordingly, we would have no objection
to this bill, provided that the authors and artists under
contract with the New Yorker are treated as employees
regardless of whether they make an election to be treated as
such and regardless of whether they were working for the
corporation as of December 31, 1977. In addition, we think
that for purposes of uniformity these individuals also
should be treated as employees for FUTA purposes. In other
words, we think that sections 1(a)(1) and 1(a)(2) of the
bill should be deleted and section 1(a) should be amended to
require treatment of such authors and artists as employees
for ail purposes under the Internal Revenue Code, including
without limitation Chapters 21, 23 and 24 of the Code (FICA,
o 0 o
FUTA and income tax withholding).
FOOTNOTES
The average amount of carrying costs varies considerably.
These costs can be expected to be quite low in the case
of old-growth timber in the Northwest, while they may
be quite high in the case of Christmas tree plantations.
Carrying costs do not necessarily have a pattern which
increases year by year. To the extent carrying charges
are constant or do not increase substantially over time,
the effect of mismatching income and expense is magnified.
In other words, the earlier in the cycle that carrying
charges are incurred, the greater the benefit from the
deduction.
Office of Tax Analysis, U. S. Treasury Department,
Federal Tax Policy and Recycling of Solid Waste Materials
4, 25, 70 (1979).
For example, suppose that an investment in timber
requires costs of $200 to produce $200 of timber income.
This investment yields zero profits before taxes and if
income and expense are properly matched, no taxes should
be paid and the investment results in zero profits
after taxes. However, if an investor in the 50 percent tax bracket can deduct $200 of expenses against
ordinary income, he achieves a tax savings of $100His gain on the later sale of timber is $200, but
if the gain is taxed at a capital gains rate which
is one-half his ordinary tax bracket, the tax on
the sale is onlv $50. The combination of an ordinary
deduction and later capital gains has permitted the
investor to pay net taxes of minus $50 on the investment.
As a result, the investment which was unprofitable
before taxes yields after-tax profits of $50 equal
to the net tax savings.
Rough and primary wood products; wood waste- lumber,
flooring and mouldings; wood veneers, plywood and
other wood veneer assemblies, and building boards.
The National Forest Management Act of 1976, P.L. 94-588,
authorizes an appropriation of up to $20 0 million annually
to replant acreage to be cut over each year and to
eliminate the backlog of lands needing reforestation.
FOR RELEASE UPON DELIVERY
Expected at 12:45 P.M., E.D.S.T.
Friday May 18, 1979
REMARKS BY THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
AT THE
ECONOMICS CLUB OF DETROIT
COBO HALL, DETROIT
MAY 18, 1979
We are at a historical turning point in the
government's managment of the economy.
"Turning point" is a bit of jargon from ballet. In the
real world, unfortunately, turning points have little grace
or elegance. They are marked by confusion and uncertainty.
In a word, they are messy. It is only in looking back on
such periods, with the hindsight of history, that we can see
the emergence of esthetically pleasing trends and patterns.
I do not have the advantage of this hindsight. But I
will try anyway to make some sense of where we now stand in
our national economic policymaking.
Fifteen years ago, even ten years ago, there was a very
broad and deep consensus — among both economists and
enlightened politicians — about the goals and techniques of
economic management. The consensus was forged by the common
experience of the Great Depression, on the one hand, and by
the seminal economic theories of John Maynard Keynes, on the
other.
To put it briefly and crudely, the consensus was that
the government's overriding economic responsibility was to
manage the level of total spending — of aggregate demand —
in the economy. The aim was to smooth out peaks and valleys
in the business cycle and to assure the steady, upward climb
of employment and income. The government was to do this by
raising and lowering its own spending or tax levels and by
restraining or loosening up on credit. Which of these tools
was the most efficient to the task was a matter of some
dispute, but this was largely a debate over technical
details. The purpose of the exercise — the short-term
management of demand — was clear to, and agreed by, all.
B-1615
-2-
This consensus has broken down.
The Great Depression is now ancient history for most
Americans. This year, for the first time, a majority of the
voting age population in this country has no first-hand
memory of the calamity of the the 1930's.
For most Americans, economic perceptions and
instincts are, instead, colored by a decade — the 1970's —
in which inflation has averaged almost 7 percent and has at
least twice soared above the double digit mark. During the
first twenty post war years, inflation averaged only 1.6
percent. This decade of the 1970's has seen tax rates
escalate sharply: marginal tax rates of 40 percent or more
were once applied only to the rich; today they apply to
middle income groups as well. Government spending has grown
from 39 percent of disposable income in 1957 to 50 percent
in 1978 and has shifted away from capital construction and
defense toward transfering income among groups. About
one-half of the federal budget now goes to income transfers.
Labor productivity growth has slowed to a crawl, growing
only four tenths of one percent over the past year. Since
1973 real GNP growth per capita has averaged only 1.2
percent, about half what it averaged in the 1950's and
1960's. This has been a decade when the U.S. became
enormously dependent on imported oil and when we have been
persistently unable to balance our international accounts.
Finally , it has been a decade of very large and stubborn
budget deficits.
From all of this disparate but dismaying evidence, a
powerful lesson is beginning to emerge. The lesson is
gaining adherents among politicians in both parties and
among professional economists of every school and stripe.
The lesson is that economic policy must now deal with a
great deal more than short term business cycles — with a
great deal more than fine tuning the aggregate demands
placed on our existing economic resources.
The new tasks facing us come on the supply side of the
economy. They involve rebuilding our capital stock,
reinvigorating the growth of productivity, reasserting
balance in our budgetary and trade accounts, creating a new
domestic base for the energy needs of our economy, regaining
our place of prominence in the world economy, and reducing
the structural unemployment and cruel waste of human
resources that cripple our economy at every stage in the
business cycle.
-3-
This is an easy lesson to state, but a very hard one to
put into practice.
The reason is that all of these great tasks take a very
long time to accomplish and involve a great deal of
sacrifice in the process. There is no mystery in that. We
all know that spending is easy; borrowing is easy; living
off our capital is easy. But: Saving and investing for the
future — putting off present consumption for the sake of a
secure prosperity for tomorrow — that is hard.
For the political system, it is nearly impossible.
"Tomorrow" has no constituency. All of the pressures on our
politicians require a quick pay-off. Every group clamors
for instant gratification of its demands. Elections happen
every few years, and it avails a politician little to plead
for patience and for the long view.
In this crucial respect, President Carter is a new sort
of politician. He decided early on that the old, short-term
politics of instant gratification no longer suits the
country's needs. He has taken enormous political risks to
reorient America's policies toward the long-term,
supply-side problems of the economy. I cannot tell you
whether this will make for good politics. But that is not
the President's ultimate concern. He is concerned with
sound and responsible economics.
Let me run through a few of the major things the
President has done to return our economy to fundamental
soundness on the supply side.
First, and perhaps most importantly, the President has
focused the entire political system on the absolute
necessity of moving the federal budget toward balance. When
the President raised this as a major campaign issue, many
self-styled experts and sophisticates tended to scoff that
budget balance was unnecessary and impossible. The scoffing
has now stopped. There is now wide-spread agreement, across
partisan and ideological lines, that paring back the deficit
must be a paramount priority of economic policy. As for
feasibility, the President has already taken an inherited
deficit that exceeded $60 billion and cut it back to below
$30 billion, while at the same time providing two major
reductions in income taxes. Federal spending has been
reduced significantly as a share of GNP, and government
demands on our financial markets are being brought sharply
back into line.
-4-
Second, the President has moved aggressively to return
competition to major sectors of the economy. He has
deregulated the airline industry, bringing about a wholesale
cut in fares and a healthy expansion of service. The
President is also moving to pare away deadening regulations
in the trucking, railroad, and communications industries.
In every area of federal regulation, the President — often
at great political risk — has insisted that costs and
benefits be brought into common sense balance. Every one of
these steps makes a contribution to bringing down inflation
and to rebuilding the prospects for productivity growth.
Third, the President is working on many fronts to
shore up our strength in the world economy. He took bold
and decisive action last fall to put a stop to the
debilitating, speculative attacks on our currency's value.
He has reasserted the importance of a strong and stable
dollar as a pillar of U.S. economic policy. Since November
1 the dollar has risen over 20 percent against the Yen, 19
percent against the Swiss Franc, and 10 percent against the
German Mark. At the same time, the President has seized
hold of our foreign trade problems: he brought back to life
the Multilateral Trade Negotiations, thus blocking a
world-wide rush toward protectionism, and he has established
a policy of vigorously promoting U.S. exports.
Finally, the President has had the courage and
foresight to act — not just to talk, but to act -- on this
nation's massive energy problems. Last year, he fought
through the Congress a landmark bill to settle at long last
a decades-long stalemate on natural gas policy. As a
consequence, for the first time in years the nation this
winter was spared devastating shortages and cut-offs of
natural gas.
This spring, in the same way, the President has moved
decisively to break the dangerous political deadlock that
has trapped our crude oil policy in muddle, rhetoric, and
redtape during most of this decade. The President is
dismantling in an orderly but final way the unbelievably
bureaucratic regime of oil price controls that has stifled
U.S. oil production and subsidized our over-consumption of
foreign oil since 1973. At the same time, he is insisting
that the American people get a fair share of the increasing
revenues of the oil industry through a fair and tough new
tax on windfall profits. The proceeds of this tax will help
-5cushion the poor against the impact of rising prices, will
help develop our mass transit systems, and will provide a
critical boost to the development of new energy
technologies.
Every one of these steps has been necessary to secure
our prosperity for the 1980's. But every one of them has,
predictably, drawn fire from special interest groups and
those that care only about what they get today. These
battles have shown how difficult it is politically to work
hard and honestly on the real, long-term, supply-side
problems of the economy. But the President, by not
flinching from the task, has also shown that genuine
progress is possible.
What does the future hold? Looking to the far horizon,
I am very confident, for the policies that the President has
put in place will guarantee the economy's fundamental health
and prosperity as the 1980's unfold. But these are, quite
properly, policies for the long term. For the shorter term,
I can and will make no rosy promises. We are in a difficult
time of transition, and it will remain difficult over the
next several years. Whether we succeed in the long term
will depend on whether the American people have the wisdom
and patience to support the present policies in the
interest of assuring a secure prosperity.
The short term outlook cannot be precisely forecast.
If I have learned anything from two years as Secretary of
the Treasury, it is that economists deal with an extremely
cloudy crystal ball. The best economists know this. Ask
one for his telephone number, and he will hesitate long
before answering, cautiously, that maybe he can provide you
with an estimate.
With that sound example in mind, let me glance briefly
at the near-term horizon.
We are heading for a period of slower economic growth.
This is proper and welcome. The economy has enjoyed a
remarkably strong, four-year recovery and has recently been
suffering from a growth rate that exceeds its potential.
For instance, the economy expanded at a nearly 7 percent
annual rate in the last quarter of 1978. That has put
excessive pressures on some markets and has greatly
complicated our inflation problems. So we must anticipate a
slower pace of economic activity, and a slower expansion of
employment, for a period of time.
-6-
This, by all indications, will not be a drastic
slow-down. We neither want, need, nor expect an outright
recession. But it will involve a lowering of expectations
and a tightening of belts.
As this slowdown proceeds, it will help cool down the
inflation. Relief on this score will also be gradual, but
we expect it to be steady. The 12 and 13 percent inflation
rates of recent months will not hold up. The coming
moderation in economic activity will provide some relief.
We also expect a slowing of beef and other farm product
inflation in the last half of the year. The firming of the
dollar last year will begin to moderate domestic prices
later this year and next, and the very extreme increases in
world oil prices this spring will not likely be repeated.
But the moderation in inflation will not be sudden or
dramatic. The only quick ways to slow inflation are to
precipitate a massive recession or to impose wage and price
controls. Unfortunately, both of those tricks lose their
magic in a few, short months, leaving the economy in a
shambles that would take us years to put right. So, here
again, a patient and steady course is required.
On the international side, we expect the dollar to
remain stable and firm. Our trade and current account
balances are moving in the right direction; we look for the
current account deficit to shrink to $2-to-$6 billion at
annualized rates in the first half of 1980. As the
President's energy measures take hold, the 1980's should see
us developing domestic sources of energy that will
eventually free us from excessive and dangerous dependence
on foreign oil.
As I said at the start, we are at a turning point in
economics — mid-way in a long-term transition from demand
management to a rebuilding of our basic productive
potential. The politics of this transition are fully as
important as the economics. The great question is whether
we will have the courage, wisdom, and discipline to maintain
a true course, involving short-term sacrifices for long term
gains that will accrue to all of us. The answer of course
is that the politicians will do this if we demand it of
them. If we don't, they won't.
So the question must be directed, ultimately, at you,
the true governors of the country. I am confident that, in
the end, the American people do have the maturity and
patience to make their economy, once again, second to none
in the world.
QUESTIONS AND ANSWERS BEFORE
THE ECONOMIC CLUB OF DETROIT
ROBERT M. SURDAM: The Secretary has told us that he would
respond to questions. We have a number of them and here is the
first one.
(Reading Question) "YOU HAVE SPOKEN OF THE UNDESIRABILITY
OF MANDATORY PRICE AND WAGE CONTROLS. WHY, THEN, DO YOU FIND
THE VOLUNTARY PROGRAM (WITH SANCTIONS) DESIRABLE?"
HON. W. MICHAEL BLUMENTHAL: I think the significant thing
about the President's anti-inflation program is that it does
not have as its centerpiece the wage and price guidelines, and
certainly does not involve mandatory controls. The centerpiece
of the President's anti-inflation program is a sharply reduced
federal deficit, a firm lid on spending, and strong cooperation
with the Federal Reserve, which is following monetary policies
commensurate with this kind of tight fiscal approach. That's
the centerpiece. That deals with the fundamentals.
Added to that is an effort -- a very, very difficult effort
given the web of laws and regulations and statutes and legitimate
concerns and interests of many different groups in our society —
to simplify and to make more cost effective the various regulations
and to eliminate those that are cost-raising and inflationproducing,' and not cost-effective.
Added to all of those things, there is an effort to provide
guidelines and targets for labor and for business in their own
self-interest and in the interest of all of us to keep some
limits on the rate at which prices and wages will go up.
The key to that effort is voluntarism. It is a framework
for reasoning together, and I think that you will have to admit
that since the inception of that program that is, in fact, the
way in which things have been approached. We reserve the right,
if a company absolutely refuses to cooperate — in fact, thumbs
its nose at the government's effort to secure moderation in this
area -- that we as prudent buyers will say, "Well, we will buy
from others."
Now, that's a long way from mandatory controls. I think it
is a very, very important distinction, and above all it must be
remembered that the centerpiece is the dealing with the fundamentals, that are going to slow down our economy and reduce the
rate of inflation on a more permanent basis.
- 2 ROBERT M. SURDAM: (Reading Question) "MR. SECRETARY,
IS NOT THE PROPOSED WINDFALL TAX ON "OIL COMPANY PROFITS A
CONTINUING EVIDENCE OF THE PERCEIVED POLITICAL POPULARITY
OF INCOME TRANSFER?"
HON. W. MICHAEL BLUMENTHAL: Let me say a word about the
windfall profits tax, a subject on which I have spent a great
deal of my time in recent weeks, since the President's
announcement of April 5th. The key thing about the lifting of
controls is that we are going to insure that Americans pay the
true replacement cost for oil. That's painful, because it's
high, but there's no getting away from the fact that we have
to pay for every additional barrel of oil that we have to buy
from the OPEC nations a certain price; that that price has been
going up, and that until this deregulation is put into effect,
as it will be June 1st, we have been charging the American
consumer a lower and subsidized price and, as a result, we've
been stimulating the consumption of a product in increasingly
scarce supply at prices that are unrealistic in terms of what
the world is actually charging.
Now, by lifting controls we are providing, very rapidly,
major additional revenues to the oil companies. Some of these
revenues are in the nature of pure windfalls, in the sense that
they are not required for an expansion of production, that they
could not be utilized efficiently for that purpose and that the
cash flow of the companies is adequate without them. With the
additional $6 billion that will be left for them, not of taxes,
including the windfall profits tax, there are enough resources
available, there's no question about that.
The Energy Security Trust Fund is being set up primarily
to capture these windfalls for three purposes, but the principal,
critical purpose is energy development. Wherever we went
throughout the country, and throughout the Congress, people
again and again said we must marshal the resources to put the
additional money that Americans are now going to be paying for
petroleum resources right back into the economy to develop
other, alternative sources of energy; to hasten the day when
we will no longer be as dependent as we are today on oil, and
on a price that is set by a foreign cartel over which we have
no influence.
So, this is not income transfer in the usual sense. It
is the utilization of that money which we will all be paying
to develop the new technology for shale oil, for liquefaction
of coal, for gasification of coal, for developments in the
nuclear field, for solar energy, for the many different ways
in which we will eventually bring about a reduction in our
dependence on oil.
- 3 That not only makes sense, it's good for the economy in
many ways. This kind of R and D effort clearly has beneficial
impact throughout the country.
There is
money to
in light
continue
a second purpose, and that is to use some of the
develop mass transit systems, certainly much needed
of the problems and shortages that exist and will
to exist with gasoline for some time.
A small amount of the revenues is going to be utilized,
and quite properly utilized in my judgment, to help cushion
the impact of those higher prices for energy for those lowest
income groups in the economy who are severely affected and who
simply cannot affort to pay that excess $50 or $100 a year for
their families in added energy cost. I'm talking about families
whose average income is below something like $7,000 a year.
There, believe me, every hundred dollars, counts. It counts
very, very heavily. It counts for all of us, but for those
people it is critical. And so a limited amount will be properly
used for that purpose, because it's the fair program. But the
major purposes are the ones I've indicated, and that's quite
different from some of the other transfer programs that we've
been referring to.
ROBERT M. SURDAM: (Reading Question) "ARE YOU CONCERNED
THAT THE CURRENT GASOLINE SHORTAGE, WITH ITS ADVERSE IMPACT
ON THE AUTOMOBILE INDUSTRY, COULD TRIGGER A MAJOR RECESSION?"
HON. W- MICHAEL BLUMENTHAL: We see no evidence of a
major recession, and I have very little concern that there is
a likelihood of one or that we are heading into one. Obviously,
the gasoline shortages, particularly in California, are very
worrisome and troublesome; obviously, they will have a negative
impact, at least in the short run, on the automobile industry.
I don't believe that we are going to have a continuation
of this, at least not to the same extent, in California or
anywhere. I think things will settle down. We have had a
number of factors coming together, particularly out there: a
rapid rise in consumption of gasoline; the reduction in crude
supplies as a result of the problems in Iran earlier in the
year; and a number of other factors that are peculiar to the
region. They are being worked on actively. President Carter
has a program in effect and is working very hard to resolve ,
that, to insure not only that there is enough gasoline available
but also, very importantly, that there is enough heating oil in
the fall so that we can not only drive our cars but also heat
our homes.
ROBERT M. SURDAM: Thank you, sir. Though I think you
spoke to this implicitly, perhaps you would wish to comment
further.
(Reading Question) "DO YOU THINK OUR STANDARD OF LIVING
WILL DECLINE IN VIEW OF THE ENERGY SHORTAGE?"
HON. W. MICHAEL BLUMENTHAL: If we don't pull up our socks
and increase our efficiency — our productivity -- by definition
it will decline. If we continue to have productivity growth
of 1% or less than 1%, certainly it will decline for some people.
The only way in which the Americans can look forward to improved
standards of living in the years to come is by producing more
efficiently, so that our productivity rises and supply get bigger.
There may well be periods -- and that has generally been
the case in the face of rapid inflation — when in fact for a
year or so the real income of many groups in the society goes
down. That is why no one gains from excessive wage and price
increases. You can't get ahead of the game. You think you can,
but you can't.
If you go back to the mid-70's and you look at some of the
labor settlements and you measure those against the rate of
inflation that then ensued, you find that the unions that got
the best settlements also didn't get ahead. There's no place
to hide. The only way to bring inflation under control is for
people to practice moderation while we work on these longer-term
problems; while we bring the budget under control and, through
monetary and fiscal policy and some of these other structural
approaches, work on the fundamental causes of inflation.
That's why the voluntary guidelines make so much sense,
for they set in fact a target that we must all have in mind
and adhere to if we are to lick this problem.
ROBERT M. SURDAM: (Reading Question) "HOW DO YOU FEEL
ABOUT AN AMENDMENT TO REQUIRE A BALANCED BUDGET?"
HON. W. MICHAEL BLUMENTHAL: I oppose it. I presume you
mean an amendment to the Constitution. I believe that the
Constitution is a vital document — the most basic one for our
form of government, and it is not lightly to be tampered with
or changed. If every time we had a particular problem — and
we have had some in the 2 03-year history of the Republic —
we would have rushed to amend the Constitution to deal with
that problem, we would not have the kind of simple, basic
document, even with its amendments, that we have; we would have
something that would be practically inapplicable to the modern
scene.
»
- 5 The problem of balancing the budget is a problem of
discipline and courage by the political leaders that we elect
and send to Washington. There is no way in which you can
mandate balance and actually achieve it if the people in the
Congress do not wish to cooperate. And, if the people in the
Congress wish it, then it's going to happen anyway.
I can tell you, after some 2-1/2 years in Washington, that
I have a long list of shenanigans on how to get around a socalled balanced budget requirement. There is a wonderful
technique called putting things "off budget." There are all
kinds of emergencies that can be created. There are all kinds
of ways in which things can be shifted between capital and
operating accounts.
A balanced budget requirement would not work unless we
wanted it to work. I do not believe, finally, that the lack
of flexibility inherent in this approach makes sense, for
clearly the Federal Budget is not like a company's budget; it's
not like a state's budget. It's quite different than the budget
of the State of Michigan, for example. The budget of the
Federal Government must be managed in terms of very important
macroeconomic goals. These goals do change, and you cannot
design a formula beforehand, a set of rules to apply to the many
different situations under which the Federal Government must
manage its affairs.
There is no substitute for fiscal responsibility, the kind
of responsibility that the President has been preaching and
practicing. And, if the Congress is willing to operate on that
basis, we will get budget balance. We'll get it, with or without
an amendment. But an amendment would put us into a straitjacket
that is uncalled for.
ROBERT M. SURDAM: I trust, sir, that you will remember —
as one of my regulators — that I am only reading this question.
(Laughter)
HON. W. MICHAEL BLUMENTHAL: But you picked it anyway.
(Laughter)
ROBERT M. SURDAM: (Reading Question) "ARE YOU AND THE
CHAIRMAN OF THE COUNCIL OF ECONOMIC ADVISERS NOW IN AGREEMENT
WITH THE CHAIRMAN OF THE FEDERAL RESERVE AS TO THE LEVEL OF
INTEREST RATES? HAVE RATES PEAKED?"
HON. W. MICHEAL BLUMENTHAL: I never predict interest rates,
for a variety of reasons, not the least of which is that I know
that whatever_I think I'm likely to be wrong. I told you the
crystal balls are clouded. They're just as clouded for me as
- 6they are for anyone else, and it clearly would be unwise to
do that.
Let me deal with the first part of the question, which
is the more interesting one perhaps.
There has never been any disagreement. The remarkable
thing about the present situation is the degree of consensus
that exists between the President's principal economic advisers
on the proper thrust of economic policy for this country on
the one hand, and that viewpoint as seen from the vantage of
the Federal Reserve Board and the Open Market Committee on the
other. And I think you can see from the kind of policies that
have been followed in the fiscal and on the monetary policy side
how closely they have dovetailed in the past.
Now, I have breakfast with the Chairman of the Fed regularly
at least once a week and often more frequently. We talk about
many things. We talk about many things that are up for consideration that week. We exchange viewpoints and of course, When
it comes to particular decisions at particular points in time,
we exchange views and ideas, and it would be frightening if on
every issue we always agreed 100%.
This Board is independent, this Board makes decisions. I
think they have been the right decisions, and they make their
decisions based on all the evidence and we are very satisfied
with the way things have been going. I think we have an
excellent Chairman. We get along very well with him and he,
hopefully, reasonably well with us. And I think it's serving
the country well.
ROBERT M. SURDAM: (Reading Question) "HOW DO YOU SEE THE
FUTURE FOR THE DOLLAR."
HON. W. MICHAEL BLUMENTHAL: The dollar came under considerable pressure last year and late in 1977 for certain fundamental
reasons that had to do with the perception in the world that our
trade balance was turning very adverse and, indeed, last year,
as you know, we wound up with a $35 billion adverse balance of
trade; that, accordingly, our current account balance would be
very adverse, and we wound up with a very heavy deficit in the
current account.
There was also a perception that the rate of inflation was
increasing in the United States, and perhaps a lack of certainty
as to what the Administration — that was still struggling to
bring down a rate of unemployment in excess of 8% that it had
inherited, would do about those problems of external accounts
and rising inflation.
- 7: In addition, there is no doubt ^hat the weakening of the
dollar last year was accentuated by speculative movements that
had no substance in any kind of fundamentals or reality. The
counterpart of course to the weakness in the United States was
the strength in the current accounts and the trade balances
of other countries, particularly Germany and Japan and the Swiss,
who were running very large surpluses — which were in a sense
the counterpart to our deficit.
Since November 1st of last year, when the President put in
place a major program to change that situation, the realization
has, I think, become widespread that our current and trade
accounts are substantially better and are continuing to improve;
the realization that the correct long-term solutions to the
inflation problem are underway; the realization that the President
clearly has identified inflation as Public Enemy Number One, and
as the major preoccupation of his economic program to which he
must address himself.
And also, frankly, a realization abroad that we are
addressing our energy problems. Last year we had trouble
generally when the Congress drafted its feet and wasn't acting
on the President's energy program, it reflected itself in currency
markets. The fact that we did get legislation, the fact that
there are now follow-up proposals before the Congress, and the
Congress will be acting on them — all that has given much
greater confidence to foreign observers of the American scene.
And, of course,there is the corollary; namely, that some
other countries have reduced their surplus and that, to some
extent, some of the inflation problems that we are having are
also being felt elsewhere.
What all that adds up to is that we have had much greater
stability -- with the cooperation that we've been able to work
out with the financial authorities in Germany and Switzerland
and Japan and elsewhere. We have much greater stability, a much
better tone in the market. I see no reason why that should not
continue. And let me just add that we are determined to keep
it that way; that we have the resources and the machinery in
place to insure that that be so, and I think it will be.
ROBERT M. SURDAM: (Reading Question) "WHAT STEPS HAS THIS
ADMINISTRATION TAKEN TO REDUCE THE AWESOME POWER OF U.S.
REGULATORY AGENCIES? THREE WEEKS AGO JOHN H. PERKINS INFORMED
THIS AUDIENCE THAT REGULATORS IN 1979 WOULD SPEND 92,00)0 MAN
YEARS PROCESSING COMPLIANCE PAPERWORK. IS RELIEF IN SIGHT."
HON. W. MICHAEL BLUMENTHAL: I commented briefly in my
formal remarks that this is a subject that the President feels
strongly about. Where he can, he has taken action — airline
- 8deregulation, trucking, railroads, other areas. I emphasize
where he can. Anyone of you who is jat all close to this
difficult area recognizes how great the limits are on the
President's ability, for many of the regulations are enshrined
in particular statutes enacted by the Congress, carefully
watched over by powerful groups — special groups that have
interest in these particular statutes and regulations. And
to get a handle on that — to review them, to simplify them,
to prune them, to reduce them — is a*very difficult and a
long-term task. I think it is without question one of the
structural problems that the United States faces. It is a task
that must be done. We have a regulatory calendar for the first
time. When we came in we found there was not even a single
place in the Federal Government — in the Executive Branch of
the Government -- where you cauld go and look to see what
regulations were up for consideration or for change. There was
no place where we could measure the combined impact of different
regulations promulgated by different regulatory agencies upon
a single industry, whether it be the automobile industry or
some other. That has been corrected. We can make these judgments now. It is going to be a slow gradual process. We are
not at all satisfied that we have gone very far, but we are
going steadily in the right direction.
ROBERT M. SURDAM: One final question, Mr. Secretary.
(Reading Question) "WHAT ELSE SHOULD WE BE DOING TO HALT THE
INFLATIONARY SPIRAL?"
HON. W. MICHAEL BLUMENTHAL: We must come to recognize
that this is not a partisan problem -- it's a national problem.
We must come to recognize that there are no simple solutions -to be very suspicious of people who say, "If they only put
price controls on gas, we wouldn't have this inflation." "If
we only curbed the power of big unions, we wouldn't have this
inflation." "If we only busted up the multinational companies,
we wouldn't have this inflation."
The problem with inflation is that it has many causes and
requires many, many different solutions. Some sacrifice today
is the only way to lick the problem in a fundamental way. I
would advise that you cooperate in an understanding way with
the President's program, to fight inflation without a recession
and without putting the economy into a straitjacket; cooperate
with the guidelines and with the program in toto; and, finally,
understand how difficult the task is.
If you do that, and if you pray a little, I think you're
doing all you can. Thank you.
(Applause)
- 9RUSSEL A. SWANEY: MR. Secretary, we're very proud to
have you where you are as Secretary of the Treasury and we
wish you continued wisdom. Mr. Surdam, thank you for being
our Presiding Officer. Thank you all for coming. This meeting
is adjourned.
ADJOURNMENT
FOR RELEASE AT 4:00 P.M.
May 18, 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 May 31, 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 $5,909 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
March 1, 1979,
and' to mature August 30, 1979
(CUSIP No.
912793 2J 4), originally issued in the amount of $3,007 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $2,900 million to be dated
May 31, 1979,
and to mature November 29, 1979
(CUSIP No.
912793 2X 3 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing
May 31, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,961
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 Daylight Saving time,
Friday, May 25, 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-1616
-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 May 31, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
May 31, 1979.
Cash adjustments will be made for differences
between
par
value
maturing
and
the the
issue
price
of ofthethe
new
bills. bills accepted in exchanqe
-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.
ipartmentoftheTREASURY
SHINGTON, D.C. 20220
TELEPH
• H H
FOR IMMEDIATE RELEASE
May 21, 1979
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,800 million of 13-week bills and for $2,900 million of
26-week bills, both to be issued on May 24, 1979, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
13-week bills
maturing August 23, 1979
Price
Discount Investment
Rate
Rate 1/
Hi
gh
97.551 9.688%
10.10%
w
<>
97.530 9.771%
10.19%
Average
97.537 9.744%
10.16%
a/ Excepting 1 tender of $1,100,000
L
26-week bills
maturing November 23, 1979
Discount Investment
Price
Rate
Rate 1/
95.125^ 9.590%
9.610%
95.115
9.602%
95.119
10.25%
10.27%
10.26%
Tenders at the low price for the 13-week bills were allotted 15%.
Tenders at the low price for the 26-week bills were allotted 36%.
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands^1
Received
Ac:cepted
Received
51,690
37,790
38,290
$
$
$
2 ,263,005
4 ,510,625
3,406,005
23,710
8,805
23,710
26,440
98,895
26,440
28,445
24,885
28,445
24,905
31,875
31,875
266,425
107,530
198,780
33,095
20,680
38,680
6,280
6,280
4,775
33,250
32,770
32,770
8,790
17,740
17,740
334,675
187,135
279,635
16,770
24,265
16,770
Accepted
$
26,690
2,532,205
8,805
29,095
17,565
24,905
90,545
11,095
4,775
28,070
8,790
93,475
24,265
$4 ,145,420
$2 ,800,170
$5 ,425.080
$2,900,280
$2 ,595,935
468,105
$1 ,250,685
468,105
$3 ,961,630
304,125
$1,436,830
304,125
Subtotal, Publ ic $3,064,040
$1 718,790
$4 ,265,755
$1,740,955
Federal Reserve
and Foreign Official
Institutions
$1,081,380
$1,081,380
$1,159,325
$1,159,325
$2,800,170
$5,425,080
$2,900,280
Type
Compet itive
Noncompetitive
TOTALS
$4,145,420
1_/Lquivalent coupon-issue yield,
STATEMENT BY
THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OP THE TREASURY
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
May 22, 1979
Mr. Chairman, I understand that you wish these hearinqs
to focus on the vital international economic issues with
which the U.S. is currently confronted and a description of
the institutional framework through which the U.S. works to
discuss or negotiate.these issues.
As you have also invited a number of other
Administration officials and Chairman Miller to meet with
you, I would like to provide you today with an overview of
the Administration's approach to the broad question of
international economic policy coordination. In subsequent
testimony, my colleagues will brief you extensively on the
specific issues of trade, export promotion, the energy
question, relations with developing countries and the role
of the banks and the Eurocurrency markets in international
lending.
The Need for International Economic Cooperation
Mr. Chairman, we in the U.S. have been slow to realize
the extent to which the economic health of our own nation
depends on the economic health of the world as a whole. To
achieve our goals of high employment, relative price
stability and a rising standard of living, we need a
liberal, open system of international trade and capital
flows. By maximizing the free flow of goods and money on a
global scale we raise the potential for the real wealth of
all nations. Including our own. Let me cite two examples
of our dependence on an open system:
— We are used to seeing figures that show exports
amounting to only 6.5 percent of U.S. GNP and
imports 8.5 percent. Yet in terms of domestic
production, our dependence on trade is much larger.
A decade ago we exported 7 1/2 percent of the goods
we produced. Imports were also 7 1/2 percent of our
B-16W-
-2«
domestic production of goods. Today we export 15
percent of the goods we produce; our imports equal
about 19 percent of our domestic production. Even
these simple ratios understate our dependence on
trade. For some important manufacturing as well as
major agricultural commodities, it ranges from one
to two-thirds of total production. We cannot place
these industries at risk by reining in on the
liberalization of the global trading system.
— A second example is provided by the U.S. dollar's
role as a vehicle currency. Directly or indirectly,
the world economic system is dependent on the U.S.
money and capital market for the credit to keep the
wheels of production oiled. Over two-thirds of all
outstanding international banking loans are extended
in dollars. Without that credit, economic
production abroad would suffer, demand for our goods
would fall, and with it employment and output here
in the U.S.
We must work to maintain an open and liberal system of
international trade and payments. To do so:
— Our domestic fiscal and monetary policy must take
account of conditions abroad, the impact of policies
followed by other major nations on us, and the
impact of our own policies on others;
— We must continue our close cooperation with other
major nations, doing all we can to reinforce each
others' policies and thereby strengthen the world
economy;
— We must do what we can to help the poorest nations
of the world meet basic human needs and become
stronger trading partners. As a rich nation, we
cannot be satisfied while millions of people lack
adequate food and shelter, education, or health
care. As a trading nation we must realize that
higher income in poor nations means more export
opportunities and therefore more jobs for Americans.
As a leading global power, we have a self-interest
and an obligation to promote stability in
potentially volatile regions.
-3— We must not allow ourselves to become excessively
dependent on imports from a few countries of items
without which our industrial machine cannot
function. Let me be blunt. The industrial nations
are all too dependent on a small group of countries
for energy, and that dependence threatens the health
of our economy and imperils our national security.
The Institutional Framework
Given the Secretary of the Treasury's role in domestic
economic policy making, as well as the international
monetary and financial policy making process, my department
carries a major responsibility in the effort to coordinate
overall economic policies among the major countries. The
institutional framework for doing this is varied and is
carried out at many different levels. At the highest
levels:
— Heads of state or government of the seven largest
nations have been meeting about once a year. They
will meet again at the Tokyo Summit on June 28-29.
— Finance Ministers or central bank governors of 21
countries, representing all 138 nations which are
members of the IMF, meet about twice a year.
Governors of all members of the IMF meet annually
and the Executive Board meets continuously
throughout the year.
— Foreign and Finance Ministers of the 24 largely
industrial nations which are members of the OECD
also meet annually, usually in June. A complex of
general policy and specialized committees of the
organization work throughout the year at the
coordination process.
There are numerous other forums: The Multilateral
Development Banks on development financing; GATT on trade
issues; the International Energy Agency on energy; the
UNCTAD on issues relating specifically to the developing
countries. Central bankers from major countries gather
monthly in Basle. Individual cabinet officers meet
bilaterally with their counterparts. Chairman Miller and I
meet quite frequently with our counterparts from England,
Japan, France and Germany; the Under Secretary of the
Treasury for Monetary Affairs is in constant touch with his
-4counterparts in these countries on a wide variety of current
issues. And joint committees headed by the Treasury have
been established with the Soviet Union, Saudi Arabia and the
People's Republic of China, to further our bilateral
economic and financial relations with those countries.
Participation in these many forums is not vacation
travel at the taxpayer's expense. It is the crucial process
of international economic cooperation. For at these
meetings we are able to exchange information and analysis on
the policies each nation hopes to follow and the effects
those policies are likely to have on others.
Where possible, agreements are reached as to what is to
be done. But the final decisions on domestic economic
policy are national decisions. Because the participants are
sovereign, both the final decisions and the implementation
of policy must be made within the political framework of
each nation. Most of these countries are democracies whose
executive leaders are responsible to parliaments and to
their people. Successful policy coordination, therefore,
requires both understanding and support from legislative
bodies. This is why I welcome this opportunity, Mr.
Chairman, to discuss the main issues with you today.
The Current World Outlook
In one way or another all of our trading partners are
having trouble coping with the complex economic situation
the world finds itself in. Our deliberations at the Summit,
OECD, the IMF and elsewhere make clear that to some degree
the leading industrial nations all have similar problems.
Let me review these briefly.
Our principal common problem is inflation. During the
first twenty post war years, inflation averaged only 1.6
percent in the United States. In the 1970's the average
rate of inflation has risen to almost seven percent and has
at least twice soared above the double digit range. For the
other industrialized countries as a group, the inflation
rate in the 1960s averaged 4.2 percent and in the 1970's has
averaged over 9 percent.
The problem is that the general level of inflation has
risen to a dangerous point. The effects of the oil shocks
of 1973/74 were clearly larger, and longer lasting, than
earlier estimates suggested. And increasingly, we are
-5beginning to pay the price for inadequate productivity and
lagging capital formation, not only in the United States but
elsewhere. The evidence is provided by our present
predicament: capacity constraints are being reached in a
number of countries much sooner than expected even when
broad measures such as the unemployment figures tend to
suggest over-all excess capacity. For example, in Japan and
Italy automobile manufacturers cannot keep up with demand.
In Canada the woodpulp, textiles and steel industries are
straining. In the U.S. the aluminum and chemical industries
are feeling the pinch of capacity ceilings.
Against this background the short-term outlook for
inflation is a clouded one. The price hikes recently
implemented by OPEC will hurt. Since January alone, the
OPEC countries have raised prices by 20. percent. By rule of
thumb we calculate that every 10 percent rise in OPEC prices
leads to a rise of 0.3-0.4 percent in the consumer price
index of American products; countries who are far more
dependent on imported oil will suffer more. On top of this
key irritant, we are.beginning to see a strong pick-up in
selected raw material prices and rising wage demands in all
OECD countries. The bottom line is that the Treasury now
expects inflation in the OECD area to increase by 1 1/2
percentage
Anotherpoints
area of
in concern
1979 above
is the global
1978 rate
balance
of 6.9
of
percent. outlook. Global current account imbalances will
payments
worsen substantially in aggregate terms during the course of
1979. Led by sharply higher OPEC export earnings and
retrenchment of expenditures, the OPEC surplus will likely
rise to a $25-30 billion level after having virtually
disappeared during the second half of last year. The sharp
1979 increase will be mirrored by a swing back into deficit
by OECD countries, as their aggregate current balance moves
from a $5.5 billion surplus in 1978 to a deficit of $10
billion or more.
Non-oil LDCs are expected to record a $5 billion larger
deficit, and their combined deficits (excluding official
transfers) could exceed $30 billion for the first time since
1975.
This shift in payments balances will lead to financial
strain in some countries. Yet, at the same time, it is
important to note that there should be significant
-6improvement in the distribution of external balances within
the OECD area, which will tend to add stability to an
otherwise very difficult situation. The surpluses of Japan,
Germany, and Switzerland will decline. Their combined
surpluses will still be very large, perhaps more than $15
billion, but more tolerable than the $30 billion of 1978.
At the other end of the spectrum, the U.S. current account
deficit should be substantially smaller than last year's $16
billion figure.
This improvement in payments relationships among the
major countries is more than coincidence. Such an
improvement has been a principal aim of our efforts at
earlier Summits, in the IMF and OECD, and in our bilateral
discussions with the countries involved. We have in
particular worked intensively with Japan to find ways of
reducing the large Japanese current account surplus —
globally and bilaterally with the United States — and to
remove the strains to the system arising from that source.
These various efforts are now producing welcome results.
But they have to be sustained and carried through.
Mr. Chairman, it is clear from these two examples that
the economic health of the industrial, and by extension of
the developing, world is jeopardized by the concentration of
power within the OPEC. Realistically, there is scant leaway
for alleviating this situation as long as consumption in the
industrial countries is so high and production so low. It
is to this end that the President has moved to phase out
price controls on domestic crude oil. The President's bold
move has the support of all OECD countries. It will provide
incentive to expand domestic production to the relief of the
world oil market. And it will encourage the substitution of
other energy sources, to the benefit of all nations.
A second initiative that has been taken is the pledge
by the members of the International Energy Agency to reduce
petroleum consumption by the fourth quarter of this year by
5 percent or 2 million barrels per day below levels expected
prior to the 1979 OPEC price measures.
The IEA is also investigating the potential for
increased utilization of coal as a replacement for oil.
This and the 5 percent pledge are being discussed today in
Paris at the ministerial level.
-7The subject of energy, and of OPEC, will continue to be
the focus of attention in international economic forums,
including the Tokyo Summit where we expect the discussion to
concentrate on further ways to increase energy production of
all kinds and new ways to further reduce consumption.
International Monetary Issues
The shifts in energy, inflation and balance of payments
situations of individual countries are, and will continue to
be, reflected in the foreign exchange markets. Today as
always, international monetary cooperation is key to
managing the changes and pressures which develop in the
global economy. Late last year, for example, the dollar
fell so sharply on the exchange markets that fear and
speculation took over and threatened the stability of the
system as a whole. A series of forceful domestic economic
actions by our own government, combined with a coordinated
program of exchange market intervention by the U.S. and the
central banks of Germany, Switzerland and Japan, turned that
situation around.
The dollar is currently strong. And the exchange
market is better balanced. The one disorderly factor in the
market in recent weeks has been a sudden erratic weakness of
the Japanese yen, primarily reflecting sensitivity over
Japan's energy dependence.
From a systemic viewpoint, the international monetary
system has been the target of a good deal of criticism in
the last two years. The improved conditions in the foreign
exchange market today and the prospect of better payments
balance among the major industrial countries provide an
opportunity to consider measures to strengthen and guide, the
evolution of the system.
There are two related areas of concern in the
international monetary system: the Eurocurrency market and
the so-called "dollar overhang."
The initial impetus to the rapid growth of the
Eurocurrency market was provided by the imposition of
captial controls by the U.S. in the 1960's. The competitive
advantages of the market, together with the need to finance
the large current account deficits which have emerged in the
wake of oil price increases, have enabled it to flourish
even after removal of our controls. Estimates of the size
of the Eurocurrency markets in 1978 vary from $600 billion
to $800 billion.
-8-
Most observers appreciate the extremely useful and
efficient role played by the Euromarket in channeling funds
from surplus to deficit countries, thus helping the world
avoid severe deflation and direct restrictions on trade and
payments. But there has also been considerable debate over
whether the Euromarket's expansion is, or may become,
excessive, and whether curtailment of some of its advantages
over domestic markets is advisable.
In a nutshell, the problem with the Euromarkets is that
they are not subject to the same degree of control as
domestic money markets. They are viewed by critics as an
uncontrolled source of credit expansion. This allegedly
complicates monetary policy and counter-inflationary
efforts.
It is not clear whether the Euromarket is an engine of
excessive credit creation which aggravates world inflation,
or essentially a highly efficient intermediary reallocating
funds from lenders to borrowers. Certainly, a large part of
new international lending has been channeled through the
Euromarket. Despite its growth, Euromarket credit to final
borrowers is still only a fraction of total funds raised in
domestic banking markets — in the case of dollar credit, on
the order of 15 percent over the 1974-78 period. But it is
a growing fraction, and its relation to domestic and
international money and credit flows needs to be carefully
assessed.
Chairman Miller and Under Secretary Solomon have been
engaged with their foreign counterparts in a careful
assessment of this market. Discussion has centered on
whether additional measures are needed to help assure that
the Euromarkets do not work to erode domestic money and
credit policies. At the very least, there appears to be a
consensus that supervisory techniques must be strengthened.
The Comptroller of the Currency has taken a number of steps
to improve oversight of the foreign lending practices of
U.S. bank branches abroad, including implementation of a
comprehensive reporting system on their activities. Similar
efforts are being considered by others. And a variety of
additional measures — including the introduction of a
minimum reserve requirement on Eurocurrency deposits — are
also being considered. This is an area that deserves
careful attention in the period ahead.
-9With regard to the so-called "dollar overhang," the
decline of the dollar in the foreign exchange market led
some to question whether the existence of large dollar
balances held abroad constitutes an important source of
instability in the international monetary system. Some $225
billion are held by central banks in official accounts and
another $400 to $600 billion are held in private hands. It
is clear that sudden shifts of ownership of foreign dollar
balances can and sometimes do add importantly to pressures
and instability in the exchange markets, though it is not
clear that the existence of these large foreign-held
balances in and of itself is a major problem.
The experience of last fall and in the period following
the November 1 measures suggests that expectations and
perceptions about our underlying economic policies,
performance and outlook have been the dominant
considerations influencing decisions on the dollar.
Moreover, this experience has reaffirmed that there is
enormous scope for capital movements leading to exchange
market pressures quite independent of the existing stock of
foreign dollar balances. Thus, while moves to reduce the
international role of the dollar may have some positive
impact on market perceptions and behavior, I do not believe
such steps can get at the root cause of exchange market
problems.
Nevertheless there is much debate over whether a
"substitution account" should be established by the IMF
through which dollars could be exchanged for SDR denominated
claims. The United States is fully willing to consider such
a substitution account, but only as a step in the evolution
of the monetary regime toward an SDR-based system. We do
not consider the substitution account an emergency support
effort for the dollar.
Mr. Chairman, any discussion of the Eurocurrency
situation and the substitution account tends to become
esoteric. I shall be glad to expand upon these subjects if
you wish. The point is that efforts such as these to
strengthen and guide the evolution of the international
monetary and financial system can make their contribution to
greater stability, and they deserve our careful attention.
But we ultimately have to come back to the basic point that
the primary focus must be on the fundamental factors of
economic performance in individual countries, and to the
task of coordinating macro-economic policy — fiscal policy,
-10monetary policy and to some extent what is called incomes
policy. The industrial countries must work at the
development of mutually supportive economic policies
constantly in their efforts to achieve stability and a
healthy world economy.
The Forthcoming Summit Meeting
The Summit forum is a key part of this process.
Ambassador Owen will be briefing you in detail on the
forthcoming Tokyo Summit. The Summit is expected to focus
on energy, economic policy and relations with the developing
nations. While there will also be a review of progress in
the trade and monetary areas, they will not receive the main
emphasis.
On energy, as I said earlier, we would expect the
discussion to concentrate on ways to increase energy
production and further reduce consumption.
On macro-economic policy, we would expect the
discussion to include both short-term growth and
anti-inflation prospects for the world economy; policies to
avoid protectionism and foster adjustment; and medium-term
structural adjustments in our economies which will help to
produce a more stable pattern of payments balances.
Last year at Bonn, there was heavy emphasis on
commitments with respect to the short-term orientation of
policy — specific growth targets for Japan and Germany,
anti-inflation pledges for others, etc. This year there is
a feeling that the short-term policies of the participants
are generally appropriate to their situations and no major
changes in direction appear in prospect. What has become
apparent is that several countries need to modify policies
now to achieve the gradual changes in the structure of their
trade which will be essential in the somewhat longer term.
The U.S., for instance, must put more emphasis on exports.
Japan should reorient more toward production for the
domestic economy. And all Summit nations, especially the
U.S., must find new ways to strengthen productivity and
enhance capital formation in order to assure
non-inflationary growth in the future.
On relations with the developing countries — the
so-called North/South issues — we would expect the
discussion to cover any common objectives in the upcominq UN
negotiations on a development strategy for the Third
Development Decade.
-11-
Development Finance
Let me linger on the developing countries for just a
moment. The issues which concern the developing nations so
heavily — fluctuations of commodity prices, levels of
resource transfers from industrial countries, relief from
debt burdens, weight in the councils of international
institutions -- are currently being discussed in a
month-long conference of UNCTAD in Manila. The interest of
the developing nations are highly diverse, and it is
difficult for these countries to agree on the specifics
which must be developed to flesh out their generalized
goals. There is often a failure to appreciate the practical
limitations either on the volume of aid which the industrial
countries are prepared to provide or on their own capacity
to absorb and utilize aid effectively. Under Secretary
Cooper will review these issues for you in more detail.
The major instrument which the U.S. has been using to
promote the economic-development of the poorer nations of
the world has been the multilateral development banks: the
World Bank group, the Inter-American and Asian Development
Banks and the African Development Fund. This is another
area in which the primary responsibility for U.S. policy
falls on the Treasury, since I serve as the U.S. Governor
for each of the institutions and instruct the U.S. Executive
Directors.
Last year the MDBs made loan commitments of $11 billion
and disbursements for development projects amounted to $5.5
billion. However, the effectiveness and impact of the banks
go far beyond the point of annual lending levels and
transfers of resources. 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 in
recipient countries. Through extensive programs of
technical assistance, they strengthen local institutions and
provide training for local officials. The longer term
results of these particular activities may well be
determinative of the success or failure of a country's
entire development program.
But the benefits of MDB lending accure to the United
States as well. Many of the countries that the banks lend
to and work with are important to us for geographical or
-12security reasons: the work of the banks lessens chances for
instability which could harm our interests. And our
participation in the banks is cost effective. The value of
goods and services purchased from the U.S. as a direct
result of MDB financing has amounted to $9.8 billion.
During the period 1972-1977, U.S. GNP increased by between
$2.40 and $3.40 for each dollar we paid into the banks.
Between 50,000 and 100,000 U.S. jobs were created annually.
U.S. exports attributable to this financing grew at an
annual rate of about 20 percent.
Trade and Trade Policy
Let me turn to trade and trade policy. Our dependence
on an open and liberal system of international trade and
payments necessitates an active role by the Treasury in the
formulation of U.S. trade policy. We must assure that both
policy elements — trade and payments — are coordinated and
consistent. The U.S. position on trade matters — whether
in bilateral negotiations or in multilateral fora such as
the GATT, the OECD, or the IMF — must reflect the totality
of our international economic interest and our domestic
economic policy. To this end, Treasury works closely with
the STR, State and Commerce and with domestic agencies such
as the CEA and COWPS in the development and the
implementation of U.S. trade policy.
The whole panoply of barriers to trade has been the
subject of negotiations for the last five years. This
difficult but extremely important task, is now being brought
to a successful conclusion.
The new agreements provide not only a substantial
reduction in industrial tariffs, but also new codes
governing the use of government standards, procurement and
customs valuation, which should significantly reduce these
non-tariff barriers to trade. Especially important to the
Treasury is the new code on subsidies and countervailing
measures. This code will bring much-needed discipline to
one of the most contentious areas of government intervention
in trade, an area where Treasury has the major operating
responsibility.
For the United States, improvement in our trade
performance will require more than the removal of tariff and
non-tariff barriers to trade. It will require a new export
consciousness. A healthy and expanding export sector is
essential for the long-run stability of our external
accounts and of the dollar.
-13-
We have seen significant improvement in our trade
balance as growth abroad has picked up while the U.S.
economy has slowed down and American businesses have taken
advantage of the price competitiveness of their exports.
Over the past year our trade deficit has been reduced by
almost 40 percent. Indeed, between the first quarter and
fourth quarter of 1978, the physical volume of U.S. exports
grew at a 22 percent annual rate while the volume of imports
rose at only a one percent rate.
Still more, however, needs to be done to increase U.S.
exports — both to pay for our oil and other imports and to
benefit our economy as a whole.
In recognition of the importance of exports to the U.S.
economy, President Carter announced a new export policy in
September 1978. At that time the President announced a
number of new measures designed to stimulate increased
exports. These include:
— A proposed $500 million increase in the Eximbank's
direct loan authority to a record $4.1 billion for
FY 1980 to help improve the Bank's competitiveness
and flexibility in terms of interest rates, length
of loans, and percentage of transactions financed.
This is in keeping with strong Administration
support for steady, sharp increases in the Bank's
activities since FY 1977, when actual financing
dropped to $700 million.
— 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 possible
adverse effects on our trade balance of major
administrative and regulatory actions, including the
use of export controls for foreign policy purposes.
Since September Eximbank has instituted new programs to
encourage smaller exporters, agricultural commodity sales,
and engineering and construction services. It has also
undertaken major efforts to meet foreign competition by
-14matching terms for direct loans. Also in keeping with the
President's initiative, the Commerce Department has begun
work on a computerized information system which will provide
exporters with prompt access to international marketing
opportunities abroad. Secretary Kreps will discuss these
efforts and our overall export policy during her testimony.
Before concluding, I would like to say a few words
about China. As you know, together with Vice-Premier Yu
Qiuli of the People's Republic, I co-chair the U.S.-China
Joint Economic Committee. The purpose of this Committee is
to oversee and coordinate our evolving bilateral economic
relationship. We have made considerable progress in the six
months since the President announced the normalization of
diplomatic relations. We have negotiated and signed a
claims/assets settlement. We have negotiated and initialed
an ad referendum trade agreement. We have begun
negotiations on textiles, civil aviation and shipping. And
just recently Secretary Kreps signed four science and
technology accords and an agreement on trade exhibitions.
We are paving the way for American firms to do business
in China. Our businesses lag far behind those of other
nations in the China market. Japan has 25 percent of the
total two-way trade with China. Europe has 18 percent. We
have 6 percent. Our market share will grow; we expect to
export nearly $2 billion in.goods to China this year or
roughly twice last year's volume. But while the Chinese
know well the superiority of American technology and methods
and will seek them out, we cannot expect trade with China to
have a dramatic overnight effect on our balance of payments.
The China market is a welcome addition to our export effort.
Yet it is a market which will take unusual patience, skill
and time to develop.
Conclusion
Mr. Chairman, I have reviewed the entire range of
international economic issues. I would be glad to expand
upon any of them if you wish.
Let me conclude by saying that the Carter
Administration has erected over the past twenty-eight months
a consistent and comprehensive international economic
policy. It is a policy that ties together monetary, trade,
energy, investment and North/South and East/West issues,
based on a common theme of balance and the elimination of
excesses — of excessive inflation, payments imbalances,
trade practices, exchange rate movements, and poverty. It
is a policy rooted in responsible economic management at
home. It is a policy developed and implemented in close
cooperation with our allies. And it is a policy which needs
the support
of this Thank
Subcommittee,
Mr. Chairman, and of your
Senate
colleagues.
you.
FOR RELEASE UPON DELIVERY
EXPECTED ATM0:0Q A.M.
WEDNESDAY, MAY 23, 1979
, i. ' ,
ll<iiw<«
:• ;vft, \-\ C:M
"^STJMONV Of THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
-, SUBCOMMITTEE ON THE CONSTITUTION
OF THE SENATE COMMITTEE ON THE. JUDICIARY
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss with the
Committee the proposed Constitutional amendments requiring
either a balanced Federal budget or restricting in some
way the growth of Federal outlays.
So that there is no misunderstanding about the position
of this Administration toward inflation, fiscal responsibility,
and the role of government versus the private sector, let me
reiterate that this Administration is unequivocally
committed to bringing the Federal budget into balance,
.and to doing so as swiftly as economic prudence permits.
Firm and continued restraint on Federal spending
is the central element in achieving this commitment.
Since President Carter has taken office, we have
already made impressive progress in this direction. The
Federal deficit has been reduced from $66 billion in fiscal
year 1976 to a projected deficit of less than $30 billion
B-1620
-2in 1980, a reduction of more than half.
During this
same period, the share of our national income and output
devoted to Federal spending has been reduced—from 22.6
percent in 1976 to 21.6 percent in the current fiscal year,
and a further reduction is proposed for 1980 and subsequent
years.
A policy of fiscal restraint, reduced growth in
Federal outlays, and a shrinking Federal deficit is the
appropriate and necessary budget policy for today's
economic circumstances, when the economy is reaching its
capacity limits and inflationary pressures are accelerating.
But it is clearly not the appropriate policy for all
economic circumstances*
Indeed, the moderately
stimulative policy pursued over the past several years
enabled the economy to recover from the deepest
recession since the 1930's and to put almost 8 million
Americans to work.
It is neither possible nor desirable to reduce the
complex process of fiscal policy to the single constraint
of budget balance.
Flexibility is the necessary element
of an effective fiscal strategy.
Constitutionally mandating
a balanced budget would undermine our efforts to develop and
practice prudent economic policy.
Strict budget balance at all times, which is the mandate
of most of the amendments proposed in recent months, has
several major flaws.
-3First, the deficit varies with economic conditions
that are neither wholely predictable nor wholely controllable.
Congress can and does limit the aggregate level of spending.
But it cannot control total receipts.
While tax rates
can be legislated in precise terms, taxable incomes can
and do vary as total output, employment, and incomes
fluctuate.
Consequently, a budget that would be in
balance at one level of output and income would be in
deficit or surplus at other levels of economic activity.
It is possible to aim fiscal policy at the objective of a
balanced budget, but achieving this objective depends on a
complex of factors that determinesthe economy's aggregate
activity and income, a complex in which Federal spending
and Federal tax rates are only partial influences.
This brings me to the second point: a rigid balanced
budget mandate could exacerbate economic fluctuations.
If
income falls unexpectedly, then budget balance can be
achieved only if tax rates are raised, or spending for
the quarter of the total budget that can be controlled on an
annual
basis is drastically reduced.
But such actions would
be counterproductive because they would reduce output, employment, and incomes still further, resulting in bigger deficits
which would, under a balanced budget mandate, require even
larger cuts in spending and/or increases in tax rates.
is a formula for deepening recession, not for promoting
economic stability.
This
-4-
This type of scenario cannot be dismissed as
pure speculation.
Although I am not overly enamored of
the forecasting reliability of econometric modelsy
I have
somewhat more confidence in their ability to explain the
past.
Several econometric exercises show that if the
Federal Government had been required to balance the budget
during the 1973-1975 recession, the economic consequences
would have been far more severe than they actually were.
A study by the Council of Economic Advisers, using three
independent econometric models, showed that if there had
been mandatory budget balance during the 1973-1975 period,
the unemployment rate would have risen to about 12 percent
in 1975, compared with the actual rate of 8.5 percent.
The number of unemployed would have increased to about
11 million during that year.
Our real gross national
product in 1975 would have been about 12 percent below the
1973 level.
Rather than just a serious recession, the
American economy would have suffered its first real
depression since the 1930s.
The Federal budget can and has been used as a stabilizing
tool when economic activity weakens.
Annual budget balance,
however, would elminate this stabilization tool.
In effect,
a budget balance requirement would elevate that objective
above other important goals such as high employment and
healthy economic growth.
Moreover, a balanced budget amendment would need
very complicated escape clauses for contingencies that
cannot be foreseen.
The most obvious is that of war, which brings sudden
and substantial increases in defense spending.
If a
balanced budget requirement were in place, either taxes
would have to be raised, nondefense outlays reduced, or
both.
A large part of nondefense outlays—almost 90 per-
cent—are uncontrollable, however, so that the compensating
outlay reductions, which could be sizable, would have to
come out of a limited number of programs.
In other conceivable contingencies, a balanced budget
requirement would require severe and abrupt contractions
in outlay programs.
A. natural disaster, such as a major
earthquake, might require sizable legally mandated relief
expenditures that would unbalance an otherwise balanced
budget.
If OPEC were to raise oil prices significantly,
and this had a serious impact on the economy,
fiscal policy could not be used to offset the impact of the
probable outflow of dollars and purchasing power from the
domestic economy.
An extended coal strike, railroad or
truck strike, or a widespread civil disorder could have
similar depressing effects on the economy which would require
unanticipated outlays that would unbalance the budget.
In
-6all of these circumstances, achieving budget balance
would require prompt and sometimes sizeable increases
in taxes or large and destabilizing reductions in budget
outlays not related to the emergency situation.
A budget amendment could conceivably be drafted that
would contain sufficient exemptions and escape clauses to
permit a budget to be out of balance. Indeed several of
the amendments before this Committee have such provisions.
However, mandating budget balance as a provision of the
Federal Constitution and yet providing the necessary
flexibility for emergencies would require more literary
and drafting precision than anyone has the right to expect,
and might well trigger extensive litigation. And, in many
cases, such an amendment would either be so complicated or
such a sham that it would probably accomplish less than
the President has already committed himself to accomplishing.
If budget balance is mandated, it would require very
precise definition of those items of receipts and expenditures
that are to be counted in achieving the balance. Items that
are presently classified as a "means of financing" the
deficit might be reclassified as a budget receipt in order
to help balance the budget, for example, seigniorage, gold
sales, and savings bonds sales.
In addition, mandating budget balance would create
incentives to circumvent the budget as a control mechanism.
-7Items could be moved off-budget, as for example were
the Postal Service and the Rural Telephone Bank, thus
making the federal budget less, rather than more,
responsive to Congressional control.
Off-budget outlays
rose rapidly in the mid 1970's, from half of one percent
of the budget in FY 1974 to 2,4 percent this year.
The
President's fiscal plans for FY 1980 and beyond reverse
this trend toward increasing the number of off-budget
Federal entities, but incentives to evade mandated budget
balance could put us back on the path toward evasion of
strict budget discipline.
Loan guarantees and insurance could replace direct
loan programs so that the outlays do not affect directly
the budget totals.
This would be counter to the President's
proposal for a new system to control the growth of Federal
activities, particularly Federally guaranteed credit.
In short, any Constitutional amendment mandating
budget balance would either be so filled with loopholes as
to be meaningless or so rigid as to hamper the proper
conduct of economic policy or national defense.
Moreover,
because precision of language and terminology are essential
ingredients of an amendment to the Constitution, it is
difficult to conceive of language that would be enduring
and unchallenged over time.
In any event, the final arbiter of the content of the
Federal budget could well become the Supreme Court.
This
-8-
would be a radical departure from our constitutional tradition
which vests the Executive and Legislative Branches with the
full responsibility and authority for determining tax and
expenditure policy.
The budget process established by the Congressional
Budget Act of 1974 has made a major contribution toward
bringing about comprehensive, logical, and responsible
budgetmaking. It is a vehicle fully adequate for achieving
budget balance when the Congress deems it the appropriate
fiscal stance. This process, which is working well in
bringing the total budget under control, would be shortcircuited by a balanced budget amendment.
Constitutional amendments should be reserved for matters
that cannot be dealt with by any other means. The
budget can be balanced without a Constitutional amendment.
In fact, as I pointed out at the beginning of my statement,
this Administration is moving rapidly toward a balanced
budget in a prudent and sensible manner that does not involve
gimmickry and does not jeopardize the economic, social, or
military goals of the Nation. I do not believe that all of
these goals could be achieved if an Administration were
forced to abide by a Constitutional amendment requiring
mandatory budget balance every year.
-9Mr. Chairman, I do not question the sincerity of
those who propose simple solutions to complicated problems,
such as how to attain our national objectives of high
employment, steady growth of output, stable prices, and
a strong dollar. But in the words of President Kennedy
some 17 years ago, "to attain them, we require not some
automatic response but hard thought." Mandatory budget
balance offers no escape from our responsibility for making
better discretionary decisions concerning economic policies,
including decisions on spending and taxes.
C. 20220
TELEPHONE 566-2041
For Release Upon Delivery
Expected at 2:00 p.m.
STATEMENT OF
DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY
OF THE TREASURY (TAX POLICY)
BEFORE THE
SUBCOMMITTEE ON LEGISLATIVE PROCESS
OF THE HOUSE RULES COMMITTEE
May 23, 1979
Congresswoman Chisholm and members of this distinguished
Subcommittee:
It is an honor to appear before you to present the
views of the Treasury Department on sunset legislation. The
Administration witnesses thus far have emphasized the
importance of the sunset concept as applied to government
programs generally. As you are aware, government programs
include tax expenditures as well as direct expenditures. If
we are to gain better control over federal programs, it is
essential that we examine both types of expenditures.
I will begin by discussing the general problem of tax
expenditures. Then I will turn to the different ways in
which the sunset concept can be applied to tax expenditures.
Next, I will discuss some technical aspects of tax expenditure sunset. I will then consider some general policy
matters and the criticisms most often leveled at applying
sunset to tax expenditures. Finally, I will discuss H*.R. «2
and H.R. 65, the bills now before you, and indicate the
Administration's views in light of the goals of sunset.
It is important to note that sunset does not eliminate
any tax expenditures. All sunset does is subject tax
expenditures to a system of controls no more burdensome or
restrictive than that which applies to direct expenditures.
B-1621
*
- 2The Tax Expenditure Problem
Our government frequently turns to the tax system as a
means of resolving the social, political, and economic
problems of the day. For the most part, these programs take
the form of tax expenditures.
The tax expenditure concept is not complicated. The
federal government has two basic means by which it can carry
out its programs. It can do so directly, such as by making
grants and loans, or it can specially reduce liabilities
otherwise owed to the government. The two methods are
economically equivalent. A potential recipient can be provided the same amount of aid using either method. When the
liabilities owed to the government are tax liabilities, we
refer to the special reductions as tax expenditures, since
they are economically and functionally equivalent to direct
expenditures.
Consider a very simple example. A business owes $1
million in income taxes to the federal government. To
encourage this business to undertake a project, the government has decided to provide $400,000 of direct economic
assistance. The government may transfer this aid using one
of the two basic methods. The business can be required to
pay $1 million in income taxes and a grant of $400,000 can
be made directly to the business. Or $400,000 of tax
^ n ^ i i n 7 C a ? b e cancel led, leaving a net tax payment of
$600,000. The grant would appear as a direct outlay of the
government. The reduction in taxes would be treated as a
tax expenditure. In either case, the business has received
the same amount of economic assistance.* in the case of the
tax expenditure, the federal income tax system is being used
simply as a means of transferring the subsidy. In other
™ £ '-*h% s u b s i d y i s b e i n 9 "cleared" - that is, accounted
and paid for — through the income tax system.
It i^^hf^"1 t3X SyStem is' to sa* the least' complicated
of the
x v°Le; ^ s s ^tial to distinguish between the use
or the tax system to transfer subsidies — which I have inst
•
described - from its basic function of raising revenues
To obtain equivalence, the $400,000 of tax reduction must
The revenue raising function is carried out b^apply^ng a
itself be considered taxable income as a direct grant would
- 3 rate structure to a tax base consisting of "net income".
Along with certain accounting and administrative rules,
these provisions comprise the structure of the income tax
system. Tax expenditures are formulated as special and
distinct modifications of the basic revenue raising structure,
and are separable from that structure. Superimposing tax
expenditure provisions on top of tax structure provisions
complicates an already complex statute. But the resulting
complexity should not be allowed to cloud the important
distinction between the two functions. Tax expenditures are
functionally the same as direct expenditures, and should be
similarly treated. The revenue raising function is a
separate one, and should not be confused with the expenditure
function.
Tax expenditures are used to subsidize the provision of
goods and services (e.g., the charitable deduction and
percentage depletion), or to subsidize the use of certain
production methods (e.g., energy tax credits and the targeted jobs credit). Tax expenditures are also used to
provide transfers to other governmental units (e.g., taxexempt bonds) or to individuals (e.g., exemptions for the
aged or blind).
There are now over 90 different tax expenditure programs. For fiscal year 198 0, the aggregate revenue loss
attributable to tax expenditures will exceed $150 billion.
This is more than 28 percent of the direct budget outlays
for the same year. Despite their obvious budgetary significance, tax expenditures receive minimal government
control and coordination. Since a tax expenditure program
takes the form of a modification of the tax laws, it avoids
the budgetary checks imposed on direct expenditures, which
must pass through both authorization and appropriation
committees, and must compete with other programs within an
agency budget ceiling. Tax expenditures are hidden within
the tax law and are not counted as spending within the
budget ceilings of any agency. In fact, tax expenditures
have no aggregate dollar limitations.
Tax expenditures
are available simply by claiming an item on a tax return.
They, therefore, operate as open-ended entitlement programs.
Their cost is determined by the willingness of taxpayers to
engage in certain economic activities. Unlike most direct
expenditure programs, cost is not limited by annual appropriations.
The tax committees, in effect, exercise both authorization
and appropriation powers over tax expenditures, and usually
do so on a permanent basis. A tax expenditure program thus
- 4 avoids coming under the scrutiny of the committees most
familiar with the subject matter of the program. Thus, the
basic tools used to control other federal programs are, for
the most part, absent from tax expenditure programs. Tax
expenditures, therefore, are often easier to enact and
retain than direct expenditures which accomplish the same
goals.
How Does Sunset Address These Problems?
•"Sunset" refers to a procedural system to compel
periodic review of governmental programs. In order to make
review meaningful, most programs are scheduled to terminate
("sunset") on a regular basis, thereby requiring the positive
action of reauthorization to maintain the program. Sunset
attempts to produce greater budgetary control by requiring
periodic rejustification of government programs in order to
renew spending authority.
Applying sunset to tax expenditures serves basically
the same objectives as sunset generally: to provide for the
evaluation of the tax expenditure in relation to the goals
leading to its enactment and in light of functionally
similar nontax federal programs. This facilitates program
improvement and coordination with direct expenditure programs.
Sunset makes it possible to introduce a modicum of
control into the chaotic tax expenditure process. The
effectiveness of the control depends on the strength and
breadth of the legislation, and on the willingness of the
Administration and Congress to make the concept work.
There are several basic approaches to incorporating tax
expenditures in some form of sunset mechanism.
A. Review only. Here, the emphasis is limited to
periodic review and evaluation of tax expenditures. A
schedule and criteria for reviewing tax expenditures would
be- established. Functionally related tax expenditures and
direct spending programs would be reviewed at the same time.
The purpose of review is to provide solid information
on which tax expenditure programs may be evaluated. There
is a surprising dearth of information comparing tax expenditure objectives with actual results, and evaluating related
tax and direct spending programs. Such review is now conducted mostly on an ad hoc basis in response to the political
necessities of the moment. Providing such information on a
- 5 regular basis will be of great assistance in formulating
legislation. To the extent that review combines the efforts
of the relevant substantive committees with those of the tax
committees, especially in comparing the effectiveness of tax
expenditures to direct spending programs, review serves a
particularly useful function. However, an evaluation report,
regardless of its quality and the information provided,
cannot by itself guarantee Congressional consideration.
The issue is whether an automatic mechanism for terminating
tax expenditures is necessary to cause Congress to focus its
attention on a tax expenditure.
B. Two-Step Termination Proposals. This approach,
found in Title VII of H.R. 2, requires two separate pieces
of legislation. The first bill establishes the termination
and review structure, which is then activated to the extent
provided in the second bill. The second bill is treated procedurally in much the same manner as a normal tax bill and
allows the traditional.tax legislative process to set
termination dates and define the scope of tax expenditure
sunset by use of outright exemptions or through transition,
grandfathering and substitution rules.
The two-step approach has the advantage of allowing
for Congressional action on the basic structure without introducing at the outset all- of the controversy surrounding
termination of tax expenditures. Also, by placing responsibility for determining the scope of tax expenditure sunset
in the tax-writing committees, this approach tends to preserve current legislative jurisdiction.
The usefulness of this approach depends on the prospects
for the second bill. Since the termination dates and
exemptions set in the second bill prescribe the review
structure, a review process is established only to the
extent provided in the second bill. Thus, the outlook
for establishing a strong review structure is tied to the
willingness to provide for termination.
C. Automatic termination. The broadest possible
approach to tax expenditure sunset is to prescribe termination
dates for all tax expenditures in conjunction with a review
process. This approach takes the most direct route to the
objectives sought by applying sunset to tax expenditures.
To the extent termination dates are provided, the review
mechanism becomes more effective, and tax expenditures are
placed more on a par with direct expenditures. There is no
apparent reason why most tax expenditures should not automatically terminate unless reenacted by Congress.
- 6 D. Apply mandatory termination dates to new tax
expenditures only. A variation on the previous approach is
to require only that all new tax expenditures contain
termination dates. This is the approach taken by Title IV
of H.R. 65. Given the rate at which tax expenditures are
now being enacted, such a requirement could be useful. The
enforcement mechanism for this approach suggested in previous
proposals is to make out of order the consideration of any
bill, amendment, resolution, etc., which includes a tax
expenditure and which does not contain termination provisions
meeting certain requirements.
Problems of Applying Sunset to Tax Expenditures
A. Definition of a tax expenditure. The existence and
definition of tax expenditures have been the subject of some
debate. Yet, those responsible for applying the concept —
Treasury, OMB, the Congressional Budget Office and the Joint
Tax Committee — have been in almost complete agreement in
identifying the tax expenditure items of the budget. Given
this historical consistency, the actual application of
sunset to tax expenditures is likely to produce few, if any,
definitional problems.
B. Technical interdependencies. Elimination of one
section of the tax code may affect related sections. But
interdependency problems may also be created when direct
expenditure programs terminate. Further, in most cases,
this will be a purely technical problem, requiring careful
draftsmanship and a knowledge of any concurrent changes in
the tax law. In some cases, however, the interrelationships
are important, and may call for broad review. The capital
gains provisions are a good example of this second category.
Technical interdependencies attest to the complexity of the
tax code, and not to any inability to evaluate tax expenditures.
C Transition rules. Transition rules are required
when tax laws change in order to mitigate detrimental
reliance on existing law. Similar examples of reliance
would also be found when subsidies and other direct expenditure
programs are abruptly terminated. In either case, transition
rules should generally be formulated as part of the review
of a given expenditure program, and not in conjunction with
creating a system of review.
D
« Substitution rules. If a subsitute program is not
in place, automatic termination of a tax expenditure often
means either the elimination of any means to accomplish a
- 7 program objective or the creation of a structural "gap" in
the tax law. As a result, a proposal to repeal a tax
expenditure will often be accompanied by a substitute provision
to accomplish the same objective or fill the "gap" (if any).
For example, the President's 1978 Tax Program recommended a
taxable bond option to encourage states and localities to
substitute subsidized taxable borrowing for tax-exempt
borrowing.
Similar substitution problems may be created by termination of direct expenditure programs. For example, if current
welfare programs automatically expire, some substitute would
be needed to accomplish the same goals. In some cases,
however, such as foreign income deferral, where the tax
expenditure may be terminated only by substituting a structural
alternative, applying sunset to tax expenditures may be
different from applying sunset to direct expenditures. This
distinction is an extremely narrow one, and does not warrant
treating all tax expenditures differently from direct expenditures.
Administration Position
In view of the general policy considerations set out
above, we believe that the following decisions should guide
your consideration of applying sunset to tax expenditures.
Tax expenditures are now subject to significantly less
budgetary control than direct expenditures. Accordingly, we
strongly urge that whatever sunset legislation is ultimately
approved by the Committee not further increase the budgetary
control gap between tax and direct expenditures.
At the very least, sunset legislation should provide
extensive mandatory review of all tax expenditures. Tax
expenditure review should be coordinated to the maximum
extent possible with direct spending review. Tax expenditure review should incorporate the views of the authorization
committee, and should be predicated on comparing the effectiveness of tax expenditures with related direct expenditures.
We see no reason to exclude any tax expenditure from review,
regardless of whether any tax expenditures are excluded from
termination.
Sunset legislation should provide dates by which
Congressional action will be required in order to maintain
tax expenditures. This simply corrects for some of the
imbalance between tax and direct expenditures and helps
ensure that tax expenditure review would be meaningful.
- 8 Termination dates should be coordinated with functionally
related direct expenditures.
It may be desirable, in the Committee's judgment, to
exclude a few tax expenditures from the termination schedule.
If the Committee is so inclined, we will be happy to work
with you in examining the tax expenditure budget, and
evaluating the various provisions in the light of the
criteria the Committee has developed for exclusion of both
direct and tax expenditures.
It is unnecessary, and may well be undesirable, for
sunset legislation to include rules which.may be needed in
the event that specific tax expenditures are allowed to
terminate. We recognize that in that event, rules might be
needed to provide grandfather protection for those who
relied on existing law and to substitute a direct expenditure provision or to conform the tax law to the lapse of
certain provisions. HOwever, such rules have not been
included in the direct expenditure part of sunset legislation.
On this basis, therefore, there is no logical reason to
require such rules for tax expenditures. The sunset bill
should direct that these rules be developed in conjunction
with review of a tax expenditure provision as part of the
evaluation of the question of termination. The choice of
substitution provision (if any) should follow from the
results of review, and not from a current notion of appropriateness. Finally, it does not appear worthwhile to
engage now in a protracted debate on substitution and
similar rules since no decision has been made yet to terminate
anything.
Traditional Arguments Against Applying Sunset to Tax
Expenditures
A. Applying sunset to tax expenditures creates serious
problems for business certainty. It is often argued that
applying sunset to tax expenditures unduly disadvantages the
business community because of increased uncertainty in
planning investments. Businesses will be less willing to
invest if tax expenditures will be regularly reviewed and
possibly terminated.
Many of those who assert this view nevertheless endorse
applying sunset to direct expenditures. These two positions
cannot be reconcilecT Firms making investment decisions
involving tax expenditures are in no different a position
from firms who must consider whether federal spending and
- 9 subsidy programs will be continued. Investment decisions
are dependent on federal spending programs, such as highway
construction, housing, military, procurement, research and
development, agriculture, and a variety of economic development programs. All of these doubtless influence business
investment decisions.
Since investment is dependent on all federal programs —
direct as well as tax — the issue really is whether such
reliance should preclude regular, meaningful review of all
Federal programs affecting the business community. We would
submit that securing the most efficient use of Federal
resources is of paramount concern. The resulting uncertainty — if any — can be managed by the business community,
as are other investment risks. We cannot accept the proposition that all Federal subsidies to business must be provided
permanently.
B. Sunset is a massive tax increase in disguise.
Another argument often heard is that applying sunset to tax
expenditures constitutes some sort of "backdoor" tax increase.
This argument plays upon the confusion inherent in the
two roles the income tax performs — raising revenue and
providing subsidies. The income tax provisions affected by
sunset are subsidies which happen to be cleared through the
tax system. Accordingly, setting a termination date for a
tax expenditure means nothing more than the fact that a
subsidy has been scheduled to terminate. When compared with
direct expenditure programs, this is surely not a novel
concept. It may be that termination of some tax subsidies
economically calls for a general tax cut, but only on the
same grounds that would apply where terminating a direct
expenditure might also justify a tax decrease.
C. Applying sunset to tax expenditures presumes that
a taxpayer is only entitled to what the government doesn't
tax away. The existence of government and allocation of
certain functions to it means that a specified portion of
national income will have to be paid in taxes. We have,
in fact, decided to finance a large part of the cost of
government by means of an income tax. No one suggests that
this in itself presumes all income belongs to the government.
Government spending may be provided either directly or by
specially foregoing revenues otherwise due. Direct government action and special income tax modification are simply
policy alternatives. Programs may be implemented either
way. There is nothing in the tax expenditure concept any
- 10 more than in the existence of an income tax that implies
that the government has a "right" to income or to anything
else. The tax expenditure concept simply serves to identify
certain government policies more accurately, namely, as
subsidies or transfers.
H.R. 2 and H.R. 65
Let me now turn to the two bills which are before the
Committee.
The nontax part of H.R. 2 would establish a ten-year
schedule for the mandatory reauthorization of selected
federal programs, beginning on September 30, 1982. If a
program is not reauthorized in accordance with the bill,
there would be no further provision of appropriations,
obligations, or expenditures for the program. Subsequent
reauthorization of programs would take place at ten-year
intervals after the initial review date. Other provisions
set up review procedures, and other procedural elements for
sunset.
Title VII of H.R. 2 applies to tax expenditures. I
have discussed Title VII in connection with the approaches
to applying sunset to tax expenditures. Title VII is the
two-step approach. In the first step, a bill is passed
which provides a basic structure for incorporating tax
expenditures in sunset. In the second step, the bill goes
through the normal tax legislative process, and allows for
great discretion to the tax committees to decide what is
included in sunset termination, and how. The second step is
also to include transition, substitution, and other technical
rules for any tax expenditures scheduled for termination.
We believe that Title VII represents a constructive
step in the right direction. However, as indicated in our
testimony, we would prefer a tax expenditure title that
directly sets termination dates for tax expenditures.
Moreover, we would not want to see technical rules, such as
substitution and grandfathering provisions, included in
initial sunset legislation. These rules should be the.
product of sunset review.
H.R. 65, introduced by Mr. Derrick, is another constructive step in the right direction. The bill would
require that legislation to provide new or increased tax
expenditures satisfy certain procedural requirements, such
as stating the objectives of the program and providing an
- 11 annual report to Congress evaluating the program in terms of
its objectives. In addition, H.R. 65 would preclude consideration of a bill or a resolution providing new or
increased tax expenditures for a time period exceeding five
years. Thus, in effect, five-year termination would be
applied to all tax expenditures covered by this provision.
Clearly, the objectives of H.R. 65, as with Title VII
of H.R. 2, are consistent with our views of applying sunset
to tax expenditures. We would, however, much prefer to have
both review and termination apply .to existing, as well as
new, tax expenditures. In addition, the effect of H.R. 65
is to set a separate review cycle for new tax expenditures.
This cycle may, or may not, coincide with the general
functional review cycle to which the new items relate. We
think it would be preferable for review and termination of
new tax expenditures to be coordinated as closely as possible
with existing tax expenditures and other federal programs.
Conclusion
As we have seen, subsidy programs may be formulated
either as direct expenditures or as tax expenditures. The
choice depends on many considerations, not the least of
which are that tax expenditures are easier to enact and are
not subject to review or termination.
If an effective sunset mechanism is applied to direct
expenditures and not to tax expenditures, the disparity
between direct and tax expenditure control will widen
significantly. This will only serve to increase the pressure to enact more tax expenditures.
We cannot stress this point too much. If the Committee
approves an effective sunset mechanism for direct expenditures,
and does not provide a similar mechanism for tax expenditures,
it will simply be shifting more of the budget control problem
from direct to tax expenditures. If anything, tax expenditures
now require greater budgetary control improvements than
direct expenditures. We, therefore, hope that the Committee
will include an effective sunset mechanism for tax expenditures
in any bill that it approves.
o 0 o
FOR IMMEDIATE RELEASE
MAY 22, 1979
Office of the White House Press Secretary
THE WHITE HOUSE
TO THE CONGRESS OF THE UNITED STATES:
For over a decade, the Federal government has limited
the interest rates that savers can receive on their deposits
in banks and savings institutions. In keeping with my commitment to eliminate inequitable and unnecessary regulations,
I directed an Administration task force, chaired by the Treasury
Department, to review the fairness, effectiveness and efficiency
of these interest rate controls.
Based on the task force's findings, I am today recommending
that the Congress enact comprehensive financial reform legislation. I am asking that the Congress permit an orderly transition
to a system where the average depositor can receive marketlevel interest rates on his or her savings. I am also proposing
measures to protect the long-term viability of savings institutions so that they can pay fair and competitive rates to
depositors and continue their traditional role in meeting
our nation's housing needs.
These actions will reform a system which has become
increasingly unfair to the small saver. The present rate
ceilings are costing the American people billions of dollars
in lost interest annually. Our senior citizens, and others
whose savings are concentrated in passbook accounts, have
suffered the most. During a period of high inflation, it
is particularly unconscionable for the Federal government
to prohibit small savers from receiving the return on their
deposits that is available to large and sophisticated investors.
The present ceilings have also contributed to sharp
fluctuations in the flow of housing credit. Large cyclical
swings in the availability of mortgage funds have increased
housing costs and forced many prospective homebuyers out of the
market during periods of high interest rates. The actions I am
recommending today will help assure a steadier flow of mortgage
credit for homebuyers.
Savings and loan associations exist to channel household
savings into mortgages. Mutual savings banks are also major
suppliers of housing credit. Because these institutions
invest in long-term, fixed-rate mortgages, they are limited
in their ability to meet competitive rates for savings when
interest rates rise.
In 1966, interest rates rose sharply, and depositors
fled many of these institutions to those able to pay higher
interest rates. To prevent the failure of savings institutions
and the disruption of the mortgage and housing markets, deposit
rate ceilings covering commercial banks were temporarily extended to thrift institutions. The ceilings generally have
been administered to permit thrift institutions to pay higher
rates of interest than commercial banks.
more
(OVER)
2
Conditions have changed dramatically since these limitations were first imposed on thrift institutions. In the current
economic and financial environment, the ceilings have the
following effects:
o They discriminate against the small saver, who often
lacks sufficient funds to purchase market-rate
securities which are available to the large investor.
o They are increasingly ineffective in maintaining
deposit flows to thrift institutions. The financial
marketplace is becoming adept at creating new investment alternatives, such as the money market mutual
funds, which induce the small saver to withdraw
his funds to obtain benefits similar to those enjoyed
by the large investor. While the six-month money
market certificate has succeeded in maintaining
the flow of housing credit since last year, it has
imposed serious pressures on thrift institutions,
and it is not a long-term solution.
o They avoid the discipline of competition and create
inefficiencies in the financial marketplace. Financial institutions are limited to non-price competitive
practices such as merchandising gifts, although
the consumer might prefer a higher yield on his
savings.
These problems cannot be solved overnight. They are
rooted in the structure of our financial system, and their
resolution will require a careful and deliberate approach
which takes account of the realities facing our thrift
institutions.
Our savings institutions have been required by law and
influenced by tax incentives to invest primarily in residential
mortgages. In most states, the law confines them to longterm fixed-rate mortgages. Their sources of funds — deposits —
have considerably shorter maturities. When short-term interest
rates rise sharply, revenues are limited by their earnings
on the existing longer-term mortgages. Since their deposit
liabilities are more volatile than their assets, they must
pay depositors market rates or they start to lose their deposits.
While raising or removing the ceilings would give savings
institutions the legal power to pay market rates to depositors,
their economic ability to do so is still limited by the earnings
from their mortgage investments. Savings institutions must
be given new investment powers so that they can afford to
pay higher rates and maintain the flow of mortgage credit.
The transition to freer deposit rates and to new asset powers
must be orderly, to avoid major shocks to the financial system.
The disparity between market rates and the ceilings is
greatest during periods of high interest rates. Yet that
is the time when it is most difficult for the regulatory agencie
that set the ceilings to raise them substantially. These
agencies are also responsible for the safety and soundness
of financial institutions. If deposit interest rates rise
sharply, the institutions' earnings come under great pressure
more
unless, at the same time, their
earnings are made more
responsive to changing interest rates.
3
Accordingly, I shall ask the Congress to:
o provide that through an orderly transition period
all deposit interest rates be permitted to rise
to market-rate levels. This will be subject to
emergency action on the part of the responsible
regulators if the safety and soundness of financial
institutions is threatened or the implementation
of monetary policy so requires;
o grant the power to offer variable rate mortgages
to all Federally-chartered savings institutions,
subject to appropriate consumer safeguards. This
authority, which would be phased in, would permit
thrifts the earnings flexibility to pay competitive
rates throughout the business cycle;
o permit all Federally-chartered savings institutions
to invest up to 10$ of their assets on consumer loans;
and
o permit all Federally-insured institutions to offer
interest-bearing transaction accounts to individuals.
These steps will bring the benefits of market rates to
consumers, promote a steadier flow of mortgage credit and
improve the efficiency of the financial markets.
In the interim, I support the efforts of the Federal
Reserve, the FDIC, the' Federal Home Loan Bank Board and the
National Credit Union Administration to take steps to increase
the interest rates payable to small savers. I urge them to
pursue the direction begun with authorization of the six-month
money market certificate, with the goal of increasing the
responsiveness of the interest rate ceilings to market rates.
JIMMY CARTER
THE WHITE HOUSE,
May 22, 1979.
#
#
#
#
partmentoftheJREASURY
SHINGTON, D.C. 20220
LEPHONE 566-2041
May 22, 1979
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $2,260 million of
$4,764 million of tenders received from the public for the 2-year
notes, Series T-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield
9.75% -1
9.77%
9.77%
The interest rate on the notes will be 9-3/4%
the above yields result in the following prices:
Low-yield price 100.000
High-yie.ld price
Average-yield price
At the 9-3/4% rate,
99.964
99.964
The $2,260 million of accepted tenders includes $499 million of
noncompetitive tenders and $1,284 million of competitive tenders from
private investors, including 89% of the amount of notes bid for at
the high yield. It also includes $477 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 $2,260 million of tenders accepted in the
auction process, $239 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing May 31, 1979.
1/ Excepting 2 tenders totaling $110,000.
B-167.2
FOR IMMEDIATE RELEASE
REMARKS BY THE HONORABLE DANIEL H. BRILL
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE 64TH INTERNATIONAL PURCHASING CONFERENCE
OF THE NATIONAL ASSOCIATION OF PURCHASING MANAGEMENT, INC.
DETROIT, MICHIGAN
May 23, 1979
I'm very pleased to have this opportunity of meeting
in person the people who generate some of the most important
economic activity in our economy and—what is more important
to those of us in the forecasting fraternity--some of the
most important leading indicators of the course of economic
activity. I recall the numerous occasions when your reports
anticipated by a long margin the events subsequently recorded
in the traditional statistics only after considerable delay.
We all are deeply grateful to your group for the insights you
provide into the state of the economy, and hope you will continue the good work—and continue to be right.
Insight is in particularly short supply at the moment,
given the recent wide oscillations in economic activity. If
economists seem to be reacting with a touch of hysteria these
days, it is understandable. Indeed, the record of the past
15 months is enough to induce hysteria in a brass monkey.
Look at the record: the economy stalled completely in the winter
of 1978, down to zero growth; rebounded to almost a 9 percent
growth rate in the spring; caught its breath with a moderate
2-1/2 percent rate of expansion during the summer; then boomed
-2to a vigorous 7 percent expansion in the final months of
the year, only to collapse to a measly 1/2 percent rate of
growth in early 79. This may be some sort of record for
short-term instability. If economists seem to be afflicted
with a nervous disorder involving a bobbing of the head up
and down, it's just the result of trying to keep track of
our oscillating economy.
Where do we go from here? Since the first quarter of
this year was so slow, does that automatically mean a speedup
in the current quarter? Or will the economy surprise us by
plunging in coming months? Or are we in for a period of
somewhat greater stability in growth rates? Andif so, at
what level of growth?
There is a natural tendency among forecasters to extrapolate the current or most recent trends into the future, and
since the most recent experience has been of a slow economy—
abruptly slowing from 7 percent to less than a 1/2 percent
rate of growth—it is not surprising that many economists are
now forecasting a recession. But then again, most forecasters al
find it hard to see sources of strength in the economy when
starting from a base of slow growth. After all, as late as
September of last year, following the slowdown last summer,
the consensus among forecasters was that the fourth quarter
of the year would show about a 3 percent growth rate. Before
the year was out, it was clear that the economy had been
- 3 growing at a rate more than double that of the consensus
forecast.
The current pessimism seems buttressed by the behavior
of the official series designated as "leading indicators".
It is worth noting that the official indicator series has
been falling primarily because of the inclusion in the series
of the monetary components (deflated M2 and the change in total
liquid assets); most indicators of real economic performance
have continued to rise. In looking for financial indicators,
I for one would put more emphasis on the expansion of credit
than on the behavior of a limited selection of certain categories
of financial assets. For example, while the growth of the
widely-watched monetary aggregates has slowed down considerably
since last fall, the expansion of bank credit has continued at
a strong clip, as banks have turned to nondeposit sources of
funds to meet customer credit demands. And activity in the
commercial paper market has soared. I think the credit figures
provide more evidence of the strength of demands, and of the
availability of credit to finance these demands, than does the
inexplicable behavoir of the monetary aggregates.
But it is silly to pin our forecasts on the behavior of
any statistical series that portray the workings of only
-4part of a very complex economic system.
There is no
simple forecasting device that functions well for any period
of time in a complex and dynamic society.
Like it or not,
we forecasters have to work for a living.
Let's for the moment dig a little more deeply into
recent developments to see what clues might emerge. There
are at least four major strands worth distinguishing. First,
there is the consumer who has bought new autos at a strong
clip so far this year, particularly imports. Admittedly,
he/she may have been inspired to do so by energy developments.
But the fact is that, for whatever the reason, when
the consumer wanted to buy a big-ticket item, the means
were there—including the credit—to make the purchase.
Second, there is the consumer who has bought
little
of anything else thus far in 1979. Retail sales, excluding
autos and adjusting for inflation, declined by 2-1/2 percent
in the first four months of the year. And residential construction
also declined, but this was partly a result of the effects
of severe weather .
Third, there is the business sector busily adding to
inventories and capital equipment.
At the manufacturing
level, the book value of inventory accumulation in the first
quarter was at a rate twice as rapid as in late 1978. And
businesses have been ordering and spending freely for capital
-5-
goods; while bad weather held up construction of factories
and warehouses, growth of real outlays for producers durable equ
in the first quarter was running well above the 1978 rate.
Fourth, there are the government sectors—Federal and
State and local--whose spending dropped sharply in the first
quarter. Part of this is weather-related (State and local
public construction), part of it is random fluctuations in
the essentially volatile series on Federal outlays.
How far can we go in extrapolating these trends? Far
enough to suggest slow rates of growth over the balance of
the year, but not so far as to yield a recession.
Business capital outlays should continue as a source
of strength for the economy. Deep order-backlogs, high rates
of capacity utilization with low margins of excess capacity,
the availability of funds from profits and capital consumption allowances—all these should buoy capital spending.
Hopefully, inventory speculation will not continue, although
with inflationary expectations strongly embedded and further
work stoppages possible in a year of major labor negotiations
it will take some discipline to limit so-called "precautionary"
buying. I hope you gentlemen will aid the fight on inflation
by resisting efforts to "buy now to beat the price rise", a
self-fulfilling prophecy that dooms us all to perpetuation of
inflation.
-6I do not look for major strength nor for significant drag from government spending this year.
The Federal
budget is moving gradually into a posture of more restraint,
but aside from random fluctuations, should not contribute
an abrupt tightening influence.
State and local govern-
ments are still living in a "Proposition 13" environment,
and while it is hard to see a major stimulative thrust to
the economy from this sector, we appear to have experienced
already as much of a stepdown in spending as is likely to
develop.
The enigma, as usual in our economic system, is the
consumer.
Will he/she or won't he/she be back in the shops
in force?
There are persuasive arguments on the negative
side.
Real wages have been declining this year, and further
increases in energy prices and fears of gasoline shortages
will probably tend to keep consumer buying in low gear. Moreover, the servicing
of mortgage and consumer debt is taking a record bite out of
disposable incomes.
And the savings rate has been below its
long-term trend for so long that it's about time for the
consumer to repair his balance sheet and boost his savings
rate; this will mean a reduction in his spending rate.
All of the arguments are persuasive.
But most of
them could have been made last year too, and the consumer
confounded us all.
The wide quarter-to-quarter oscillations
-7in total growth of the economy last year and into
the early months of this year have mirrored the oscillations in consumer purchases of goods.
I think the dominant influence in consumer behavior
will be his anticipation of the course of inflation.
It
is evident, from the behavior of retail sales so far this year,
that the consumer has not been buying to beat inflation
except perhaps in the housing area.
Rather, he has been
trying, albeit unsuccessfully, to restore the purchasing
power of his financial assets. The savings rate did rise
by about half a percentage point from the fourth quarter of last
year to the first quarter of this year.
My guess is that some progress on the inflation front
will provide the assurance —
resources —
as well as the real income
needed to bring retail purchases back to
reasonable rates of growth.
And I'm hopeful on this score.
We will be getting some relief on the food price front;
indeed, some has emerged already.
There was a steady
deceleration of growth in consumer food prices at the wholesale level
in the January-March period, and an actual decline in wholesale
food prices in April.
-8Moreover, the strength of the dollar will remove one
source of inflation that contributed significantly to the
miserable price performance in 1978. It is estimated that
as much as one percentage point of the 9 percent increase
in the CPI last year resulted from the rise in costs of
imports and the correlated rise in prices of domestic goods
competing with imports. A strong dollar is protection
against domestic inflation.
Further, the behavior of wages in recent months is
encouraging — despite all the publicity about the Teamster's
settlement. The best measure we have of wages — the hourly
wage series adjusted for overtime in manufacturing and Interindustry shifts -- shows little acceleration. The push on
labor costs comes from the collapse in productivity growth and
some self-inflicted wounds like the minimum wage increase and
higher social security taxes, not — at least thus far —
from a push in wages.
On the other side, we still face the possibility
that recent increases at the wholesale level in raw
material prices and in unit labor costs will carry through
to the retail level. And an attempt by labor to make up
the loss in real wages resulting from the soaring inflation
could result in an ending to the general moderation in wage
rates thus far. The battle against inflation is far from
being won. But there are a few favorable signs in an otherwise dismal and alarming price picture.
-9-
That about sums up the whole economic picture —
mixed.
Not enough bad news to warrant the stampede among forecasters
to a recession scenario.
Not enough good news to warrant
heralding an end to inflation.
Not enough broad strength
to warrant expectations of a strong surge in aggregate
economic activity.
To me it adds up to slow growth, a
desirable outlook if it permits us to unwind both inflationary
pressures and inflationary expectations in an orderly fashion.
FOR IMMEDIATE RELEASE
May 23, 1979
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2,750 million of 52-week Treasury bills to be dated
May 29, 1979, and to mature May 27, 1980, were accepted at the Federal
Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS;
Investment Rate
Price
Discount Rate
(Equivalent Coupon-issue Yield)
High - 90.782 9.117% 9.96%
Low
- 90.727
9.171%
Average - 90.745
9.153%
10.03%
10.01%
Tenders at the low price were allotted 82%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
$
43,650,000
3,928,585,000
2,445,000
30,340,000
24,590,000
8,230,000
151,030,000
39,600,000
5,585,000
6,550,000
4,245,000
355,525,000
9,095,000
$
28,650,000
2,408,485,000
2,445,000
15,340,000
19,590,000
8,230,000
41,030,000
15,600,000
5,585,000
6,350,000
4,245,000
185,525,000
9,095,000
TOTALS
$4,609,470,000
$2,750,170,000
The $2,750 million of accepted tenders includes $ H 8
million of
noncompetitive tenders and $1,431 million of competitive tenders from
private investors. It also includes $1,201 million of tenders from
Federal Reserve and foreign official institutions in exchange for
maturing securities.
REMARKS BY THE HONORABLE DANIEL H. BRILL
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
B'JFORL THE 89TH ANNUAL CONVENTION OF THE TENNESSEE BANKERS ASSOCIATION
i
\
NASHVILLE, TENNESSEE
TUESDAY, MAY 22, 1979
A Treasury visitor always feels a certain affinity with
a banking group such as yours, particularly since many of
yo'.i are finally paying interest on our deposits.
Furthermore, we face common problems. Both of our
institutions are caught up in the inflationary spiral, paying
more for the money we raise and tunneling it out to a borrowing
clientele whose needs, or should one say demands, for credit
are seemingly insatiable.
However, we feel that we are
getting a handle on our situation with the Federal budget
deficit narrov:ing, and our own borrowing requirements clearly
of manageable size. Now we await some comparable signs of
moderate but effective restraint on the private borrowing
and spending which is fueling inflation.
Turning to a less parochial view of the situation, it is
all too clear that the dominant economic problem in this
country for some time new has been an excessive rate of
inflation. It undercuts economic and social progress, weakens
the traditional incentives for thrift and capital formation,
distorts the distribution of income, and threatens to turn
expansion into contraction. Yes, there is a long list of
reasons why we must achieve better control ever inflation.
The behavior cf prices thus far this year is nothing
short of dismaying.
Inflation at a 13 percent annual rate—
the average for the early months of this year--is unacceptable.
-2Continued for long, it would undo the significant economic
progress of the* past two yt-ars, two years of substantial
economic growth, two years of record job creation, two years
of major reduction in unemployment, two years in which Federal
r.pending h?s been harnessed and the budget deficit reduced
dramatically. We cannot--and I am sure we will not—allow
these economic gains to be dissipated by inflation.
The question, then, is no* whether we will curb inflation,
but how: with what tools and at what pace. There is obviously
a deep public discontent with the way economic developments
have been going recently.
But it v,ould prDfit no one to
embark on an anti-inflation effort which would leave the basic
problem unsolved, whatever mignt be the public relations
benefits of seeming to take strong action. What are some
of the pseudo solutions against which we must guard?
First, deliberately trying to cure inflation by recession
is a nonanswer.
It doesn't work. We've tried it, and the
recession of 197-1-75, the worst downturn this economy has
suffered since the Great Depression of the '30's, didn't
eradicate the inflation virus. True, it did bring inflation
down out of the stratosphere, but it left a residue of underlying inflation at a rate still unacceptably high. Furthermore, it shot the Federal budget deficit up to all-time
record levels from which we are just now descending.
Whatever success the recession achieved in bringing
inflation down from historic highs was at the cost of over
million workers unemployed and over .=» quarter of industrial
capacity idle. When the economy falls off that far, the
traditional economic virtues are called, into question,
drastic action to get the economy moving again becomes the
order of the day and the control of inflation is no longer
at the top oi the list of economic and political priorities
In*- ,'i tably, the government steps in and takes a range of
actions to reflate the economy. If past experience is ar.y
guide., many of the government spending initiatives begun
in recession would live beyond their time and burden the
budget far into the future.
Another dead end road that we can rule out from the
start is a program of mandatory controls. In Washington, w
are genuinely puzzled b\ the conviction in so many circles
th-~t " ne economy is inexorably on the path to controls, a
convicion so stronc that it hardly pays to argue with thos
vho hcl .^ it. But the basic facts are worth repeating. Fir
we 6c nr>t nave the statutory authority to irpose wage-price
::o.-; irols, and the fight to euro inflation would be lest the
day a request was ;:ade for such authority. Second, the
ccricepc of controls is repugnant to the President, to his
advisors, and to a majority of the Congress. Third, no
system of controls has done more than temporarily suppress
inflation forces. If not supported by the appropriate macr
-conomxc policies of restraint, and long-term policies dire
at reducing costs and improving productivity, controls just
delude all of us--policy makers, businessmen, labor and
cor?umers--into confusing the suppressior of symptoms with
fundamental cure of illness.
-4-
Finally, we should stop the search for scapegoats
to explain the inflationary process. Business blames labor,
labor blames business, and the public blames its government.
Certainly, the government bears an ultimate responsibility—
as the public's instrument--to protect the value of the
dollar at home and abroad. But the current inflation reflects
a sequence of events stretching over nearly 15 years, during
which time both political parties have given the control of
inflation high priority.
It is naive to label the current inflation as exclusively
a Washington product, cr to suppose that it can be legislated
out of existence. Tnflatior is a worldwide phenomenon,
deeply rooted in most of the major industrial nations, and
as threatening in its longer range implications as was the
Great Depressior of another era.
Mth the non-ansv;^;s out of the way, let's focus on the
basic nature of the forces involved in the current inflation
probleiT: and on the ____________ options for dealing with them.
Part of our current inflationary problem is simply a
legacy of inflation from the past. We 'can't wave a wand and
•'•ake that past experience disappear. Over the entire period
since the mid-60's, the progression has been one of ever
jpvarc-trending inflation. With fluctuations to be sure,
but with each peak and trough in inflation rates higher than
the preceeding ones. Before completing the process of unwinding
from one jolt to the price system, another jolt has propelled
prices upward again. It is no wonder, then, that expectations
of further acceleration in inflation have come to play such
an important role--pcrhaps a dominant role--in influencing
private sector economic decisions.
-5-
The consequence of this history for the wid-1970's was
a game of catch-up ball. Despite the slack in aggregate
demands in 1975 and 1976, labor was still trying to catch
up with the food and energy price explosion of 1973.
Business
was adjusting prices to catch up with current and prospective
wj.ge demands and declining productivity.
And these price
boosts and expectations of further price boosts fueled higher
wage demands for the next round of collective bargaining.
It was indeed a period of wages-chasing-prices-chasing wages.
To the extent this type of tail-chasing behavior explains
the persistence of inflation, a program such as the voluntary
vage-price deceleration program is eninently suitable. If
everyone involved in the tail-chssing game can be persuaded
tc "base a little slower, no one loses position, society as a
whole g a m s . That was and is the basic rationale for the
guidelines. Labor cojlc aiford to accept more moderate contract
settlements, because the redrced pressure of rising wage costs
would permit business to slow the rate of price increase.
It is true that the wage-price program has encountered
rough going. Both consumer and wholesale prices have been
rising at double-digit annual rates this year. However, it
would be wrong to sell the program short, or to conclude that
it- has not been raking a useful contribution.
-6-
The wage-price program was not designed to hold down
food cr energy prices, or market rates of interest. No
program, voluntary or mandatory, could be expected to
wor* in those areas. Yet it is those areas that have given
the most trouble. For example, consumer prices have risen
at -n annual rate of about 11 percent since last September,
arc 1^ percent this year alone. Exclusive cf items largely
uncovered by the program—food, energy, costs of buying,
financing and maintaining a home, used cars--the rise has
oec; at about a 7 percent annual rate- since last September
and icughly the same percent this year.
Of course, family
bucjets are hit by increases in all the elements of the cost
of L'vipg; but trie coverage of the wage-price prc>gram has
al^ys be?n lihited, and it Takes no sense to blame the
orcgi"2:". for tnings i- was never designed to deal with.
Ihe bat r._.*-?• this year cn *-,.e inflation front reflects
ir. p-srt special unfavorable developments in farrr and food
prices. Fart of the sharp rise _n food prices earlier was
d,.e to severe winter weather in the Midwest and strikes in
California. Moreover, recent adverse and unexpected developments in the energy sector is another reason for the poor
prict performance. When the price-wage program was being
formulated last fall we anticipated an increase in imported
crude oil prices of around 7 percent. Price decisions adopted
r.y OPEC at their December meeting and subsequent pricing
decisions at *hc Geneva meeting in April, have placed the
likely 197S- price increase for imported crude oil at more
than three times our initial expectations.
-7-
Moreover, the economy surged forward with surprising
strength in the fourth quarter of last year. Real growth
ir the fourth quarter was af an annual rate of almost 7
peicent, more than double the current estimate of the
economy's long-term growth potential, and well above the 5
percent average rate for the current expansion. Consumer
expenditures for goods increased at a 11-1/2 percent annual
rate, and business fixed investment, with a 9-1/2 percent
annual rate of real growth, also showed considerable strength..
This surge came after nearly four years of cyclical recovery,
with w-nly very narrow margins remaining of unutilized skilled
labor and industriaJ capacity. We had added significant
demand-pull to the cost-push, t^.i 1-chasing, feature of inflation with -vhich the wage-price program was designed to deal.
Tn? excessive rate of activity was reflected in costs
ano prices, and the impact carried over into early 1979.
The GMJ deflator, the miost comprehensive measure of inflation
we have, moved up from the 7 percent rate, to which it had
settled after a bulge in the spring of 1978, to en over 8
percent rate in the fourth quarter and to around a 9 percent
rate in the first quarter of this year.
Though more bad price news is anticipated for the next
month or two, we do expect moderation later in the year as
th-r impact of special factors influencing prices dissipates.
Already there are some early, albeit inconclusive, signs of
relief. Wholesale prices at early stages of processing for
both food and non-food items actually fell in April.
-8-
The most severe feedback effects on domestic prices from
last year's depreciation of the dollar are substantially
complete. The rise in import prices in 1978 resulting from
th•? decline in the dollar's exchange rate directly raised
costs and indirectly provided an umbrella for increases in
prices of import-competing goods.
Perhaps as much as 1
percentage point of our inflation last year reflected the
reduced value of the dollar in exchange markets. The strong
recovery of the dollar since our November 1 actions will
alleviate some of the pressure on domestic prices in 1979.
Moreover, the effect on costs of mandated increases
in the minimum wage and social security taxes which went
into effect at. the beginning of this year will moderate
as the year progresses,
Further, the tightening of the price standards, and
the intensified monitoring program announced by CWPS will
spread allowable price increases miore evenly through the
program year.
With the removal of some of the special factors affecting
prices in recent months, the latest upsurge in inflation
should begin to moderate. Among the more favorable signs for
the inflation outlook is the slowing in economic activity that
has taken place this year.
Admittedly, the slowing is from.
a torrid pace, a pace unsustainable in an economy with very
slim margins of excess capacity.
Admittedly, the slowing is
in part attributable to adverse weather.
Admittedly, the
slowing has not been uniform across the economy, but has been
centered mainly in housing and in certain categories of
consumer spending, while business caprital spending and ordering
for inventory additions have accelerated.
-9-
Nevertheless, this relief from intense demands on resources
is welcome after the strains on prices set off by the surge
in spending in the fourth quarter of last year. The task of
governmental policies is to prevent another such surge in
spending in the months ahead. We would neither anticipate
ncr welcome a rebound in consumer spending to the pace of
late 1978, particularly when business spending for inventories
is at a rap>id rate. One can hope for--and legitimately anticipate-some revival in con-.umer spending from the sluggish pace of
retail sales in the e:irly months of this year. But it is
inportanr that the rebound be on the moderate side.
"imilarily, it is important that manufacturers' accumulation of inventories, which accelerated sharply in the early
months of the year, should be closely geared to sales. A
itc.jor factor sustaining the recovery over the past four
years has been easiness prudence in keeping inventories
under good control and abstaining from inventory speculation.
Inventory imbalance has usually been the proximate cause of
the termination of a recovery, and while inventory/sales
ratior are stiii or the low side, it doesn't take long for
these ratios to move away from equilibruim.
It is clear, therefore, that curbing inflation and
sustaining economic expansion calls for moderation in private
sector behevior, along with government restraint cn its own
spending, lending and regulatory programs.
-10-
While some improvement in inflation is expected, we
have to recognize that enduring progress requires persistent
application of policies of restraint. Our objective should not
only be to bring the rate of inflation down from the doubledigit range, but also to set in place a complex of policies
dedicated to continued, persistent reduction in inflation over
ti:ne. That is why the President proposes continued reduction
in the share of the nation's output absorbed by government
spending.
That is why we will continue to revamp our tax
structure to encourage the investment needed to modernize and
expand our capacity and restore productivity growth. That
is wny we are reexamining our regulations to insure that
the\ accomplish our social and economic objectives in the
most cost-ef"icient manner pos.iole. And finally, that is w'r.y
we haw-e embarked upon a policy of phased de-control of domestic
energy prices.
Although decontrol may add slightly to our inflation
problem in the short run, in the longer-term; it is clearly
beneficial. By discouraging domestic oil consumption, by
erecu;.aging domestic production, by investing the recaptured
"etcromic rents" in research for r.ev energy technologies, by
strengthening the dollar in foreign exchange markets, and by
freeing ourselves from the inflationary results of dependence
on a cartel's pricing decisions, we will be making a long-*-""*
contribution to reducing thr U.S.
rate of inflation.
But equally, if not more, important to our long-run
struggle against inflation is the need to improve the U.S.
productivity performance. Essential to the achievement of
this objective is the continued education and training cf
our labor force, the upgrading and modernization of.our
capital stock and the expansion of the share of our national
m.
resources devoted to research and development.
That is why,
-11-
despite the necessity for restraining the growth of federal
outlays and reducing the size of the budget deficit, the
fiscal 1980 budget provides for increased outlays--and in
some cases for increased tax incentives--for basic research
and for on-the-job training of the unemployed, unskilled and
disadvantaged.
Encouraging and insuring the growth of business investment will, however, require more than mere tax incentives.
It will require, above all, a stable and growing economy—
free from episodes of boom and bust--and an adequate rate of
return on investment.
Late -ast year, profits grew rapidly, as they
typically do in periods of sharply rising activity.
When large fourth-quarter profits increases were announced,
there was a flurry of reports in the press and considerable
critical commert. Now with the release of first quarter
GNP statistics, the revelation that first quarter profits on
0
the national ircome accounts basis actually fell by S10-1/2
billion was not nearly so newsworthy.
In the last analysis, inflation will not be cured by
struggling over income shares or looking for villains.
It
will only be cured when all of us--governmient included-recognize that there is an inflationary bias in the modern
economy.
It is unlikely that we will change human nature
<.n the near future or drastically restructure existing economic
and financial arrangements. The only sensible course of
action is to practice fiscal and monetary stability, year in
and year out, while we make a gradual transition back to
relative pr ice__stability.
FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.'
THURSDAY, MAY 24, 1979
TESTIMONY OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
Mr. Chairman and Members of the Committee:
I appreciate the opportunity of meeting with this
distinguished Committee to discuss legislation relating
to Presidential powers for dealing with inflation.
The Credit Control Act of 1969 permits the President
to authorize the Federal Reserve Board to regulate
extensions of credit for the purpose of preventing
or controlling inflation generated by the
extension of credit in excessive volume. In its various
provisions, the Act gives the Federal Reserve Board broad
powers to allocate credit flows.
Today, you have before you two proposed bills, S. 3 5
and S. 389, which would remove or weaken the President's
authority to move promptly to quench credit-generated inflation. S. 3 5 would repeal the Credit Control Act, while
S. 389 would amend the Act by requiring a concurrent resolution of the Congress before the Board could exercise the
B-1624
-2-
provisions of the Act.
Mr. Chairman, the Administration opposes such
efforts to circumscribe the President's ability to cope with
economic emergencies or distortions. This is not because
we see a need to exercise such authority now or in the foreseeable future. Indeed, the current economic situation
does not call for selective credit controls.
But the economic situation can change rapidly. It
is only prudent, therefore, that the President retain the
authority to respond promptly, and if need be selectively,
to disruptive changes in the composition of credit demand.
The need for such authority today is no different than
it was a decade ago, when after extensive discussion of the
problem, Congress enacted the Credit Control Act of 1969.
The legislative history of the Act attests to the concern
the Congress had then that the President have available
the broadest possible spectrum of alternatives in fighting
inflation, including the capability of curbing inflationary
expansion of credit without unduly restricting the supply of
funds for housing, small businesses and other claimants who
tend to be disproportionately crowded out of financial
flows when the total supply of credit is restricted.
While the financial system of our country has developed
significantly in scope and flexibility in the decade since
-3-
the Act was passed, and no circumstances have arisen
which required invoking the authority for selective
credit controls, the basic problems addressed in the
Act remain: first, monetary policy works slowly, often
with a substantial lag and second, monetary restraint can
have a markedly uneven impact on the structure of credit
flows.
As long as these problems remain, the authority
in the Act to limit credit expansion selectively is an
important component of the government's armory of potential
tools for coping with inflation in a prompt but equitable
manner.
General monetary policy is a powerful tool of economic
stabilization.
The Federal Reserve, by controlling the
volume of reserves available to the commercial banking
system, can have a major impact on the total volume and
cost of credit and,therefore/on the course of economic
activity.
But this influence is transmitted to the world
of production, sales and employment with a lag.
The lag
is variable in length, from cycle to cycle, and often can
be substantial.
In the event of national emergencies, it
could be essential to allocate the flow of credit quickly,
to serve national defense or emergency relief efforts.
normal workings of monetary policy and the credit system
could be too slow and inefficient in such situations.
The
-4Even in less dramatic circumstances, there can be
occasions when it would be desirable to use a rifle, rather
than a shotgun against excessive expansion of credit in an
inflationary environment.
One can envisage such circumstances
as an economy stretching its resources, with production levels
straining capacity limits, consumer usage of credit expanding rapidly in support of an excessive burst of spending,
and with businesses adding to inflationary pressures
by attempting to build inventories aggressively.
General
monetary restraint would, of course, ultimately restrain
the ability of lenders to meet these consumer and business
credit demands, but because of rigidities and barriers in
the financial structure, other credit uses might suffer
disproportionately.
Our system of housing finance, for example, depends
very largely on savings and credit flows through financial
intermediaries which essentially borrow short and lend long.
When monetary restraint results in rising market rates of
interest, these institutions are limited in their ability
to retain and attract savings,because their asset portfolio
turns over slowly
and the rates they can offer savers is
limited.
Recent changes in regulation have permitted housing
finance institutions to issue short-term savings instruments
competitive with market interest rates .
This authority
-5prevented
serious disintermediation in 1978, permitting
housing construction to continue at a high rate throughout
the year.
But these new instruments have increased the cost
of funds to thrift institutions, narrowing—and in some cases
eliminating—the spread between money costs and mortgage
returns.
Over an extended period, institutions with slowly-
adjusting portfolios cannot be completely insulated from the
competition for savings from financial instruments traded
in markets which move rapidly in response to surges in inflation.
If inflation were to continue in the double-digit
range for long—a prospect I do not rate as likely—housing
activity would once again have to bear a disproportionate
share of the burden of monetary restraint.
Let me emphasize that the situations I have been describing are, fortunately, as yet hypothetical.
Neither present
nor foreseeable economic events suggest the need for selective
credit allocation.
Consumer spending, after surging in late
1978, has been modest thus far in 1979. Business outlays for
additions to inventories have increased, but these should
likely moderate as production schedules are adjusted to the
quieter pace of sales. And housing finance and construction
activity have held up remarkably well; the principal limitation on housing demand
itself.
seems to be the price of housing
-6Credit flows in this cycle have been remarkably well
balanced. While aggregate credit demands were at a record
high of $485 billion in 1978, it is likely that 1979 will
see a decline in this total of from 10 to 15 percent. Reports
on recent developments in the consumer sector show that the
consumer is now adding to debt more slowly than in the
past. The ratio of net extensions of credit to disposable
personal income has fallen from 3.52 percent in the second
quarter of 1978 to 2.58 percent in the first quarter of
this year. (The previous peak of this ratio had been
2.82 percent in the first quarter of 1973.) Automobile
sales, which account for a significant part of the
increase in consumer credit, have slowed somewhat in
the past month and should contribute to some slowing in
the rise in the consumer's debt burden.
Business borrowing has been at a high level, through
commercial paper and through the commercial banking system.
But there is no evidence that business demands are preempting credit that might otherwise flow to other sectors.
Indeed, with profits rising sharply in recent months, the
business sector is in large measure financing itself by
providing funds to banks and through the commercial paper
market.
-7-
With mortgage lending holding up reasonably well and
government credit demand expected to abate, the composition
of total credit flows is expected to reflect a reasonable
balance among the various sectors of the economy.
In conclusion, Mr. Chairman, there is not the need now,
nor do our projections suggest the need in the foreseeable
future for attempting to allocate flows of credit.
But
economic events have a way of confounding forecasters; no
one last summer correctly anticipated the surge in business
and consumer spending that took place in the fourth quarter
of the year, or the sky-rocketing of prices in the
early months of this year.
The future is too uncertain
to permit dispensing with tools that might help us cope
with unexpected disturbances on the economic scene.
Therefore, the Administration opposes S. 35, which
would repeal the Credit Control Act.
We also oppose the
second bill being considered by the Committee, S. 38 9,
which would interpose the possibility of serious delays
in invoking the Act by requiring Congressional approval
before the Federal Reserve could implement the President's
authorization.
This delay would create a situation wherein
lenders and borrowers could take actions to evade the intent
of the controls before such controls are implemented.
The
initial response to the President's action would likely
exacerbate the very inflationary effects of credit extension
that the controls would seek to mitigate.
FOR IMMEDIATE RELEASE
May U, 1$H
Contact: Alvin M. Hattal
202/566-8381
TREASURY TO START COUNTERVAILING
DUTY INVESTIGATION ON CERTAIN FROZEN
POTATO PRODUCTS FROM CANADA
The Treasury Department has started an investigation into whether imports of certain frozen
potato products from Canada are being subsidized.
A preliminary determination in this case must
be made by October 20, 1979, and a final determination by April 20, 1980.
Imports of this merchandise during 1978 were
valued at about $877,000.
The investigation follows receipt of a petition
alleging that manufacturers and/or exporters of this
merchandise receive benefits from the Government of
Canada.
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 May 25, 1979.
o
B-1625
0
o
FOR RELEASE ON DELIVERY
EXPECTED AT 2:00 P.M., EDST
MAY 24, 1979
STATEMENT BY JOHN LANGE,
DIRECTOR, OFFICE OF TRADE FINANCE
BEFORE THE SUBCOMMITTEE OF INTERNATIONAL FINANCE
COMMITTEE ON BANKING,
HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
Introduction
Mr. Chairman, Senators: I am pleased to be here today,
along with representatives of the Export-Import Bank and the
Department of State, to assist you in your review of United
States lending to Zaire. There is no question that Zaire is
in a difficult economic situation. Zaire is a classic case
of a resource rich country with great economic potential
which is having very difficult growing pains. There are
encouraging signs that it is making progress in stabilizing
its economy and correcting some of the underlying problems,
but it will be a long and difficult task.
Before reviewing some salient economic issues related
to Zaire, I would like to comment briefly on the ExportImport Bank loan for the Inga-Shaba power line. As you
know, the Treasury Department—in the National Advisory
Council—supported the recent preliminary commitment to
finance this second cost overrun. The situation reminds
me of a swimmer who, having crossed two-thirds of the lake,
finds the swim exhausting and decides to turn back. Not
going forward with the cost overrun has all the problems
of the swimmer turning back. Continuing forward is preferable
to turning back.
If Zaire's economic situation were beyond control and
there were no hope for improvement, the situation might be
viewed differently. However, there is a reasonable chance
for improvement and thus a reasonable chance for repayment
of this Eximbank credit. In this connection, Treasury
B-1624?
- 2 -
made its approval of this credit contingent upon a sound monetary
stabilization program, supported by an IMF Standby Arrangement.
Such a Standby should be in effect before disbursements of the
Eximbank credit begin.
Recent Economic Developments
The balance of my comments concentrate on Zaire's external
economic situation. Deputy Assistant Secretary Walker of the
Department of State will be discussing Zaire's domestic economic and political developments.
In the early 1970's, Zaire rode a crest of rising prices
for its exports o: industrial raw materials and agricultural
products, enabling it to pursue an ambitious economic development plan, of which the Inga-Shaba power line project was a
part. In 1973 when the first Eximbank loan for this project
was made, the swim across the lake looked very reasonable.
While the trade balance and the current account were in
deficit during this period, Zaire was able to borrow from
public and private lenders and to attract sufficient investment flows to maintain a healthy overall balance of payments.
However, the sharp drop in export prices in the second half of
1974, combined with continued efforts to maintain the thrust
of development, led to a severe deterioration in Zaire's external accounts.
From 1975 through 1978, Zaire experienced severe balance
of payments deficits. The deficit on external accounts has
been associated with a continued high level of demand for
imported goods and services, stimulated by substantial
deficits financed by the central bank. The overall central
government deficit was between 10 and 12 percent of Gross
Domestic Product in 1975 and 1976 but this declined to between
5 and 6 percent in 1977 and 1978. Export unit prices for copper
from 1975 to 1978 hovered between 55 and 70 percent of the
1974 level, contributing to the balance of payments deficits.
Moreover, declining volumes of copper exports contributed further
to the deteriorating external balance.
The balance of payments deficit was financed principally
by mounting arrears on current payments. As a result, Paris
Club creditors rescheduled interest and principal payments
falling due in 1975 through 1977 and private foreign credit
naturally became hard to come by.
and ^h^r1^' rising exP°rt prices, particularly for copper
and cobalt, have given a mild lift to Zaire's balance of payments prospects for 1979. The value of exports may attain
- 3 -
1974 levels this year, chiefly on the strength of rising
prices for copper and, especially, for cobalt, which are
likely to represent two-thirds of Zairian exports in 1979.
Nevertheless, demands on foreign exchange resources to
pay for imports and the external debt service remain heavy,
while inflows of private and public capital are running at low
levels.
Relations with Official and Private Creditors
Before describing Zaire's relations with its official
and private creditors, I would like to review briefly some
basic tenets of our debt rescheduling policy:
First, a multilateral debt reorganization should be
warranted only in cases where the debtor country is in default
or facing imminent default on its debt servicing obligations.
Second, debt service payments extended, guaranteed, or
insured by the United States Government should normally be
reorganized only in the framework of a multilateral creditor
club.
Third, the debt relief efforts of the official creditors can only be successful if the debtor country undertakes
a stabilization program designed to correct underlying economic problems.
Normally such a program is worked out in
conjunction with the International Monetary Fund and
supported by a Fund standby arrangement.
Finally, to avoid discriminating among creditor countries
and categories of creditors, the debtor country must extend
most-favored-nation treatment to all principal official creditor countries, both participants and non-participants in
creditor arrangements, and seek to secure an arrangement
covering its private credits on terms comparable to those
negotiated for official and officially-guaranteed credits of
a comparable maturity.
When Zaire's economic and financial situation reached
crisis proportions in 1975 and its foreign exchange earnings
proved insufficient to cover external debt servicing obligations, it took steps to develop an economic stabilization program. Zaire opened discussions with the International Monetary
Fund, instituted such a program, and a one-year Standby
Arrangement was approved by the Fund in March, 1976.
- 4 Zaire then turned to its official and private creditors
for relief on its external debt servicing obligations. The
subsequent negotiations with official creditors in 1976 and
1977 took place in the creditor club, familiarly known as the
Paris Club, which is convened in such instances on an ad hoc
basis in Paris under the chairmanship of the French Treasury.
At the June 1976 Paris Club meeting, the United States,
Zaire's largest creditor, and ten other countries agreed ad
referendum to reorganize arrearages, as well as 85% of principal
payments falling due during the last six months of 1976. Total
relief amounted to about $210 million, with the United States
accounting for $46 million. During the negotiations the Government of Zaire stated its intention to seek a comparable arrangement with its private creditors.
In November of that year, Zaire met in London with representatives of twelve international banks acting as syndicate
managers for some 120 banks with exposure in Zaire. Citibank,
on behalf of the syndicated banks, agreed to try and put together
a $250 million medium-term loan. In exchange Zaire was expected
(1) to meet its interest payments to all the banks on schedule,
(2) to place principal payments in an account for release to the
banks once the new loan was available, and (3) to negotiate an
IMF Standby Arrangement. (The World Bank estimates that by the
end of 1976 debt to the syndicated banks amounted to $580 million,
of which almost $90 million was in arrears.)
During 1977 Zaire's severe economic and financial difficulties continued. Official creditors met once again in June and
December and agreed, ad referendum, to reorganize 85% of principal
and interest falling due that year. Relief totalled $200 million,
of which the United States rescheduled $56.5 million. The
creditors also agreed to meet early in 1978 to consider the
need to renegotiate 1978 maturities, depending upon develop^ n ; S . u n Z a i r f' s Glance of payments. They stressed, however,
JStLt Y ™ .
2 c t ° n l y o n c°ndition that Zaire (1) adopt an
^
IMF-endorsed stabilization program, and (2) reach
agreement with the syndicated banks on either a medium-term
J V ? ? d e s c r i b e d m the London agreement), or a direct
rescheduling or refinancing of private bank debt.
rinh hLZn^8KhaS n0t fulfilled either condition, the Paris
succeeded in s v n S i o ^ ^ o n ^ . 6 a r l y
1978
' hoover. Citibank
succeeded m syndicating a $220 million five-vear loan to be
condiMo e T f i a l / s p o r t s . Citibank insisted zlire meet two
C U l d be d r a w n :
Zaire
concludTa Standi ^
°
^uld have to
rran9ement
lth the IMF
a n d ifc
t^becoL c u r r e n X n
*
'
*°uld have
arreSrageS
f
a?! commlrciarSLks.
° Principal and interest due
- 5 The financial authorities in Zaire have not accepted
Citibank's offer because the country's foreign exchange is
insufficient to cover arrearages of principal due private
bank creditors. As a counter proposal, Zaire has suggested
rescheduling or refinancing the payments of principal due.
Discussions between Zaire and its private bank creditors have
been suspended for some months.
International Monetary Fund Relationship with Zaire
Before reviewing the relationship between Zaire and the
IMF, let me describe briefly how IMF programs are developed
and implemented.
The IMF is the central monetary institution for the
world economy and its resources are available to help
members deal with temporary balance of payments difficulties in an internationally responsible manner. The basic
goal of the IMF's support is to help ensure that the member's
balance of payments problem is corrected within a reasonable
period—during which IMF financing is available. A program
to improve the balance of payments is developed by the member
in consultation with the IMF, and IMF financing is made
available on a phased basis, as the program is implemented.
Specific performance criteria are established to permit
the member country and the Fund to assess progress in the
implementation of the program. While these criteria are norma
confined to those macroeconomic variables necessary to achieve
the objectives of the program, the specifics of each program
depend on the nature and cause of the member's problems.
These differ from case to case. Failure by the member to
meet the criteria established in the program signals the
need to examine whether further measures are necessary,
and triggers consultations between the member and the Fund
in order to reach further understanding before additional
financing is provided by the Fund.
In March 1976, the Zairian Government initiated an
IMF-supported stabilization program. It depreciated the
zaire by 42 percent and adopted restrictive wage and demand
management policies. However, aggregate demand was not
adequately restrained because the overall government deficit
substantially exceeded program levels. The overall balance of
payments deficit in 1976 was, therefore, $384 million,
substantially higher than planned levels.
In April 1977, a second and more stringent stabilization effort was launched with the support of an IMF standby arrangement. The program called for a wage freeze,
careful management of foreign exchange resources, of
-6public and publically guaranteed borrowings and placed limitation.
on external borrowing. Performance ^ " ^
P ? "™
e
of expectations. Credit ceilings were substantially exceeded, as
r h e ^ n k of Zaire financed higher than P j ^ ^ S e S K
The
decl
n
n
expenditures. External arrears rose instead of
J ^ ^
™*
disruption in production for export associated with the two Shaba
invasions exacerbated these economic difficulties.
Since June 1978, the Government of Zaire and the IMF have
continued to discuss a stabilization program, which might be
supported by a Fund standby arrangement. To support Zaire s
efforts to develop a meaningful program, both the IMF^and IBRD
have provided technical assistance to improving Zaire s
statistical data gathering and reporting capabilities.
While we are hopeful that a program will soon be established,
it is not possible now to predict when that might occur. To
accelerate this effort, the Zairian Government has, with the help
of the IMF, recruited a small staff of technically trained
expatriates. To improve'foreign exchange management in the
Central Bank, the Central Bank has put in place a strict foreign
exchange regime which appears to have to have been reasonably
effective during its first six months.
The IMF will resume negotiations as early as possible,
sometime in June, and I would expect the negotiations to be
concluded as expeditiously as possible.
Linking disbursements of the Eximbank Inga-Shaba credit to a
Standby Arrangement will delay progress on the project. Whether
the contractor will be willing to wait that long is an open
question. At this juncture, however, we believe it is a necessary
condition given the history I have outlined for you.
Activities of the Multilateral Development Banks
The World Bank Group has an active long-term program in
Zaire designed to promote development and the rehabilitation of
the economy. Given its limited resources, the African Development
Fund has made only one loan to Zaire, which was approved last year.
Since 1969 Zaire has received $222 million from the
International Development Association (IDA) for transport,
development finance company operations, water supply, agriculture
and education projects. In 1975, the World Bank made a loan of
$100 million for the GECAMINES Mining Expansion Project, which
was cofinanced by the European Investment Bank and by the Libyan
Arab Foreign Bank. The International Finance Corporation, which
has an equity participation in the national development finance
-7company (SOFIDE) Societe Financiere de Development, approved a
$4.1 million loan for an offshore oil production project in
1978. Zaire is current on the repayment of principal
and interest on its loans from the World Bank Group.
In addition to project financing, a major objective of the
World Bank Group is the building of institutions capable of
promoting development. The Bank has also helped encourage the
design and implementation of appropriate economic policies,
particularly in the agricultural, transport and education
sectors. In agriculture, Bank assistance has focused on
coordinating and reinforcing efforts to reverse the declining
trend of agricultural output, reduce reliance on agriculture
imports, and promote the exports of selected agricultural
commodities.
The Bank has also played an active role in coordinating
donor activities in Zaire. At a Consultative Group Meeting
chaired by the Bank in June 1977, the donors strongly
supported the Government's intention to give highest priority
to the development of agriculture. The Consultative Group may
be reconvened after the Government completes its public
investment program.
Conclusion
Zaire seems prepared to take the necessary steps to stabilize
its economy. Mineral export prices have strengthened, and a
reasonably effective system for managing foreign exchange is in
place in the Bank of Zaire.
The decision on the Inga-Shaba loan is not easy. But,
with the project 80 percent completed, I believe we should
swim the rest of the way across the lake. To encourage the
institution of sound monetary and fiscal policies, initial
disbursement of the loan should be contingent on an IMF Standby
Arrangement being in place. Before changing this condition, it
is the intention of the Executive Branch to consult with this
Subcommittee or the Chairman again.
For these reasons Treasury recommends your concurrence with
the Eximbank loan being considered by the Subcommittee today.
Thank you, Mr. Chairman.
WtmntoftheTREASURY
SHINGTON, D.C. 20220
TELEPHONE 566-2041
May 25, 1979
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 2,800 million of 13-week bills and for $ 2,901 million of
26-week bills, both to be issued on May 31, 1979,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
High
Low
Average
13-week bills
maturing August 30, 1979
Discount Investment
Price
Rate
Rate 1/
97.616
97.585
97.592
9.431%
9.554%
9.526%
9.
9.
9.
26-week bills
maturing November 29, 1979
Discount Investment
Price
Rate 1/
Rate
95. 2 6 ^ 9.358%
95.225
9.445%
95.243
9.409%
9.
10.
10.
a/ Excepting 2 tenders totaling $600,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
TENDERS RECEIVED AND ACCEPTED
(In Thousands]>
Received
Received • Accepted
$
26,905 $
26,905::
$
20,105
3,465,235
3,602,615 2,262,615 :
10,480
20,585
20,585 :
40,605
58,845
30,605 :
.
49,355
14,320
49,355 :
'
36,615
26,285
36,615
232,525
242,155
157,525 :
36,810
35,070
13,810 :
14,525
12,580
14,525 :
.
32,800
15,385
32,800 :
10,720
6,415
10,720 :
240,740
198,470
126,740 :
17,250
16,560
17,250 :
Accepted
$
20,105
2,367,485
10,480
58,845
14,320
26,285
192,155
16,530
12,580
15,385
6,415
143,460
16,560
$4,362,050 $2,800,050 :
$4,121,905
$2,900,605
$2,708,995
415,155
$1,246,995:
415,155 .
$2,708,020
254,185
$1,586,720
254,185
$3,124,150
$1,662,150
$2,962,205
$1,840,905
$1,237,900
$1,137,900.
$1,159,700
$1,059,700
$2,800,050 :
$4,121,905
$2,900,605
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
and Foreign Official
Institutions
$4,362,050
TOTALS
1/Equivalent coupon-issue yield.
B-1627
FOR RELEASE AT 4:00 P.M.
May 29, 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 $5,600 million, to be issued June 7, 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 $5,837 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
March 8, 1979,
and to mature September 6, 1979
(CUSIP No.
912793 2K 1), originally issued in the amount of $3,006 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $ 2,800 million to be dated
June 7, 1979,
and to mature December 6, 1979
(CUSIP No.
912793 2Y 1 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing June 7, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,553
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 Daylight Savings time,
Monday, June 4, 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-1628
-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 June 7, 1979,
in cash
or other immediately available funds or in Treasury bills maturing
June 7, 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.
::ederal financing bank
WASHINGTON, D.C. 20220
May 25, 1979
FOR IMMEDIATE RELEASE
FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank
(FFB), announced the following activity for April 1-30, 1979.
Department of Transportation Guarantees
On April 2, the National Railroad Passenger Corporation
(Amtrak) refinanced the $250 million outstanding under Note
#16 with Note #19, which matures October 1, 1979. This note
carries an interest rate of 10.215%. Also on April 2,
Amtrak issued Note #20 to the FFB. This note provides Amtrak
with a $200 million line of credit to October 1, 1979.
Interest rates are set by FFB at the time of each advance.
Amtrak borrowed the following amounts from FFB under
their other line of credit--Note #18, which matures June 29,
1979:
Interest
Amount
Rate
Date
4/11
$5,000,000
6,000,000
6,000,000
5,000,000
5,000,000
10.277%
10.191%
10.01%
9.573%
10.159%
4/13
4/18
4/25
4/30
FFB lent the United States Railway Association (USRA)
$600,000 on April 5 under Note #8 at an interest rate of
9.989%. Note #8 matured April 30, and the $312,611,501.21 of
principal and $46,716,922.57 of interest due was refunded by
a new Note #14 for not to exceed $396,716,922.57 maturing on
July 31, 1979. Conrail is the recipient of funds advanced
under this note.
On April 12, FFB lent USRA $500,000 under Note #13 at
a rate of 8.125%. Note #13 matures December 26, 1990.
B-1629
- 2Under notes guaranteed by DOT pursuant to Section 511 of
the Railroad Revitalization and Regulatory Reform Act of 1976,
FFB lent funds to the following railroads:
Date
Chicago § North Western
Trustee of Chicago, Rock Island
Trustee of The Milwaukee Road
4/11
4/13
4/25
Maturity
Interest
Rate
$1,291,650.00 11/1/90
3,010,492.00 12/10/93
1,317,326.00 11/15/91
9.388%
9.661%
9.661%
Amount
Continuing Programs
FFB signed the following loan agreements which are guaran
teed by the Department of Defense (DOD) under the Arms Export
Control Act.
Date Signed
Country
4/2/79
4/11/79
4/11/79
Morocco
Jordan
Lebanon
Amount
Maturity
$40,000,000.00
67,000,000.00
42,500,000.00
4/10/87
3/30/88
4/15/86
Also FFB made 27 advances totalling $91,180,519.14 to
17 foreign governments under existing DOD-guaranteed foreign
military sales loan agreements.
Under notes guaranteed by the Rural Electrification Administration, FFB advanced a total of $160,095,000 to 22 rural
electric and telephone systems.
On April 18, FFB purchased a total of $3,865,000 in
debentures issued by 5 small business investment companies.
These debentures are guaranteed by the Small Business Administration, mature in 3, 5 and 10 years, and carry interest rates
of 9.695%, 9.465% and 9.365%, respectively.
FFB provided Western Union Space Communications, Inc.,
with the following amounts which mature October 1, 1989.
Repayment of these advances is secured by NASA's obligations
under a satellite tracking system procurement contract.
Interest is payable on an annual basis.
Date
Amount
Interest
Rate
4/2
4/20
4/24
$ 400,000
8,645,000
2,760,000
9.579%
9.607%
9.666%
- 3FFB purchased four General Services Administration participation certificates:
Interest
Series
Date
Amount
K-018 4/2 $ 989,176.90 7/15/04 9.191%
M-044
4/11
4,613,684.55
L-053
4/17
905,542.59
K-019
4/30
1,248,390.73
Maturity
Rate
7/31/03
11/15/04
7/15/04
9.253%
9.315%
9.373%
Agency Issuers
FFB purchased two Farmers Home Administration Certificates
of Beneficial Ownership. Interest is payable annually.
Date Amount Maturity
4/6 $580,000,000 4/6/84
4/18
325,000,000
4/18/84
Interest
Rate
9.542%
9.637%
The Student Loan Marketing Association, a federally
chartered, private corporation raised $20 million in new
cash and refunded $210 million in maturing securities. FFB
holdings of SLMA notes now total $1.05 billion.
The Tennessee Valley Authority (TVA) sold FFB a $25
million, 10.239% note on April 13 and a $310 million, 9.845%
note on April 30. Both notes mature August 31, 1979. These
sales refunded $150 million in maturing securities and provided TVA with $185 million in new cash.
FFB Holdings
As of April 30, 1979, FFB holdings totalled $56.6 billion.
FFB Holdings and Activity Tables are attached.
# 0#
FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
April 1979
Program
cch. .2U-L9JZ
On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
$ 6 ,260 .0
7 ,131 .3
$ 6,075.0
7,131.3
2 ,114 .0
400 .5
2,114.0
356.9
Net Change
(4/1/79-4/30/79)
$
185.0
-0-
Net Change FY 1979
(10/1/78-4/30/79)
$1,040.0
563.0
Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
-0-
-0-
43.6
43.7
4,615.0
10.4
H
Agency Assets
26 ,890,.0
67 .4
163..7
38 .0
921,.0
101..7
25,985.0
62.2
163.7
38.0
921.0
103.1
905.0
DOT-Emergency Rail Services Act
22..4
71.,4
DOT-Title V, RRRR Act
4 ,684..2
DOD-Foreign Military Sales
327.,3
General Services Administration
36..0
Guam Power Authority
38.
5
DHUD-New Communities Admin.
+
mUD-Community Block Grant
337. 3
)
Nat' 1. Railroad Passenger Corp.(AMTRAK)
347.,2
,121.
8
5,
NASA
287. 3
Rural Electrification Administration
1,,050. 0
Small Business Investment Companies
21. 6
Student Loan Marketing Association
177. 0
Virgin Islands
WATA
$56,609.6
TOTALS
+less than $.1 million
22.4
65.8
4,614.1
319.6
36.0
38.5
-05.6
Farmers Home Administration
DHEW-Health Maintenance Org. Loans
DHEW-Medical Facility Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government Guaranteed Loans
Federal Financing Bank
+
454.8
335.4
4,961.7
283.4
1,030.0
21.6
177.0
$55,310.4*
5.2
-0-0-0-1.4
70.1
7.8
-0-0-0-117.5
11.8
160.1
3.9
20.0
-0-0$1 ,299.2
-0-2.2
283.3
-10.5
4.9
35.6
706.3
57.2
-0-0•
-197.1
110.7
930.3
36.7
305.0
-0.2
-0$8,532.1
May 25, 1979
*total does not add due to rounding.
FEDERAL FINANCING
April
BORROWER
BANK
1979 Activity
:
DATE :
AMOUNT
OF ADVANCE
:
:INTEREST:
INTEREST
: MATURITY : RATE :
PAYABLE
(other than s/a)
Department of Defense
Thailand #2
Thailand #3
Jordan #2
Taiwan #2
Taiwan #3
Spain #1
Colombia #2
Costa Rica #1
Greece #9
Greece #10
Morocco #5
Jordan #3
Israel #7
Israel #7
Indonesia #3
Korea #10
Korea #9
Jordan #2
Tunisia #4
Panama #2
Korea #10
Peru #3
Honduras #3
Ecuador #2
Taiwan #8
Thailand #2
Thailand #3
4/10
4/13
4/16
4/17
4/18
4/19
4/20
4/24
4/25
4/25
4/25
4/26
4/26
4/26
4/26
4/30
4/30
135,125.51
878,164.00
464,400.00
44,509.56
1,268,786.78
2,006,334.28
54,000.00
199,657.00
6,800,032.21
10,460,507.79
16,626,900.00
3,636,428.13
15,698,838.55
1,000,000.00
63,377.94
26,099,434.93
100,000.00
104,940.00
82,763.16
6,695.50
2,616,507.00
712,929.67
1,500,000.00
39,929.85
3,142.28
557,380.00
19,732.00
6/30/83
9/20/84
11/26/85
12/31/82
12/31/82
6/10/87
9/20/84
4/10/83
5/3/88
2/1/89
4/10/87
12/31/86
12/15/08
12/15/08
9/20/86
12/31/87
6/30/87
11/26/85
10/1/85
3/31/83
12/31/87
4/10/84
8/1/83
8/25/84
7/1/85
6/30/83
9/20/84
9.643%
9.539%
9.483%
9.678%
9.678%
9.407%
9.548%
9.672%
9.394%
9.36%
9.503%
9.552%
9.309%
9.31%
9.502%
9.403%
9.416%
9.532%
9.568%
9.726%
9.473%
9.631%
9.678%
9.603%
9.563%
9.837%
9.719%
4/6
4/18
580,000,000.00
325,000,000.00
4/6/84
4/18/84
9.325%
9.415%
989,176.90
4,613,684.55
905,542.59
1,248,390.73
7/15/04
7/31/03
11/15/04
7/15/04
9.191%
9.253%
9.315%
9.373%
4/11
4/13
4/18
4/25
4/30
250,000,000.00
5,000,000.00
6,000,000.00
6,000,000.00
5,000,000.00
5,000,000.00
10/1/79
6/29/79
6/29/79
6/29/79
6/29/79
6/29/79
10.215%
10.277%
10.191%
10.01%
9.573%
10.159%
4/2
4/2
4/2
4/2
4/2
4/2
4/3
4/3
4/3
4/5
4/5
4/5
4/6
2,670,000.00
2,953,000.00
1,879,000.00
764,000.00
1,409,000.00
1,822,000.00
2,548,000.00
300,000.00
10,500,000.00
1,856,000.00
325,000.00
2,399,000.00
12,000,000.00
4/30/81
12/31/13
4/2/81
4/2/81
4/2/81
4/2/82
3/31/86
4/3/81
4/3/81
4/5/81
4/5/81
12/31/13
4/6/81
9.855%
9.216%
9.895%
9.895%
9.895%
9.515%
9.315%
9.915%
9.915%
9.885%
9.885%
9.192%
9.855%
4/2
4/2
4/3
4/5
4/5
4/5
4/9
4/9
4/9
4/9
$
Fanners Home Administration
9.542% annually
9.637%
General Services Administration
Series
Series
Series
Series
K-018
M-044
L-053
K-019
4/2
4/11
4/17
4/30
National Railroad Passenger Corp.
Note
Note
Note
Note
Note
Note
#19
#18
#18
#18
#18
#18
4/2
Rural Electrification Administration
Allegheny Electric #93
Arkansas Electric #97
Big River Electric #58
Big River Electric #91
Wolverine Electric #100
Northern Michigan Elect. #101
Tri-State Gen $ Trans. #89
Associated Electric #20
Associated Electric #132
South Texas Electric #109
M 5 A Electric #111
Pacific Northwest Gen. #118
Cooperative Power #130
9.737% quarterly
9.112%
9.776%
9.776%
9.776%
9:404%
9.209%
9.795%
9.795%
9.766%
9.766%
9.089%
9.737%
FEDERAL FINANCING BANK
April 1979 Activity
Page 2
•
:
: DATE :
t
BORROWER
AMOUNT
OF ADVANCE
:
.•INTEREST': INTEREST
: MATURITY : RATE :
PAYABLE
(other than s/a)
Rural Electrification Administration
(continued)
Alabama Electric #26
Allegheny Electric #93
Wolverine Electric #100
Northern Michigan Elect. #101
Wabash Valley Power #104
Western Illinois Power #99
Associated Electric #132
Dairyland Power #36
East Kentucky Power #73
Big River Electric #58
Big River Electric #91
Gulf Telephone #50
Dairyland Power #36
Dairyland Power #54
Chugach Electric #82
Colorado-Ute Electric #78
Sunflower Electric #63
Indiana Rural Electric #107
So. Mississippi Electric #3
So. Mississippi Electric #90
Cooperative Power #5
Cooperative Power #130
Tri-State Gen. $ Trans. #89
Southern Illinois Power #38
4/9
4/10
4/10
4/10
4/10
4/13
4/17
4/18
4/19
4/20
4/20
4/20
4/23
4/23
4/23
4/23
4/23
4/25
4/25
4/25
4/26
4/26
4/30
4/30
$
8,600,000.00
2,643,000.00
2,158,000.00
2,757,000.00
2,976,000.00
2,501,000.00
8,000,000.00
1,022,000.00
6,949,000.00
3,217,000.00
3,232,000.00
145,000.00
2,569,000.00
7,431,000.00
4,731,000.00
414,000.00
432,000.00
40,000,000.00
508,000.00
650,000.00
4,000,000.00
8,000,000.00
5,690,000.00
45,000.00
9.925% 9.805% quarterly
4/9/81
it
9.955% 9.834%
4/30/81
tt
9.985% 9.863%
4/10/81
ti
9.595% 9.483%
4/10/82
it
9.232% 9.128%
12/31/13
tt
4/13/81 10.025% 9.902%
u
4/17/81 10.035% 9.912%
tt
12/31/13
9.266% 9.161%
ti
9.885% 9.766%
4/19/81
it
4/20/81
9.855% 9.737%
II
4/20/81
9.855% 9.737%
it
12/31/13
9.254% 9.149%
it
12/31/13
9.293% 9.187%
II
12/31/13
9.293% 9.1871
it
12/31/13
9.293% 9.187%
ti
4/23/81
9.905% 9.785%
it
3/31/86
9.395% 9.287%
tt
4/25/81
9.925% 9.805%
ti
4/27/81
9.925% 9.805%
it
4/27/81
9.925% 9.805%
II
4/26/81
9.945% 9.824%
it
4/26/81
9.945% 9.824%
tt
3/31/86
9.485% 9.375%
it
4/30/82
9.735% 9.619%
Small Business Investment Companies
Greater Washington Investors, Inc.
Suwannee Capital Corp.
Bohlen Capital Corp.
Michigan Capital $ Service, Inc.
Van Rietschoten Capital Corp.
4/18
4/18
4/18
4/18
4/18
565,000.00
1,000,000.00
1,000,000.00
300,000.00
1,000,000.00
4/1/82
4/1/84
4/1/89
4/1/89
4/1/89
4/3
4/10
4/17
4/24
75,000,000.00
40,000,000.00
45,000,000.00
70,000,000.00
7/3/79
7/10/79
7/17/79
7/24/79
10.121%
10.18%
10.142%
9.610%
4/13
4/30
25,000,000.00
310,000,000.00
7/31/79
7/31/79
10.239%
9.845%
4/11
4/13
4/25
1,291,650.00
3,010,492.00
1,317,326.00
11/1/90
12/10/93
11/15/91
9.388%
9.438%
9.438%
4/5.
4/12
4/30
4/30
600,000.00
500,000.00
316,820,274.97
42,508,148.81
4/30/79
12/26/90
7/31/79
7/31/79
9.989%
8.125%
10.019%
10.019%
9.695%
9.465%
9.365%
9.365%
9.365%
Student Loan Marketing Association
Note
Note
Note
Note
#190
#191
#192
#193
Tennessee Valley Authority
Note #96
Note' #97
Department of Transportation
(Section 511)
Chicago § North Western 511-78-3
Trustee of Chicago, Rock Island
Trustee of The Milwaukee Road
United States Railway Association
Note
Note
Note
Note
#8
#13
#14
#14
9.661% annually
9.661%
FEDERAL FINANCING BANK
April 1979 Activity
Page 3
BORROWER
AMOUNT
OF ADVANCE
DATE
:
:INTEREST:
INTEREST
: MATURITY : RATE : PAYABLE
(other than s/a)
Western Union Space Communications, Inc.
[NASAl
4/2
4/20
4/24
$
400,000.00
8,645,000.00
2,760,000.00
10/1/89
10/1/89
10/1/89
9.36%
9.387%
9.443%
5,211,911.87
various
9.11%
Department of Health, Education and Welfare
Block #4 4/27
9.579% annually
9.607%
9.666%
FOR RELEASE AT 4:00 P.M.
May 29, 1979
TREASURY TO AUCTION TWO CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills, as follows:
15-day bills (to maturity date) for approximately $5,000
million, to be issued June 4, 1979, and to mature June 19, 1979
(CUSIP No. 912793 4T 0). .
16-day bills (to maturity date) to be issued June 5, 1979,
representing an additional amount of bills dated December 21,
1978, and to mature June 21, 1979 (CUSIP No. 912793 Z2 5).
The amount of the offering will be announced June 1.
Competitive tenders will be received at all Federal Reserve
Banks and Branches, up to 1:30 p.m., Eastern Daylight Saving
time, Thursday, May 31, 1979, for the 15-day bills, and up to
12:30 p.m., Eastern Daylight Saving time, Monday, June 4, 1979,
for the 16-day bills.
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 each 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 $100,000 denomination, which will be available only to
investors of the 16-day bills 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.
B-1630
2.
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.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of
the Treasury of the amount and price range of accepted bids.
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 Monday, June 4, 1979, for the 15-day bills,
and on Tuesday, June 5, 1979, for the 16-day 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 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.
For Immediate Release
May 16, 1979
REMARKS BY
ARNOLD NACHMANOFF
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR DEVELOPING NATIONS
BEFORE THE
AFRICAN DEVELOPMENT FUND'S SIXTH ANNUAL MEETING
ABIDJAN, IVORY COAST
Introduction
It is a great pleasure and honor for me to represent
the United States at this sixth annual meeting of the African
Development Fund. I wish to thank the Government of the Republic
of the Ivory Coast and most especially President Houphouet Boigny
for the warm hospitality which has been shown to us during the
meeting in Abidjan.
The past few years have witnessed a remarkable expansion
in the lending activities of the African Development Fund. In
1978, Fund lending reached a new record of almost $190 million —
compared to $47 million during the first year of Fund operations
just four years ago. This achievement bears witness to the
vitality and dynamism of the African Development Fund. It reflects
the strong and growing confidence of member governments in the
ability of the Fund to play a significant role in facilitating
Africa's development and their commitment to the principle
of multilateral aid.
The United States is proud of its growing role in promoting
growth and prosperity in Africa through participation in the
African Development Fund. Since last year's annual meeting,
the United States has contributed an additional $25 million
to the Fund in order to help finance its lending program for
1978. Over the next three years, the United States plans
to contribute a further $125 million as our contribution to
the second African Development Fund replenishment. Our support
for the African Development Fund is one tangible indication
of the deep commitment of the United States to the development
B-1631
- 2 of the nations of Africa. It also reflects our dedication
to helping meet the basic human needs of the over 400 million
people who live in Africa as well as a recognition of the
growing cultural, economic and political ties between the
United States and the African continent. Indeed, in
the increasingly interdependent world in which we live,
no nation can escape the consequences of economic trends
and conditions in other regions of the world. All nations
— developed and developing — have a stake in the health
and vitality of the international economy.
World Economic Situation and Outlook
In looking at the world economy today, one finds conflicting
trends and uncertainty which have been heightened recently by
oil price increases. Aggregate demand has been sluggish in much
of the industrial world outside the United States since 1973.
The growth of GNP has been low by 1960's standards, making
it difficult to reduce unemployment; while higher than normal
inflation and larger than normal external deficits have
complicated the problem by constraining governments from
actively pursuing expansionary policies. One result has been
that protectionist pressure groups have gained strength and
sought measures which we believe would make industrial economies
less dynamic and more prone to inflation.
Nevertheless, the global economy ended 1978 on an upswing.
We estimate developed country growth reached 4.3 percent in
the second half of the year, while growth in the developing
countries continued at more than 5 percent for the third year
in a row.
A major concern we now have is that recent oil price
increases will hinder progress and exacerbate negative trends.
Industrial country growth rates can be expected to return
in 1979 to the 3.6 percent range experienced in 1978, while
rising oil prices will add to inflationary pressures in both
the developed and developing countries. We can also expect
the pattern of current account balances as a whole to retreat
from important gains. If oil prices remain at current levels,
the OPEC surplus will likely swing sharply upward, while the
deficit of the oil importing developing countries will increase
substantially.
The U.S. Response to Africa's Needs
In Africa, recent economic developments have been mixed.
While a number of countries recorded higher growth rates in
1978 than in 1977, other nations have encountered rather severe
economic difficulties.
- 3 The United States is deeply committed to helping
African nations overcome their difficult economic problems
and has adopted policies which will foster their development:
First, we have worked to maintain a strong and stable
U.S. economy~as a vital prerequisite to meeting our obligation
to assist the developing world and our broader responsibility
to contribute to the effective functioning of the global
economy. In 1978, the U.S. output of goods and services
increased in real terms by four and one-half percent. On the
negative side, inflation worsened during the year; consumer
prices rose by nine percent — a substantial increase from
the six and three-quarter percent rise in 1977. In response
to these conditions, President Carter has pursued a restrained
budgetary policy, curtailing the growth of federal spending
and lowering the share of America's GNP accounted for by
Federal Government spending. The U.S. is also taking steps
to adjust to higher oil prices and reduce U.S. energy consumption. These measures will go far to establish the fundamental
conditions required for a sound dollar at home and abroad. To
complement these efforts, we have also joined with other major
industrial countries to coordinate closely on direct action
in the foreign exchange market to prevent any resumption of the
disorders which led to the precipitous decline of the dollar
last fall.
Second, the Carter Administration has resisted pressures
to adopt inward looking protectionist measures, and has chosen
to pursue a liberal trade policy as the only path to sustained
economic growth for developed and developing countries. In
this regard, as part of the Tokyo Round of Multilateral Trade
Negotiations the United States has agreed to a reduction of
about 30 percent on some $40 billion of imports. A legislative
package to implement the trade agreements reached during the
Tokyo Round will go before the Congress shortly. These agreements
will place greater discipline on the use of non-tariff barriers.
Moreover, they will also provide a permanent legal basis for
special and more favorable treatment of developing countries
and liberalize the rules governing trade measures for development
purposes.
Third, the United States has responded constructively
to the producer need for commodity agreements, in many cases
designing mechanisms to provide greater benefits from price
stabilization for producer and consumer countries. These
initiatives are of considerable importance to the economies
of most African countries, since they affect commodities
which account for a substantial share of total export earnings.
- 4 We are approaching international discussions on copper and a
new cocoa agreement in a flexible fashion, aiming to design
market-responsive arrangements which rely on buffer stocks to
provide balanced stabilization around underlying market trends.
We expect our Congress to complete ratification of the new
International Sugar Agreement in the coming months, and the
Administration has recently forwarded to Congress implementing
legislation covering our obligations under the Coffee Agreement.
Also, the United States agreed recently to a framework Agreement
on Natural Rubber and is preparing for negotiations next spring
on a sixth Tin Agreement. Finally, to facilitate financing of
individual commodity agreements, the United States joined with
other countries in agreeing on most of the basic elements of a
Common Fund in March and looks forward to working out final
details later this year.
Fourth, in the field of energy, the United States strongly
supported a growing role for the development bank and our Overseas
Private Investment Corporation in the search for energy throughout
the world, as well as new bilateral cooperation programs to assist
in the development of renewable energy alternatives.
— Fifth, in order to promote food security we have worked
for the establishment of a reserve stock policy designed to ensure
adequate grain supplies at~reasonable prices and to meet food aid
commitments.
Finally* the United States recognizes that Africa will
require substantial development financing in order to facilitate
its development? U.S. bilateral aid to Africa totaled almost $500
million in FY 1978.
The U.S. Congress has also passed legislation that will allow the poorest developing countries — most of
which are African — to repay certain loans by spending local
currencies for development projects instead of sending dollars
back to the United States. The effect of this new initiative will
be to increase the net flow of U.S. assistance to the poorest
nations.
In addition to bilateral aid, the Administration has recently
submitted to the U.S. Congress a request for the largest yearly
appropriation in the history of the multilateral development
banks — $3.6 billion. This figure includes, in addition to
our appropriation request of $41.7 million for the African
Development Fund, almost $2.2 billion for the World Bank Group,
which will also have a significant impact on Africa. In 1977
and 1978, almost one-third of IDA lending — or $1.1 billion
— went to African countries. The International Finance Corporation
(IFC) is also stepping up its efforts to assist private sector
-development in Africa, thereby promoting new sources of savings,
investment, and employment.
- 5 More needs to be done. As we look to the future, the
United States believes that it is important that we concentrate
our resources on programs which most directly contribute not
only to growth but also to equity in those countries which
receive our aid. A major concern of my Government is that
bilateral and multilateral assistance should directly help
the poorest people to become productive members of their
societies. In this connection, we believe that respect for
fundamental human rights, including efforts to meet basic
human needs, is integral to achievement of economic and
social development.
We also support efforts by African countries to join
together themselves to promote intra-regional cooperation and
development through regional and sub-regional organizations,
including, for example, the Economic Community of West African
States (ECOWAS).
The African Development Fund and its Achievements
The United States joined the African Development Fund in
late 1976 — three years after the Fund's establishment. The
period since our accession to the Fund Agreement has witnessed
a substantial increase in our commitment to the AFDF. The most
recent U.S. pledge of $125 million to the second replenishment
of the African Development Fund represents approximately 17.5
percent of total resources pledged to the replenishment.
The United States is also assisting the African Development
Bank Group through our bilateral technical assistance program.
Since 1968, U.S.A.I.D- has funded technical services, preinvestment studies, and training to enhance the Bank's and
Fund's ability to identify, appraise and monitor projects.
The African Development Fund, under the leadership of
its President, Kwame D. Fordwor, has made admirable progress
in increasing its ability to identify, develop and administer
a portfolio of sound development projects. We would encourage
Fund management, in cooperation with the Fund's Board of
Directors, to continue to make improvements in the Fund's
administration and operational capacity. In this task, an
informed and active Board of Directors will be of vital
importance. We therefore believe the well established
pattern of dialogue and free flow of information between
management and the Board should be fostered and strengthened
in the coming years.
One area of particular interest to the United States is an
intensified effort to establish independent evaluation and
auditing systems within the Fund to assess the efficiency and
- 6 effectiveness with which Fund loans are utilized. Development
is a learning process in which the experience gained through
the evaluation of earlier projects may provide invaluable
insight into ways to improve future programs. We are pleased
to note that Fund management has already taken certain initiatives
in this area, and is establishing an internal audit unit.
We welcome the emphasis which the new Fund lending guidelines
place on assisting the poor. Agricultural projects — especially
those aimed at increasing the productivity of small farmers —
may be of particular importance in the coming years given Africa's
increasing food requirements.
We also wish to encourage the Fund to closely examine the
technologies used in projects. Given the scarcity of capital in
many African countries, it is essential for the AFDF to incorporate
capital savings technologies into project designs in order to
obtain the maximum development impact and benefit.
Close cooperation among international development institutions
is essential if external aid is to make its maximum contribution
to African development. We are pleased to note that the Fund
has actively cooperated with the World Bank and other development
agencies in the past and would urge the Fund to intensify its
efforts at coordination and co-financing in order to assure the
efficient and effective use of external development assistance.
For the past several months the U.S. administration has been
engaged in an oversight process with relevant congressional committees concerning the operational procedures of the multilateral
development banks. Among the subjects considered were auditing
and evaluation procedures, the availability of documentation,
the banks' role in aid coordination and the banks' efforts to
better "reach the poor." A number of suggestions to enhance the
effectiveness of the banks emerged from this review, and we look
forward to discussing these ideas with both Fund management and
the African Development Fund members.
Conclusion
In closing, I want to reaffirm the deep commitment of the
United States to Africa and to the African Development Fund. I
would also like to express our satisfaction with the historic
decision by the Governors of the African Development Bank to
invite non-regional nations to join their institution. The
United States recognizes that non-regional membership will increase
the flow of development resources to the African countries while
preserving the African character of the African Development Bank.
In particular, it will enhance the Bank's access to capital
markets, including the U.S. capital market, the largest and
most open in the world.
- 7 The U.S. administration welcomes the decision taken by
the Governors, and we will consult promptly with our Congress
on the legislative measures required for United States membership in the Bank. The United States looks forward to
working closely with all members during the years ahead in
the pursuit of our common goals.
FOR IMMEDIATE RELEASE
MAY 31, 1979
"
ADDRESS BY THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY
BEFORE THE
INTER-AMERICAN DEVELOPMENT BANK
TWENTIETH ANNUAL MEETING
MONTEGO BAY, JAMAICA
MAY 29, 1979
It is a great pleasure for me to be here today to address
this distinguished gathering on the occasion of the twentieth
annual meeting of the Inter-American Development Bank. I
would like to thank the people and government of Jamaica for
the hospitality they are so graciously extending to us in
beautiful Montego Bay.
The United States shares the commitment of the other
members of the Inter-American Development Bank to economic
development and social progress in the hemisphere. As the
bank moves toward completion of two decades, we have an opportunity to reflect upon the remarkable progress that has been
made toward these goals and the evolving role of the bank as
the focus for regional development assistance and cooperation.
The decision of the Governors last December to replenish the
resources of the bank and to set new priorities for the next
four years reflects the shared view that the bank should continue to expand equity in the region. The United States
will maintain its firm support for the bank and its efforts
to promote balanced development throughout the region.
WORLD ECONOMIC SITUATION AND OUTLOOK
The world economic situation is far from satisfactory.
Inflation is at unacceptable levels in almost all countries.
Many nations have near record unemployment which is increasingly of a structural nature. Severe imbalances in external
payments positions continue in some countries. Moreover,
the oil price and supply situation is increasing the inherent
dangers which exist.
A major common problem is inflation which has risen to
a dangerous point. The effects of the oil shocks of 1973/74
were clearly larger, and longer lasting, than earlier estimates suggested. And increasingly, we are beginning to pay
the price for inadequate productivity and lagging capital
formation, not only in the United States, but elsewhere.
B-1632._
The evidence is provided by our present predicament: capacity
-2constraints are being reached in a number of countries much
sooner than expected, even when broacl measures such as the unemployment figures tend to suggest over-all excess capacity.
Against this background the short-term outlook for inflation is a clouded one. The price hikes recently implemented by OPEC countries will hurt. Since December alone,
the OPEC countries have raised prices by 27 percent. Additionally, we are beginning to see a strong upsurge in selected
raw meterial prices and rising wage demands in all OECD
CsrofttiiJSs. The bottom line is that we now expect inflation
in the OECD area to increase by 1.5 percentage points in
1979 above the 1978 rate of 6.9 percent.
We are, however, particularly troubled by the oil price
increases of last December and March and fear they will reverse recent progress and aggravate those global economic
problems which have persisted. Rising oil prices will add
to inflationary pressures in both the developed and developing
countries despite an expected slow-down in industrial country
growth rates. The global pattern of current account balances
is expected to worsen significantly in 1979, reversing important
recent gains. Even if oil prices do not increase further
this year, the OPEC surplus will be in the *25 to $30 billion
ranqe for .1979.
The deficit of the oil-importing developing countries
will increase substantially. The price increases to date
in 1979 are expected to add at least $4 billion a' year to
J:he cost of their oil inpor't's — — an unjustifiable
transfer of wealth that will further hamper their development
efforts. We strongly support those countries here which have
recently voiced their concerns, at the unctad conference
and elsewhere, about the expected adverse impact of increased
oil prices on their economies.
But the outlook is not entirely gloomy. During 1979
we should continue to see slow, steady progress in a number
of important areas. We expect a substantial reduction in
the disparities in economic performance among OECD countries.
Somewhat faster growth abroad combined with slower U.S.
growth will add stability. Real growth outside the U.S. will
exceed that of the U.S. for the first time since 1975.
This alteration in relative growth rates' , coupled with
the gains from past changes in competitive positions, will
reduce external imbalances. We are already seeing this very
clearly in the case of Japan and the United States, and we
expect some reduction in the German surplus. The recent trade
-3figures confirm our expectations for a substantial reduction
in the U.S. deficit in 1979 continuing into 1980.
UNITED STATES POLICY AND DEVELOPING COUNTRIES' NEEDS
Over the past year we have undertaken a number of steps
designed to assure a strong, non-inflationary U.S. economy.
These steps are required if the United States is to do its
part in the effective functioning of the world economy.
They are also a prerequisite, and perhaps the most important
contribution the United States can make, to improving the
economic well-being of Latin America given the high degree
of economic interdependence between our two regions.
The rate of real economic growth in the United States
in 1978 was four and one-half percent* and U.S. imports of
goods and services from Latin America and the Caribbean
increased 12.2 percent in 1978. In addition, three million
jobs were created in the United States, and unemployment
fell below six percent, but inflation clearly worsened. Consumer prices in the United States rose by nine percent for
the year. Consequently, President Carter is forcefully
pursuing an anti-inflationary policy through a program of
monetary and fiscal restraint, supplemented by voluntary
wage and price restraints and increasing competition in
certain industries, such as the airlines, through federal
deregulation.
We are also acting to increase energy conservation,
partly through the market mechanism by decontrolling domestic
oil prices, which will serve to adjust the U.S. economy to
the economic realities of significantly higher world oil
prices. We have also reached agreement with 19 other oil
consuming nations in the International Energy Agency (IEA)
to reduce oil consumption by about two million barrels per
day or five percent below anticipated IEA demand.
Together these actions, in combination with the November
1st measures, have helped reestablish the fundamental conditions for a stronger U.S. dollar, which has consistently
demonstrated stability in world currency markets in recent
months. Furthermore, we are now coordinating closely with
other major industrial countries to maintain a stable exchange market climate in which currency values reflect underlying economic and financial conditions.
The recent economic climate has given new life to internal political and economic pressures favoring the adoption
of inward looking protectionist measures. Despite those
pressures, President Carter has made it clear that his
_4administration will pursue a liberal trade policy as the only
path to sustained economic growth. In this regard, the
trade package to conclude the Tokyo round of Multilateral
Negotiations (MTN), in which the United States played a
decisive role, is about to go before the Congress. That
agreement will reduce U.S. tariffs on some $40 billion
of imports by about 30 percent and sharply reduce non-tantr
barriers, thereby assuring developing countries improved
access to our market.
Along with other countries, we have taken action to
strengthen the International Monetary System by the adoption
of revised articles of agreement for the International Monetary Fund and Measures to countries in need of such assistance.
These measures include the establishment of the supplementary financing facility, agreement on new allocations of
special drawing rights during the next three years, and subject
to the necessary legislative approval by member Governments,
a 50 percent increase in IMF quotas.
The United States views the developing nations as an
integral part of the world economic system, with needs and
concerns which must be taken into account in formulating
all of our global economic policies, and with responsibilities
which affect the functioning of the whole system. The developing countries share our interest in an open international trading and financial system, in stable international
monetary arrangements, in helping to promote adequate rates
of growth of global production and in improving the economic
well-being of poor people everywhere.
The degree of responsibility assumed by each country
should depend on its stage of development. For the poorest
countries we support increased concessional development assistance and preferential treatment in international trading
arrangements. We expect the more advanced developing countries
to assume greater obligations through the phaseout of preferential treatment, growing participation in efforts to
assist the poorer developing countries, and greater collaboration in molding the evolution of the international
economic system. In return, these countries have a right to
expect that their access to open markets for trade and capital,
so essential to their own development, will be maintained.
-5-
These twin principles of shared responsibility and the
right to participate in international economic decisions
have been basic to the concrete actions taken by the United
States, along with other nations, to benefit the developing
countries over the past two years.
In trade, they can be seen in the MTN package in which
a number of developing countries will participate directly
in the new codes, yet benefit from special and differential
treatment. Also improvements in the gatt framework will*
make it easier for the grievances of developing countries
to be heard and for them to influence the evolution of the
world trading system.
In commodities, approaching agreements on sugar, natural
rubber and a common fund call for shared producer-consumer
financing and decision-making with the objective of reducing
excessive price volatility around market trends to the benefit
of producing and consuming countries alike.
In development finance, where the amount of U.S. assistance has increased from $5.10 billion in FY 1976 to
$7.3 billion in FY 1979. we have criven increasina
emphasis to the multilateral development banks, for which
U.S. contributions have more than tripled over? those years.
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 IDB, the oldest
and largest of the regional development banks, exemplifies
the cooperative, multilateral approach to effective social
and economic development.
The IDB and other multilateral development banks are
making great .strides toward meeting the needs of poor people
and poor countries. We strongly support this effort. The
banks are shifting the sectoral composition of their lending
activities and changing the emphasis of lending from the more
traditional infrastructure projects to those which more clearly
-6assure that the benefits of development are shared by the
rural and urban poor. Thus, the IDB and the other banks
are actively supporting the efforts of borrowing countries
to benefit their poor.
Because of their effectiveness, their development priorities, and their contributions to worldwide economic growth,
social progress and political stability, U.S. support for
these institutions, which has been long and unwavering,
has grown dramatically in recent years. This year the Carter
Administration is requesting of the U.S. Congress appropriations for the banks of $3.6 billion.
'
LATIN AMERICA AND THE CARIBBEAN
Latin America and the Caribbean have, on the whole,
shown great progress in the past two decades. Over that
period development in the region clearly has accelerated at
a rapid pace and much of Latin America, along with a small
number of Asian countries, has been the vanguard of the
developing world. The region has assumed an ever-increasing
role in the world economy, and we expect this trend to continue.
Even in the present decade, with all its economic problems, regional GDP has expanded at an average annual rate
of 5.8 percent. In contrast, the OECD countries have seen
only 3.4 percent average growth over the same period.
As the region's growth proceeds, its economic importance
to the United States continues to increase, with expanded
opportunities for mutually beneficial interaction. U.S.
merchandise exports to the region reached $22 hillion
in 1978, over three times the level in 1970. Similarly,
U.S. merchandise imports from the region in 1978 were
$24 billion, more than four times 'their 1970 U'eyel,
U.S. direct investment in Latin America is now approximately
$30 billion, about 80 percent of all U.S. Direct investment in developing countries. Lending by private banks
in the United States to Latin America has also risen rapidly
and exceeded $42 billion at the end of 1977 —
21 percent
of all U.S. bank lending abroad. If, as expected,
the region's economies continue to demonstratie recent economic
dynamism, these mutually beneficial trade and investment
relationships will continue to expand at a rapid rate.
Although these economic trends are encouraging, much
remains to be accomplished. Despite the overall economic
progress of the region, the benefits of this progress have
not flowed to all segments of the region's population or to
-7all countries within the region uniformly. Several nations
of the region remain desperately poor and, in almost all
the countries of the region, there are substantial numbers
of people living in poverty.
THE INTER-AMERICAN DEVELOPMENT BANK
In order for the IDB to continue its work toward the
solution of a wide range of development problems, we have
recently agreed to increase the bank's resources. That replenishment agreement reflects both the achievements and the
needs of the region, and charts new courses for the bank
over the next four years. The spirit of compromise and
common purpose which prevailed throughout the negotiations
resulted in an agreement which is realistic and fair to all
concerned and which provides a framework for continuation
of the effective contribution of the bank to development
in Latin America.
In light of the economic progress of much of Latin
America, the fund for special operations (FSO) will now focus
more directly on those countries and people with the greatest
need. Several borrowers have progressed sufficiently so
that they no longer rely upon the FSO as a source of external
capital. Furthermore, in view of their broader access to
private capital markets and their desire to assume greater
responsibility for the needs of their less fortunate neighbors, the larger and more prosperous Latin countries have
agreed to increase the convertible portion of their FSO
contributions and to limit their capital borrowing to approximately present levels. This will enable the poorer countries
to attain substantial annual increases in their real rate
of total borrowing from the bank. We strongly support this
replenishment and intend to work closely with the Congress
to provide our full share. Last year we were able to eliminate all previously unfunded pledges to capital of the
bank. This year we have asked the Congress to authorize
the full amount of our pledge in the replenishment, which is
almost $3.5 billion, and to appropriate the full-amount
of our first year's portion for the capital and FSQ as well
as the remaining FSO pledge under the previous replenishment,
a total in excess of $1 billion for this year alone. Concrress has already held numerous hearings, and the United
States Senate recently voted overwhelmingly to authorize
the full amount requested. We expect the U.S. House of
Representatives to complete action shortly on the authorization. The appropriations process has only recently begun
which
and wewe
will
have
make
requested.
every effort to secure the full amount
-8I would like to comment on several noteworthy accomplishments of the bank in the recent past:
— Lending over the 1975-78 period confirmed closely
to the goals established for that period in terms of amounts
and sectoral distribution, with increasing attention to the
needs of the less developed members.
— Disbursements last year reached a new high well in
excess of one billion dollars, a substantial increase over
previous levels.
— Normal mobilization of private resources through
the bank's own borrowings was supplemented in 1978 by securing
a record $133 million in private co-financing for high
priority projects within the region.
— The recent action to reorganize what is now known as
the Office of External Review and Evaluation represents a
significant step forward in the evolution of this important
function, and it will bolster efforts to improve the bank's
efficiency and effectiveness.
— These accomplishments stemmed from the bank's ability
to recognize and adapt to changing circumstances. The agreed
goals of the replenishment, which are also based on changing
circumstances, present an even greater challenge, requiring
flexibility, resourcefulness, and a spirit of cooperation.
We have every confidence that this institution, with the
support of all its members, will meet that challenge.
One task before us is to give definition to one of the
replenishment goals in order for it to become operational.
Specifically, there is a need to define explicity those low
income groups which will be the target of 30 percent of the
bank's lending over the replenishment period and the methods
and techniques which will be used to measure project benefits.
We have been encouraged by the progress made thus far and
believe that the establishment by the committee of the board
of a date for decision on definition and methodology is a
constructive step. We urge the bank to devote increased
resources to this task.
The bank's mandate to intensify efforts to channel resources to projects which provide benefits to low income
groups is clearly a recognition of the balance that should
exist between two basic development objectives — structural
transformation and growth with equity. We recognize the
difficulty of translating this general principle into operational terms. We do not envision that projects that impact
exclusively and immediately on low income groups. While
-9projects of this kind are important, careful analysis will
demonstrate that a wide variety of projects can be structured
to have a substantial and sustained impact on the welfare
of these groups, either directly or indirectly, immediately
or over the medium term.
I would also like to note that we believe that the goals
and purposes of the bank encompass a broad range of fundamental concerns related to the development process, including
recognition of human rights. We also believe that scarce
development funds generally can best be utilized to promote
economic and social objectives by governments which have
manifested a commitment to protecting and promoting the
rights of their people as President Carter has emphasized,
we seek to cooperate with all members in finding the best
ways to advance our common commitment to the protection of
internationally recognized human rights including the fulfillment of basic human needs. At the same time the integrity and effectiveness of all the development banks must be
assured.
For the past several months we have been engaged in an
oversight process with congressional committees concerning
the operational procedures of the Multilateral Development
Banks must be assured.
For the past several months we have been engaged in an
oversight process with congressional committees concerning
the operational procedures of the Multilateral Development
Banks. A number of suggestions deal among other things,
with auditing and evaluation procedures the banks' role in
aid coordination and the banks' efforts to reach the poor
more effectively. We look forward to discussioa our ideas
with both bank management and the member countries.
In the view of the United States, this has been a year
of major accomplishment for the IDB. The course of this institution for the next four years has been charted. It is a
good one.
However, a dedicated effort will be required to fulfill
the goals which have been laid out. The U.S. will strongly
support the bank and we look forward eagerly to working with
you and meeting the challenges of the next few years. We
hope that our joint efforts will allow us to look back upon
the coming period as one of great accomplishment in which
the bank made notable advances toward the goal of balanced
development with equity through regional cooperation.
partmentoftheTREASURY
5HINGT0N, D.C. 20220
TELEPHONE 566-2041
IMMEDIATE RELEASE
May 31, 1979
Contact:
Charles A r n o l d
(202) 566-2041
TREASURY CLEARS REVENUE SHARING
PAYMENTS TO NEW YORK CITY
The Treasury Department and New York City today
completed a "compliance agreement" removing any possibility
that Federal Revenue Sharing Funds would not be received
by the city as scheduled because of a court holding of
discrimination in the City police department.
The agreement, signed previously by City Corporation
Counsel A l l e n G. Schwartz, was approved today by B e r n a d i n e N,
Denning, Director of the Office of Revenue Sharing.
The text of the agreement is attached.
B-1633
COMPLIANCE AGREEMENT BETWEEN THE OFFICE OF
REVENUE SHARING ANP NEW YORK CITY
New York City (hereinafter the "City") and the Office
of Revenue Sharing (hereinafter "ORS") hereby enter into a compliance agreement pursuant to the provisions of Section 122 of
the State and Local Fiscal Assistance Act of 1972 as amended in
1976.
On March 12, 1979, ORS received a copy of the opinion
of the United States District Court in Guardians Association of
the New York City Police Department, Inc., et al., vs. Civil
Service Commission of the City of New York, et al.,
Supp.
Fed.
, 76 Civil 1982 (RLC) (Southern District, New York,
February 27, 1979).
That opinion held that NYC engaged in racially
discriminatory employment practices in connection with the hiring
of police officers on the basis of examinations given in 1968, 1969
and 1970.
ORS construes such opinion as a "holding" within the
meaning of Section 122.
On March 23, 1979, ORS issued a notice of
the receipt of such holding and informed the City of the requirement
that within a period of 30 days it would be necessary for a compliance agreement to be entered into pursuant to Section 122.
The City was also apprised of its appeal rights on "funding."
No compliance occurred and on May 2, 1979, the City was
notified by ORS of the suspension of funds unless within a period
of 10 days the City entered into a compliance agreement or appealed
the "funding" issue.
The City disputes the question of whether there has
been a "holding" within the meaning of Section 122 and further
contends that, if it is, a stay by a Court of the District Court's
order, when entered, will suspend the effect of the Court "holding
and preclude the suspension of revenue sharing funds. The Treasury
Department disagrees with such interpretation.
On May 14, the District Court entered its order in the
Guardians litigation. Under that order, the City is required to
perform certain steps preliminarily to establishing retroactive
seniority for police officers who were the subject of the Court
determined discrimination.
To resolve the differences between the City and ORS and
to avoid the necessity of litigation, the parties hereby agree as
follows:
1. The City has filed a notice of appeal with the
Second Circuit on May 23 and upon motion will seek an expedited^
appeal from the Second Circuit.
2. The City wiir perform those actions required of it
under the Court order at the time required, regardless of the
fact of an appeal and regardless of whether any stay order is
entered except that the provisions of paragraphs 9, 10, 12 and
14 will be -stayed only to the extent that a stay order is granted
by the District Court or by the Court of Appeals directed to the
relief ordered in such paragraphs.
3. At each such time as the City completes an action
required of it by the order of the court, a report will be made
to ORS describing the action taken and providing the basis for
the action taken.
4.
In the event the City does not comply with the
provisions of paragraph 1, the City shall, notwithstanding a
stay of the District Court's order (if entered), award to
class members all relief authorized by the District Court's
order in a manner consistent with such order.
5.
The provisions of this agreement will be modified
by ORS to conform to any revised order of the District Court
or of the Court of Appeals.
6.
The parties agree that revenue sharing funds
were employed in the Police Department.
The City expressly
waives further processing of its claim for administrative review
of the actions of ORS.
7.
This Agreement will terminate upon full compliance
with the final order concluding the litigation.
FOR IMMEDIATE RELEASE
May 31, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY FINDS CONDENSER
PAPER FROM FINLAND IS SOLD
HERE AT LESS THAN FAIR VALUE
The Treasury Department today said it has
determined that condenser paper imported from Finland 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 the tentative decision issued on February 20, 1979. The
weighted average margin of sales at less than fair
value in this case was 18 percent, computed on all
sales.
Interested persons were offered the opportunity
to present oral and written views before 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 this merchandise from Finland during
February-July 1978 were valued at about $528,000.
Notice of this determination will appear in the
Federal Register of June 4, 1979.
o
B-1634
0
o
FOR IMMEDIATE RELEASE
May 31, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY FINDS CONDENSER
PAPER FROM FRANCE IS SOLD
HERE AT LESS THAN FAIR VALUE
The Treasury Department today said it has
determined that condenser paper imported from France
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 the tentative decision issued on February 20, 1979. The
weighted average margin of sales at less than fair
value in this case was 77.7 percent, computed on all
sales.
Interested persons were offered the opportunity
to present oral and written views before this determination.
(Sales at less than fair value generally occur
when imported merchandise is sold in the United State
for less than in the home market.)
Imports of this merchandise from France during
1978 were valued at about $2 million.
Notice of this determination will appear in the
Federal Register of June 4, 1979
o
B-1635
0
o
$
FOR IMMEDIATE RELEASE
May 31, 1979
RESULTS OF TREASURY'S 15-DAY BILL AUCTION
Tenders for $5,010 million of 15-day Treasury bills to be dated
on June 4, 1979, and to mature June 19, 1979, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
Discount Rate
Investment Rate
(Equivalent Coupon-Issue Yield)
High - 99.584 9.984% 10.19%
Low
99.579
10.104%
Average 99.581
10.056%
10.32%
10.27%
Tenders at the low price were allotted 99%.
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-1636
Received
$
45,000,000
7,980,000,000
Accepted
$
39,950,000
4 ,236,500,000
92,000,000
10,000,000
553,000,000
38,000,000
20,000,000
28,000,000
91,900,000
10,000,000
206,950,000
37,940,000
19,950,000
24,970,000
478,000,000
342,200,000
$9,244,000,000
$5 ,010,360,000
FOR IMMEDIATE RELEASE
May 31, 1979
Contact:
Alvin M. Hattal
202/566-8381
TREASURY ANNOUNCES FINAL DETERMINATION
IN COUNTERVAILING DUTY INVESTIGATION ON
CERTAIN FASTENERS FROM JAPAN
The Treasury Department today announced a final
determination that the Government of Japan is subsidizing
exports of certain fasteners to the United States.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional duty equal to
the subsidy paid on merchandise exported to the United
States.
As a result of its investigation, Treasury found that
manufacturers of this merchandise received subsidies consisting of low-cost loans, deferment of repayment of loans,
the right to carry back current losses related to yen
appreciation up to three years to offset income and corporate and local taxes paid in prior years, and special
government credit guarantees for firms affected by yen
appreciation over and above those otherwise offered to
small and midsize businesses.
The amount of the subsidy has been determined to be
4.2 percent ad valorem on some fasteners and 4.0 percent
on the remainder.
Notice of this action will appear in the Federal
Register of June 4, 1979.
Imports of this merchandise during 1978 were valued
at about $315 million.
o
B-1637
0
o
53232654,26
0G/02/04 = {l\ * \m |
\
@FedFRASER