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v.228

U. S. Dept. of the Treasury,

PRESS RELEASES.\

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FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 a.m.
March 3, 198 0

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I am here today to advise you of the Treasury's financing needs
through fiscal year 1981. I am also requesting an increase in the
authority to issue long-term securities in the market and removal
of the statutory interest rate ceiling on savings bonds.
Financing Requirements
The present temporary debt limit of $879 billion will expire
on May 31, 1980, and the debt limit will then revert to the
permanent ceiling of $400 billion. As part of the Congressional
budget, the May Budget Resolution in the House of Representatives,
therefore, must include an increase in the debt limit to permit
the Treasury to borrow to refund maturing securities and to pay
the Government's other legal obligations for the remainder of
fiscal year 1980.
Our current estimates of the amounts of debt subject to
limit at the end of each month through the fiscal years 1980
and 1981 are shown in the attached table. The table indicates
that the debt subject to limit will increase to $887 billion
on September 30, 1980, and to $934 billion on September 30, 1981,
assuming a $15 billion cash balance on these dates. These
estimates are consistent with the budget estimates which the
President submitted to Congress on January 28. The usual $3
billion margin for contingencies would raise these amounts
to $890 billion in September 1980, and $937 billion in
September 1981. Thus, the present debt limit of $879 billion
should be increased by $11 billion to meet our financing
requirements through the remainder of fiscal 1980 and by an
additional $47 billion to*meet the requirements through fiscal
M-352
1981.

- 2 Let me emphasize the importance of timely Congressional
action on the May budget resolution. In mid-May the Treasury
expects to announce offerings of new note issues to refund
obligations which mature on May 31 and perhaps to raise new
cash. Since May 31 is a Saturday the obligations maturing
on May 31 cannot be paid off or refunded until Monday, June 2,
at which time the present debt limit authority will have
expired. Moreover, we will also need to announce and auction
Treasury bill issues in the third or fourth weeks of May.
These do not settle until the first week of June. Thus, without an increase in the debt limit by mid-May, we will be forced
to postpone offerings because delivery of the securities
in early June could not be assured. Failure to offer these
securities as scheduled could be disruptive of the Government
securities market and costly to the Treasury.
Investors as well as dealers in Government securities
base their day-to-day investment and market strategies on
the expectation that the Treasury will offer and issue the
new securities on schedule. Delayed action by Congress on
the budget resolution and thus on the debt limit, therefore,
would add to market uncertainties, and any such additional
risk to investors is generally reflected in lower bids in
the Treasury's auctions and consequently in higher costs
to the taxpayer.
I know that this Committee has made every effort in the
past to assure timely action by Congress to increase the debt
limit. Yet, the record of recent years has not been good.
On three of the last five debt limit bills action was not
taken before the expiration date, and the Treasury was unable
to borrow until the Congress acted two or three days later.
Significant costs were incurred by the Treasury, and extraordinary measures were required to prevent the Government
from going into default. The Treasury was required to suspend
the sale of United States savings bonds, and people who
depend upon social security checks and other Government
payments suddenly realized that the Treasury simply could
not pay the Government's bills unless it was authorized
to borrow the funds needed to finance the spending programs
previously enacted by Congress.
You would agree, I trust, that it is essential that
we do everything possible to maintain the confidence of the
American people in their Government. Confidence in the
management of the Government's finances was seriously
undermined each time the debt limit was allowed to lapse,
and we must all work to avoid that outcome in this instance.

- 3 -

Bond Authority
I would like to turn now to our need for an increase in
the Treasury's authority to issue long-term securities in
the market without regard to the 4-1/4 percent ceiling.
Under this Administration, the Treasury has emphasized
debt extension as a primary objective of debt management,
a policy which we believe to be fundamentally sound. This
policy has caused a significant increase in the average
maturity of the debt, reversing a prolonged slide which
extended over more than 10 years. In mid-1965 the average
maturity of the privately-held marketable debt was 5 years,
9 months. By January 1976 it had declined to 2 years, 5
months, because large amounts of new cash were raised in the
bill market and in short-term coupon securities. Since that
time, despite the continuing needs for cash of the Federal
Government, Treasury has succeeded in lengthening the debt
to 3 years, 8 months, currently.
Debt extension has been accomplished primarily through
continued offerings of long-term bonds in our mid-quarterly
refundings as well as regular offerings of 15-year bonds in
the first month of each quarter. These longer-term security
offerings have contributed to a more balanced maturity structure
of the debt, which will facilitate efficient debt management
in the future. Also, these offerings have complemented
anti-inflation efforts. By meeting some of the Government's
new cash requirements in the bond market rather than the
bill market, we have avoided adding to the liquidity of the
economy at a time when excessive liquidity is being transmitted into increasing prices.
Congress has increased the Treasury's authority to issue
long-term securities without regard to the 4-1/4 percent
ceiling a number of times in recent years, and in the debt
limit act of September 29, 1979, it was increased from $40
billion to the current level of $50 billion. To meet our
requirements for the remainder of the fiscal year 1980, the
limit should be increased to $54 billion; and to meet our
requirements in the fiscal year 1981, the limit should be
increased to $70 billion.

- 4 -

The Treasury to date has used about $44 billion of the
$50 billion authority, which leaves the amount of unused
authority at about $6 billion. While the timing and amounts
of future bond issues will depend on prevailing market
conditions, a $20 billion increase in the bond authority
would permit the Treasury to continue its recent pattern of
bond issues throughout fiscal year 1981. We are currently
issuing long-term securities at an annualized rate of
approximately $14 billion.
Savings Bonds
In recent years, Treasury has recommended frequently
that Congress repeal the ceiling on the rate of interest
that the Treasury may pay on U.S. Savings Bonds. In the
debt limit Act of April 2, 1979, Congress increased the
statutory ceiling from 6 percent to 7 percent. Since April,
the Treasury has increased the savings bond rate twice:
to 6-1/2 percent effective June 1, 1979, and to 7 percent
for the new series EE bonds which went on sale on January 1, 1980.
Legislation is necessary to provide for further increases
beyond the present 7 percent statutory ceiling.
Mr. Chairman, we are concerned that the present
requirement for legislation to cover each increase in
the savings bond rate does not provide sufficient flexibility to adjust the rate in response to changing market
conditions. The delays encountered in the legislative
process could result in serious inequities to savings bond
purchasers and holders as interest rates rise on competing
forms of savings.
The Treasury relies on the savings bond program as an
important and relatively stable source of long-term funds.
On that basis, we are concerned that participants in the
payroll savings plans and other savings bond purchasers
might drop out of the program if the interest rate were not
maintained at a level reasonably competitive with comparable
forms of savings. In this regard, market interest rates
have increased substantially since the current 7 percent
ceiling was established in April, 1979, and are currently
at historic highs. This has caused a significant increase
in savings bond redemptions last year. In 1978, as market
rates of interest increased, redemptions began to exceed sales.
The cash outflow increased to $5.3 billion in 1979 and was
a record $1.7 billion in January 1980. These cash losses
to the Treasury must be made up by increasing the amounts
the Treasury borrows in the market, and the Treasury is
currently paying significantly higher interest rates on its
market borrowings. If this situation continues, it will be

- 5 essential to increase the savings bond interest rate in order
to avoid further substantial cash drains to the Treasury and
permanent damage to the savings bond program. The amount of
any necessary rate increase will depend on current market
conditions and on the other terms and conditions offered
to savings bonds investors. We are currently reviewing the
savings bonds program to determine what changes need to be
made. Thus, we are requesting that the present ceiling on
the savings bond interest rate be repealed.
Any increase in the savings bond interest rate by the
Treasury would continue to be subject to the provision in
existing law which requires approval of the President. Also,
the Treasury would, of course, give very careful consideration
to the effect of any increase in the savings bond interest
rate on the flow of savings to banks and thrift institutions.
Debt Limit Process
I would now like to comment on the process by which
the public debt limit is established.
Separate legislation for a statutory debt limit is not
an effective way for Congress to control the debt. The
increase in the debt each year is simply the result of
earlier decisions by Congress on the amounts of Federal
spending and taxation. Consequently, the only way to
control the debt is through firm control over the Federal
budget. In this regard, the Congressional Budget Act of
1974 greatly improved Congressional budget procedures and
provided a more effective means of controlling the debt.
That Act requires Congressional concurrent resolutions on
the appropriate levels of budget outlays, receipts, and public
debt. "This new budget process thus assures that Congress will
face up each year to the public debt consequences of its
decisions on taxes and expenditures.
The debt limit act of September 29, 1979, which established
the current limit of $879 billion, also amended the rules of
the House of Representatives to tie the establishment of the
debt limit to the Congressional budget process. Under the new
House Rules, the vote by which the House adopts a budget
resolution will be deemed to be a vote in favor of a joint
resolution changing the statutory debt limit to the amount
specified in the budget resolution. The joint resolution
on the debt limit will then be transmitted to the Senate for
further legislative action.

- 6 Mr. Chairman, I would like to express our appreciation
and support for this significant reform in the debt limit
process. This new procedure will assure a more effective
focus by Congress on the total budget and debt process and
more timely action by Congress on the debt limit.

Attachment

OoO

ESTIMATED
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 19 80
Based on: Budget Receipts of $524 Billion,
Budaet Outlays of $564 Billion,
Unified"Budget Deficit of $40 Billion,
Off-Budget Outlays of $17 Billion
($ Billions)
Operating
"Cash
Balance
1979

Public Debt
Subject to
Limit

With $3 Bill
Margin for
Contingenci

ACTUAL

September 28

$24.2

October 31

10,5 828

November 3 0

5.6 835

December 31

15.9 846

$828

1980
January 31

16.6 849
853

March 31

13.0
ESTIMATED
15.0

867

870

April 30

15.0

869

372

May 3 0

15.0

881

884

June 3C

15.0

871

874

July 3 1

15.0

373

831

Augus. 2?

15.0

839

392

SecterrJaer 30

15.0

33"

890

February 26

ESTIMATED
PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1981
Based on: Budget Receipts of $600 Billion,
Budget Outlays of $616 Billion,
Unified Budget Deficit of $16 Billion,
Off-Budget Outlays of $18 Billion
($ Billions)
Operating
Cash
Balance

Public Debt
Subject to
Limit

With $3 Billion
Ma::gin for
Com :ingencies

$15

$900

$903

November 3 0

15

909

912

December 31

15

910

913

January 3 0

15

910

913

February 27

15

920

923

March 31

15

930

933

April 30

15

935

938

May 29

15

940

943

June 3 0

15

934

937

July 31

15

936

939

August 31

15

940

943

SeDtember 30

15

934

937

1980
October 31

1981

March 3, 1980

Treasury Secretary G. William Miller today announced that
Deputy Secretary Robert Carswell will oversee the activities
of the Office of the Under Secretary for Monetary Affairs until
appointment of a successor to Anthony M. Solomon who resigned
to become President of the Federal Reserve Bank of New York.
Secretary Miller stated that Assistant Secretary for
International Affairs C. Fred Bergsten, and Assistant Secretary
for Domestic Finance Roger C. Altman will have broadened
responsibilities during the interim period and will report to
him through Mr. Carswell.
Mr. Carswell was nominated by President Carter as Deputy
Secretary in March, 1977 and confirmed by the Senate a month
later. Previously, he was a partner in the New York law firm
of Shearman and Sterling. He served as Special Assistant to
the Secretary of the Treasury from 1962 to 1965.

M-353

ortmentoftheTREASURY
TELEPHONE 566-2041

!HINGTON,D.C. 20220

FOR IMMEDIATE RELEASE

March 3, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,300 million of 13-week bills and for $3,300 million of
26-week bills, both to be issued on March 6, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

a/
b/

High
Low
Average
Excepting 4
Excepting 2
Tenders at
Tenders at

13-week bills
maturing June 5, 1980
Discount Investment
Price
Rate
Rate 1/

96.259^' 14.800%
15.59%
96.135
15.290%
16.13%
96.174
15.136%
15.96%
tenders totaling $2,165,000
tenders totaling $755,000
the low price for the 13-week
the low price for the 26-week

26-week bills
maturing September 4, 1980
piscount Investment
Rate 1/
Rate
Price

:
:

92.600^ 14.637%
92.479
14.877%
92.522
14.792%

16.03%
16.31%
16.21%

bills were allotted 71%.
bills were allotted 78%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands )
Received
Accepted
Received
$
39,970
"
$
68,685
$
69,970
4,543,200
2,553,700
5,388,460
31,035
31,035
17,400
87,785
84,735
54,525
36,215
36,215
40,875
66,690
66,690
45,350
313,435
133,435
379,360
25,890
25,890
18,090
6,305
6,305
6,305
49,965
49,965
46,545
21,440
21,440
15,170
382,145
197,145
251,160
53,675
53,675
50,485

Accepted
$
38,685
2,789,260
17,400
41,525
40,875
45,350
94,545
15,090
6,305
46,535
14,170
100,160
50,485

TOTALS

$5,687,750

$3,300,200

$6,382,410

$3,300,385

Competitive
Noncompetitive

$3,812,005
764,425

$1,424,455 :
764,425 :

$4,475,660
535,850

$1,393,635
535,850

Subtotal, Public

$4,576,430

$2,188,880 :

$5,011,510

$1,929,485

Federal Reserve
Foreign Official
Institutions

877,650 877,650 j

870,000

870,000

500,900

500,900

$6,382,410

£3,300,385

Type

TOTALS

233,670

233,670 :

$5,687,750

$3,300,200 :

alent coupon-issue yield.

DATE: March 3, 1980

13-WEEK

^^VTEEK

TODAY:
LAST WEEK:

/3. lOpJa jUtAtl"

HIGHEST SINCE:

£^M—
LOViEST SINCE:

£HtK

FOR RELEASE UPON DELIVERY
Expected at 9:30 A.M.
STATEMENT OF
HARRY L. GUTMAN
DEPUTY TAX LEGISLATIVE COUNSEL
BEFORE THE
SUBCOMMITTEE ON TAXATION AND
DEBT MANAGEMENT
OF THE
COMMITTEE ON FINANCE
March 4, 1980
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to present the views of
the Treasury Department on the following bills: S. 464, S.
1194, S. 1859, S. 2167, S. 2201, S. 2275, H.R. 4746 and
section 4 of H.R. 5973.
Summary of Positions
S. 464 would amend the targeted jobs credit to expand
the categories of target groups to include "displaced
hcmemakers." The Treasury Department recommends that
consideration of S. 464 be deferred.
S. 1194 would exclude from coverage under the Federal
Unemployment Tax Act (FUTA) the services of fishermen who are
employed on a fishing boat with an operating crew of fewer
than 10 individuals and who do not receive cash remuneration
except for a share of the boat's catch. The Treasury
Department is opposed to S. 1194.
M-355

-2S. 1859 and S. 2201 would permit the use of crop share
rentals in the estate tax special use valuation formula. The
Treasury Department is opposed to both S. 1859 and S. 2201.
However, if amended as described below, the Treasury would
not oopose the bills.
S. 2167 would provide that the taxable income of a
homeowners association would be taxed at the graduated rates
prescribed for corporations. The Treasury Department is
opposed to S. 2167.
S. 2275 would make a number of technical changes in the
Internal Revenue Code provisions governing General Stock
Ownership Corporations (GSOC's). The Treasury Department
does not oppose this bill.
H.R. 4746—Miscellaneous Changes
Section 1 of H.R. 4746 would simplify the private
foundation return and reporting requirements and make private
foundation information returns more readily accessible to the
public. The Treasury Department supports section 1.
Section 2 of H.R. 4746 would permit private foundations
to reimburse government officials for certain types of
foreign travel. The Treasury Department does not oppose
section 2.
Section 3 of H.R. 4746 would remove the charitable
contribution deduction from the computation of adjusted
itemized deductions for purposes of the alternative minimum
tax on a charitable lead trust where the grantor of the trust
is a corporation. The Treasury Department does not oppose
section 3.
Section 4 of H.R. 4746 would provide for voluntary
withholding from sick. pay. The Treasury Department supports
section 4.
Section 5 of H.R. 4746 would allow a deduction from
gross income for the repayment of supplemental unemployment
compensation benefits if the repayment is required because of
the receipt of trade readjustment allowances. The Treasury
Department does not oppose section 5.

-3Section 6 of H.R. 4746 would give state auditing
agencies access to Federal tax return information in the
hands of state taxing authorities for the purpose of auditing
the activities of the taxing authority. The Treasury
Department does not oppose section 6.
Section 7 of H.R. 4746 would extend the investment tax
credit to the International Maritime Satellite Organization
("INMARSAT"). The Treasury Department does not oppose
section 7.
Section 8 of H.R. 4746 would allow the interest rate on
retirement plan bonds and individual retirement bonds to be
increased. The Treasury Department does not oppose section
8.
H.R. 5973
Section 4 of H.R. 5973 would provide a limited exception
to the definition of "acquisition indebtedness" for purposes
of determining whether the disposition of real property by a
tax-exempt organization gives rise to taxable unrelated debtfinanced income. This section would benefit the Tillamook
County Young Men's Christian Association of Tillamook,
Oregon. The Treasury Department opposes section 4 of H.R.
5973.
* * * *

S. 464 — Targeted Jobs Credit
for Displaced Homemakers
Under the targeted jobs credit provisions of the Revenue
Act of 1978, an employer may elect to claim a credit for
certain wages paid to an individual who qualifies as a member
of any one of seven target groups. The purpose of the credit
is to encourage prospective employers to hire members of
these disadvantaged groups.
S. 464 would expand the categories of target groups for
whom the credit is available to include a new group, "displaced homemakers," as defined in paragraph (7) of section 3
of the Comprehensive Employment and Training Act Amendments
of 1978. A "displaced homemaker" is there defined as an
individual who:

-4(1) has not worked in the labor force
for a substantial number of years but, during
those years, has provided unpaid services for
family members in the home,
(2) either has been dependent on public
assistance or the income of another family
member but is no longer supported by that
income, or is receiving public assistance on
account of dependent children in the home, and
(3) is either unemployed or
underemployed and experiencing difficulty in
obtaining or upgrading employment.
S. 464 would be retroactive, applying with respect to amounts
paid or incurred after December 31, 1978, in taxable years
ending after that date.
The targeted jobs credit was enacted as an experimental
program with a three-year life. (The three-year duration
assumes enactment of H.R. 2797, the Technical Corrections Act
of 1979.) There was substantial debate within the Congress
concerning target groups. The result of this debate, which
reflected the considered judgment of the Congress, was the
designation of seven target groups.
After the enactment of the Revenue Act of 1978,
representatives of a number of other relatively disadvantaged
groups sought to have their groups added to the list of eligible target groups. Many of these additions may be meritorious. However, in order to ensure that each receives the
thorough consideration to which it is entitled, we believe
all proposed amendments that would produce significant
changes in the present provisions of the targeted jobs credit
should be considered together. For this reason, and because
we believe a large number of individuals would be included in
the new target group, the Treasury Department believes that
consideration of S. 464 should be deferred in favor of a more
comprehensive examination of the targeted jobs credit when
the current program has been in effect for three years.
In your consideration of this program, the Treasury
Department requests that retroactive effective dates, such as
provided in S. 464, be deleted. The targeted jobs credit is
intended to be an incentive for employers to hire certain
individuals who qualify as members of target groups.
Providing a retroactive effective date for wages paid to
members of a new target group hired before the date of
amendment would clearly be inconsistent with this purpose.
The credit could not have affected an employer's decision to
hire these individuals.

-5* * * *

S. 1194 — FUTA Exemption
for Certain Fishermen"
S. 1194 would amend section 3306(c) of the Internal
Revenue Code of 1954 to exclude from the definition of
covered employment under the Federal Unemployment Tax Act
(FUTA) service performed by crew members of certain fishing
vessels. The amendment would exempt the owners or operators
of fishing boats from the payment of FUTA taxes if there are
normally fewer than 10 crew members on the boat, the crew
members do not receive cash remuneration except for either a
share of the catch or a share of the proceeds from the sale
of the catch, and each crew member's share depends on the
amount of the boat's catch. These crew members would then
not be considered to be employees of the fishing boat
operators, and it is likely that they would not be eligible
for unemployment benefits.*
This provision is patterned after sections 3121(b)(20)
and 3401(a)(17) of the Code, which were enacted in 1976 and
provide the same exclusion from taxation for purposes of the
Federal Insurance Contributions Act (FICA) and income tax
withholding, respectively. The intent of S. 1194 appears to
be to make the treatment of fishermen consistent for the
purposes of Social Security, income tax withholding and
* The proposedcompensation.
exclusion would be in addition to, and not a
unemployment
substitute for, the present fishermen exclusion under section
3306(0(17) of the Code. Under section 3306(c)(17), the
employers of fishermen are not exempt under FUTA from the
payment of Federal unemployment taxes if the services
performed are related to the catching of salmon or halibut
for commercial purposes, or if the services are performed on
vessels of more than 10 net tons. S. 1194 would thus broaden
the exclusion of fishermen under FUTA to include fishermen on
vessels that exceed 10 net tons and commercial salmon or
halibut fishermen.

-6Historically, maritime workers have had unique
employment relationships, but under maritime law, which is
applied in determining their status for employment tax
purposes, captains and crew members are nearly always
considered to be employees of the owners of the vessels.
Thus, this bill would unfairly relieve employers from paying
the FUTA tax for the services of crew members, but would not
alter their existing employer-employee relationships which,
in fact, do not reflect self-employment.
Further, the consequences of a FUTA exclusion would be
more detrimental to the individual worker than the FICA
exclusion under present law. Individual crew members
excluded from the term "employment" under FICA will
nevertheless be covered under the Social Security system as
self-employed individuals. By contrast, such crew members,
if excluded from FUTA coverage, could not obtain unemployment
compensation coverage as self-employed persons, since all
States provide that only employers may elect coverage of
services performed for them. Exclusion of these workers from
FUTA coverage by their employers, unlike the FICA exclusion,
would therefore leave such workers without any protection,
if, as experience has demonstrated, a Federal exclusion is
quickly followed by State exclusions.
We believe there was good reason for limiting the 1976
changes in the employment status of fishermen to the Social
Security and withholding tax provisions of the Code. The
change proposed in S. 1194 is not in the best interest of the
individual workers. Furthermore, this bill involves the
broader issue of whether workers employed under unusual
earnings agreements, such as those described in the bill,
should be excluded from unemployment compensation coverage.
The National Commission on Unemployment Compensation is
currently undertaking a study of policies regarding
unemployment compensation coverage. Consequently, Federal
action, if any, on S. 1194 should be deferred pending the
issuance of a report from the National Commission. For these
reasons, the Treasury Department opposes S. 1194.
* * *

S. 1859 and S. 2201— Estate Tax
Special Use Valuation for Farms
Where a "family farm" contributes a large part of a
decedent's estate, the estate may now take advantage of a
special valuation method intended to determine the value of
the land for use in farming (special use valuation) even if
someone would pay more to use the land for non-farm purposes.

-7S. 1859 and S. 2201 each would amend the formula method
of valuing farms under the special use valuation provision
to permit in-kind or crop share rentals to be taken into
account.
The Treasury objects to the bills in their current form.
However, we would not object if the changes described below
were made as well.
Under the estate tax laws in effect prior to 1976, all
property was included in a decedent's gross estate at its
fair market value. Fair market value did not necessarily
reflect use of the property for farming if the farm land
could have been used for other, more profitable, commercial
purposes. In such cases, the estate tax was higher than the
tax would be if the land were valued solely as a farm.
In 1976, Congress changed the law to allow special
valuation of farm property for estate tax purposes. This
provison (section 2032A of the Code) allows valuation on the
basis of the use of the property as a farm.
Section 2032A includes two methods for valuing family
farms. The first method involves the use of a mathematical
formula, and is intended to minimize subjectivity in farm
valuation. The second method, available to all property
which is eligible for special use valuation (i.e. , farms and
real estate used in certain closely-held businesses),
involves the application of a list of commonly accepted
appraisal factors to the property, including the capitalization of income from the property.
An example may help to illustrate the 1976 change in the
law, the issue addressed by S. 1859 and S. 2201, and the
problem we have with the current law.
Farmer A has a farm about 20 miles outside of
Washington, D.C. which he actively manages. A has received
offers of $1,000 an acre for his land from farmers in the
vicinity who want to use his land for farming. However, A
knows that other farmers in the area have sold their land to
real estate developers for condominiums and shopping centers
at $1,500 per acre.

-8If Farmer A had died before December 31, 1976, then the
Internal Revenue Service could have argued that his farm land
should be valued for estate tax purposes at $1,500 per acre
because that was the price that developers were willing to
pay.
Section 2032A was added to the Code to prevent the
$1,500 valuation of Farmer A's land. To illustrate, if under
the application of commonly accepted appraisal factors, the
value of A's farm land, used as farm land, is $1,000 per acre
(also the amount other farmers, who would have continued to
use the land in farming, were willing to pay A for his land),
section 2032A enables the executors of Farmer A's estate to
reduce the estate tax valuation. However, to do so the
executors are required to engage in a factual determination
involving some subjective factors. The formula method of
valuation in section 2032A avoids this subjectivity.
The formula starts with the average annual gross cash
rental for comparable land and subtracts the average state
and local real estate taxes of comparable land. The result
is then divided by the average annual effective interest rate
for all new Federal Land Bank loans and the result is the
value of the farm for estate tax purposes.
Two problems arise under the formula, one which the
sponsors of S. 1859 and S. 2201 seek to remedy and another
which concerns the Treasury.
The problem addressed by each bill is the limitation of
the formula to areas where there are gross cash rentals for
comparable land. In many areas of the country, farm land is
rented on an "in-kind" or crop share basis, rather than for
cash. In these areas, the mathematical formula is not
available. In other words, if land comparable to A's was not
rented for cash, A's estate would not be entitled to use the
formula. While tKe land may nonetheless be valued under
section 2032A by using the commonly accepted appraisal
approach, this method is not as simple or as objective as the
formula.
The formula is designed to produce a farm use value
roughly equivalent to that which would be derived by
appraisal. However, as currently stated, the formula
significantly understates farm use value. This occurs
because the interest rate, which is the effective interest
rate charged by the Federal Land Bank, is too high. For
example, assume a realistic four percent interest rate would
be applied under the appraisal factor method to determine
that Farmer A's land was worth $1,000 per acre as farm land.

-9The mathematical formula would give a value to the land of
less than $500 per acre, a more than 50 percent reduction
from the appraised value of the land for farming. Thus, the
formula reduces Farmer A's estate taxes far below the amount
intended by section 2032A.
This example is neither unusual nor overstated. Filings
with the IRS show that farms having no potential use other
than farming are nonetheless being valued at a substantial
discount under the formula. Of 54 Internal Revenue Service
offices reporting values determined by estate executors (not
by the IRS) in a nationwide survey (attached as Appendix A ) ,
20 offices reported average values below 40 percent of the
fair market value of the land as a farm. The remaining
offices also reported substantial discounts. In some areas,
the executor's own calculation of the discount from the value
of the land as farm land has been as high as 80 percent. We
believe that even these figures do not fully reflect the
effect of this discount since in most examined cases, fair
market value as reported by the executor has been found to be
lower than the finally agreed value. Indeed, section 2032A
was estimated to cost $14 million per year when enacted.
However, current figures show that unless this problem is
corrected, the cost may be as much as $140 million per year.
We recognize that the goals of simplicity and
objectivity will be more readily achieved if the simple,
mathematical formula approach is expanded. Although the
calculation of the value of in-kind or crop share rentals
will introduce an element of subjectivity into the formula,
we are willing to accept this approach if the formula is
revised so that it will reflect more clearly the value of the
farm as farm land.
We believe the undervaluation problem in the current
formula can be remedied by providing a more realistic rate of
capitalization. We would propose that the interest rate in
the denominator of the formula be changed to equal the
greater of four percent or the annual rate of return on
equity from farm property. The annual rate of return on
equity would be derived from two statistical tabulations
prepared and published annually by the Department of
Agriculture, "State Farm Income Statistics" and "The Balance
Sheet for The Farming Sector." Specifically, the rate of
return on equity from farm production would be determined, on
a state-by-state basis, by subtracting government payments

-10from net farm income and dividing the result by proprietors'
equities. Each of these three figures is readily available
from Department of Agriculture publications. The Agriculture
Department data would guarantee a fair value based upon the
land's use as farm. It would not increase the value to
reflect non-farm use or reduce the value by using an
unrealistic interest rate. It would not decrease the number
of estates eligible to use the formula or take away any of
the objectivity or certainty currently available in applying
the formula. In other words, this proposal would merely
modify the formula so that the valuation of a farm under the
formula would reflect more accurately the farm's fair market
value as a farm.
If S. 1859 or S. 2201 were amended to include this
change in the interest rate, we would not object to either
bill.
* * * *

S. 2167—Rate of Tax on
Homeowners Associations
S. 2167 would amend Code section 528, relating to
certain real estate management and condominium associations
("homeowners associations"), so that tax would be imposed on
such associations at the graduated rates for corporations.
Currently, the income of a homeowners association is taxed
at the "highest rate of tax" for corporations, 46 percent.
The Treasury Department is opposed to S. 2167.
Section 528 was added by the Tax Reform Act of 1976. It
was enacted to insure that participants in homeowners
associations could arrange to defray collectively the
expenses of maintaining their personal residences, without
being subjected to more onerous tax treatment than those who
paid directly the expenses of maintaining their homes.
Before 1976, it was unclear whether corporations organized as
condominium or residential real estate management
associations would be treated as exempt organizations or
associations taxable as corporations. If taxed as
corporations, homeowners who maintained homes through an
association would be taxed twice, once when they earned the
income and a second time when it was received by the
corporation.

-11To alleviate this uncertainty Congress enacted Code
section 528. That section essentially provides that an
eligible, electing association will not be taxed on amounts
received from members to defray the expenses of maintaining
common property. However, this exemption would offer an
opportunity for tax advantage if homeowners were permitted to
contribute portfolio assets to the homeowners association and
use the tax-free income from those investments to defray the
expenses of maintaining their residences. Similarly, a
homeowners association might be used as a shield for the
conduct of an unrelated business, the pre-tax profits from
which could be applied to the maintenance of the
participants' common expenses. Accordingly, the statute
provides that all income derived by a homeowners association,
other than through dues, fees or assessments received from
its members, is to be taxed to the association as a
corporation.
Before the Revenue Act of 1978, which added the
graduated rate schedule for corporations, a homeowners
association was taxed on its income without allowance for the
pre-1979 surtax exemption. Out of consistency with the
statute as it existed before 1979, therefore, homeowners
associations were not permitted to use the graduated rate
schedule.
Taxation of investment or trade or business income of a
homeowners association is essentially a surrogate for
attributing the income to members of the association and
taxing it at their individual marginal rates. Where the
average rate of the participants is less than the 46 percent
top corporate rate, the income of the association might be
said to be "overtaxed." Where the average rate of the
participants exceeds the 46 percent top corporate rate, even
without the change by S. 2167, the association income would,
in effect, be undertaxed.
Short of conduit treatment, there is no absolutely
correct solution to this problem. However, there is no
particular reason to encourage homeowners associations to
have large investment portfolios. 'Application of the
graduated corporate rate would, in many cases, subject
association income to tax at rates lower than these of the

-12participants. It would, therefore, encourage accumulation of
investment assets. By the same token, use of the top
corporate tax rate would discourage accumulation and
eliminate any incentive to shift income from one year to the
next to achieve taxation at a lower rate. On balance we
believe the latter course is preferable.
Finally, the rationale for enacting a graduated
corporate rate was to encourage capital formation,
particularly in the hands of small business. That rationale
furnishes no justification for imposing a graduated rate on
homeowners associations which are not organized as
profit-making enterprises.
The Treasury Department therefore opposes S. 2167.
* * * *

S. 2275 — GSOC Technical Corrections
S. 2275 makes a number of technical corrections in the
provisions of the Code (sections 1391-1397) governing General
Stock Ownership Corporations ("GSOC's"). These provisions
were added to the Code as part of the Revenue Act of 1978.
In general, a GSOC is a corporation which is established
and owned by the residents of a state and which is intended
to borrow funds to acquire profitable enterprises for the
benefit of the residents. The income of the GSOC is taxed on
a pass-through basis to the resident-shareholders and not to
the GSOC.
Most of the changes made by this bill merely correct
typographical and other errors. In addition, two of the
changes fill gaps in the statutory scheme so as to facilitate
a GSOC's ability to function as intended.
First, the GSOC provisions now prohibit transfers of
GSOC shares to any individual who is not a resident of the
chartering state, thus appearing to prohibit the transfer of
shares to an estate upon the death of a shareholder. The
bill corrects this oversight.
Second, the Code requires that at least 90 percent of a
GSOC's taxable income be distributed to the shareholders, who
are taxable on 100 percent of the GSOC's income whether or
not it is distributed to them. A penalty tax of 20 percent
is imposed on any shortfall in this distribution requirement.
The legislative history indicates that this penalty tax is to

-13be deductible by the GSOC in computing its taxable income,
but the statute is silent. The bill remedies this
inconsistency by expressly providing for deductibility. If
the penalty tax were not so deductible, the shareholders
would be taxed on the amount of the tax, even though they had
not received a distribution of that amount.
The Treasury Department is not opposed to S. 2275.
* * * *

H.R. 4746— Miscellaneous Changes
Section 1 of H.R. 4746—Simplification of Private
Foundation Reporting Requirements
Under current law, private foundations are required to
file both an annual return and an annual report. In
addition, non-exempt charitable trusts which have solely
charitable beneficiaries are subject to different return and
disclosure requirements from those applicable to exempt
charitable trusts and organizations.
Section 1 of H.R. 4746 would consolidate the two
reporting requirements for private foundations into one
return requirement. The requirement to file an annual report
would be eliminated. In addition, non-exempt wholly
charitable trusts would be required to file the same report
as private foundations, thereby consolidating certain
requirements and making the information returns of such
trusts subject to public disclosure. Finally, the proposal
would provide that a private foundation would not be required
to list on its return the name and address of a needy or
indigent recipient receiving grants of less than $1,000 in
any year.
The Treasury Department supports section 1 of H.R. 4746.
Section 2 of H.R. 4746—Private
Foundation Reimbursements
Under current law, a private foundation is prohibited
from engaging in certain self-dealing transactions. Selfdealing transactions include payments to a government
official. A limited exception is provided which permits the
payment or reimbursement of traveling expenses of a
government official solely from one point in the United
States to another point in the United States. This exception
does not allow for"the payment or reimbursement of traveling
expenses outside the United States.

-14Section 2 of H.R. 4746 would expand this exception to^
provide that a foundation may reimburse a government official
for travel between a point in the United States and one
outside the United States. The bill further includes
limitations on the availability of the exception which are
similar to those under current law in the area of expenses
for domestic travel.
The Treasury Department does not oppose section 2 of
H.R. 4746.
Section 3 of H.R. 4746—Alternative Minimum
Tax on Charitable Lead Trust with Corporate Grantor
Under the alternative minimum tax, capital gains and
adjusted itemized deductions constitute the two tax
preferences. The latter preference excludes a number of
itemized deductions and the remaining itemized deductions are
preferences to the extent they exceed 60 percent of adjusted
gross income less the excluded deductions.
Although trusts and estates are generally subject to the
alternative minimum tax, certain charitable contributions of
trusts and estates are treated favorably for minimum tax
purposes. For example, charitable contributions are
considered untainted in the case of certain wholly charitable
trusts, pooled income funds and testamentary lead trusts.
However, there is generally no exception for the charitable
deductions of inter vivos lead trusts.
Section 3 of H.R. 4746 would provide that the charitable
deductions of a charitable lead trust will not be considered
in determining the adjusted itemized deduction preference for
purposes of the alternative minimum tax if the grantor of the
trust and the owner of all reversionary interests in the
trust is a corporation.
The Treasury does not oppose section 3 of H.R. 4746.
Section 4 of H.R. 4746—Voluntary Withholding
Under Wage Continuation Plans
Under present law amounts received by an employee
through accident or health insurance for personal injuries or
sickness generally are includible in gross income to the
extent such amounts (1) are attributable to contributions by
the employer which are not includible in the gross income of
the employee, or (2) are paid by the employer.

-15Withholding is not required on sick pay payments
provided by third parties, such as insurance companies, even
if the recipient so requests.
Section 4 of H.R. 4746 provides that a taxpayer who is
to receive sick pay may request that the third party paying
such amount withhold a specified percentage (but no less than
the minimum prescribed by regulations) from these payments.
A number of special rules relating to the information which
must be provided to the third party payor, the treatment of
requests under collective bargaining agreements and the
timing of information reporting on these withheld amounts are
included in the provision.
The Treasury Department supports section 4 of H.R. 4746.
Section 5 of H.R. 4746—Repayments of
Supplemental Unemployment Compensation Benefits
Under current law a worker who receives supplemental
unemployment compensation benefits (SUB) payments under a
claim of right is entitled to a loss deduction if the
taxpayer is required to repay the SUB payments in a
subsequent year. Alternatively, if the SUB payment exceeds
$3,000, the worker may elect to reduce taxes in the year of
repayment by the amount of the decrease in the prior year's
(or years') taxes which will result from the exclusion of the
SUB payment from gross income in the prior year (or years).
Section 5 of H.R. 4746 would allow the loss deduction
for a repayment of a SUB payment which is required on account
of the receipt of a trade readjustment allowance ("TRA") to
be taken into account in computing adjusted gross income
under the Code. As under present law, the deduction would be
taken in the year of repayment.
The Treasury Department does not oppose section 5 of
H.R. 4746.
Section 6 of H.R. 4746—Disclosure of Federal
Tax Information to State Auditing Agencies
The Internal Revenue Code currently gives state auditing
agencies access to Federal tax return information only when
the agency is actually involved in the determination,
assessment, collection or refund of taxes (i.e. , tax
administration activities), and not when the agency's role is
limited to general oversight of the taxing authority.

-16Section 6 of H.R. 4746 would amend the Code to give state
auditing agencies access to Federal tax return information in
the hands of state taxing authorities for purposes of tax
administration and for the purpose of auditing the activities
ct the taxing authority.
The Treasury does not oppose section 6 of H.R. 4746.
Section 7 of H.R. 4746—Investment
Tax Credit for INMARSAT
Under current law, the investment tax credit is not
generally available for property used outside the United
States or for propety used by an international organization.
Section 7 of H.R. 4746 would make the investment tax
credit available for the interests of United States persons
in communications satellites used by the International
Maritime Satellite Organization (INMARSAT), an international
organization established to develop and operate a global
maritime satellite telecommunications system.
The Treasury is not opposed to section 7 of H.R. 4746.
Section 8 of H.R. 4746—Interest
on United States Retirement Bonds
Under current law, the interest rate on an individual
retirement bond or a retirement plan bond remains the same
from the date of issuance until the bond is redeemed.
However, the interest rate on outstanding Series E Bonds is
increased whenever there is an increase in the interest rate
on new issues of Series E Bonds.
Section 8 of H.R. 4746 would allow the Treasury
Department, with the approval of the President, to make
upward adjustments in the interest rate on outstanding
retirement bonds, so that such bonds would earn interest at a
rate consistent with the yield for new issues of such bonds
after the effective date of the interest rate increase.
The Treasury Depatment is not opposed to section 8 of
H.R. 4746.
* * * *

-17H.R. 5973
Section 4 of H.R. 5973— Special Rule Relating to
Debt-Financed Income of Exempt Organizations
Section 4 of H.R. 5973 provides a limited exception to
the definition of "acquisition indebtedness" for purposes of
determining whether the disposition of real property by a
tax-exempt organization gives rise to taxable unrelated
debt-financed income. The Treasury opposes this provision of
H.R. 5973.
In general, income that an exempt organization receives
from investment property is taxable in the proportion that
the property is financed by debt. If the property is sold,
gain on the sale also is taxable in the proportion that the
property is debt-financed. This proportion is determined by
the highest "acquisition indebtedness" on the property for
the twelve-month period preceding the date of disposition.
The circumstances under which the proposed exception
would apply are limited and detailed. Basically, it would
exclude a sale of real property during 1976 that had been
financed before 1965, provided certain other narrow
requirements are met.
We believe Congress clearly intended to tax sales of
"debt-financed property." We also believe Congress intended
that the test whether property was debt-financed at sale was
to be judged by looking at the twelve-month period preceding
the date of sale. An exempt organization planning to dispose
of income producing property may extinguish the acquisition
indebtedness on the propety and sell it without tax only
after a twelve-month waiting period.
These rules were enacted in 1969, and, after a
transitional period, have applied to dispositions of all
debt-financed property since 1972. Exempt organizations have
had more than enough time to adjust to this provision and we
have no reason to believe that they have not done so. We,
therefore, consider the special retroactive exception of
section 4 to be discriminatory and unwarranted.
*

* *

•

I shall be happy to answer any questions you may have.

oOo

APPENDIX A
age Discount on Fair Market Values from Section 2032A Elections (based upon valu
rted by executors electing section 2032A and shown by IRS district)
Southwest Region

est Region
ringfieid, Illinois
icago, Illinois
s Moines, Iowa
rgo, North Dakota
lwaukee, Wisconsin
aha, Nebraska
. Louis, Missouri
erdeen, South Dakota
• Paul, Minnesota

627. Albuquerque, New Mexico
617.
Oklahoma City, Oklahoma
507.
Austin, Texas
47%
(Houston POD - 817.)
627.
Dallas Texas
457.
Wichita, Kansas
497.
Cheyenne, Wyoming
477.
Denver, Colorado
477.
Little Rock, Arkansas
New Orleans, Louisiana

65'
64"
67'

64
39"
71
63'
44
44

ral Region
Western Region
ncinnati, Ohio
eveland, Ohio
troit, Michigan
dianapoiis, Indiana
uisvilie, Kentucky
rkecsburg, West Virginia

577.
497.
627.
517.
517.
467.

\tlantic Region
iladelphia, Pennsylvania
wark, New Jersey
Itimore, Maryland
:hmond, Virginia
Lmington, Delaware

767.
637.
607.
55%
597.

l Atlantic Region
sany, New York
ston, Massachusetts
)okiyn, New York
r
falo, New York
rlington, Vermont
rtford, Connecticut
ihattan, New York
•tsmouth, New Hampshire
>vidence, Rhode Island

23%
67%
42%
46%
68%
707.
39%
327,
26%

Boise, Idaho
Helena, Montana
Seattle, Washington
Portland, Oregon
Fresno, California
(IRS Service Center)
Salt Lake City, Utah
Los Angeles, California
Phoenix, Arizona
San Francisco, California

52'
47
40
57
55
46
29
59
40

Southeast Region
Greensboro, North Carolina
Jacksonville, Florida
Nashville, Tennessee
Atlanta, Georgia
Birmingham, Alabana
Columbia, South Carolina

44
65
66
43
07
57

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 AM
TUESDAY, MARCH 4, 1980
STATEMENT OF THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON TREASURY, POST OFFICE AND
GENERAL GOVERNMENT
COMMITTEE ON APPROPRIATIONS
U.S. HOUSE OF REPRESENTATIVES
Appropriation of the U.S. Contribution to the
International Natural Rubber Agreement

Introduction
I am pleased to appear before you today to testify in favor
of an Administration request for a $88 million appropriation for
the new International Rubber Agreement. This appropriation is
necessary to support U.S. membership in the International
Rubber Agreement for which the Administration will be seeking the
advice and consent of the Senate as well as authorizing
legislation.
The Treasury Department strongly supports ratification of
this Agreement and recommends approval of the appropriation at an
early date to serve as an important element in the Administration's anti-inflation program. In calling attention to the need

M-356

- 2 to fight inflation, President Carter has made prominent reference
to international commodity trade and the potential role of international commodity agreements in contributing to the battle
against inflation in the United States:
"When prices of raw materials and food fluctuate
upward, the effects tend to spread throughout the
economy, raising prices and wages generally ....
Reducing fluctuations in commodity prices, therefore, helps to reduce inflation."
This objective was reaffirmed in the Administration's
testimony before the Senate Budget Committee recently when
Secretary Miller and others stated that "properly constructed
commodity agreements can provide benefits to both producers and
consumers by reducing inflationary pressures, promoting greater
stability and increasing incentives for primary commodity
production." They went on to point out that the Rubber
Agreement provides an excellent example of an international
commodity arrangement which balances producer and consumer
interests to their mutual benefit.
Approval of this appropriation will demonstrate the firm
commitment of the U.S. Government to the Agreement and to our
overall international commodity policy. It is important to note
that, while this Agreement will contribute to rubber price
stability, it will not provide any artificial prop for rubber
prices.
My colleague from the State Department will describe the
planned operation of the Agreement and details of this U.S.

- 3 contribution.

I would like to focus my remarks on overall U.S.

commodity policy and how the Natural Rubber Agreement is a major
element of that policy.
Administration Commodity Policy
One of the early international economic policy decisions
made by this Administration was to reorient U.S. policy from
leaving commodity trade to the vicissitudes which are
characteristic of commodity markets to seeking deliberate
measures to reduce instability in prices and supplies.

This

reorientation reflects the Administration's continuing concern
about the adverse effects of volatile commodity prices on
inflation in the U.S., on the economies of all exporting and
importing countries, on individual producers and consumers, and
on the orderly expansion of raw material supplies.
Prices of primary commodities are exceptionally unstable and
the U.S. economy experiences real costs from such price
instability.

For example, excessive rises in commodity prices,

even when they are temporary, induce economy-wide price
increases beyond the direct impact of the commodity prices
themselves.

This is because producers of manufactured goods and

food processors often justify additional increases in their price
on the basis of cost increases stemming from rising prices for
their raw materials.

However, these increases are not likely to

be withdrawn when raw material prices subsequently recede.

The

effect is a ratcheting up of the general consumer price index,

- 4 which in turn provides justification for higher wage increases.
As inflation spreads, for this as well as other reasons,
inflationary expectations then generate additional demand for
business inventories and create fears of impending shortages,
provoking protective purchases and forcing raw material prices
up even further in a spiral which, as we saw particularly in
1973 - 1974, can be devastating.
Excessive price declines for commodities can also, paradoxically, fuel inflation over the long run. When such declines

are precipitate and extended in time, they can deter investment i

new productive capacity at both the primary and processing stages
Supply then becomes inadequate to meet the normal growth of
demand in future years, pushing prices up at that time.
These two occurrences are peculiar to some, though not all,
of the commodity markets because prices in these markets
fluctuate much more sharply than do prices either of industrial
products or of services.
It is often argued that the market provides the optimal
degree of price stability for commodity trade. Unfortunately,
this is not always the case. The direct benefits of reducing
commodity price fluctuations accrue to all buyers and sellers,
whether or not they individually contribute to the cost of the
stabilization arrangement; hence the incentive to individual
market participants to contribute to the cost of stabilization
is negligible, and the market alone will not call forth the
appropriate institutions. In addition, the indirect benefits

-

3 -

of price stabilization — notably the reduction of overall
inflation rates — extend well beyond the universe of
participants in the commodity markets themselves. Thus, price
stability can be considered a public good, and an appropriate
target for Governmental action.
Economies of exporting countries also suffer significantly
as a result of gyrating commodity prices. Many cf these

exporters rely heavily on commodities for their foreign exchange
earnings, which are used largely to buy industrial products
needed for development. The United States is among those who
supply substantial amounts of exports tc commodity exporting
countries. In 1S79, we sold S5.2 billion tc natural rubber
producing countries, a more than 30 percent increase over 1978.

Extreme volatility in commodity prices weakens the ability of th

United States to maximize our export potential to these countrie
It was against this background that the Administration

decided tc launch a series of steps to help contain inflationary

pressures emerging from commodity markets, reduce our vulnerabii

to unreliable and uneconomic sources of supply, and enhance econo
stability in producing countries. This U.S. policy embodies
the following elements:
negotiation of international commodity
agreements, where feasible, between
producers and consumers to reduce excessive
price volatility;

- 6 emphasis on buffer stocking as the
preferred price stabilizing mechanism;
joint financial responsibility for
financing such agreements;
promotion of increased investment in
commodity industries;
negotiation of a Common Fund to
facilitate financing of individual
agreements; and
more effective operation of the
Compensatory Finance Facility of the
International Monetary Fund to buffer
the effects of fluctuations in a country's
export earnings.
The United States now belongs to the Coffee, Sugar and Tin
Agreements, which all contain market intervention mechanisms
which rely to some extent on commodity stocking to achieve their
objectives.

The United States joined the Coffee Agreement in the

1960s and became a member of the Tin Agreement in 1976 after
participating in its negotiation a year earlier.

Negotiation of

the Sugar Agreement, with the United States playing a major role,
took place in 1977 and the Senate ratified the Agreement late
last year.

The Congress early this year authorized a U.S.

contribution to the Tin Agreement to stabilize prices.

- 7 Structure of the Rubber Agreement
Countries involved in exporting and importing rubber have

recognized for sometime the desirability of a commodity agreement
for rubber to alleviate volatile market conditions.
The volatility of rubber prices is well documented. For

example, a recent World Bank study of the volatility of the price

of 40 commodities showed that rubber ranked seventh. The attached

graph shows the wide fluctuations in natural rubber prices during
the past 20 years. The New York price declined in an irregular
fashion from 38 cents per pound in 1960 to 20 cents in 1968. It
then rose to 26 cents the next year before resuming its downward
trend to 18 cents in 1972. This low was followed by a new peak
of 39 cents in 1974. After another sharp break to 30 cents in
1975, the price has soared, reaching nearly 80 cents a pound in
mid-February. It has now dropped back to about 70 cents.
Because of their concerns about these price fluctuations,
producing countries reached agreement among themselves to
establish a small buffer stock and institute export controls to
seek to stabilize rubber prices. It was only after importing
countries demonstrated a sincere effort to negotiate a producer-

consumer agreement that the producers agreed to hold their agreement in abeyance.
All countries agree that a producer-consumer arrangement
would be more effective in stabilizing the natural rubber
market and provide a better balance of benefits to producers and

- 8 consumers. Accordingly, the producing countries have agreed to
abandon their proposed agreement when the new Natural Rubber
Agreement goes into force.
We believe price stabilization agreements should operate
wherever possible through buffer stocks. The structure of the
rubber market is well-suited to a buffer stock arrangement.
Bought when prices are low, and sold when they are high within
an agreed price range, buffer stocks can be more effective than
any other approach in stabilizing prices without distorting
markets or production patterns. In fact, we expect them to make
profits to help cover operating costs.
Buffer stocks are far preferable to supply controls regarding

market efficiency, operational simplicity and consumer benefits a
they allow the price mechanism to allocate resources to the most

efficient producers. There are three basic criteria which must be

met for this, our preferred approach, to apply to a given commodi
First, the international price must be established in an open
market. Second, the commodity should be either non-perishable or

easily rotated in storage facilities so that stock maintenance is
feasible and carrying costs do not become exorbitant. Third, the

commodity should be relatively homogeneous in the sense that most
trading takes place in a limited number of well-defined grades
whose prices move in tandem. In addition, a buffer stock must
have large stocking authority, adequate financing shared by both

producers and consumers, an adjustable price range, and membershi
by all major producers and consumers.

- 9 There is wide agreement that the natural rubber market meets
these criteria. I particularly want to emphasize that this
Agreement will provide for: a large buffer stock of 550,000 tons;
a wide price band of plus or minus 20 percent around a reference
price; and provision for adjustment of this range as market
conditions change. In fact, this Agreement will come close to
being a prototype commodity agreement.
Furthermore, the Agreement contains provisions under which
producing countries will implement policies to ensure availability
of rubber supplies and will not undertake actions which are
inconsistent with the Agreement. In addition, the Council may
make specific recommendations to governments on policies affecting
supply and demand for rubber.
In achieving this high degree of success in negotiating an
effective agreement, we need to recognize the spirit of cooperation
among the participants in the conference. The major rubber producers
from Southeast Asia in particular worked long and hard to assure a
successful outcome. Those countries fully appreciate that
stabilization will promote a more efficient industry.
Appropriation of the Contribution
As a member of the Natural Rubber Agreement, the United States
will be obligated to finance its share of the costs of acquiring
and operating the buffer stock. The costs of the Agreement are to
be shared equally between producers and consumers. We have
estimated the U.S. share will be $88 million, or about 12.5 to 15.5
percent of the total requirement. This approximates our share

- 10 of trade in natural rubber.

We expect that the appropriation

will be on a one-time basis, and the amount of money to be paid
in FY 1981 will be relatively small — perhaps $5 million.
This small initial payment will enable the Agreement to set
up its administrative machinery and begin purchasing a buffer
stock quickly, if necessary. The remainder of members' contributions would be made as needed to the buffer stock manager to enable
him to expand his purchases to keep prices within the price range.
We recognize that budgets must be kept tight in this
difficult period, but the Administration has carefully considered
the need for this appropriation and feels it is imperative that
it be appropriated this year.
By doing so, the Natural Rubber Agreement, an important
element in the Administration's international commodity policy
will contribute to our long term fight against inflation. It will
also provide benefits for the producing countries. But in order to
set these mutual benefits in train, we and others must do our part
by providing funding to permit the Agreement to become operational.
By doing so, we are following a course similar to that established
by our contribution to the Tin Agreement.
Policy Implementation
We have made substantial progress in implementing U.S.
commodity policy, though the task has been long and arduous and
much work remains. The successful negotiation of the Rubber
Agreement is but the latest achievement in the commodity area.
Other accomplishments are:

- 11 successful negotiation and ratification
of the International Sugar Agreement with
its special stocking provisions;
Congressional authorization to contribute
tin to the International Tin Buffer Stock
in proportion to our imports;
a commitment by all countries to share
financing of commodity agreements;
significant progress in negotiating a
Common Fund;
action by some commodity producing countries
to reexamine and, in some cases, modify their
tax policies to reduce deterrents to investment in commodities;
adoption by the multilateral development banks
and our Overseas Private Investment Corporation of policies to allocate more loans to
raw materials industries in developing
countries; and
liberalization of the Compensatory Finance
Facility of the IMF which has resulted in
gross drawings of $4.8 billion since 1975,
compared with $1.2 billion in the 13 years
of its prior operations.

- 12 There have been disappointments along the way in achieving
these goals, but we have established precedents which should lead
to future achievements.
Conclusion
In conclusion, I would like to reemphasize that the Administra
tion is strongly committed to an international commodity policy
which will help fight inflation in the United States and worldwide.
We have made substantial progress in implementing it.

This

Natural Rubber Agreement will become a strong component of that
policy, and represents a serious cooperative effort between
importing and exporting countries.

It will lead to the abandon-

ment of the producer proposal for a natural rubber agreement.

We

expect the agreement to significantly moderate rubber price fluctuations over the long run and be well worth the modest cost to
the United States.

o 0 o

NATURAL RUBBER
(YEARLY AVERAGE)

US CENTS/LB
227

182

RSS 1
NEW YORK MARKET
(1978 CONSTANTS)

RSS1
LONDON MARKET
(CURRENTS)

I I

14
1950

1955

1960

1965

97:

975

3UL2
'vorld Bank

FOR RELEASE AT 4:00 P.M.

March 4, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,600 million, to be issued March 13, 1980.
This offering will provide $250 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$6,352 million, including $950 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,844 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,300
million, representing an additional amount of bills dated
December 13, 1979, and to mature June 12, 1980 (CUSIP No.
912793 4J 2), originally issued in the amount of S3,236 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,300 million to be dated
March 13, 1980,
and to mature September 1L 1980 (CUSIP No.
912793 5E 2 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 13, 1980.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices 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. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, March 10, 1980.
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

-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. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. 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. 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, when submitting tenders for customers, must
submit a separate tender for each customer whose net long
position in the bill being offered exceeds $200 million.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual issue
price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit
of 2 percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action shall be
final. Subject to these reservations, noncompetitive tenders for
$500,000 or less without stated price from any one bidder will be
accepted in full at the 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 March 13, 1980,
in cash or other immediately available
funds or in Treasury bills maturing March 13, 1980. 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.

0)
l_

federal financing bank
WASHINGTON, D.C. 20220

0_

March 4, 1980

FOR IMMEDIATE RELEASE
FEDERAL FINANCING BANK ACTIVITY

Roland H. Cook, Secretary, Federal Financing Bank (FFB),
announced the following activity for January 1-31, 19 80.
Guarantee Programs
During January, FFB made 35 advances totalling $307,622,076.50
to 17 governments under loan agreements guaranteed by the Department of Defense pursuant to the Arms Export Control Act.
Under notes guaranteed by the Rural Electrification
Administra-tion, FFB advanced a total of $216,534,000.00 to
26 rural electric and telephone cooperatives.
On January 23, FFB purchased a total of $4,750,000 in
debentures issues by 6 small business investment companies.
These debentures are guaranteed by the Small Business Administration, mature in 3, 5, 7 and 10 years, and carry interest
rates of 11.135%, 11.035%, 11.085% and 11.035%, respectively.
On January 31, FFB signed Note #4 with Seven States
Energy Corporation under a $2 billion nuclear fuel lease
credit agreement. Note #4 is in the amount of $526,236,242.60,
matures April 30, 1980, and carries an interest rate of
12.815%.
FFB provided Western Union Space Communications, Inc.,
with the following amounts. These advances mature October
1, 1989, and will be repaid by NASA under a satellite
procurement contract with Western Union. Interest is payable
on an annual basis.
Interest
Amount
Date
Rate
1/2
1/21
1/24

M-358

: 700,000.00
6,650,000.00
1,610,000.00

ft

SO
CM
cx SO
SO
IT)
tn C\J
d) O
k_ f\l

3

10.883%
11.755%
11.319%

- 2During January, FFB purchased" the following General
Services Administration public buildings interim certificates
Date

Series

1/17
1/17
1/17
1/24
1/30

L-063
K-028
M-055
M-056
K-029

Amount
88,342,.33
131,037,,04
2,978,875,.35
119,657,.00
164,020.,25

Maturity

Interest
Rate

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

10.699%
10.674%
10.696%
10.954%
11.255%

Department of Transportation (DOT) Guarantees
On January 3, the Milwaukee Road issued a $30 million
Trustee's Certificate to the FFB. Funds advanced under this
Certificate are due July 3, 1980, and are fully guaranteed by
DOT pursuant to the Emergency Rail Services Act, as amended by
the Milwaukee Road Restructuring Act. Under this certificate,
FFB advanced $5 million on January 7, and $16,025,833 on
January 18 at interest rates of 13.085% and 12.815%, respectively
Under 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:
Interest
Date
Amount
Maturity
Rate
11.110% an.
5/1/86
Chicago Q North Western 511-78-2
1/14 $ 290,552
1/17 1,778,898
12/10/93
11.154% an.
Chicago, Rock Island
1/17
1,254,765
11/1/90
10.831%
Chicago § North Western 511-78-3
1/18
914,697
12/10/93
11.211% an.
Chicago, Rock Island
1/22
500,000
11/15/96
10.973% qtr
Missouri-Kansas-Texas RR
During January, the United States Railway Association financed
the following through FFB:
Interest
Date
Note #
Amount
Maturity
Rate
1/9
1/18

19
17

$1,000,000
4,017,500

12/26/90
4/29/80

10.735%
12.556%

Agency Issuers
FFB advanced $90 million in new cash to the Student Loan
Marketing Association, a federally chartered private corporation.
On January 31, FFB purchased a $595 million Certificate of
Beneficial Ownership from the Farmers Home Administration. This
certificate matures January 31, 1985 and carries an interest rate
of 11.614%, payable annually.

- 3During January the Tennessee Valley Authority sold FFB
the following notes totalling $600 million and maturing
April 30, 1980
Interest
Date
Note #
Amount
Rate
1/9
1/15
1/23
1/30
1/31

120
121
122
122-A
123

$ 25,000,000
10,000,000
35,000,000
15,000,000
515,000,000

12.697%
12.573%
12.844%
12.804%
12.815%

On January 31, TVA issued FFB a Power Bond, 1980 Series A,
in the amount of $500 million. This bond matures January 31,
2005 and carries an interest rate of 12.815%.
On January 29, FFB pruchased Block #6 of the Department of
Health, Education and Welfare-guaranteed Health Maintenance
Organization notes at a price of $9,423,668.48. The notes that
form Block #6 have various maturities and were purchased at a
rate of 11.235%.
FFB Holdings
As of January 31, 1980, FFB holdings totalled $68.3 billion
FFB Holdings and Activity Tables are attached.
# 0 #

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
Program

Net Change-FY 80
10/1/79-1/31/80

December 31, 1979

Net Change
(1/1/80-1/31/80

$ 1 ,457,.0
8 ,352,.7
31.,6

,0
$ 1 ,272.
:
8,,352.,7
38.,1

$185.0
-0-6.5

1 ,587,,0
440.•5

1 ,587.,0
436.,3

-04.2

-0-5.2

32 ,145,.0
94.,1
160,.1
33,.6
1,,223,.2
89,.2

32 ,050,,0
84..6
160.,1
33..6
1 ,223,.2
90,.7

95.0
9.5
-0-0-0-1.5

1,065.0
16.8
-0-2.2
-0-5.2

63,.4
108,.1
5 ,762,.7
379,.9
36,.0
33,.5
7,.4
405,.6
464,.6
6 ,700,.5
562,.2
363,.2
1 ,595,.0
21,.3
177,.0

42,.4
103,.9
5 ,480,.0
376,.4
36,.0
33,.5
7..4
446 .4
455,.6
6 ,484 .0
526 .6
358 .4
1 ,505 .0
21..6
177 .0

21.0
4.1
282.7
3.5
-0-0-0-40.8
9.0
216.5
35.7
4.8
90.0
-0.2
-0-

26.0
15.4
491.9
20.2
-0-5.0
2.0
-26.7
44.2
774.1
562.2
26.8
320.0
-0.2
-0-

$68,294.4

$67 ,382 .5

$912.0

January 31, 1980

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility

$

332.0
399.8
31.6

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Farmers Home Administration
DHEW-Health Maintenance Org. Loans
DHEW-Medical Facilities Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government Guaranteed Loans
DOT-Emergency Rail Services Act
DOT-Title V, RRRR Act
DOD-Foreign Military Sales
General Services Administration
Guam Power Authority
DHUD-New Communities Admin.
DHUD-Community Block Grant
Nat'l. Railroad Passenger Corp. (AMTRAK)
Western Union Space Comm. (NASA)
Rural Electrification Administration
Seven States Energy Corp. (TVA)
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
WMATA
TOTALS
Federal Financing Bank

$4,083.4*

February 26, 1980
'Totals do not add due to rounding.

FEDERAL FINANCING BANK
January 1980 Activity

BORROWER

.
:
: DATE :

DEPARTMENT OF DEFENSE
Israel #7
Israel #9
Colombia #2
Colombia #3
Indonesia #5
Turkey #7
Spain #2
Colombia #3
Ecuador #3
Korea #10
Philippines #4
Spain #2
Spain #3
Tunisia #5
Greece #11
Spain #1
Spain #2
Spain #3
Colombia #2
Thailand #2
Indonesia #5
Israel #9
Liberia #3
Malaysia #3
Jordan #3
Jordan #4
Ecuador #2
Honduras #3
Israel #8
Spain #1
Turkey #4
Colombia #3
Egypt HOME
#1 ADMINISTRATION
FARMERS
Jordan #3
Jordan #4 of Beneficial
Certificate
Ownership

1/3

1/3
1/7
1/7
1/7
1/7
1/8
1/10
1/10
1/10
1/10
1/10
1/10
1/10
1/14
1/14
1/14
1/14
1/17
1/17
1/18
1/23
1/23
1/24
1/24
1/24
1/24
1/24
1/24
1/29
1/31
1/31
1/31
1/31
1/31

$

AMOUNT
OF ADVANCE

: INTEREST:
INTEREST
:
: M A T U R m :: RATE : PAYABLE
(other than s/aj

6,476.69
186,204,955.86
108,327.88
1,614,595.96
12,949,793.00
828,727.00
11,282,637.00
631,347.38
18,000.00
2,284,595.00
699,378.99
691,876.95
295,838.00
4,260,201.00
25,856.00
70,853.20
10,004,000.00
3,978,073.00
117,093.50
100,000.00
2,657,920.00
51,211,985.58
20,679.48
125,848.18
6,800,548.54
519,683.00
574,638.81
60,885.00
1,550,000.00
70,785.00
102,168.00
36,666.00
3,258,148.00
1,094,324.50
3,365,170.00

12/15/08
12/15/09
9/20/84
9/20/85
7/21/88
6/3/91
9/15/88
9/20/85
8/1/85
12/31/87
9/12/83
9/15/88
9/20/89
6/1/86
5/10/89
6/10/87
9/15/88
9/25/89
9/20/84
6/30/83
7/21/88
12/15/09
6/30/84
3/20/84
12/31/86
3/15/88
8/25/84
8/1/83
9/1/09
6/10/87
6/3/91
9/20/85
9/1/09
12/31/86
3/15/88

10.4851
10.4741
11.172%
11.0641
10.8891
10.814%
10.8781
10.947%
10.954%
10.806%
11.199%
10.833%
10.784%
10.908%
10.879%
10.938%
10.912%
10.867%
11.080%
11.272%
10.894%
10.948%
11.294%
11.309%
11.087%
11.063%
11.360%
11.535%
11.115%
11.385%
11.329%
11.494%
11.363%
11.437%
11.410%

1/31

595,000,000.00

1/31/85

11.295%

1/17
1/17
1/17
1/24
1/30

88,342.33
131,037.04
2,978,875.35
119,657.00
164,020,25

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

10.699%
10.674%
10.696%
10.954%
11.255%

9,423,668.48

various

11.2351

11.614% annually

GENERAL SERVICES ADMINISTRATION
Series
Series
Series
Series
Series

L-063
K-028
M-055
M-056
K-029

DEPARTMENT OF HEALTH, EDUCATION S WELFARE
HMO Block #6 1/29
RURAL ELECTRIFICATION ADMINISTRATION
Arkansas Electric #97 1/2 5,698,000.00
Tri-State Gen. $ Trans. #89
1/2
South Mississippi Elect. #3
1/3
South Mississippi Elect. #90
1/3
Tri-State Gen. S Trans. #89
1/3
South Carolina Telephone #12
1/4
Southern Illinois Power #38
1/4
M § A Electric #111
1/9

1/2/82
4,327,000.00 12/31/86
1/7/82
125,000.00
1/7/82
431,000.00
7,785,000.00 11/30/86
505,000.00 12/31/14
1/4/83
100,000.00
1/9/82
200,000.00

11.565%
10.535%
11.515%
11.515%
10.685%
10.521%
10.965%
11.435%

11.402% quarterly
10.400%
11.354%
11.354%
10.546%
10.386%
10.819%
11.276%

FEDERAL FINANCING BANK
January 1980 Activity

BORROWER

Page 2
AMOUNT
DATE
OF ADVANCE

RURAL ELECTRIFICATION ADMINISTRATION
(continued)
Doniphan Telephone #14
Wabash Valley Power #104
Wolverine Electric #100
Allegheny Electric #93
Northern Michigan Elect. #101
Colorado-Ute Electric #78
Tri-State Gen. § Trans. #37
South Texas Electric #109
Arkansas Electric #97
East Kentucky Power #73
Western Illinois Power #99
Central Iowa Power #51
Associated Electric #132
Seminole Electric #141
Cajun Electric Power #76
Dairyland Power #54
Big Rivers Elect. #58
Big Rivers Elect. #91
Big Rivers Elect. #136
Brazos Electric Power #144
Westco Telephone #112
Hoosier Energy #107
Corn Belt Power #94
East Kentucky Power #140
Basin Electric Power #87
Basin Electric Power #87
SMALL BUSINESS INVESTMENT COMPANIES
Basin Electric Power #137
C § C Capital Corp.
Rice Investment Co.
Sprout Capital Corp.
Rice Investment Co.
Rice Investment Co.
First SBIC of Alabama
Gold Coast Capital Corp.
Intercapco, Inc.

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

150,000.00
4,602,000.00
989,000.00
2,867,000.00
1,263,000.00
880,000.00
128,000.00
2,000,000.00
10,000.00
8,746,000.00
4,859,000.00
942,000.00
19,400,000.00
12,732,000.00
50,000,000.00
1,400,000.00
521,000.00
2,846,000.00
67,000.00
2,810,000.00
1,000,000.00
30,000,000.00
300,000.00
3,666,000.00
350,000.00
10,195,000.00
35,000,000.00

12/31/14
12/31/14
1/10/82
1/31/82
1/10/83
1/11/82
12/31/86
1/14/82
1/14/82
1/15/82
1/15/82
12/31/14
1/18/82
1/18/83
1/22/83
1/22/82
1/23/82
1/23/82
1/23/82
1/24/82
1/30/82
1/30/83
1/31/82
1/31/82
1/31/82
1/31/82
1/31/82

10.501%
10.5.01%
11.415%
11.375%
10.855%
11.355%
10.665%
11.505%
11.505%
11.525%
11.525%
10.618%
11.545%
10.945%
11.125%
11.755%
11.735%
11.735%
11.735%
11.705%
12.055%
11.435%
12.015%
12.015%
12.015%
12.015%
12.015%

1/23
1/23
1/23
1/23
1/23
1/23
1/23
1/23

500,000.00
200,000.00
2,000,000.00
200,000.00
200,000.00
500,000.00
400,000.00
750,000.00

1/1/83
1/1/83
1/1/83
1/1/85
1/1/87
1/1/90
1/1/90
1/1/90

11.135%
11.135%
11.135%
11.035%
11.085%
11.035%
11.035%
11.035%

1/8
1/15
1/22
1/29

1,520,000,000.00
1,520,000,000.00
1,535,000,000.00
1,580,000,000.00
1,595,000,000.00

1/8/80
1/15/80
1/22/80
1/29/80
2/5/80

12.821%
12.645%
12.603%
12.911%
12.748%

25,000,000.00
10,000,000.00
35,000,000.00
15,000,000.00
515,000,000.00

12.697%
12.573%
12.844%
12.804%
12.815%
11.225%

12.815%

1/10 $
1/10
1/10
1/10
1/10
1/11
1/11
1/14
1/14
1/15
1/15
1/17
1/18
1/18
1/22
1/22
1/23
1/23
1/23
1/24
1/30
1/30
1/31
1/31
1/31
1/31
1/31

STUDENT LOAN MARKETING ASSOCIATION
Note #229 1/2
Note #230
Note #231
Note #232
Note #233
TENNESSEE VALLEY AUTHORITY
Note #120
Note #121
Note #122
Note #122-A
Note #123
Power Bond 1980, Series A

1/9
1/15
1/23
1/30
1/31
1/31

500,000,000.00

4/30/80
4/30/80
4/30/80
4/30/80
4/30/80
1/31/05

1/31

526,236,242.60

4/30/80

Seven States Energy Corporation
Note #4

10.367% quarterly
10.367%
11.257%
11.218%
10.712%
11.198%
10.526%
11.344%
11.344%
11.364%
11.364%
10.481%
11.383%
10.799%
10.974%
11.587%
11.568%
11.568%
11.568%
11.539%
11.879%
11.276%
11.840%
11.840%
11.840%
11.840%
11.840%

FEDERAL FINANCING BANK

BORROWER
DEPARTMENT OF TRANSPORTATION

January 1980 Activity
Page 3
:INTEREST:
INTEREST
~1
:
AMOUNT
:
DATE
MATURITY : RATE : PAYABLE
OF ADVANCE
(other than s/a)

Section 511
290,552.00
1,778,898.00
1,254,765.00
914,697.00
500,000.00

5/1/86
12/10/93
11/1/90
12/10/93
11/15/96

10.817%
10.859%
10.831%
10.913%
11.124%

1/18

5,000,000.00
16,025,833.00

7/3/80
7/3/80

13.085%
12.815%

1/18

1,000,000.00
4,017,500.00

12/26/90
4/29/80

10.7351
12.556%

700,000.00
6,650,000.00
1,610,000.00

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

10.602%
11.587%
11.016%

Chicago $ North Western 511-78-2 1/14
Chicago, Rock Island
1/17
Chicago $ North Western 511-78-3 1/17
Chocago, Rock Island
1/18
Missouri-Kansas-Texas RR
1/22
Emergency Rail Services Act
Milwaukee Road 1/7
Milwaukee Road

11.110% annually
11.154%
11.211% annually
10.973% quarterly

United States Railway Association
Note #19 1/9
Note #17

WESTERN UNION SPACE COMMUNICATIONS, INC.

1/2
1/21
1/24

10.883% annually
11.755%
11.319%

FOR IMMEDIATE RELEASE

March 4, 1980

RESULTS OF TREASURY'S 43-DAY BILL AUCTION
Tenders for $4,002 million of 43-day Treasury bills to be issued
on March 5, 1980, and to mature April 17, 1980, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price

Investment Rate
(Equivalent Coupon-Issue Yield)

Discount Rate

High - 98.185 15.195% 15.69%
Low
98.163
15.380% .
Average 98.173
15.296%

15.88%
15.80%

Tenders at the low price were allotted 99%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location

Received

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

$
30,000,000
8,119,000,000

TOTAL

\t c c n

Accepted
$

10,000,000

3,436,750,000

125,000,000

125,000,000

635,000,000
55,000,000
20,000,000
10,000,000

180,000,000
20,000,000
20,000,000
10,000,000

570,000,000

200,000,000

$9,564,000,000

$4,001,750,000

)tpartmentoftheTREASURY
IHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
March 5, 1980

Contact

Robert E. Nipp
202/566-5328

THOMAS B.C. LEDDY
APPOINTED DEPUTY ASSISTANT SECRETARY FOR
INTERNATIONAL MONETARY AFFAIRS
Secretary of the Treasury G. William Miller has appointed Thomas B.C. Leddy, 37, as Deputy Assistant Secretary of the Treasury for International Monetary Affairs
in the Office of the Assistant Secretary for International
Affairs. Mr. Leddy succeeds F. Lisle Widman, who has retired after more than 40 years of government service.
In his new capacity, Mr. Leddy will play a key role
in developing and implementing U.S. international monetary
policies and will be particularly concerned with U.S. economic
and financial relationships with other industrial countries.
A career employee, Mr. Leddy began his government service
in 1965 as an international economist in the Office of the
Assistant Secretary for International Affairs (OASIA). From
1968 to 1970, he served as Assistant Financial Attache in
Tokyo, Japan. Since returning to the United States, Mr.
Leddy has served in a number of positions in the Treasury
Department. From 1970 to 1973 he was an International
Economist in the Industrial Nations Finance unit of the International Monetary Office; from 1973 to 1977, he was Deputy
Director, Office of International Monetary Affairs, and 1975
to 1979, U.S. Alternate Executive Director, International
Monetary Fund. From 1977 to 1979, he also served as Special
Assistant to the Under Secretary of the Treasury for Monetary
Affairs. In 1979, he was appointed Director of the Office
of International Affairs, where he has served until this
appointment.
Mr. Leddy received a Bachelor of Arts degree in Economics
from George Washington University in 1964, and has completed
course work toward a PhD from that University.
A native of Washington, D.C, he is married to the former
Eileen Bullock of Virginia. They have two daughters and live
in Vienna, Virginia.

o 0 o
M-360

Remarks of F. Lisle Widman
Deputy Assistant Secretary of the
Treasury of the United States of America*
before the "Australia 2000" Seminar
sponsored by the Stock Exchange of Melbourne
Melbourne, Australia
February 28, 1980

THE CHALLENGE OF GLOBAL INTERDEPENDENCE
It is a great honor to follow to this podium your esteemed
Prime Minister. In keeping with your theme — Australia 2000 —
he has focused our attention on many of the opportunities of the
far horizon. The turn of the century is only 20 years away,
but if the next 20 years change at the pace which has characterized
the last two decades — and the probability is that this will
happen — it will place us in a very different world from the
one we see today.
Last year the -Organization for Economic Cooperation and
Development published the results of a three-year research project
titled "Facing the Futures: Mastering the Probable and Managing
the Unpredictable." The report concluded that there are no inherent
physical limits on world wide economic growth for the next half
century — provided nations achieve profound structural changes
in the areas of energy relations, agriculture, raw materials,
climate and protection against toxic products — a not inconsiderable agenda!
This "Interfutures" report, as it is called, emphasizes that
the key to the achievement of mankind's material objectives in
the years ahead is international cooperation to improve the functioning of international markets and to reduce the vulnerability
of national economies. The report suggests that the achievement
of these aims will necessitate the development and strengthening
of institutional arrangements and a readiness by governments to
take account in their own decisions of the impact of their domestic
policies on others.
*Retiring
M-361

- 2 -

The OECD report concludes that "management of the world's
interdependence will be the result of a long learning process, and
the pragmatic, but active, pursuit of this process is essential."
Today I hope to touch a bit more specifically on the problems of
living in a world of increased economic interdependence and to
suggest some elements of a strategy for coping with the challenges
that stretch out before us to the year 2000.
The peoples of the world want independence — we are seeing
political fragmentation even in some of the most advanced nations.
Yet the dramatic advances in the technology of communications and
transportation have helped to make nations more mutually dependent
— both economically and politically.
Since 1949 the volume of trade across national boundaries
has grown about seven percent per year while total world output
expanded by something less than five percent per year. Even in
the U.S., long the prime insular continental economy, the ratio
of exports and imports to GNP has doubled over the last 30 years,
going from 7.6 percent to 15.4 percent.
The international flow of capital has increased even more
dramatically — partly because of the expansion of individual firms
which carried their technology and managerial skills to all parts
of the world. The development of international banking and the
growth of world money markets has substantially integrated most
major domestic financial markets into the international financial
system. Finally, we have all become supremely conscious of international dependence on a relative handful of energy suppliers.
There is, of course, nothing historically unique about
product specialization and trade among mutually dependent
countries such as I have described. What has changed, I think,
is the degree of these economic interrelationships.
Why has this happened? Fundamentally because the world
wanted the higher standards of living that specialization made
possible. We enjoy higher consumption and growth possibilities
when countries specialize according to their comparative advantage.
Growth rates in capital-short countries rise, and savers in countries with saving surpluses reap higher rewards, when capital
flows to countries with profitable investment opportunities
they could not undertake on their own. If we tried to produce
everything at home and refused to let investment capital flow
internationally, our countries could not have a standard of
living remotely comparable to that we now enjoy.

- 3 Postwar governmental policies have on the whole facilitated
growing specialization and interdependence. There has been a
gradual and significant reduction in barriers to non-agricultural
trade. A relatively free, multilateral world payments system
was erected, beginning with Eretton Woods and evolving over the
years into the present more freely flexible exchange rate system.
Cf course, there have been disappointments. The Soviet
Union has never fully participated in this system. From time
to time, individual countries have tried to insulate their
economies from the world economy. Failures in domestic policy
have sometimes led to the erection of trade barriers in hopes
of deflecting external pressures. But we have generally found
that attempts to prevent freer trade and payments have proved
costly, perhaps even more to the countries imposing restrictions
than to their trading partners. Ey and large, over the last
2C years the movement has been toward a more free and interdependent global economic system. Few indeed would want to
return to autarky and the lower standard of living it implies.
A STRATECY FOR PROGRESS
Economic interdependence has gone so far, and employment
and income patterns for nearly the entire world are now so
structured around this interdependence, that a retreat would
seriously disrupt the world economy both economically and
politically. All nations would suffer. Thus we all have a
major stake in the preservation of the open trade and payments
system within which most of the world functions today.
The pressures of political nationalism and the lobbying
of special interest groups gnaw away at the open system almost
constantly. Nearly every country finds it necessary to concede
a little from time to time to some particular protectionist
group. Eut if there are too many backward steps on that slippery
slcpe and the overall impression is one of backsliding, the
risks cf emulation, of retaliatory restrictions, of turning
inward, can mushroom quickly. It is of great importance that
the periodic setbacks in particular situations be offset
by continued liberalization in other areas. The overall thrust
-ust be toward further interdependence.

- 4 Our task is to maintain that forward thrust within the
framework of our independent political units. How the world
political system will have evolved by the year 2000, I certainly
cannot say. But working with the mix of systems and goals
we have known in the non-communist world in the post war era,
and assuming that political change in most countries will
be gradual and orderly, I can at least suggest some elements
of a strategy for an approach to the year 2000.
In outlining such a strategy I offer nothing that is
dramatically new — we have known for some time the requirements for successful cooperation. But this knowledge
does not imply general acceptance of the tasks, nor does it
mean that it is easy to follow. The strategy is complex, •
incorporating elements from a number of policy areas:
— the energy constraint;
— the distribution of world income;
— the basic terms and conditions of international
trade and investment;
— last but not least, the monetary system: the
international impact of national policies for growth,
employment and price stability, the operation of
money and capital markets, exchange rates and the
roles of various types of assets in financing
international imbalances.
Energy
Energy is the most imminent of the challenges we face.
In the United States we talk about having become excessively
dependent on imported oil — about 47 percent of our requirements.
We have concluded that we must reduce that dependence. In theory
there is no reason that the United States could not rely on
imports for virtually all of its oil requirements. Japan does.
So does Germany. (Australia is in the enviable position of
producing about 70 percent of its oil requirements.) In reality,
however, we cannot allow the world's largest economy to be
hostage to either political or economic events in a small
group of states, particularly as that would reflect major
deterioration from the existing situation. With the prospect
of continued increased global demand for oil; with supply
heavily concentrated in a number of countries which have no

- 5 immediate need to sell the desired volume of oil; with some
producing areas experiencing political uncertainties; with oil
producers concerned about the depletable nature of their resources;
and with the long-terra prospect of a substantially rising price
in terms of consuming country purchasing power — the whole world
finds itself in a very unstable and unsatisfactory energy situation.
The oil situation is a case of one sided "interdependence."
Oil importers have developed their economies on the basis of
readily available oil supplies. But the rather under developed
economies of many oil producers are not as dependent on imports.
Their stake in the health of the world economy is far less than
that of the oil importers. The structural change in the world's
balance of supply and demand for oil has come too suddenly,4with
too much impact on the cultures, the religious traditions and
the political structures of some of the oil exporting nations.
It has come much too suddenly for the importing states as well.
As long as energy prices remained relatively low, entire economies
were structured around the relatively low cost of petroleum. The
line between surplus and shortage is slim, but the ratio of energy
input to overall economic output is, in the short run, quite rigid.
The industrial world did not correctly anticipate the
radical increase in the relative price of oil since 1972.
Now it finds that the lead times for expansion of alternative
energy sources are very, very long, and voter resistance to
che life style changes which a significant change in the ratio
of energy input to economic output will require is very great.
There is a lesson here: changes must be gradual — even
changes in the direction of additional interdependence. And
it is dangerous to be completely dependent on suppliers who
in some cases are independent of their customers, or who may
have political systems of questionable durability.
For the next year or two, with the U.S. anticipating a
shallow recession followed by slow recovery, and growth rates
sliding off to low levels in much of the industrialized world,
the supply of oil should be adequate unless political events
disrupt the flow. 3ut as one looks just beyond this period,
to the time when global output should be rising more rapidly,
oil producers may simply not be prepared to produce the volume
of oil required which would be needed to achieve that growth
— not at any price. In fact, the producers may not even
have the capability to meet such a demand. It is questionable
whether investment programs begun even today could create
that caoacity in time.

- 6 If energy is in short supply, the price will go up. It
will climb until the demand slackens. And if too little has
been done to improve the efficiency of energy use — reduce
the amount of energy input required per unit of output —
there simply won't be the increased output nations want. But
there will be a great deal more inflation than they want. It
isn't very easy in our democratic societies to keep increases
in the oil price from spilling over into higher wages and
higher prices of everything else.
If the world wants to move in triumph toward the year
2000, it must act on the energy crisis today. We must search
out more of the world's oil and produce it. But develop other
types of energy as well. The real cost of oil is rising so
rapidly that we must move forward with coal, natural gas,
coal gasification and liquifaction, with development of tar
sands and oil shales, nuclear power and the various synthetics
and revewable forms of energy.
We need to set in motion all of the research and development
efforts we can mobilize to ease what will otherwise be a severe
restraint on the world's economic progress in the 80s, the 90s,
and even the year 2000.
And in the meantime we must do everything possible to increase
the efficiency with which the world uses the energy it has.
Distribution of World Income
The revolution in communication and transportation has made
people of the less developed nations acutely aware of the
material goods available to most residents of the industrial
nations. Not surprisingly, that awareness has created dissatisfaction with existing political and economic systems.
The industrial nations have sought to ease this problem
by promoting rapid economic growth throughout the world —
reasoning that increased total output would bring more to the
poor with no less to the rich. A small share of a larger
pie may be greater than a larger share of a small pie.
Private sector trade and foreign investment has made a
major contribution to LDC growth. The industrial nations of
the world will be providing something like $15 billion in
grants — outright resource transfers — to the developing
world in 1980. Many billions will be provided in the form

- 7 of credits with some concessional element. Major strides
are being made, largely through multilateral institutions/
but also bilaterally, to assist the developing nations in
the utilization of their own savings and their own resources.
The results of this effort have been greater than generally
realized. Output has been increasing faster in the developing
world as a whole than in the industrial world. LDC growth
has averaged 5.5 percent a year over the last 10 years, compared
to an average of 3.5 percent in the industrial world. Several
important developing nations are well along toward what some now
call "newly industrialized" status. In some areas — the rim
of East Asia, for instance — growth has averaged an impressive
9.3 percent for a decade.
Other countries have, unfortunately, not shared in thj.s
progress. In some cases the bulk of the increased output is
being devoured by increased mouths. And even where growth has
been rapid, there has not always been political stability.
Witness what has happened in Iran.
Consequently the developing countries are seeking a "new"
international economic order. They advocate massive increases
in resource transfers by any and every means that anyone suggests
— new price agreements on commodities, more concessional aid,
control of international financial institutions by the LDCs
while the industrial nations continue to provide the funds,
money creation and distribution to the developing nations, etc.
Efforts to equalize incomes simply by massive increases in
transfer payments from wealthy countries to poor ones are not
likely to produce much sustained growth in poorer nations.
The approach is politically unrealistic, and the more strained
the world economy the less realistic it becomes. Industrial
nations are encountering enough voter resistance to higher
taxes for transfers within their own societies. Transfer of
the control of the multilateral development banks or of the
International Monetary Fund to the developing nations would
simply dry up the industrial country financial support for
these institutions essential to their operation.
The developing nations could do most to promote their
own growth by creating a climate which would make it attractive
for investors to come into these areas with technology and
capital, and thereby enable the developing countries to employ
their people where they have a distinct comparative advantage.

- 8 The industrial nations should also do more to assure access
to their domestic markets for LDC manufactured goods. The
United States has made respectable strides in this direction.
Our imports of manufactured goods from non-OPEC developing
countries nearly tripled between 1973 and 1978, from $7.3
billion to almost $21 billion.
To be sustainable the process must be gradual, so as
to ease the impact of structural adjustment on the industrial
world. This may be one of the most important avenues for
increasing economic interdependence over the next 20 years.
It requires difficult political choices and major changes
in the structure of employment in the industrial world, but
if the industrial nations accommodate the change rather than
resist it, they themselves will reap great economic benefit,
both directly and through improvement in the atmosphere of
cooperation with the Third World. The Organization for Economic
Cooperation and Development is embarking on a major effort
to obtain support for this "positive" adjustment. That effort
will need to be pursued for a good many years to come.
Progress may also be possible in helping to dampen price
movements for specific commodities whose demand is highly
responsive to changes in the levels of economic activity in
industrial nations. By this means the inflation-deflation
shocks of one-commodity countries might be significantly eased.
And over time the terras of trade can be expected to shift
toward raw material producing countries, including LDCs.
Except to the extent success can be achieved by cooperative
efforts of this nature, the developing nations which are heavily
dependent on imported oil will, sooner or later, have to slow
their development in order to pay the increased real cost of
that oil. There is no practical alternative. That pressure
will come as their debt burdens rise and credit institutions
International
Trade
andof Investment
raise the yellow
flag
caution.
The nations of the world have just completed major trade
negotiations in which they have agreed on substantial tariff
reductions phased over an eight-year period and new codes
regulating government intervention in non-tariff areas (including
subsidies, government procurement, standards, and licensing).
The MTN agreements, however disappointing they were in the
agricultural area, are a major achievement in continuing
progress toward a more open world economy despite difficult
economic circumstances in most countries.

- 9 The next steps must lie in avoiding protectionist backsliding and in implementing, interpreting, and building upon
the new non-tariff codes and dispute resolution mechanisms
which will form the basic framework for trade relations in
the decades ahead. Improvements in the present international
understanding on official export credits are also essential
to avoid excessive and disruptive competition in this area.
We also need to address the increasingly important problems
in the field of international investment, and gradually evolve
an international body of regulations in this area similar
to the GATT for trade and the IMF regulations in the monetary
area. More than ever before, investment is becoming the engine
of future economic growth and a key factor in future trade*
flows. When government intervention favors — or hinders —
the location of industrial plants in particular countries,
the economic benefits to the world as a whole are reduced and
economic relations among countries may be adversely affected.
This is a very complex area of policy, and the obstacles
to agreement are great. Yet if no agreements are worked out,
we can expect competition among countries which results only
in a waste of taxpayers' funds in fruitless efforts to advance
each country's trade position at the expense of all others.
The Monetary System
If we are going to trade with one another and to operate
wholesale money and credit markets on an international basis
we have to have a monetary system — a method of pricing, a
vehicle for payment and a method of holding financial balances.
Xenocurrency Markets. We find ourselves in a period
of extremely large imbalances in current payments for goods
and services. A half dozen oil-producing countries had an
aggregate surplus last year of something in the range of $60
billion. This year, given what has happened to the price of
oil, those surpluses may be double that figure. By definition,
the rest of the world must face deficits of an equivalent
amount. Obviously the imbalances could not occur unless there
were a mechanism for financing them. Equally obviously, the
sudden elimination of these imbalances would spell economic
disaster.
In the early.post war years most countries were dependent for credit on loans from other governments and from the
international financial institutions. Their deficits were

- 10 limited by the availability of funds from these sources. The
relaxation of barriers to private lending and the development
of what has become virtually a global money and capital market
opened up the possibilities for much larger imbalances in
nations' current account positions.
Even though governmental and international institution
lending has risen in amount, it has financed only about a
quarter of the aggregate imbalances in recent years. The
poorer countries are still limited in the deficits they can
allow by the financing they can obtain from official sources,
but the rest have more scope.
Most of this borrowing is in the Eurocurrency market — or
"xenocurrency" market, to use a more accurate albeit less .
recognized term. It flourishes because the absence of reserve
requirements, freedom from certain taxes, and the economies of
scale stemming from very large transactions give it a competitive
edge in most cases over the national markets to which a borrower
could go directly.
Concerns have been voiced that the xenocurrency market
extends too much credit and thus exacerbates world inflation
and that the participating banks may be lax in their application
of standards of credit risk. Although there is some validity
to these complaints, I believe the concerns are exaggerated.
In any event, it seems unlikely that actions will be taken
which deprive borrowers throughout the world of access to
highly efficient, solidly based international credit markets.
The prudential aspect of the xenocurrency market is likely
to be improved in the years ahead. The U.S. bank supervisory
authorities already examine U.S. banks on a consolidated basis;
the German and British authorities are moving in a similar
direction. We should see further movement toward a situation
in which all the branch, and possibly subsidiary, offices
which operate in this xenocurrency market are subject to the
same lending standards as are applied to their home offices.
The entire system will benefit from this development.
In addition, the monetary authorities of the major countries
are gaining insight into the relationship between domestic
monetary policy and international credit flows. It has become
more important that the volume of xenocurrency deposits be
taken into account when central banks look at their domestic
monetary aggregates and determine the need for injecting or
withdrawing reserves from domestic banks.

- 11 Committees of central bankers are currently studying both
the need for some form of additional supervision or control
over the xenocurrency operations and how such supervision
or control should be exercised if found to be needed. They
are also working to develop better data on these operations.
With the return of extremely large OPEC surpluses, questions
are also being raised as to whether the private markets will
— as they did in 1974 and 1975 — "recycle" the surpluses,
permitting countries to incur the current account deficits
which now seem in prospect. Private lenders are likely to be
more cautious this time in their lending to countries which
appear to be approaching the limits of their creditworthiness.
For countries which are good credit risks, however — and I.
think both Australia and the United States fall in this category
— the availability of funds is not likely to be a problem.
The oil exporting countries must invest their surpluses. They
will lend directly to countries whose fundamental position is
strong, but they will also no doubt continue to offer deposits
to the xenocurrency banks, thereby providing those banks with
ample funds for on-lending.
The fear is that countries will borrow too much, for too
long a period of time, in a desperate effort to avoid a slowdown
in development and a reduction in consumption. Unfortunately,
there appears to be no alternative to adjusting domestic economies
structurally to the higher real price of oil. If countries delay
too long in initiating the necessary adjustments, they will
erode their creditworthiness and find themselves forced into
a very abrupt and severe retrenchment which may be politically
destabilizing. Ideally, borrowing countries will recognize
the need to adjust at an early stage. With the proper adjustment
policies in place they are more likely to be able to obtain
financing to cover their remaining needs.
The International Monetary Fund can play a crucial role
in permitting countries to accomplish their adjustment gradually
and with far less impact on their people than would otherwise
be necessary. But it can do so only if the countries come
to the Fund at an early stage and if they are prepared to
institute the stabilization programs which are essential
to the reduction of their deficits to levels which preserve
their creditworthiness.
This is the direction in which the world must move to
preserve the soundness of this vast credit system. If it does,
we should continue to see the volume of international credit
outstanding rise steadily as the years pass — and still do
so safely.

- 12 Rcle of the Special Drawing Right. Another trend which
xay have significance for the longer term is the gradual increase
in the use of currencies other than the dollar — for pricing,
for invoicing, for investment and for the holding of liquid
balances. It is not a dramatic shift and the pace ebbs "and
flows from time to time. Some fading of the dollar's role is
probably inevitable as other economies come to play a relatively
larger role in the world. The U.S. accepts this evolution
as long as it occurs smoothly without disruption to the system.
"he U.S. is determined to keep the U.S. dollar strong
and stable but there is no dollar imperialism — no interest
in trying to compel the world to remain on a dollar standard.
In any event, there simply is no realistic alternative to the
the dollar today. Even Iran is discovering that.
But a full fledged multinational currency reserve system
7.ay not serve the world well. It may not be stable. There
may be too great a likelihood of disruptive swings in liquid
balances from one currency to another as changes occur in
the policies and prospects of individual countries.
Four years ago, at Jamaica, the members of the Interim
Ccirmittee of the International Monetary Fund agreed tc work
toward a system in which the Special Drawing Right would te
the principal reserve asset in the system. The SDR is a "basket,"
a composite of the currencies of the 16 countries with the
largest share in international trade. It should, therefore,
offer better protection against exchange rate movements for
a number of countries than any single national currency.
SDKs are created by the IMF. They are issued to governments
and central banks and some international institutions. There
are limits on holders and regulations on their transfer. But
there is nothing to prevent the extension of credit by private
lenders denominated in SDF, payable in any specified national
currency or currencies. Seme U.S. banks offer such credits.
Zszar.c for them is on the increase.
The IMF is now considering what is referred tc as a
"sucstitution account." Participants would deposit U.S. dollars
with this account and receive a claim denominated in SCR. At
tr.is stage the idea is still an idea — but the objective would
be to roster the use cf the SDF. not only by central banks
but also by che private market. This is a genuine year-200C
project, the kind of shift which must be expected to evolve
over a cericc cf rr.ar.v vears.

- 13 I know that your authorities here in Australia have been
skeptical. They question whether such an instrument can be
made sufficiently attractive to be widely used without imposing
too heavy risks on participating governments. At this stage
we do not know. But given the uncertainties of the next 20
years and given trends, it certainly seems worth trying.
It is one specific, practical step toward coping with economic
interdependence.
Exchange Rate Stability. Finally, there remains the basic
question of exchange rates. In the early postwar years the
world operated on the assumption that fixed exchange rate
relationships could be set and governments could maintain
them by using reserves or by borrowing. The IMF was established
to provide a basic set of rules for the international monetary
system and to provide balance of payments financing.
Although the world economy flourished for a good many years
under this system, it eventually broke down. Now the obligation
of IMF members to maintain fixed rates of exchange for their
currencies has been replaced by obligations to pursue domestic
policies designed to achieve the underlying economic stability
that is required to sustain stability of exchange rates. This
change reflects a recognition that it is the basic performance
of the domestic economies of the major countries which determines
whether exchange rates will be stable.
Stability in exchange markets remains an objective. Close
cooperation among central banks in their use of intervention
is important, but not sufficient. If there is to be stability,
it has to be founded on stability in the relationship of domestic
prices, monetary conditions and rates of economic growth among
nations. That requires the pursuit' of a combination of basic
fiscal and monetary policies in the individual countries which
fosters stability.
How can the coordination of these basic policies, which
are at the core of national sovereignty, be achieved? The
world is far from accepting a central government which would
have the power to set tax rates for every citizen and every
corporation throughout the globe. And it is many years away
from having a world central bank which sets the limits on the
amount of money which banks can borrow. The power to tax,
the decision to spend, the authority to control credit and
thus influence interest rates — these are powers which nations
will guard very jealously for a long, long time. Each country
wants to be sure that these decisions are made in strict accord
with its own preferences.

- 14 This is the central problem with which we must wrestle
as we proceed on the path of economic interdependence. I think
there is a way to go forward — to get increasing coordination
which will promote stability, but without world government or
other schemes of centralized world political authority. It
offers no guarantees, no legal force — but it should help.
This way — this key — is in the exchange of information,
in the sharing of analysis, and in the development of consensus
as to the combination of policies which at any one time are
best suited to the promotion of stability. If governmental
leaders can be convinced of the advantages of a mutually supportive
set of policies and are prepared to return to their capitals
to seek the adoption and implementation of those policies in
accordance with the laws and customs of their land, we at least
have a start in the direction of stability and economic health.
Some may fail to convince their public or their legislatures.
Some may win approval for the policy but fall flat in their
implementation — but at least the outcome should be more
favorable than policies set without reference to what others
may do and without any common vision.
How can this be achieved? Through a combination of formal
and informal mechanisms. I submit that the IMF provides the
best basis for a formal institutional mechanism to coordinate
economic policies in an interdependent world. The IMF Articles
of Agreement constitute the agreed operating rules of the
international monetary system and establish member countries'
obligations to promote a cooperative and stable world monetary
order. Moreover, the Fund is the principal source of official
balance of payments financing to help countries to adjust
their payments positions in a manner supportive of national
and international well-being.
The revised IMF Articles provide the Fund with enhanced
authority and responsibility for surveillance over all members'
exchange rate policies and the balance of payments adjustment
process. The surveillance provisions increase the ability of the
IMF to advise not only countries in balance of payments deficit,
but also those in surplus, on the international implications
of their policies and on the approaches they might appropriately
follow to correct their payments imbalances.
In the period since the amended Articles took effect, the IMF
has adopted new principles for the guidance of members in
conducting exchange rate policy, and implemented procedures
and criteria for assessing those policies. The guidelines,

- 15 and IMF practice, reflect the new orientation of the Fund's
exchange rate provisions that exchange rate stability can be
achieved only by directing economic and financial policies
toward fostering orderly economic growth with reasonable price
stability. Consequently, the Fund's examination goes beyond
narrowly defined exchange rate policy to encompass the broad
range of economic policies affecting balance of payments adjustment.
The IMF has begun to implement surveillance in a cautious
and prudent manner. Consultations under the new provisions
have been held with virtually all IMF members, including both
the U.S. and Australia.
The time has now come for the Fund to take bolder action.
I believe it should:
— Require any nation with an exceptionally large payments
imbalance — deficit or surplus — to submit for Fund
review an analysis showing how it proposes to deal
with that imbalance;
— Assess the performance of individual countries against
an agreed global approach;
— Advise on the financing of payments imbalances by
surplus and deficit countries;
— Give the IMF Managing Director a more active role
in initiating consultations with members.
-- Establish a decision-making Governors Council to
replace the advisory Interim Committee.
Progress in these areas would help achieve the closer
coordination of economic policies required for a more stable
global economy in the years ahead.
The formal mechanism of the IMF can also serve as the
basis around which small informal groupings can be built.
We all realize that when issues are controversial, and the
matters very sensitive, small informal groupings may be crucial
to success. There are such groupings now — in the so-called
economic "Summit" meetings of the heads of state or government
of the seven largest nations, in the meetings of finance ministers
and central bank governors of the five largest states and in
the periodic gatherings of the IMF Interim Committee. Bilateral

- 16 sessions are frequent — Treasurer Howard met quietly with
Secretary Miller at Belgrade last fall. Central bank governors
of countries which participate in the work of the Bank for
International Settlements confer monthly. Regular telephone
conferences, using special equipment to provide security of
transmission, now link both senior policy officials and foreign
exchange traders of a number of central banks. These central
bank communications are steps in the direction of promoting
the coordination which fosters stability on the exchange markets.
Obviously much remains to be done. But the critical area
lies in the difficulty of adopting domestic policies which
can provide the domestic economic stabilization that is the
key to stable exchange rates.
SUMMARY
In summary, economic interdependence has brought the
world untold benefits, but the interdependence has reached a
point which requires management on a global scale if it is
not to produce distortions so severe as to imperil the retention
of an open trade and payments system. Our task is to retain
the benefits of interdependence without compromising on personal
freedom and national sovereignty. To do so we must move forward
on a variety of fronts. We must:
— Urgently and drastically improve the efficiency with
which we use energy.
-- Open further developed country markets to manufactured
goods from the developing countries.
— Seek greater stability of commodity prices.
— Continue concessional aid.
-- Implement and expand upon the new nontariff codes.
— Work to eliminate incentives which distort the allocation
of investment resources.
— Maintain sound media for international credit.
— Encourage the use of the Special Drawing Right in
international transactions.

- 17 —

Strengthen the role of the IMF in promoting international
cooperation on the issues of basic macro economic
policy.
— Seek, through policies which maintain stability within
nations and close cooperation among central banks,
to maintain stability in foreign exchange markets.
With nations truly working together in these areas, the
world should "master the probable and manage the unpredictable."

o .0 o

prtmentoftheTREASURY
IGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

March 6, 1980

Treasury Secretary G. William Miller Presents
Congressional Gold Medal to Family of John Wayne
At a ceremony in the United States Capitol today, Treasury
Secretary G. William Miller presented to the family of the late
John Wayne a special Congressional gold medal in recognition of
Mr. Wayne's distinguished career as an actor and his service to
the Nation.
On the obverse of the medal is a head and shoulder portrait
of Mr. Wayne with the inscription, JOHN WAYNE - AMERICAN.
Mr. Frank Gasparro, Chief Sculptor and Engraver of the United
States Mint, executed the likeness from a photograph furnished
by the Wayne family. This photograph was Wayne's favorite
portrait of himself, taken during the filming of "The Alamo."
Typifying the American Cowboy, the reverse of the medal, also
designed by Mr. Gasparro, depicts John Wayne galloping on horseback in the rugged Western beauty of Monument Valley - location
for many of his pictures and a familiar scene the world over.
Public Law 95-16 which authorized this national expression of
appreciation, was signed on John Wayne's birthday, May 26, 1979.
Provisions of the legislation permit the striking of bronze
replicas by the United States Mint.

M-362

RELEASE ON DELIVERY
Expected at 8:45 A.M.
Friday, March 7, 1980
REMARKS BY THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
FUTURES INDUSTRY ASSOCIATION
MIAMI, FLORIDA
March 7, 1980
"Futures Markets—The Treasury Perspective" .

I appreciate the opportunity to meet with the members of
this important association to offer a few observations on
recent developments in the futures markets. During the last
several months, trading activity in all securities markets,
and especially in financial futures, has reached all-time
highs. The highest interest rates in our lifetimes have
produced disorderly conditions in the bond markets and
extraordinary strains on participants in the financial futures
markets. These developments have placed a heavy burden on all
markets and on the Commodity Futures Trading Commission (CFTC)
and its statutory responsibilities for regulation of the
futures markets.

Development of Financial Futures Markets
The financial futures markets have had phenomenal growth
and tremendous success since their inception four years ago.
The growth of trading in futures contracts based on Treasury

- 2 securities has far exceeded expectations when such
trading commenced in January 197 6. Transactions in
Treasury bill futures contracts alone totalled nearly
2 million contracts in 1979, representing some $2
trillion in annual trading volume, a twenty-fold
increase in three years. The dollar amount of
trading in the Treasury bill futures market now
actually exceeds the total volume of dealer trading
in the cash market for Treasury bills.
While trading volume in Treasury bill futures
was soaring in 1979—and this growth has continued
in 1980—there has been a remarkable reversal in the
growth of open positions in these contracts. Open
interest grew, along with trading volume, from $3
billion at the end of December 1976 to $17 billion
at the end of 1977 and $59 billion at the end of
1978.

But by the end of 1979 open interest in T-bill

contracts had declined to $36 billion, and this decline
has continued in 1980 to the current level of $25 billion.
Such increases in trading volume coupled with declines
in open interest presumably reflect increased day trading

\

- 3 in response to recent increases in the level and
volatility of interest rates.

The T-bill futures

market appears to have become a major vehicle for
short-term speculation in interest rate movements.
You may well ask whether the Treasury reaction
to this extraordinary growth in financial futures should
not be approbation if not applause.

Many useful functions

can be served by financial futures.

Positions can be

hedged, risks transferred, transactions and research
costs reduced in carrying out forward type commitments,
and better information produced and disseminated.
Individuals and institutions who must hold inventories
can protect themselves from adverse price movements by
transferring risk to those who have a preference for
risk bearing.

This can be particularly important in

periods such as those of the last ten weeks.

Even though

these activities also take place in cash markets and in
unorganized forward markets, futures markets permit
these activities to be carried out more efficiently.
The existence of a central futures market (the exchange)
facilitates bringing hedgers and speculators together.
The fact that the exchange interposes itself,

I

- 4 acting as guarantor of every contract, reduces the risk to
each side. Furthermore, information on expectations becomes
widely available as speculators and hedgers express their
views through the prices they bid and offer.

The fact that

financial futures have grown as rapidly as they have suggests
some economic purpose is being served.
These are valuable services. And it was not entirely
predictable that a phenomenon so large and dramatic as the
growth of the futures market should have produced such
benefits with so relatively few apparent problems. However,
neither the Treasury nor anyone else knows the full clinical
anatomy of this new business of financial futures, and explosive
growth typically brings with it unexpected side effects and
problems.

The number of new exchanges entering the financial

futures industry creates even greater uncertainties, for it
calls into question the viability of exchange self-regulation
as each exchange seeks to promote new products and the increased
use of existing contracts.

Proliferation and the potential for

the competitive devaluation of exchange self-regulation present
new questions and new challenges. There are significant gaps
in our knowledge about who is participating in these markets,
what they are doing or why, and the extent of- the economic purpose actually being
served.

Theories provide some guidance, but market practitioners

provide conflicting opinions. While the Treasury has more than
a century of institutional experience in the cash markets for
\

- 5its securities, it shares with you who operate the markets
only four years of actual participation in financial futures.
But as the primary issuer of the underlying securities,
Treasury necessarily has a role to play.

Treasury Role
Let me comment briefly on the interests and responsibilities
of the Treasury Department in the financial futures area. The
Futures Act of 1978 (P.L. 95-405, September 30, 1978) provides
that the Commodity Futures Trading Commission shall maintain
communication with the Department of the Treasury, the Board of
Governors of the Federal Reserve System, and the Securities
and Exchange Commission for the purpose of keeping such agencies
fully informed of Commission activities that relate to the
responsibilities of those agencies. The Act further provides
that the, Commission shall solicit the views of the Department
of the Treasury and the Board of Governors of the Federal Reserve
System when a board of trade applies for designation as a
contract market involving transactions for future delivery of
any security issued or guaranteed by the United States or any
agency thereof.

The CFTC is required by the Act to take into

consideration all comments it receives and to consider the effect

- 6-

that any such contract designation, suspension, revocation,
or emergency action may have on the debt financing requirements
of the United States Government and on the continued efficiency
and integrity of the underlying market for government securities.
In keeping with these responsibilities the Treasury and
the Federal Reserve Board conducted a study of the Treasury
futures market, which included extensive interviews -with
market participants and consultations with the CFTC. The
results of that joint study were published in May 1979.
As we indicated in the Treasury/Federal Reserve Study,
the Treasury is primarily concerned witfc the potential, impact
of financial futures on the Treasury's debt management flexibility
and on the underlying cash market in government securities.
Surely, there can be no disagreement on this point —

that the

overriding purpose of the Government securities market is to
provide for the financing of the public debt at the lowest
possible cost to the taxpayer. Moreover, since the Treasury
securities market provides a benchmark for interest rates throughout the economy, the continued stability, efficiency, and integrity
of the Government securities markets are essential not only to
the efficient management of the public debt, but also to the
Nation's economic health, and to the effective functioning
of all financial markets.

- 7From my vantage point, the joint study provides the
first systematic—although necessarily incomplete—analysis
of this market and how it is operating.

The study focussed on

the following areas:
1.

The impact of futures trading on the efficiency
and integrity of the cash market;

2.

The adequacy of deliverable supplies and the possible
constraints on debt management flexibility;

3.

The ability of the exchanges and the CFTC to main-.
tain effective surveillance, particularly in cases
of duplicative contracts; and

4.

The dangers for unsophisticated investors who may
not fully appreciate the risks inherent in futures
contracts when those contracts are based on USG
securities.

As part of the study we sought the opinions of those who
were favorable to futures markets and those who were unfavorable.
Those who were favorable—generally the majority—argued that
there were important social benefits from these markets, and
these benefits are discussed at length in the study.

But I must

admit that another and perhaps the principal objective was to
identify potential problems, and to determine how futures may
affect the basic cash market for Treasury securities and the
efficiency with which the cash market can accommodate the
requirements of financing the public debt.

- 8We recommended that the CFTC consider both the
width of the maturity range of deliverable securities and the
number of outstanding issues in determining the adequacy of.
deliverable supply.

We recommended that the CFTC not approve

a contract which depends solely on the deliverable supply of a
single security yet to be issued and not designate new contracts
which duplicate contracts on other exchanges. We also encouraged
the CFTC to proceed gradually in authorizing new contracts, so
as to minimize any perverse effects of rapid growth.

These

recommendations have been generally adopted by the Commission
except that the Commission did not feel it could adopt our recommendation to proceed gradually in authorizing new contracts.
The study also urged that investor safeguards be adopted, including
customer suitability and the use of serial tapes by the exchanges,
and much remains to be done In this area.
Since our study, we have learned considerably more about
financial futures.

Some concerns have been assuaged by

experience and continued analysis.

But other concerns still

linger.and, indeed, are reinforced by the press of new developments and events. As we enter a new phase of development in
these markets involving multiple exchanges, duplicative contracts,
and contracts on new instruments such as stock indices, the
problems and warning signs become more pronounced. While we
support developments that promote the efficiency of financial
markets, and we recognize the value of the competitive process
in determining which contracts and exchanges survive, these
occurrences place new and difficult burdens on the industry
and the regulators.
--^

\
-^TTITTV^;

-

ome of these unresolved issues.

- 9 Proliferation
In the area of Treasury securities and other debt instruments,
thirteen financial futures contracts are now being traded, and ten
additional contracts are under review by the Commission.

In

addition, at least a dozen new contracts have been proposed for
stock index futures, ranging from futures on broad indices to
narrowly defined sectoral indices.

While the Treasury has reviewed

only one of these index contracts, the KCBT futures contract on the
Value Line Average, many others have been approved by the exchanges
and submitted to the CFTC,
This sudden surge in financial futures raises new questions
of proliferation and duplicative contracts and adds to our concerns
that exchange self-regulation could weaken as each exchange seeks
to promote its product.
successful.

Many. of.the newer contracts have not been

On some contracts trading is virtually nonexistent.

Yet, the exchanges have not been required to justify continuation
of these contracts.

Moreover, if new markets in stock index

futures gain broad acceptance, the limited surveillance capabilities of the CFTC and the exchanges will be under increasing
pressure, particularly in view of the need to deal with extraordinary trading and market situations in a number of other
"commodities markets.

-10Deliverable Supplies
Another unresolved issue is the adequacy of deliverable
supplies.

The "deliverable supply" problem, and possible

pressures on the Treasury to relieve or prevent a squeeze
in the cash market, needs to be addressed anew in light of
the recent experience with the Treasury bill contract.
For the December 1979 Treasury bill contract on the IMM, .
deliveries reached the unprecedented level of $1 billion,
which was about half of the total estimated supply of
bills available for delivery.

Such pressures on deliverable

supplies were a concern to many market observers in both
June and December because of abnormal price relationships
among the underlying cash market bills.

Specifically, the

deliverable bill traded out of line with surrounding maturities.
These developments are difficult to quantify and assess,
but they increase concern about the possibility of manipulative
or fraudulent behavior as well as the likelihood of disruptive
effects on- the markets for U.S. Government securities.

Use of Futures Trading for Tax Purposes
— The episode of the December Treasury bill also suggests
that tax motives may play a significant part in the trading in
the§e markets.
• The strong interest in taking delivery of the December
Treasury b.ills appears to be traceable in part to efforts by
some participants to reduce tax liabilities.

- 11 Trading in the futures markets for tax purposes is
nothing new, of course.

The popularity of commodity straddles

for this purpose was evident long ago. However, the extent
to which the futures markets are being used for strictly tax
purposes appears to be growing, as is the complexity and
sophistication of schemes designed to produce a specified
tax deferral or avoidance result.
These trends can only be of concern to us at the Treasury.
The underlying straddles do not serve any apparent economic
function and the alleged liquidity increase is illusory because
tightly straddled trades do not provide any market liquidity
in any real sense.
Moreover, these trends should be of concern to you, the
industry leaders. An industry that allows its economic
purposes to be undermined by the proliferation of tax
avoidance schemes invites regulation and restrictions.

Market Practices
In the market practices area, we are concerned with the
complexity of contracts, the nature of participants in the market: —
the March 1979 survey by the CFTC indicates nearly half of the
outstanding contracts are held by individuals and commodity pools

—

and the possibility that these markets may be increasing risk

exposure rather than reducing it, even by professional participants,
such as banks and financial institutions.

- 12 -

We are also concerned with a number of related problems
involving questionable market practices that have surfaced in
the forward markets, particularly in the Ginnie Mae forward
market.

Recent press reports indicate that a number of lawsuits

are being filed against securities firms alleging that they promoted unsuitable and illegal investments.

Persistent problems

in the GNMA forward markets have led to growing pressures for
regulation.

Currently, the Treasury, Federal Reserve, and the

SEC are conducting a study of markets for GNMAs and other
government-guaranteed securities to identify the scope and
significance of problems. We plan to complete this study
in April.
The authority to establish and adjust margins and the adequacy
of investor protection safeguards and suitability standards need
to be addressed, particularly since the exchanges have given every
indication that they plan on attracting substantial participation
by individual investors through new products involving stock index
futures and the retailing of existing financial instrument futures.
Foremost among our concerns is the likelihood that futures contract
will be inappropriately merchandised

to investors who do not

fully understand these contracts.
We envision the possibility that certain financial futures

'

could become, in these times of heightened speculative excesses,
a popular means for the uninformed to place "bets" on the futurewithout reducing risk or serving as a legitimate hedging instrument
The joint Fed/Treasury study on financial futures in 1979 called
i

- 13 -

for "further study of investor protection." And the SEC Options
Study recommended that the broker/dealer#be required to "find that
the customer is capable of evaluating the risks" of options trading.
The Treasury favors a more explicit and elaborate risk disclosure
statement than that now required by CFTC's Rule 1.55.
In the broadest perspective, Treasury's interest is in the
stability of the nation's economy and financial markets. History
tells us that inflation begets speculation as investors strive
to protect vanishing principal, and there appears to be a substantial speculative element in the commodities futures and
financial futures markets today.

Speculation, in turn, may increase

the risk of sharp swings in the market that can victimize the
investing public, discredit the market itself, and distort and impair
capital formation in the process.
Accordingly, we favor a reevaluation of the margin question.
At present, apparently neither the CFTC nor any other agency has
clear authority to establish and adjust margins for approved
contracts and thus could not stop ambitious futures exchanges.
from setting initial margins very low or even at zero (while
still requiring daily, after the fact, marking-to-market). At
a minimum, regulatory authority in this area should be specifically
clarified.

Obviously, there must be coordination among the

CFTC, SEC, and Federal Reserve to monitor competitive inequities
as between stocks, stock options, and stock futures.

i

- 14 -

I do not intend to prejudge the results of the ongoing Treasury/Fed/SEC
study of the government-guaranteed securities markets but I think it is fair
to say that the trends I have discussed must be addressed if this new industry
is to continue its impressive growth and contribute to the nation's economic
growth.

That will require a joint effort between you who

are the leaders of the industry and those—like the Treasury—
with responsibilities to protect the public interest.
I am mindful that automatic nay-saying or knee-jerk
recalcitrance on the part of governmental and regulatory
authorities is not very useful.

It is possible for an

entity like Treasury that is properly concerned about
excessive volatility in financial markets to fall into a
"Chicken Little Syndrome," claiming' perennially, "The sky
is falling, the sky is falling."' i can assure you our
views will be balanced.

But there are problems present

here, and I hope we can all work constructively together
to resolve them with the least cost and government
involvement possible.

0O0

STATEMENT BY
THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE THE COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
MARCH 10, 1980

Mr. Chairman:
Thank you for the opportunity to appear before the Committee in
support of S.2271, legislation to strengthen the International
Monetary Fund and to provide for maintenance of the U.S. role
as the leader of this important institution.
We meet at a time of heightened international tension,
affecting vital U.S. strategic and economic interests. Recent
events have driven home dramatically the close interrelationship
between foreign policy and economics. The turmoil in Southwest
Asia has contributed to oil supply shortages and uncertainties and
placed added strains on the international financial system. These
developments have come at a time when the world economy is
already facing extremely difficult problems. The massive oil
price increases of the past year have led not only to slower
growth and surging inflation but also to another period of dramatic
changes in the balance of payments positions of the oil importing
countries. And today's world economic environment is likely
to make it both more difficult for nations to obtain the
financing needed to deal with their balance of payments problems,
and more difficult for them to make the necessary adjustments
to changed external circumstances.
The success of our efforts to deal with political tension
and maintain peace in the 1980*s will depend importantly on
our ability to address current economic problems. The IMF
is a cornerstone of U.S. international economic policy, providing

M-364

- 2 the institutional framework for world monetary cooperation,
finance and trade that is vital to the economic prosperity
of the U.S. and the global economy. A strong and effective
IMF is essential to our efforts to assure world monetary and
financial stability and to provide the broad cooperative framework
we will need to overcome fundamental economic difficulties.
The IMF serves two related functions — general guidance
of the monetary system and provision of temporary financing
in support of members' efforts to overcome their balance of
payments problems.
First, the IMF's Articles of Agreement constitute the operating
rules of the international monetary system and establish member
countries' obligations to promote a cooperative and stable world
monetary order. The decade of the seventies brought major changes
in the international monetary system and in the IMF's role in
guiding the system's operations.
In the area of balance of payments adjustment, the Bretton
Woods par value exchange rate obligations have been replaced by
obligations on members to pursue policies to achieve the underlying
economic stability that is needed for genuine and sustained exchange
rate stability. The IMF has been given the task of surveillance
over members' compliance with those obligations, and over the
operations of the balance of payments adjustment process more
generally.
In the area of international liquidity the IMF membership has
established the objective of making the Special Drawing Right
(SDR) the principal reserve asset in the international monetary
system to help avoid the instabilities inherent in a system based
on a multiplicity of national currencies.
These changes have paralleled and to a large extent reflected
changes in the position and role of the dollar in the system.
The original Bretton Woods arrangements assumed a fixed and central
role for the dollar, with the U.S. position essentially passive
and the product of other countries' actions in pursuing their
own balance of payments policies and objectives. That arrangement
ultimately became both unsustainable and intolerable in terms
of U.S. economic interests. The new arrangements have provided
much more scope for balance of payments adjustment by the United
States, and recognize the need for greater symmetry in encouraging
adjustment by all nations — those in surplus as well as those
in deficit.
At the same time, the world's reserve system has been undergoing significant change. Increases in the relative economic
size and financial capacity of other major countries have tended
to bring some growing use of their currencies in international transactions and reserves. On the one hand, such a development could
help to mitigate some of the burdens on the dollar and U.S. financial

- 3 markets that arose from its extremely large international role.
On the other hand, the process of change can itself be unsettling
and disruptive, and there is a widespread view that increasing reliance on the SDR — an internationally created and managed reserve
instrument — would be preferable to development of a full-scale
multiple currency reserve system. The IMF over the past few years
has taken a number of important steps to promote the role of the
SDR and is presently considering a potentially significant further
step in its examination of the substitution account.
The dollar nonetheless remains critically important to the
operation of the international monetary system, and the U.S. economy
remains a powerful element of that system. This will continue
to be the case, and we recognize and accept the responsibilities
incumbent on the United States to maintain a sound economic position
and a stable dollar. At the same time, a strong IMF — able to
encourage effective economic and balance of payments adjustment
by all countries and able to guide the orderly evolution of the
reserve system — is of direct and immediate importance to our
economy and to our efforts to maintain the integrity and strength
of the dollar.
The second basic function of the IMF, closely tied to
its role in guiding the overall operation of the system, is the
provision of temporary financing in support of members'
efforts to deal with their balance of payments difficulties.
Its aim is to encourage timely correction of balance of payments
problems in a manner that is not distructive of national or
international prosperity — and thus to promote a smoothlyfunctioning world payments system in the context of a strong
and stable international economy. This is a central objective
of the IMF and one in which all members must participate as an
obligation of IMF membership.
It is important to understand the nature of IMF financing.
The IMF is essentially a revolving fund of currencies provided
by every member and available to every member for temporary balance
of payments financing under prescribed criteria. Each country
is obligated to provide its currency to the IMF to finance drawings
by other countries facing balance of payments needs; and each
country in turn has a right to draw upon the IMF in case of balance
of payments need. When a country provides financing to the IMF —
that is, when its currency is drawn from the Fund — it receives
an automatic and unchallengeable right to draw that amount from
the IMF in usable foreign exchange. This is the so-called "reserve
position" in the IMF, an automatically available reserve claim
on the IMF which is normally carried in countries' international
monetary reserves.
Financing thus flows back and forth through the IMF depending on balance of payments patterns and financing requirements
at any given time. There is no set class or group of lenders
or borrowers, no concept of "donor" or "recipient." All major
industrial countries have drawn upon the IMF at times, and many

- 4 members, developed and developing alike, have been both lenders
and borrowers during the history of their participation in the
IMF.
proposed Increases in Quotas
Throughout its history, the IMF has needed periodic increases
in its quotas in response to the rapid growth of world economic
activity and international trade and financial transactions. To
maintain a strong IMF, capable of encouraging needed adjustment
while providing the temporary financing required to maintain monetary
stability, we must assure that its resources are adequate to meet
potential demands. The proposed 50 percent general increase in
IMF quotas is a key element in assuring that strength.
Quotas play a central role in the IMF. Members' quota subscriptions constitute the IMF's permanent financial resources. Quotas
determine both the amount of IMF resources a member can draw when
in balance of payments need, and its obligation to provide resources
when its balance of payments is strong. Quotas determine the distribution of SDR allocations. And, of key importance in all IMF
operations, quotas also determine voting power. Unlike the case in
many institutions, where member countries try to hold down their
shares of participation, in the IMF countries compete to gain the
largest possible share of the total because of the votes and financing that a larger quota share provides. The United States
has by far the largest IMF quota and thus the largest share of
votes and potential access to IMF resources.
To ensure that IMF quotas remain realistic and adequate, they
are reviewed periodically in relation to the growth of international
transactions, the size of payments imbalances and financing needs,
and world economic prospects. Such a review was initiated in 1977
and led to a resolution adopted by the IMF Board of Governors on
December 11, 1978, with the U.S. Governor concurring, calling for
an increase in overall IMF quotas by 50 percent, raising total quotas
from about SDR 39 billion to roughly SDR 58 billion. The increase
proposed for the U.S. quota amounts to SDR 4,202.5 million,
eguivalent to about $5.4 billion at current exchange rates.
This increase would raise the U.S. quota by 50 percent from
SDR 8,405 million (or about $10.9 billion) to SDR 12,607.5 million
(or about $16.3 billion).
The negotiation of quota shares is always difficult with
pressures on the U.S. to accept a smaller quota share. Given the
key roles of the dollar and the U.S. economy in the international
monetary system, and the IMF's central role in guiding the operations
and evolution of the system, it is essential that the U.S. maintain an appropriate share of quotas and votes, and thus its influence
over basic decisions about the system. In the end, the pressures
for a reduced U.S. share were successfully resisted during the
most recent review, and only a very few selective changes in
guota shares, all within the LDC group, were agreed.

- 5 The decision to propose a 50 percent overall increase in
quotas reflected a widely felt view that quotas had, by any
measure, failed to keep pace with potential balance of payments
financing needs. Despite quota increases on four occasions during
the IMF's history, aggregate quotas had fallen to about four
percent of annual world imports in comparison with 8 to 12
percent during the 1960s and 10 to 14 percent during the 1950s.
The adequacy of quotas had eroded particularly during the seventies,
as the ratio of quotas to members' aggregate deficits fell by
two-thirds between 1971-73 and 1978. In mid-1978 the Fund's
usable quota resources -- that is, its holdings of the currencies
of members then in strong payments positions — totaled only
about SDR 16 billion, or just over one percent of world imports.
In November 1978, before the Supplementary Financing Facility
was put in place, the amount of usable quota resources was effectively halved to around SDR 8 billion when the U.S. drew the
equivalent of $3 billion and the dollar was taken off the IMF's
"budget" of currencies used in financing current drawings.
These shifts in the IMF's "liquidity" illustrate the difficulties
of projecting either the level of usable IMF resources or the
level of future drawings on the Fund. In its 1977 quota review,
the IMF estimated that the level of international transactions
between 1978 and 1983 would increase by 60 percent in SDR terms.
In fact, that 60 percent figure is now much too low, as inflation,
oil price increases, and other factors have caused a much more
rapid expansion in the value of world trade and financial
transactions. And even if we could accurately predict future
levels of world trade, we would not know the pattern of trade,
the size and distribution of payments imbalances, or the availability of financing from banks and other sources.
In determining how large a quota increase would be needed,
it was recognized that the IMF's Supplementary Financing Facility,
introduced last year to provide badly needed resources to the IMF
on a temporary basis, would be phased out after a 2-3 year period.
That Facility was proposed and is regarded as a bridging operation
to be followed by an increase in the IMF's permanent resources.
It was in the light of these considerations that the IMF
membership concluded that a 50 percent increase in total quotas
would be the minimum required to assure that the IMF remained in
a strong position to meet prospective needs. Even a 50 percent
increase will do little more than slow the decline in the
relative size of IMF resources into the mid-1980's. In fact, most
developing countries and some OECD members, fearing growing world
economic uncertainties, pressed hard for a much larger increase.
Events since completion of the quota review have strengthened
the justification for the quota increase. Oil market developments
have again radically altered economic prospects and have drawn the
world into a pattern of payments imbalances reminiscent of that
following the 1973-74 oil price increase. Countries must, and will,
begin adjusting to these developments, and that will cause further

- 6 changes in world balance of payments patterns and financing needs
that cannot be foreseen. Moreover, events in Iran and Afghanistan
have created a climate of concern and uncertainty that makes it
all the more important to have in place the institutional means for
assuring monetary stability and for providing advice and financial
support to countries facing the growing economic and financial
problems of the 1980s.
At present, the IMF has usable quota resources estimated at about
SDR 10 billion, plus SDRs held by the IMF totaling approximately SDR
1.1 billion. These resources are supplemented by amounts remaining
available under the General Arrangements to Borrow equal to
SDR 5.7 billion, and SDR 7.4 billion under the Supplementary
Financing Facility which is scheduled to end in early 1981
or 1982.
Severe payments imbalances and consequent financing needs will
very likely intensify during the next several years. At present,
in broad terms, we anticipate an OPEC current account surplus of
about $120 billion in 1980 and current account deficits, after
official transfers, of about $70 and $50 billion for the OECD and
LDC group respectively. A world environment of slower growth, high
inflation, heightened caution in the private financial sector, and
the continuing threat of energy supply disruptions will simultaneously make the financing of external deficits and the adjustment
of national economies to reduce those deficits more difficult.
The private financial sector will again be called upon
to meet the bulk of expanding international financing needs,
and we believe that the private banking system, including the
U.S. banks, can and will continue to participate in the recycling
process without incurring undue risk. At the same time, our
regulatory authorities will be monitoring developments closely
to help insure that the banks' loans are sound and that excessive
concentrations do not arise. Moreover, flows of official
development assistance will continue to rise. But we have to
anticipate that a number of countries, developed and developing,
will encounter growing financial difficulties, and pressures to
adjust and bring their external positions closer into line with
sustainable flows of financing. This will result in increased
demands for official balance of payments financing, and early
in 1980, the IMF is already processing requests for balance of
payments financing that far exceed the total drawn in 1979 as a whole.
The IMF must have adequate resources — and this means adequate
quotas — to encourage countries to adjust in an appropriate way,
rather than adopt trade and capital restrictions, aggressive exchange
rate policies, or unduly restrictive domestic measures in order to
reduce their financing needs. Such restrictive measures could have
serious implications for the entire world economy and the prosperity
of all nations, as well as for the economy of the country introducing
them. We must not forget the lessons of the 1930's, when serious
economic
worsened to
bypreserve
ultimately
self-defeating
actions
of nationstroubles
trying were
individually
employment
and prosperity

- 7 during times of economic distress and international tension. The
impact on the United States today could be especially harmful. Our
economy has grown heavily reliant on world trade and financial flows.
An interdependent world brings real economic benefits, but also greater vulnerability to outside developments. Imported goods, from raw
materials to high technology products, are integrated into all
phases of U.S. economic activity. Export markets constitute a
major source of demand for U.S. goods and services. One out of
every seven U.S. manufacturing jobs and one out of every three
acres of U.S. agricultural land produce for export. For the U.S.
economy specifically and the world economy generally, prosperity
is dependent on a well-functioning international financial system.
Uncertainties about the magnitude, distribution, and financing
of payments imbalances over the next few years make it impossible
to project the precise level of IMF resources that will be used
during the next five years. But we must assure ourselves that
the IMF's resources are sufficient to enable it to meet its important responsibilities — sufficient as measured against historic
standards and current trends, and sufficient against a realistic
appreciation of the dangers we face as we enter a new decade.
The IMF and National Balance of Payments Adjustment Programs
Let me turn, Mr. Chairman, to the IMF's role in fostering
balance of payments adjustment on the part of its member countries.
This is an area that has drawn a great deal of public attention
in recent years, and one in which the IMF is again likely
to become quite heavily involved as its members address the
difficult problems they now face.
In trying to gain an understanding of the appropriate role
for the IMF, it is important to bear in mind the purpose for which
it provides financing — to help members overcome their balance of
payments problems without recourse to measures destructive of
national or international prosperity.
Access to IMF financing is contingent upon the member meeting
certain criteria which are designed to ensure that the IMF's
financial resources are used in a manner consistent with this
purpose. In the initial stages of a member's use of IMF financing,
the requirement is simply that the member have a balance of payments
need. As a member makes greater use of regular Fund resources,
it must demonstrate that it is making "reasonable efforts" to overcome its balance of payments difficulties. And if there is a
need for further financing from the Fund — and the member begins
to enter into the higher stages of its access to Fund resources —
the IMF requires that a comprehensive adjustment program be developed
by the member that provides "substantial justification" in terms
of correcting the country's balance of payment problems. Such
programs generally involve the use of certain "performance criteria"
which establish concrete policy objectives and which are used at

- 8 regular intervals during the program as indicators of the progress
being made toward those objectives. This progression of policy
requirements is what is referred to as Fund "conditionality."
It is generally agreed that the "conditionality" attached to IMF
lending is essential to achievement of the IMF's purposes.
Whatever the cause of a country's balance of payments problem,
unless it is temporary and self-reversing, the country will
ultimately have to adjust — it cannot indefinitely spend reserves
and borrow abroad. Restrictions on trade and on exchange transactions
may provide temporary relief, but can lead to retaliation from abroad
and to pervasive distortions in the economy which often compound
the member's economic problems. If policy adjustments are delayed
too long, the country's creditworthiness and ability to borrow
abroad will inevitably decline; trade credit will evaporate;
investment and productivity will generally fall; and growth
will decline or become negative. This in itself is one form
of adjustment, but it is a harsh and inefficient adjustment. What
may look like the easy way out is in fact very costly.
Most governments will make policy adjustments before the
situation deteriorates to that extreme, but sometimes a country will
not approach the Fund until the situation is desperate. This is
a key point to remember. The Fund does not cause the lack of foreign
exchange that interrupts vitally needed imports. Indeed the IMF,
oftentimes alone, tries to help by providing resources to maintain
the economy and balance of payments temporarily, and by providing
policy advice that will help the borrower restore sustained economic
stability and growth. In return for this financing, the world
community expects the government to foreswear measures disruptive
to the world economy. To assure repayment and the most beneficial
results for the country, the Fund requires that the member
undertake appropriate measures to solve its balance of payments
problem. But barring a major change in the country's economy
— such as discovery of oil or a political decision by other
nations to finance the deficits of the country, on a more or
less permanent basis — every nation will have to adjust.
In most cases the sooner needed adjustments can be initiated
the better since the longer adjustment is delayed, the more difficult
and painful it will be.
Quite often, the adjustments that must be made require
difficult policy choices for the country concerned and can involve
short-term restraint and hardship affecting virtually all segments of the population. The immediate difficulties of a relatively
short-term restraint program must be weighed, however, against
the pervasive, destructive — and lasting — effects of an inflation
that is allowed to go unchecked on investment, employment, development, and general welfare. If the IMF can help a country to restore
a sound basis for growth and development through implementation
of
This
and ansocial,
does
adjustment
not
canmean
far
program,
that
outweigh
the
then
IMF
the
the
should
shorter-term
longer-term
take a costs.
rigid
benefits,
or economic

- 9 doctrinaire approach in dealing with its members. Indeed, it is
widely overlooked that the institution has, in fact, adapted its
policies and practices and taken a large number of steps to
improve its effectiveness and ability to respond to members'
changing needs.
First, reflecting the generally increased scale and
persistence of balance of payments problems, the IMF now provides
more financing for longer periods for nations with adjustment
problems. Quota limits on drawings have been expanded; and for
drawings with higher conditionality, in the upper credit tranches,
two and three year programs have become much more the accepted
rule, in contrast to the one-year program that was traditional
in earlier days.
In addition, a variety of IMF facilities are now available
to members, ranging from unconditional reserve tranche drawings
through facilities such as the Compensatory Financing Facility
and the first credit tranche (both with relatively "light" conditionality requirements) to the upper credit tranche and Extended
Fund Facility drawings. Of total drawings amounting to nearly
$30 billion since 1973, roughly two-thirds has been drawn from
unconditional or relatively unconditional facilities. Some countries
have, of course, gotten into more serious difficulty and have
had to turn to the more conditional facilities — which have themselves been expanded and adapted — and these are the cases one
hears about most often. But it is important to bear in mind
the whole spectrum of IMF financing facilities when assessing
its role in balance of payments financing and adjustment.
Second, the IMF has undertaken a major review of conditionality
in the upper credit tranches and has established a new set of
guidelines for its application. To an extent, these new guidelines
formalize certain protections for borrowing countries that
had already existed in practice, but they also add important
new features. For example, they now emphasize the desirablity
of encouraging countries to adopt corrective measures at an
early stage — before very severe adjustment problems arise —
and recognize the need for more gradual and more flexible
adjustment over longer periods. They also recognize that adjustment
measures frequently encompass sensitive areas of national policy, and
provide that in helping to devise adjustment programs the Fund
will pay due regard to the concerns of governments about the
compatibility of such programs with their domestic social and
political objectives and economic priorities. They provide that
"performance criteria" will normally be confined to macro-economic
variables (other than those performance criteria needed to implement
specific provisions of the Articles, such as the avoidance of
exchange restrictions). The new guidelines should help dispel
the idea that conditionality is a weapon for imposing unnecessary
hardship
and make
clear
that
forcommunity.
countries
severe
country
IMF
the adequate
conditionality
involved
and and
timely
isthe
inadjustment
world
the best
interests
which iswith
of
the both
objective
the imbalances,
individual
of

- 10 A third change in the IMF's approach to adjustment, and
a particularly important one, is one that I mentioned earlier —
its new role in surveillance. Surveillance over every IMF member's
efforts to foster orderly underlying economic and financial
conditions provides valuable IMF leverage for promoting sound adjust
ment policies by all countries, surplus or deficit, whether or not
they draw on the IMF's resources. It is designed to introduce a
badly needed symmetry in the international monetary system, more
effectively encouraging adjustment efforts by surplus countries,
and not leaving the entire burden of adjustment on deficit
countries. Development of IMF surveillance can be helpful in
various ways. To the extent it encourages earlier adjustment
action, it helps to avoid the more severe corrective measures
which become necessary as a country's situation worsens; and
to the extent it encourages adjustment action by all countries
with large imbalances, it reduces the relative emphasis on those
deficit countries drawing upon the IMF.
Thus the IMF is making a continuing effort to adapt to the
changing needs and circumstances of its members. This process
should, and will, continue. But as we move to adapt IMF
policies and practices, we need to keep the IMF's basic purposes
clearly in view, and ensure that its programs do, in fact,
effectively promote adjustment by its members. This is in
the individual borrower's own interests and of the international
community as well.
Budgetary Treatment of IMF Quota Increase
Before I conclude, Mr. Chairman, let me briefly mention
the question of the budget and appropriations treatment of
this quota increase. The President's budget proposes that
a program ceiling on the increase be provided in an appropriations act. We have been consulting closely on this
question with interested committees, and considerable interest
has developed in an alternative approach which would involve
the following elements:
— Appropriations would be required in the full amount
of the increase, and that sum would be included
in budget authority totals for fiscal year 1981.
— Payment of the quota increase by the United States
would result in budgetary outlays only as cash transfers are actually made to the IMF on the U.S. quota
obligation (25 percent of our quota increase will be
transferred immediately in the form of SDRs; subsequent transfers can occur when dollars are needed
by the IMF in its operations).
— Simultaneously with any cash transfer under the quota
subscription, an offsetting budgetary receipt, representing an increase in the U.S. reserve position in
the IMF, would be recorded.

- 11 -

—

As a consequence of these offsetting transactions, therefore, transfers to and from the IMF under the quota obligations would not result in net outlays or receipts.

— Net outlays or receipts resulting from exchange rate
fluctuations in the dollar value of the SDR-denominated
U.S. reserve position in the Fund would be reflected
in the Federal budget. These net changes cannot be
projected and thus would be recorded only in actual
budget results for the prior year.
We are continuing our consultations on this matter. The
point I would stress today is that under either the program
ceiling contained in the President's budget or this alternative
approach, U.S. payments on its quota subscription would not
affect net budget outlays or, therefore, the Federal budget deficit
Conclusion
Mr. Chairman, the proposed quota increase is important for
three reasons.
First, from the point of view of the international monetary
system as a whole, it will help assure that the IMF can continue
to meet its responsibilities for international monetary stability
in a period of strain, danger, and financial uncertainty.
Second, from the point of view of individual countries,
it will provide additional resources to encourage cooperative
balance of payments adjustment policies — and I note that IMF
resources have been of major direct benefit to the United
States when we faced severe balance of payments pressures.
Third, from the point of view of the United States, it
maintains our financial rights and our voting share in the
institution during a time when far-reaching changes in the
monetary system — for example, a substitution account —
may be under consideration.
The record of the IMF is a good one in adapting to
changing world circumstances and responding to the needs of
its members. The proposed quota increase will provide the Fund
with resources needed for its valuable work, and I urge the
Committee to approve this legislation.

o 0o

FOR IMMEDIATE RELEASE

March 10, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,300 million of 13-week bills and for $3,300 million of
26-week bills, both to be issued on March 13, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing June 12. 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing September 11, 1980
Discount Investment
Price
Rate
Rate 1/

96.163
96.085
96.112

92.497-^ 14.841%
92.417
14.999%
92.439
14.956%

15.179%
15.488%
15.381%

16.00%
16.34%
16.23%

16.27%
16.46%
16.40%

a/ Excepting 1 tender of $5,000,000
Tenders at the low price for the 13-week bills were allotted 46%.
Tenders at the low price for the 26-week bills were allotted 70%.

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

TENDERS JDECEIVED AND ACCEPTED
(In Thousands])
Received
Received
Accepted
$
75,645 $
75,645 '
$
63,920
4,545,225
2,341,725 1
4,361,770
45,465
45,465 5
24,780
81,525
81,015 5
56,585
64,185
64,185
69,545
79,580
79,580
54,150
350,775
200,775
339,685
54,060
45,060 :
33,845
12,500
12,500 :
9,175
79,795
79,795
51,155
15,715
28,195
28,195 i
300,460
351,215
166,215
86,050
79,975
79,975 :

Accepted
$

63,920
2,573,770
24,780
46,585
69,545
53,150
169,685
24,845
9,175
50,015
15,715
112,980
86,050

$5,848,140

$3,300,130

'>

$5,466,835

$3,300,215

Competitive
Noncompetitive

$3,631,355
1,133,390

$1,083,345
1,133,390

:

:

$3,248,135
753,300

$1,081,515
753,300

Subtotal, Public

$4,764,745

$2,216,735 " i

$4,001,435

$1,834,815

Federal Reserve
Foreign Official
Institutions

924,195

924,195

920,000

920,000

159,200

159,200

545,400

545,400

$5,848,140

$3,300,130

$5,466,835

$3,300,215

Type

TOTALS

1/Equival<*™*" -e«**pftn-issue yield.
M-365
'
.

•
:

DATE: March 10, 1980

13-WEEK

2 6-WEEK

TODAY: ff.lfl% /V-//&
LAST WEEK: ATT/3 Q °7o rf.ff Z

HIGHEST SINCE:

f
LOWEST SINCE:

TRANSCRIPT OF REMARKS BY
THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE U.S. TREASURY
AT THE PRESENTATION OF A GOLD MEDAL AUTHORIZED
BY ACT OF CONGRESS
AT THE CAPITOL
MA.RCH 6, 19 80
Ladies and gentleman, not only from the Congress and from
the public, but, ladies and gentleman of the Wayne family.
It's a very special privilege and pleasure for me to be here
for a number of reasons. One, I've just left a meeting to
discuss the economic policies of our nation, and it's nice to
have a respite from that, and to come to a subject that's
related. Because you cannot talk about John Wayne—his life
and his contribution—without thinking about the inherent
strengths and capacities and meaning of our country.
The second reason I'm happy to be here is that I rarely
get to be in such elegant company. And I'm delighted to be
able to see the wonderful people who have known and loved and
been a part of John Wayne's life.
And another reason, of course, is that this is the most
popular medal that we've ever struck. So we have a winner. And
in that sense, the United States is not only recognizing a great
American but is making that recognition available to many, many
Americans who share that sense.
When you think of John Wayne, whether he was portraying a
fighting Marine, or whether he was that indomitable Western cowboy, he always projected that sense of admiration, of love and
affection for his country. Whether he was on the screen or off
the screen, he always contributed to that spirit of our great
nation.
He spoke in terms of affection for America and the freedom
that allowed all the people to thrive and to make their way in
this world against odds that may have impeded us as we started
on our individual progress. In a substantial way, he projected
a vision of a strong human being, the kind of strong human
being that each of us hopes to be. Some people called him a
legend, some even called him a national resource, but no matter
how others pictured John Wayne or Duke, as his friends knew him,
he always possessed honor and dignity and was unashamed of
affection for his homeland.
M-366

- 2 -

In authorizing the striking of this gold medal, Congress
has placed John Wayne among the most illustrious group of the
nation's outstanding individuals. Only a small number of
Americans have received this kind of honor. The distinguished
group includes George Washington, Andrew Jackson, Jonas Salk,
Thomas Edison, Charles Lindbergh, Marian Anderson—great names.
It is not difficult to perceive the patriotism of this
remarkable man. He espoused faith in America time and again,
in his speeches, in his personal relations, and always through
the films he appeared in. He saw his films and his roles as a
catalyst for stirring our feelings for America. He acted in
and financed the film entitled "The Alamo" so that, in his words,
he could recreate a moment in history that will show this generation of Americans what their country stands for, what some of
their forebears went through to win what they had to have or
die—liberty and freedom.
At this time in our history it is important for us to remember that patriotism is an acceptable demonstration of our faith
in our country. John Wayne was a patriot. He wanted his own
children to understand American ideals and to adhere to them.
He stated one time that he was grateful each day of his life to
wake up in the United States of America. He wanted his children
to also have that sense of gratitude. He said about his daughter,
I don't care if she memorizes the Gettysburgh Address, but I hope
she understands it.
It's interesting that he should have used Abraham Lincoln's
address as the embodiment of his feelings, because he was shown
in a recent poll to be second only to Abraham Lincoln as a name
and a face most readily recognized by all Americans.
So it's therefore appropriate today that we honor his
memory and his impact and his contribution upon the American
scene, by a presentation of the Presidential medal, which is
shown in replica here, inscribed very simply and very eloquently,
"John Wayne, American." This is the replica, but this is the
real medal in gold. And it may be the last time that Congress,
if it's going to balance the budget, will be able to do this.
So to the family, I would like to present the gold medal that
has been made available by an act of the Congress of the United
States.
Congratulations.
o
0
o

portmentoftheTREASURY
GTON, D.C. 20220

J u

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LIBRARY
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FOR RELEASE AT 4:00 P.M.

KwU'BO Marchn' 1980
TRtASu^ DEPARTMENT

TREASURY'S WEEKLY BILL OFFERING
The Department of th e Treasury, by this public notice,
invites tenders for two s eries of Treasury bills totaling
approximately $6,600 mill ion, to be issued March 20, 1980.
This offering will provid e $250 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$6,347 million, including $975 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,933 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,300
million, representing an additional amount of bills dated
December 20, 1979,
and to mature June 19, 1980
(CUSIP No.
912793 4 K 9 ) , originally issued in the amount of $3,222 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,300 million to be dated
March 20, 1980,
and to mature September 18, 1980 (CUSIP No.
912793 5 F 9 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 20, 1980.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices 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. 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, W a s h i n g t o n ,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, March 17, 1980.
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.
M-367

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. 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. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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
respective
(in three decimals)
issues. of accepted competitive bids for the

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on March 20, 1980,
in cash or other immediately available
funds or in Treasury bills maturing March 20, 1980.
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.

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
MARCH 10, 1980

Contact:

George G. Ross
202/566-2356

JUNE GIBBS BROWN AND ANTHONY PICCIRILLI
RECEIVE 1979 FINANCIAL MANAGEMENT IMPROVEMENT AWARDS
Treasury Deputy Fiscal Assistant Secretary, Gerald Murphy and
Comptroller General Elmer B. Staats, presented the 1979 Financial
Management Improvement Awards to June Gibbs Brown, Inspector General
of the Department of the Interior and Anthony Piccirilli, Auditor
General of the State of Rhode Island on March 3, 1980. They were
recognized for their outstanding contributions to the improvement of
financial management in the public sector at the Ninth Annual Financial
Management Conference In Washington, D. C., sponsored by the Joint
Financial Management Improvement Program (JFMIP).
The JFMIP is a joint and cooperative undertaking of the Department
of the Treasury, the General Accounting Office, the Office of Management
and Budget and the Office of Personnel Management to improve financial
management practices throughout the Government.
June Gibbs Brown was commended for her dynamic and outstanding
leadership in establishing the Office of Inspector General at the
Department of the Interior. Through her efforts, the principles and
integrity anticipated by the Inspector General Act of 1978 are beginning
to be realized through a climate of mutual concern at all levels of
management. She has installed an aggressive managerial and organizational
style to ensure a response to every allegation received in the Office
of the Inspector General and has designed a management information
system to provide management feedback on the status of all audit report
recommendations.
Mrs. Brown was recognized as one of the most outstanding financial
systems design experts in the Federal Government, having worked on
several large complex systems for the U. S. Navy and the Department of
the Interior. She created a new automated system for payrolling and
processing personnel actions for the Department of the Interior, that
utilizes the latest concepts in data transmission, computer processing,
financial reporting and internal control. Several Federal agencies
have adopted this system for their own use.

M-368

- 2 -

Mr. Anthony Piccirilli, Auditor General of Rhode Island, was
commended for his dedication, initiative and imagination in making
the Office of the Auditor General a vital force in Rhode Island
State Government. Through the Issuance of audit reports to the
State legislature on a wide range of State programs and services
from education to health to transportation, he has triggered improvements in many State services and financial management practices
throughout the Rhode Island State Government.
Under his leadership, the Office compiled an accounting manual
providing guidance for local governments in Rhode Island. The impact
of the manual is already evident in the increased adherence on the
part of municipalities to generally accepted accounting principles
and auditing standards and the publication of more meaningful
financial information to the public.
Mr. Piccirilli has also been very active in the Intergovernmental
Audit Forums that promote cooperation and coordination of audit
efforts among Federal, State and local governments. While serving
as chairman of the New England Intergovernmental Audit Forum, he has
been instrumental in developing guidelines for the conduct of quality
reviews of audit organizations that perform audits of government
programs.

FOR RELEASE AT 4:15 P.M.

March 12, 1980

TREASURY TO AUCTION 2-YEAR AND 4-YEAR NOTES
TOTALING $6,000 MILLION
The Department of the Treasury will auction $3,500
million of 2-year notes and $2,500 million of 4-year notes to
refund $5,267 million of notes maturing March 31, 1980, and
to raise $733 million new cash. The $5,267 million of
maturing notes are those held by the public, including $1,279
million of maturing notes 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 $809
million of the maturing notes that may be, refunded by issuing
additional amounts of the new notes at the average prices of
accepted competitive tenders. Additional amounts of the new
securities may also be issued at the average prices to Federal
Reserve Banks, as agents for foreign and international
monetary authorities, to the extent that their aggregate
tenders for each of the new notes exceed £heir aggregate
holdings of the maturing notes. For purposes of determining
such additional amounts, foreign'and international monetary
authorities' holdings of the maturing notes etre considered to
be made up of $309 million of original 4-year notes and $970
million of additional 2-year notes.
Details about the new securities are given in the
attached highlights of the offering and in the official
offering circulars.
Attachment

oOo

M-3n9

HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 4-YEAR NOTES
TO BE ISSUED MARCH 31, 1980
lAmount Offered:
To the public

$2,500 million
$3,500 million

[Description of Security:
F
Term and type of security
Series and CUSIP designation

2-year notes
.Series Q-19**?
^ ™ 1X
(CUSIP No. 912827 KN 1)
*,

Maturity date
Call date
Interest coupon rate

March 31, 1982,.m
No
provision
To £e tJetermine/3 based on
the average of accepted bids
To be determined at auction i
To be ^etermined after auction
September 30 and March 31
..$5,000 »

Investment yield
Premium"' discount
Interest payment dates
Minimum denomination available
iTerms of Sale: . .. n
1
Yield
Method of sale
Auction
Accrued interest payable by
None
investor
,...
. .A -^
Preferred allotment
j ^ S S S * ~ £ 2 *"
Deposit requirement 5% of face amount.
Deposit guarantee by designated
institutions
Acceptable
K<ty
Define for receipt of tenders *»**•**' H""* "' 198°'
by 1:30 p.m., EST
Settlement date (final payment due)
. ., 1 9 8 0
a) cash or Federal funds
Monday, March 31, 1980
b)
^Iliftrict^herfs^^ed....Wednesday, March 26, 1980
C> C h
n
a n k
S
F Rr^s"i ct°whe r e subm i^ea....Tuesday, March 25, 1980
.

. *„_^v

a a t e

March 12, 1980

£ o

^

C O U P

o»

S

ecurities...Monday,

April

14,

1980

4-year notes
Series D-1984
(CUSIP No. 912827 KP 6)
March 31, 1984
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after aucti
September 30 and March 31
$1,000
Yield Auction
None
Noncompetitive bid for
$1,000,000 or less
5% of face amount
Acceptable
Tuesday, March 25, 1980,
by 1:30 p.m., EST
Monday, March 31, 1980
Friday, March 28, 1980
Friday, March 28, 1980
Monday, April 14, 1980

RELEASE ON DELIVERY
March 17, 1980
Expected at 10:00 A.M.

STATEMENT OF THE HONORABLE WILLIAM W. NICKERSON
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT)
BEFORE THE
SUBCOMMITTEE ON TRADE
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
Mr. Chairman and members of the Subcommittee,
I thank you for inviting me here today to discuss
H.R. 5961 - a bill to amend the Currency and Foreign Transactions Reporting Act (a part of the Bank Secrecy Act) - and
why the Treasury Department so urgently requests its passage.
As you may be aware, we testified on behalf of the provisions
of this bill before the House Banking Committee last November.
Subsequent to our testimony, the bill, with a few minor amendments, was reported out of the Banking Committee. We urge
you to carefully consider the merits of the bill. We believe
that after having done so, you will support it.
Title I of the bill would amend section 231(a) of the
Bank Secrecy Act to make it illegal to attempt to export or
import currency or other monetary instruments without filing
the required reports. Title II would amend section 235 of
the Act to authorize Customs officers to search suspected
individuals at the border for currency and other monetary
instruments without a search warrant when they have a reasonable cause to suspect that those persons are in the process
of transporting monetary instruments for which a report is
required. Title III would add a new section to the Act which,
by offering as a reward a percentage of funds recovered, would
encourage people to supply information to the Government about
individuals who have violated the reporting provisions of the
Currency and Foreign Transactions Reporting Act. The Banking
Committee has amended the bill by increasing the amount which
need not be reported from $5,000 to $10,000, by requiring that
the Treasury Department report to the Congress within 18 months
after the effective date on the results produced by the bill's
provisions, and by postponing the effective date of the bill
to October 1, 1980.
Mi

-2I would like to emphasize that this bill would impose
no additional reporting requirements on travellers.
Although we have good reason to believe that, at a minimum,
hundreds of millions of dollars were carried or shipped out of
the United States to purchase illegal drugs, we have been able
to detect only a very small part of those funds. In 1978, for
example, less than $46 million was reported as being transported
to drug significant countries. It is obvious to us that we are
not receiving all of the reports that should be filed, and
these amendments are needed to help us deal with this problem.
The best way to illustrate the problems we encounter in
enforcing the currency reporting requirements is to compare the
situation we face when an individual enters the United States
to the situation when he leaves.
Imagine an individual arriving by plane from abroad with
$50,000 in cash in his luggage. As he approaches the U.S. Customs
inspector for routine inspection and clearance, he is notified
of his legal obligation to file the Customs Form 4790 (Report of
the International Transportation of Currency and Other Monetary
Instruments) because a specific question concerning this obligation appears on the baggage declaration form given to him on the
airplane. In addition, signs notifying travellers of this requirement are posted at ports of entry and verbal notice of the requirement may also be given by Customs personnel. Should he attempt to
avoid filing this form, it is conceivable that the currency would
be discovered by the Customs inspector in the course of the routine
inspection. If the individual declines to file the report after
being specifically advised of his obligation to do so, and the
currency is discovered, there is no question that a violation of
the Act has occurred. The individual has clearly transported the
currency into the United States without filing a report, and the
Customs inspector clearly had the authority to search his baggage.
This violation can easily be expanded through investigation by
Customs agents to determine whether the funds were transported in
furtherance of a violation of another Federal law. This is the easy
case.
Imagine, however, a private airstrip in Florida, where a small
private jet has taxied out on the runway as an impeccably dressed
man, carrying an attache case, walks out to meet the plane. A
Customs officer, on the scene only because he had just received an
anonymous phone call that someone was leaving for a known narcotics
producing country from that airport with $250,000 in cash, stops
the well-dressed man and asks where he is going. After the man
indicates that he is going abroad, the Customs officer asks if he
is carrying more than $5,000 in currency or monetary instruments,
and if so, states that a report must be filed. The man responds
This
attache
in theindividual
negative,
case and could
at
discovers
which
very time
well
that the
escape
it Customs
is filled
prose:uc:-^
officer
with -Sinn
opensh the
m

-3In this situation, the individual had not yet departed from
the United States when the Customs officer stopped him. Although
there is little doubt that within the next five minutes he would
have been airborne, transporting the $250,000 without having filed
the required report, and beyond the reach of Federal law enforcement authorites, some courts have held that it is not a violation
of the Act to attempt to transport currency out of the United
States without filing the report and the actual violation does
not occur until the individual has left the United States and is
tnerefore beyond our jurisdiction.
This incident also dramatizes the limitation on the scope of
the Customs authority to verify the individual's negative response
by opening the attache case. In this instance, the facts leading
to the search very likely do not constitute probable cause, the
search standard in the Act. Thus, even if there is a violation of
the Act, the evidence may be suppressed. It is evident that under
existing statutes the Customs inspector has much greater authority
to examine an incoming individual's luggage, which gives him a good
opportunity to discover a violation of the reporting requirement.
Customs is, however, virtually powerless to enforce the Act with
respect to departing travellers.
Another problem is providing coverage at the place of departure.
Customs personnel are not generally stationed at smaller airports or
even major departure ports, as they are at points of entry. There
is no routine screening of individuals as they leave the United
States. Therefore, to a very large degree we must rely on prior
information to alert us to future departures. In the case cited,
the officer had received a phone call which proved to be reliable.
However, with our present resources, we must be selective and thus
may not always be able to respond to every anonymous tip. We must
develop sources of information concerning the financial operations
of organized narcotics traffickers. To encourage people who have
this sensitive information to contact the law enforcement community,
it is, unfortunately, sometimes necessary to offer something valuable
in return. Often, the informant risks his life by giving information on major criminal activities and therefore substantial
payment may be necessary. It should be noted, however, that this
amendment will not cost the Government anything. Payments will
only be made after a substantial recovery has occurred.
In sum, we believe that the problems we are currently facing
in enforcing the Act with respect to departing violators would be
greatly alleviated if H.R. 5961 were enacted.

oOo

ipartmentoftheTREASURY
March ±/, iyou

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,300 million of 13-week bills and for $3,302 million of
26-week bills, both to be issued on March 20, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing June 19, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing September 18, 1980
Discount Investment
Price
Rate
Rate 1/

96.197 15.045% 15.86%
96.187
15.084%
15.90%
96.195
15.053%
15.87%

92.460
92.422
92.442

14.914%
14.989%
14.950%

16.35%
16.44%
16.40%

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 32%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands])
Received
Accepted
Received
$
55,385
$
78,555
$
80,530
5,303,025
2,578,645
6,087,740
24,855
48,255
42,625
46,300
68,770
65,030
64,460
58,540
64,260
59,985
77,020
83,050
380,075
420,425
72,055
47,940
58,530
30,530
14,425
11,260
17,260
43,790
53,610
54,110
24,570
32,940
27,940
127,525
391,170
358,385
76,685
76,685
88,925

TOTALS

$7,483,725

$3,300,020

$6,512,120

$3,302,280

Competitive
Noncompetitive

$4,929,400
1,103,785

$ 745,695 :
1,103,785 :

$4,450,310
747,010

$1,240,470
747,010

Subtotal, Public

$6,033,185

$1,849,480" :

$5,197,320

$1,987,480

Federal Reserve
Foreign Official
Institutions

763,570 763,570 :

1,170,000

1,170,000

144,800

144,800

$6,512,120

$3,302,28.0

Accepted
54,790
2,644,280
24,155
35,190
44,460
49,245
83,775
19,940
8,415
39,625
23,570
185,910
88,925

$

Type

TOTALS

686,970

686,970 :

$7,483,725

$3,300,020 :

1/Equivalent coupon-issue yield.

/

DATE: March 17, 1980

13-WEEK

TODAY
LAST WEEK:

26-WEEK

ArTo^3 % /4a9jro7o

J£lXl3 j£2&$

HIGHEST SINCE:

LOV7EST SINCE

/J. 7^o /£
/y 7 ^ %

STATEMENT OF EMIL M. SUNLEY
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TAX POLICY (TAX ANALYSIS)
ON TAX EXPENDITURES FOR HEALTH CARE
BEFORE THE HEALTH SUBCOMMITTEE OF THE
SENATE FINANCE COMMITTEE
MARCH 18 , 1980
Mr. Chairman and Interested Members:
I am pleased to appear here today to discuss the role of
the tax system in the provision of private health insurance
and health care, and to examine in particular its effect on
competition and cost consciousness. It is especially beneficial
for the national debate that this subcommittee can examine the
role of tax expenditures as it reviews the President's National
Health Plan, the Health Incentives Reform Act of 1979, and other
proposals for national health insurance or for restructuring
incentives in the private health care sector.
Current Tax Treatment
Over $16 billion of Federal income tax expenditures are
provided currently through the exclusion or deduction from the
income tax base of payments for certain medical expenses,
including premiums for insurance. These tax expenditures are
the principal programs of government assistance for the purchase
of medical care by the nonaged, nonpoor population, and they
exceed the $14 billion of Federal contributions to medical care
for the poor.
Specifically, the tax system subsidizes the purchase of
medical care by permitting (1) employer contributions for health
insurance premiums or other medical payments for employees to be
excluded from taxable income and (2) certain medical expenses to
be deducted from adjusted gross income on individual income
tax returns.
The tax expenditure estimate of $16 billion relates to
the Federal income tax alone. There is a further tax
expenditure cost of about $3 billion to States with income
taxes. In addition, social security tax revenues are reduced
by about another $6 billion. In total, Federal and State
revenues are reduced by about $25 billion because certain
health expenditures are allowed to be excluded or deducted
from income and social security tax bases.
In addition, another $0.4 billion dollars of Federal
tax revenue is forgone each year because interest income from
certain hospital bonds is tax exempt.
M-37.3

-2As for many tax expenditures, I am not sure that Congress,
if starting over, would determine that the existing tax expenditures for health care would be an optimal way of providing
either tax relief or assistance for purchasing medical care.
Current tax law in this area has resulted more from a
maintenance of past practice, or habit, than from a process
in which choices were made among means of subsidizing
expenditures for health care. The debate on Federal health
policy currently being undertaken by the Congress is a
convenient and crucial opportunity to reexamine health tax
expenditures for health care.
The Medical Deduction
No deduction for medical expenses existed until 1942.
During World War II, substantial numbers of citizens were
brought under the income tax and tax burdens were raised
significantly; it was felt that some relief from this heavier
tax burden should be granted to taxpayers with extraordinary
medical expenses. Consequently, deductions were allowed for
certain medical expenses exceeding a 5 percent floor. The
1951 Act and subsequent provisions effectively eliminated any
floor for medical expenses for the aged; in 1965, however,
the Social Security Amendments required that all taxpayers,
including the aged, again to be subject to the same floor.
In 1954, another major change was made when the 5 percent
floor was lowered to 3 percent, and an additional 1 percent
floor was applied to expenses for drugs before those expenses
could be counted toward the overall 3 percent floor. A major
justification for both actions was that deductions should be
allowed for all "extraordinary" expenses. While a 5 percent
floor was considered too high to cover all extraordinary
expenses, a 1 percent floor was considered necessary to exclude
ordinary drug expenses.
Besides the 1 percent floor on drugs, another separate
calculation was required when the Social Security /Amendments
of 1965 allowed a deduction for one-half the cost of medical
insurance, up to a maximum deduction of $150, without regard
to the 3 percent floor. The remaining half of insurance
premiums (including premiums in excess of $300) are subject
to the 3 percent floor.
The deduction for medical expenses generally has been
justified on the grounds that extraordinary medical expenses
reduce ability to pay taxes and that the income tax base
should take account of this. However, this argument makes
more sense for uncontrollable than it does for controllable
or voluntary medical expenses, and also, there is no clear
standard for what constitutes extraordinary expenses. In any
case, for 1977, (the most recent data available) only 19 percent
of taxpayers benefit from the medical deduction and 43 percent
of these only deduct one-half of their insurance premiums.

-3The tax saving from the itemized deduction rises with income.
Of course, the deduction is of no value to the nonitemizer. However, even among returns with itemized medical deductions, the
average tax expenditure per return increases as income increases.
This increase, in what essentially is a subsidy for the purchase
of medical care, is the result of several factors, including
higher marginal tax levels. The 3 percent floor does result in
a decline in the proportion of taxpayers who can itemize expenses
in excess of the floor, especially at income levels in excess of
$50,000. However, if the average tax expenditure is calculated
across all taxpayers in the income class, rather than just
itemizers, the tax expenditure is still of greater average value
to taxpayers in higher income classes, rising from $10 for
taxpayers with incomes between $5,000 and $10,000 to $501 for
taxpayers with incomes of $200,000 or more.
Exclusion of Employer-Paid Premiums for Medical Insurance
The exclusion from individual income taxation of payments
to employer-provided grdup plans has existed since the adoption of the income tax; only the rationale for the exclusion
has varied over time. At first, most fringe benefits of
employees were not taxed—tax rates were low and noncash
compensation was not widely recognized as income. Of course,
before World War II, the income tax did not affect the
majority of workers, and taxation of fringe benefits would
have served little purpose in the case of nontaxable workers.
Moreover, a few decades ago, benefit payments under group
health insurance were much smaller relative to income. Later
Internal Revenue Service rulings eventually supported the
exclusion, and in 1954,' the exclusion was written into the
Code. However, despite later recognition that fringe benefits
indeed are income, and despite rapid growth in amounts spent
on group health insurance, no substantial changes have ever
been made in the exclusion. Treasury figures show the
Federal income tax expenditure cost of the exclusion to have
grown from $1.1 billion in 1968 to $13 billion in 1980.
The distribution of benefits from the exclusion—a subsidy
for the purchase of medical insurance through an employer, with
the subsidy rate increasing with income—is somewhat similar to
the deduction; that is, because marginal tax rates increase with
income, a dollar of tax-free health insurance is worth more
(i.e., the tax expenditure cost is greater) to taxpayers at
higher income levels. However, the exclusion is available to all
employees, regardless of whether they itemize on their returns
or the level of their expenditures. (But approximately 16 percent
of all employees do not have group health and, presumably, do
not receive employer-paid health insurance premiums.) Below
tax-exempt levels of income, of course, there is no employee
gain from either the exclusion or the deduction.

_4Exclusion of Interest Income From Tax-Exempt Bonds
Prior to 1968, interest on IDB's issued by State and local
governments had been exempt from Federal income taxation even
though the proceeds were used by private persons. The use of
such IDB's had been growing in importance as a mechanism by
which State and local governments sought to attract plants to
their communities. Through the use of IDB's, these governments
had been able to extend the tax exemption afforded to interest
on their securities issued for public investment to interest on
bonds issued for essentially private purposes. Of course, as
many States and localities came to utilize this method, the
competitive advantage was lost and the increased volume of taxexempt financing afifected the interest cost of public issues.
These factors, and fear of increasing revenue losses to Treasury
as use of this method of financing long-term private debt expanded,
led to the limits on tax-exempt IDB's included in the Revenue
and Expenditure Control Act of 1968.
Under present law, the definition of a taxable industrial
development bond generally does not include an obligation issued
to finance a trade or business carried on by a private, nonprofit
charitable organization. Thus, many bonds issued by State and
local governments to finance facilities for private, nonprofit
hospitals are not considered to be taxable IDB's and are eligible
for tax exemption on the grounds that they have been issued
directly by States and localities. About $3.5 billion of taxexempt hospital bonds were issued in 1979.
Effect of Tax Expenditures for Health on
the Demand and Price of Medical Care
I believe that this subcommittee is especially interested
in the effect of the tax expenditures for health on the demand
and price of medical care.
Exclusions for medical care, like many other tax
expenditures, are mostly open-ended. That is, there are few,
if any, budget limits on the amount of the exenditure that
can occur. Earners have a substantial and fairly open-ended
incentive to convert wage compensation into nontaxable compensation in order to minimize their taxes. For instance, for a
taxpayer with a 20 percent marginal tax rate from all sources,
$1 in cash compensation is equal to only $0.80 in nontaxable
compensation. The tax incentive lowers the price of the nontaxable fringe benefit and thereby creates a demand for more of
the fringe benefit--far beyond the demand that would exist in
absence of the incentive.
Over the last three decades, these demands have increased
enormously, and noncash compensation has become a large part
of the compensation package of most workers. As a result,
the income tax base has been eroded. To compensate for this,
the rate of tax on cash wages effectively must be increased if

-5a given amount of revenue is to be raised; thus, marginal rates
of tax on cash wages must go up even if average rates of tax
on all compensation remain steady. Workers who receive larger
proportions of their compensation in cash—often workers in
weak firms or secondary workers—suffer the most from this
shift in tax liabilities. Also, the social security tax base
has been eroded, slowly forcing other changes in that system of
taxation. Moreover, some inflationary pressures can be traced
in part to demands of employees for greater increases in
payments to nontaxable benefit plans than for increases in
cash compensation. It should also be noted that policies to
grant equal pay to employees of both sexes are often hindered
by the inability of the secondary worker to receive equal
value of pay in fringe benefits.
These problems are present with all exclusions of fringe
benefits from income subject to tax. The exclusions increase
the demand for fringe benefits, which in turn weaken the
effort of policies which are based on cash compensation.
In the case of health benefits, income in the form of
employer-paid health insurance premiums is exempted from
Federal income tax, State income tax and social security tax.
Thus, employees may be inclined to accept a larger share of
their compensation in the form of health insurance than they
would if the income in-kind was taxable. This has contributed
to the growth in employer payments to group health plans from
0.8 percent of wages and salaries in 1955 to about 4 percent
in 1980.
Since the exclusion provision reduces the price employees
must pay for health insurance, it is also likely to increase
the demand for coverage under health insurance. Increased
coverage may be reflected in a reduction of the deductible amount
or the copayment rate, or inclusion of previously uncovered
services. Since tax rates are higher in higher income brackets,
the price reduction—and the price incentive to increase the
quantity of services demanded—increases with income.
The effect of allowing itemized deductions for health
care expenses may be analyzed along the same lines. The
deduction for health insurance premiums has much the same
effect as the exclusion: it reduces the after-tax price of
health insurance or health care, and the reduction is of
greater value at higher income levels. The major difference
is that the exclusion is available regardless of whether
the taxpayer itemizes deductions or takes the standard
deduction, whereas the personal deduction for health insurance
premiums must be itemized. For the majority of taxpayers
who do not itemize, there is no price reduction.

-6The requirement that medical expenses exceed 3 percent of
AGI before qualifying as a deduction (except for 50 percent of
health insurance premiums up to $150) is somewhat similar to a
deductible clause in an insurance policy. Although the evidence
is not conclusive, some researchers have found that a small
deductible has little effect on the demand for hospitalization,
while, for ambulatory and other nonhospital services, a moderatesize deductible is likely to influence demand markedly.
While the 3 percent floor is roughly analogous to a
deductible in an insurance policy, the exclusion of employer
premiums and the deduction of all expenses above 3 percent are
both analogous to a copayment rate. For employees in group
health plans and for itemizers above the 3 percent floor, then,
the marginal tax rate determines the proportion of the last
dollar of medical expense or medical insurance paid by the
Government; thus, the copayment rate equals one minus the taxpayer's marginal tax rate. Again, the tax incentive for increased
use of medical services is greater the higher the taxpayer's
taxable income.
The quantitative effect of these tax subsidies on the overall
demand for health services is thus based in large part upon the
subsidy rate on marginal expenditures. On average, the Federal
income tax expenditures of about $16 billion cover approximately
10 percent of total private expenditures for health care. At
the margin, however, the reduction in price is much greater
than 10 percent. The marginal price reduction is equal to the
taxpayer's marginal tax rate. For an average employee, the
income tax rate alone is 22 percent. If we also take into account
State income taxes and social security taxes, that marginal rate
rises to about 35 percent. For the average itemizer, the marginal
rate of income tax is about 25 percent. Since demand is based
primarily upon marginal price, the impact of the tax expenditures
upon the demand of medical services is greater than the price
reduction averaged across all expenditures would indicate.
Whether increased demand for medical services will actually
lead to an increase in the quantity purchased will depend primarily
upon conditions in both the supply and demand sides of the market.
In general, the more responsive supply or demand is to price
changes, the more likely will the tax subsidy increase the amount
of medical care provided in the economy. While the demand for
health care is often viewed to be insensitive to price, price
effects on demand may be much stronger for controllable expenses
or noncatastrophic events than for uncontrollable or catastrophic
occurrences. That is, demand for some basic level of health
care or insurance may not be responsive to price, but the demand
for additional health care or insurance may be much more responsive.
This certainly deserves more study.

-7Insurance complicates considerably the analysis of the
demand side of the medical marketplace. Some researchers argue
that the demand for health insurance is relatively responsive
to price incentives (compared to most estimates of the demand
for medical care). To the extent that demand responds to price
incentives, tax subsidies then lead to increased insurance coverage.
Increased coverage may take the form of lower deductibles and
copayment rates on medical goods actually purchased, or it may
increase benefits. These researchers then suggest that, once a
large proportion of the population pays little or nothing for
additional medical services, the demand side of the market ceases
to exert an independent restraint on the market, and medical
care cost changes, over time, are determined by forces or events
not subject to the usual limits of market behavior.
Because tax subsidies tend to increase the demand for
medical care, they also tend to increase its market price. A
subsidy creates a wedge between the market price received by
the seller and the net cost to the buyer. Increases in price
result in the tax subsidy (or the wedge) being shared with the
providers of medical care; thus, the greater the increase in
market price, the less the tax subsidy reduces the net cost
of medical care to taxpayers.
To make matters worse, market price increases probably
apply fairly uniformly to many types of purchase of medical
care, while the value of the tax subsidy increases with the
taxpayer's income. Thus, even if the tax subsidy results in
a net price (after subsidy) decrease to the average taxpayer,
it may still result in a net price increase for low- and
moderate-income taxpayers who receive only a small price
subsidy. For those who do not receive any subsidy, a net
price increase is almost certain.
In issuing industrial development bonds, a State or local
government essentially lends its tax exemption to a private
business to enable it to finance facilities at the lower
interest rates prevailing in the tax-exempt market. This
construction subsidy increases the flow of capital into the
hospital sector and out of other areas in the economy. The
resulting excess hospital capacity in turn increases the cost
of hospital stays.
Dealing with the Problem
There is sufficient reason to be concerned about the tax
and economic policy problem that tax expenditures contribute to
high and rising medical care prices. This problem has led some
observers, including members of this subcommittee and other
members of the Congress to seek ways to reduce the inflationary
properties of medical care subsidies. In fact, they have proposed
to redesign existing tax expenditures in a way that will provide
leverage for promoting competition and developing consumer cost
consciousness--a
rare
attribute
among
us eunuches
the
responsibility for
decisions
about
medical
care towho
ourwaive
physicians

-8who are compensated on a fee-for-service basis by third party
payers with little if any interest in cost control. Although
I would not consider such proposals a panacea, in my opinion
this approach can play a significant role in restraining
increases in medical care prices.
The Health Incentives Reform Act, sponsored by Senators
Durenberger, Boren and Heinz, would enhance competition among
types of medical care delivery systems by granting favorable tax
treatment to contributions of employers of over 100 people only
if three conditions are met: employers offer a choice of at
least three health insurance or delivery plans; employees
choosing lesser cost options would receive a cash rebate in
lieu of higher health insurance premiums; and all plans must
include coverage of catastrophic medical expenses which exceed
$3500 out-of-pocket in any one calendar year.
Determining the appropriate tax on the rebate brings forth
a dilemma. A legitimate health policy view is that the rebate
should be nontaxable and thus play a neutral role—i.e., not
be a bias for or against money wages versus the employer-paid
premium which itself is nontaxable. However, a nontaxable rebate
provides an incentive to convert taxable wages into a nontaxable
rebate. This could result in a revenue loss of about $2 billion
per year even without any increase in health insurance purchases.
To avoid this problem, the Health Incentives Reform Act makes
the rebate subject to the individual income tax. However, in his
plan, the rebate is not subject to employer-paid FICA and FUTA
taxes, thus preserving the existing policy of not including most
employer-paid fringes to the employer's FICA or FUTA tax base.
The Health Incentives Reform Act would also limit to $125
per month per family the amount of the employer contribution
that qualifies for taxfree treatment. Because of some health
policy concerns, the Administration's plan did not cap the
tax-free amount of the employer contribution. The cap also
poses some tax administration issues that deserve examination.
As described in S. 1968 the cap would perform several functions.
It was proposed in combination with a comprehensive benefit
package apparently in an attempt to assure that the plans offered
will contain significant deductible and copayment provisions
(to keep the premium price within the limit) and thus avoid
subsidization of first dollar coverage. Also, the S. 1968 cap
probably is intended to help limit the total amount of the
subsidy—the revenue loss to the Federal budget. And, the cap
is proposed presumably as part of an attempt to cover a potential
loophole. This loophole could emerge when qualified plans are
required to offer both a choice of higher and low-cost plans
with an equal contribution by the employer, and a cash rebate
of the difference between the high-cost plan and the option
chosen by the employee. Without the cap, an employer could "game"
the
situation
by wages
offering
high-cost
plan
an FUTA—would
attempt
to
convert
rebate
fully
taxable
taxable—including
intoa avery
nontaxable
income
tax,
rebate.
FICA in
and
Making
the

-9prevent such gaming and woud eliminate this reason for a cap.
The cap has some disadvantages from the perspective of health
policy—such as using a single national limit for a subsidy that
applies to differently situated workers (age, sex, and geographic
location)—and these are discussed in the testimony of my colleagues
from HEW.
Recent Administration proposals. In 1978, the Carter
Administration proposed that medical and casualty losses be
deductible only to the extent that, when combined, they
exceeded 10 percent of adjusted gross income. All medical
expenses, including health insurance premiums and drug
expenses would be subject to this same floor. Thus there
would be no separate allowance for half of insurance premiums
nor would there be a separate 1 percent floor for drugs. The
House of Representatives accepted the simplification aspects
of this proposal, but the suggested 10 percent floor was
kept at 3 percent, and casualty losses were not folded into
the medical deduction. The Senate rejected the House
provision and no change was made in the Revenue Act of 1978.
Nonetheless, if the itemized deduction is to apply only
to extraordinary expenses, then the floor should be raised.
While the floor for itemized medical expenditures has remained
at 3 percent for 25 years, the proportion of income spent on
medical expenditures has risen. From 1950 to 1978, total health
expenditures, both public and private have risen from 5.9 percent
to 14.7 percent of adjusted gross income, while private expenditures have risen from 4.5 percent to around 8.7 percent. What at
one time may have been an extraordinary level of medical expenditures may now be only an ordinary or normal level. To the
extent that their is time, the 3 percent floor cannot be justified on either equity or incentive grounds. Substantial
simplification would also be possible if fewer taxpayers were
required to maintain medical records.
As part of its National Health Plan, the Administration
has again proposed that medical expenses be deductible only
to the extent that they exceed 10 percent of adjusted gross
income. Although we believe that the floor should be raised—
for both equity and incentive reasons-even in absence of a
National Health Plan, there are additional, compelling reasons
why the deduction should be limited in the context of a National
Health Plan. Perhaps most importantly, unlike 1978, today a
clear choice is given to redirect some of the current Federal
expenditures on health care rather than merely reduce those
expenditures. Moreover, a National Health Plan means that total
Federal expenditures for health would increase substantially,
leading to subsidies not only of the aged and disabled, but also

-10of those persons in high risk categories and those currently
unable to obtain insurance. Indirect subsidies to individuals
may also result from subsidies of premium payments made by employers.
Thus, in my judgment, there is sufficient reason to cease allowing
deductions for nonextraordinary medical expenses.
In 1978, the President proposed that employer-sponsored
medical, disability and group-term life-insurance plans be required
to provide nondiscriminatory benefits to a fair cross-section of
employees, not merely to a select group of officers or highly
compensated employees. Antidiscrimination tests would have been
similar to those applied with respect to coverage and benefits
under qualified retirement and group legal plans. Congress,
however, adopted substantial nondiscrimination tests only for
coverage and benefits under medical reimbursement plans which
are not funded by insurance, thus allowing discrimination with
respect to insured medical plans (as well as disability benefits
and group-term life insurance).
As part of the National Health Plan the President has
proposed that, effective in 1983, employers be required to provide
for all full-time employees a minimum health insurance plan that
has a package of basic benefits (including unlimited hospitalization, physician's services, laboratory tests, selected skilled
nursing services, home health, mental health, and other benefits,
and free-fee maternal and infant care) with annual out-of-pocket
expenditures for covered services limited to $2,500 per family.
Employers would also be required to make equal dollar contributions
to all plans that they offer, including a rebate of the difference
between the contribution for the employer's "primary plan" and a
lower cost option selected by the employees, thus encouraging
employees to seek out lower cost plans (and thus increasing the
employer's relative contribution). We believe that this proposal
will not only solve some of the problems of discrimination, but
also will increase competition in the medical marketplace by
giving employees an incentive to choose among cost-efficient
plans or health maintenance organizations.
In 1978, the President proposed to limit the use of taxexempt bonds in financing hospital construction. The
Administration is concerned that excess expansion of hospital
facilities is increasing costs of medical care and has, therefore, proposed, in its Hospital Cost Containment Act, that the
number of certificates of need for hospital construction be
drastically reduced. In order further to reduce incentives
for construction of excess hospital facilities, the Administration has also proposed to disallow tax-exempt IDB financing
for hospitals operated by charitable organizations for which a
certificate of need has not been issued. If a need for the
facility has been established, interest on the bonds would
As you know, the President has again urged Congress to
pass
the
Cost Containment
Act as part of an overall
effort
toHospital
reduce inflation
in the economy.

-11Summary
In summary, tax expenditures for medical care form a large
and growing part of the Federal budget. For 1980, Federal
income tax expenditures for medical care will exceed $16 billion
and will comprise about 10 percent of total medical expenditures.
State income tax and social security tax collections are also
reduced by another $9 billion. While not as large as direct
expenditure programs such as Medicare and Medicaid, these tax
expenditures do have an impact upon the demand and price of
medical care. At the margin, these subsidies can reduce price
by 29 to 35 percent.
Tax expenditure policy should be explicitly integrated
into the current review of national health policies. The
design and choice of the exclusion, the deduction and the taxexempt treatment of hospital bonds should reflect judgments
about: the extent to which tax burdens are to be shared between
those receiving cash compensation and those receiving compensation
in other forms; the extent to which these tax subsidies are to
be made equally available to all persons; the design of direct
health expenditure programs, and the limits that should be placed
on tax-induced increases in demand for health insurance and
health care. Even without explicit change in the laws affecting
them, the amount of health tax expenditures will be affected by
changes in virtually all policies connected with medical care.

FOR RELEASE AT 4:00 P.M.

March 18, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of th e Treasury, by this public notice,
invites tenders for two s eries of Treasury bills totaling
approximately $6,800 mill ion, to be issued March 27, 1980.
This offering will provid e $550 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$6,254 million, including $670 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,879 million currently held by
Federal Reserve Banks for their own account. The two series
91-day
(to maturity date) for approximately $3,400
offered
are bills
as follows:
million, representing an additional amount of bills dated
December 27, 1979, and to mature June 26, 1980 (CUSIP No.
912793 4L 7), originally issued in the amount of $3,228 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
March 27, 1980,
and to mature September 25, L980 (CUSIP No.
912793 5G 7) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing March 27, 1980.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices 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. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and -at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, March 24, 1980.
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 mf the Treasury.^
M-375

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. 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. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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
respective
(in three
decimals)
issues.
of accepted
competitive
bids average
for the price

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on March 27, 1980,
in cash or other immediately available
funds or in Treasury bills maturing March 27, 1980.
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.
Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills are
sold is considered to accrue when the bills are sold, redeemed
or otherwise disposed of, and the bills are excluded from
consideration as capital assets. Accordingly, the owner of these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on
original issue or on subsequent purchase, and the amount actually
received either upon sale or redemption at maturity during the
taxable year for which the return is made.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, and this notice, prescribe the terms of
these Treasury bills and govern the conditions of their issue.
Copies of the circulars and tender forms may be obtained from any
Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

Hut 211'BO
TREASUY DEPARTMENT
Contact:

FOR IMMEDIATE RELEASE
March 18, 1980

Charles Arnold
202/566-2041

CUSTOMS RULES CHANGED TO ENCOURAGE FOREIGN INVESTMENT
The Treasury Department announced today an amendment to the
Customs Regulations designed to encourage foreign manufacturing
concerns to relocate assembly operations to the United States.
Customs rules governing appraisement of merchandise in
foreign trade zones were amended to exclude overhead and labor
incurred in a zone from dutiable value. Profit was also dropped.
These changes will provide additional incentive for foreign
automobile manufacturers, as well as manufacturers of other products
subject to a lower duty on the end product than on the component
parts, to shift their manufacturing operations to the United States.
Foreign trade zones are geographically inside the United States
but legally outside the nation's customs territory. Their purpose
is to attract and promote international trade and commerce.
A copy of the regulation is attached.

o

M-376

0

o

ADM-9-03:RRURR:tjs
097052
(T.D. 80- )
Foreign-Trade Zones—Customs Regulations amended

Section 146.48(e), Customs Regulations, relating to processing costs
incurred and profit realized in foreign-trade zone manufacturing
operations, amended
\ TITLE 19—CUSTOMS DUTIES
CHAPTER I--UNITED STATES CUSTOMS SERVICE
PART 146 - FOREIGN-TRADE ZONES
AGENCY: U.S. Customs Service, Department of the Treasury.
ACTION: Final rule.
SUMMARY: The Customs Service includes the cost of processing "non-

privileged" merchandise in a foreign-trade zone, and profit realized

in the dutiable value of that merchandise when it enters the customs

territory of the United States. The present policy results in Custom

assessing duty on the costs of American labor, overhead, facilities,
and profit. This document changes Customs appraisement practice <o

as tc exclude the cost of processing and profit realized in a foreig
trade zone when determining the dutiable value of articles produced
entirely from nonprivileged merchandise (foreign or domestic), or
from a combination of nonprivileged and privileged merchandise
(foreign or domestic).
This change results from a Customs review of the existing policy
and consideration of the numerous favorable comments received in
response to an advance notice and a notice of proposed rulemaking
proposing to change the policy. The change is considered to be
significant.

2
EFFECTIVE DATE: (30 days after date of publication in the Federal
Register).
FOR FURTHER INFORMATION CONTACT:
Thomas Lobred, Classification and Value Division, U.S. Customs
Service, 1301 Constitution Avenue, N.W., Washington, D.C. 20229
(202-566-2938).
SUPPLEMENTARY INFORMATION:
BACKGROUND
" foreign-trade zone ("zone") is established under the Foreign-

Trade Zones Act r 19 U.S.C. 81a-81u) and the general, regulations and
rules of procedure of the Foreign-Trade Zones Board contained in

15 CFR Part 400. Part 146 of the Customs Regulations (19 CFR Part 14

governs the admission of merchandise into a zone; manipulation, manufacture, or exhibition of merchandise in a zone; exportation of

merchandise from a zone; and transfer of merchandise from a zone int
customs territory of the United States ("customs territory1*).
On October 4, 1978, an advance notice of proposed rulemaking
inviting comments on the advisability of changing current Customs
appraisement practice to exclude the cost of American labor, overhead, facilities, and profit when determining the dutiable value

of articles produced in a zone entirely or in part from nonprivilege
merchandise (foreign or domestic) or from a combination of nonprivileged and privileged merchandise (foreign or domestic), was

published in the Federal Register (43 FR 45885). The vast majority of

comments received favored the change proposed in the advance notice.

A notice of proposed rulemaking requesting the public to
comment on a specific proposal to change the current appraisement
practice and discussing the possible economic effects of the proposed change was published in the Federal Register on May 21, 1979
(44 FR 29489).
DISCUSSION OF COMMENTS
A total of 293 comments were received. Of these, 2G6 favored
the proposal.
In response to Customs discussion ;.:, and request for, comments
on the possible economic effects of the proposal, both those \.no supported and those who opposed the proposal offered principally economic
arguments to bolster their position—essentially, that the proposal
would be "good" or "bad" for business and the economy. However, le^al
and other arguments also were made by both sides.
The comments received are discussed below:
at

FAVORABLE/ECONOMIC
The proposal would
- Help both the national economy and the United States role in
international trade by creating greater investment and higher
employment in the United States, i.e., United States industry
would not have to go abroad.
- Be anti-inflationary.
- Provide an added tax base.
- Increase United States exports because various products are
exported from a zone.

4
- Allow operations presently performed elsewhere to be conducted in the United States; that, in turn, would help the United
States balance of payments.
- Remove the unfair burden of double taxation imposed on

labor in a zone, especially because local, state, and Federal taxe

are imposed upon the investments made in the zone and income gene
from the zone.
- Aid local economies through encouragement of investment and
creation of new jobs. The use of local zones, as well as the
general concept of greater zone use, would be enhanced.
- Result in substantial savings of Customs duties for zone
users. Under the present system, it may cost more in duty to use
a zone than not to use it.
- Not affect significantly the competitive position of the
United States manufacturers of finished products.
- Eliminate, or at least minimize, the disadvantage ta zones
located in high cost areas in that no duty would be collected on

high costs of real estate and labor. Discrimination against zones
in high cost areas would end.
- Result in cash flow savings to companies that would deposit
duties at the time goods leave the zone, rather than pay duty on
finished goods when imported.

FAVORABLE/LEGAL
- The proposal is expressive of the Congressional intent
behind the Foreign-Trade Zones Act: to encourage the development
of American industry and labor.
- There is no authority under current law to appraise merchandise as Customs presently is doing.
- The Secretary of the Treasury has the authority under the
Foreign-Trade Zones Act and section 1624, title 19, United States
Code, to fix t.io basi^ of duty OJ set forth in the prc-.:osal.
•' •'::.UL2/,!ISCELIA\E0L'i
- Approval of the proposal is recommended because to do oci.cr.;ise would be unfair and illc^i-ai.
- The proposal would encourage the upgrading of port, marine,
and terminal facilities, thereby strengthening the American shipping
industry and the various ports.
- The proposal would eliminate red tape for importers who now
must rely on drawback, the use of bonded warehouses, and temporary
importation bonds in connection with zone merchandise.
- The proposal would aid Customs in that the calculation of
duty would be less complex.
- The Tariff Schedules of the United States (TSUS) (section
1202, title 19, United States Code) are structured in a manner to
encourage, in many instances, the importation of finished products
rather than parts to be further processed and combined with United
States-origin parts. This built-in disincentive in the tariff
schedules can be overcome only by use of a zone.

6
OPPOSED/ECONOMIC
The proposal would
- Result in injury to United States manufacturers of components.
- Result in injury to United States manufacturers of end-products.
- Reduce demand for domestic raw materials with the resultant
loss of jobs.
- Not spur United States exports.
- Not result in any significant increase in United States
investment.
OPPOSED/LEGAL
The proposal is contrary to Congressional intent in that value would

be added to the product "outside United States commerce", thus in foreign
territory, and the added value therefore should be subject to duty.
OPPOSED/MISCELLANEOUS
The proposal would encourage circumvention of existing import
restrictions.
All seven coramenters who opposed the proposal did so based on^one

or more of the economic agruments listed above. Two commenters also state

that the proposal would encourage circumvention of existing import quotas
In some cases, the reduction of the dutiable value of products manufactured in a foreign-trade zone by manufacturers already located in the

United States may encourage the use of foreign parts and components. This

might be the case if the FTZ manufacturer concluded that the reduction in

dutiable value resulting from the rule change made the use of foreign-mad
parts and components less costly than domestic parts and components, and
other factors typically favoring U.S. suppliers, such as delivery time,
reliability of source, and quality control, were not important. A much

6a
more likely consequence of the change, however, is that it will tend to
encourage foreign manufacturers who now assemble their products entirely
outside of the United States to transfer some or all of that assembly to
foreign-trade zones in the United States.
Customs finds no merit to the contention that the proposal would
encourage the circumvention of existing import quotas. The change in
appraisement does not in any way change the existing treatment of quota
merchandise processed in a zone. With respect to such merchandise, Customs

has held that articles manufactured in zones are products of the zones rath
than of the countries from which the component materials were obtained.

'.ihether or not a particular quota limitation applies to products entering
the customs territory of the United States from a zone depends on the
language of the particular quota provision. In situations where a quota
limitation does not apply to merchandise manufactured in a zone, the

Foreign-Trade Zones Board has the authority to exclude from zones any goods
or manufacturing operation that in its judgement is "detrimental to the
public interest". 19 U.S.C. 81o(c).
In sum, it is Customs opinion that the proposal, on balance, will be
beneficial to United States industries, employment, and the general United

States economy by attracting increased assembly and manufacturing operation
Customs is sympathetic to industry concerns regarding zone activity that
might affect domestic production adversely. However, as mentioned above,
adequate safeguards against domestic injury exist under the regulations of
the Foreign-Trade Zone Board.

Two commenters opposed the proposal as contrary to the intent
of Congress when the Foreign-Trade Zones Act was enacted. They
contend that a zone' is "outside United States commerce" and that
any value added to merchandise through processing occurs in a
"foreign territory" and thus is fully dutiable. Moreover, they
contend that neither the Foreign-Trade Zones Act nor the Tariff
Act of 1930, as amended, authorizes Customs to adjust the valuation
base of merchandise entering from a zone by deducting the value of
processing which occurs in a zone.
It is Customs position that those statutes do not address how
merchandise which leaves a zone is to be appraised. Certainly, as
provided in the Foreign-Trade Zones Act, such merchandise is subject
"to the laws and regulations of the United States affecting imported
merchandise". However, the laws and regulations regarding appraisement of merchandise ordinarily are concerned with prices and costs
in the country of exportation. Thus, for years an anomaly has

8
existed which results in a zone being treated as the "country of
exportation" for appraisement purposes. Customs does not believe
this was the intent of Congress. As neither the Foreign-Trade
Zones Act nor the Tariff Act of 1930, as amended, is explicit on
this issue, Customs is not precluded from adopting the proposal
for the reasons advanced by these commenters.
In light of the overwhelming public support for the proposal
and Customs conclusion that there is no legal impediment to its
adoption, section 146.48(e), Customs Regulations, is '-eing amended
as set forth in the May 21, 1979, notice of proposed rulemaking,
subject to the clarification described below.
CLARIFICATION OF PROPOSED AMENDMENT
One of the commenters in favor of the proposal expressed his
understanding that the words "labor cost" were not excluded intentionally from proposed section 146.48(e), but were omitted
because the words "processing costs" were thought to be more
inclusive and to parallel the language in section 402(d), Tariff
Act of 1930, as amended (19 U.S.C, 1401a(d)), pertaining to constructed value. The coramenter's understanding is correct. Labor
costs are an element of processing costs.
Because of another comment, the proposal has been clarified
to specify that the cost of fabrication or other processing includes
general expenses and all other expenses incident to placing the
merchandise in condition, packed ready for transfer into the customs

b

territory.

This clarification is designed to prevent any confusion

regarding the limitation of "processing" to exclude those general

and other expenses described above from the scope of the amendment.
The same coramenter noted that it would be appropriate to apply
the amendment to all affected entries on which "appraisement"
(liquidation) had not become final on the effective date of the

amendment. Customs agrees, finding that suggestion to be consistent
with the intent of the proposal and sound Customs administration.
ME/CxAN'DISE SL3JECT TO A^LXJiENT
This amendment will apply to merchandise as to which liquidation
has not become final on the effective date of the amendment,
INAPPLICABILITY OF E.O. 12044
This document is not subject to the Treasury Department directive

implementing Executive Order 12044, "Improving Government Regulati

because the regulation was in process before May 22, 1978, the effe
ive date of the directive.
DRAFTING INFORMATION
The principal author of this document was Todd J. Schneider,

Regulations and Research Division, Office of Regulations and Ruling

U.S. Customs Service. However, personnel from other Customs offices
participated in its development.
AMENDMENT TO THE REGULATIONS
Section 146.48(e), Customs Regulations (19 CFR 146.48(e)), is
amended as set forth below:

10
PART 146 - FOREIGN-TRADE ZONES
Section 146.48(e) is amended to read as follows:
146.48 Treatment of merchandise not elsewhere provided for
in this subpart.
*****

(e) Appraisement and tariff classification. (1) Merchandise
subject to the provisions of this section, upon transfer from a
zone and entry for consumption or for warehousing, either immediately or after transportation in bond, shall be subject to
appraisement and tariff classification in accordance with its
character and condition at the time of its constructive transfer
to the customs territory and, except for any different rates
applicable to any privileged foreign merchandise therein, to
the rate or rates of duty and tax in force at the time entry
for consumption or withdrawal from warehouse for consumption
is made (see sections 141.68 and 141.69 of this chapter).
(2) The value of the merchandise described in paragraph (e) (1)
shall be determined in accordance with sections 402, 402a, and
500, Tariff Act of 1930, as amended (19 U.S.C. 1401a, 1402,
1500), and the related provisions of law. However, the cost
of fabrication or other processing, and the general expenses
and profit, related to zone operations shall be excluded when
determining the dutiable value of an article produced entirely
from nonprivileged merchandise (foreign or domestic), or from
a combination of privileged and nonprivileged merchandise
(foreign or domestic). All other expenses incurred in the

11
zone incidental to placing the article in condition, packed
ready for transfer, and freight, insurance, and similar costs
incurred after the article is packed ready for transfer into
the customs territory also shall be excluded in determining
dutiable value.

s/0#- r
A^i.-,.,, Commissioner of Custof

FFi

4 1S30

Approved
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Assistant Secretary of the Treasury

For Release Upon Delivery
Expected at 10:00 a.m.
STATEMENT OF
DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY (TAX LEGISLATION)
DEPARTMENT CF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
March 19, 1980
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to present the
views of the Department of the Treasury on the income tax
provisions of H.R. 4769, "The Cmnibus Maritime Regulatory
Reform, Revitalization, and Reorganization Act of 1979."
The bill before us today has been substantially changed
from the original version, on which we testified last fall
before the Merchant Marine Subcommittee of the Committee on
Merchant Marine and Fisheries. (A copy of our earlier
testimony is attached hereto.) As originally drafted, H.R.
4769 proposed far-reaching changes in the treatment of
international shipping income, including changes affecting
the statutory reciprocal exemption, treaty exemptions, source
rules, subpart F deferral and a new alternative tax on the
shipping income of foreigners. Many of these proposals drew
on the recommendations of the Task Force on Foreign Source
Income, chaired by Congressman Rostenkowski, which submitted
its report to this Committee on March 8, 1977.
Most of the proposals concerning international shipping
income have now been eliminated from H.R. 4769; the
provisions which have been retained primarily affect domestic
shipping operations. I will comment on these specific
provisions in a moment.
M-377

-2-

First, however, we believe it is important to point out
that the economics of international shipping is a complex
matter, and that the treatment of domestic shipping
operations is intimately related to the treatment of
foreign-owned operations, including those foreign shipping
companies controlled by U.S. companies. The Rostenkowski
Task Force considered these complex matters and proposed
certain changes in our treatment of the U.S. income derived
by foreign shippers, such as limiting the statutory
reciprocal exemption. We would respectfully suggest that the
Committee examine the tax proposals of H.R. 4769 in an
overall context of the appropriate taxation of the shipping
industry, and we would be happy to work with the Committee in
this effort.
H.R. 4769 contains a number of non-tax related
provisions (i.e., Titles I, II, III and V) for revitalizing
maritime policy. These non-tax provisions are not dependent
upon the tax provisions (i.e., Title IV) and could proceed in
the Congress on their own. This Committee could then devote
careful attention to the whole area of shipping — both
domestic and international.
Let me now turn to the specific proposals before us
today.
Section 401 of the bill amends the capital construction
fund provisions of the Merchant Marine Act in two significant
ways.
The Merchant Marine Act of 1936 (Section 607) now
provides an income tax deferral for profits from certain
"eligible vessels," if those profits are deposited in a
capital construction fund. The deposited profits, and any
earnings thereon, continue to be exempt from tax if they are
withdrawn from the fund and used for the construction or
reconstruction of certain types of "qualified vessels."
The bill expands the categories of "eligible vessels"
and of "qualified vessels."
Under existing law, "eligible vessels" — whose profits
may be tax deferred — must be U.S.-controlled, U.S. flag
vessels which were constructed in the U.S. and which are

-3operated only in the foreign or domestic commerce of the U.S.
The bill would expand the deferral to include (1) profits
from U.S.-controlled foreign flag ships, as well as U.S. flag
ships, (2) profits from ships constructed outside, as well as
in, the U.S. and (3) profits from international trade, as
well as U.S. domestic and foreign trade.
The expansion of the "eligible vessels" category would
provide U.S.-controlled foreign shipping corporations with a
new, alternative form of tax deferral on their foreign
earnings. Since such corporations may currently defer tax
under subpart F by reinvesting earnings in vessels used
abroad, we do not object on tax policy grounds to providing
this alternative deferral, although we would wish to
re-examine this issue in the context of an overall review of
the tax treatment of shipping. While we defer to others more
expert on these matters, we wish to point out that this new
deferral option may not have any significant impact. In
order to withdraw and use tax-deferred construction funds,
U.S.-controlled foreign shipping companies must use U.S. flag
ships and largely U.S. crews. Non-tax factors, especially
labor costs and to some extent regulation of safety and
operating standards, may therefore tend to make this deferral
mechanism less attractive than that already available under
subpart F. Moreover, there seems to be no shortage of
capital construction funds. Accordingly, strengthening of
U.S. shipyards may not be a likely result.
We would, however, object to the creation of an entirely
new form of tax deferral by permitting the use of capital
construction funds by domestic companies which have
foreign-flagged and foreign-built vessels. Domestic
operators already pay little or no U.S. tax, and creating
additional tax subsidies will only encourage tax shelter
abuses.
Also under existing law, "qualified vessels" — i.e.,
those which may be constructed from tax deferred capital
construction funds — must be U.S.-controlled, U.S. flag
vessels constructed in the U.S. and must be operated only in
the U.S. foreign, Great Lakes or noncontiguous domestic
trade. The bill would expand the category of "qualified
vessels" to include ships built and flagged in the U.S., but
operated in international trade and in the U.S. coastwise and
intercoastal domestic trade -- i.e., essentially in all

-4aspects of U.S. domestic and foreign commerce, except
domestic trade in U.S. inland and intercoastal waters.
We do not see the reason for allowing capital
construction funds to be used to build vessels for the U.S.
coastal and intercoastal domestic trade, where domestic
operators are already protected from foreign competition by
the cabotage laws under the Jones Act. The main purpose of
the capital construction funds was to equalize the tax
treatment of U.S. and foreign ship operators in the U.S.
foreign trade, not to provide a non-budgeted subsidy to
domestic operators.
Section 4 02 of the bill amends the Internal Revenue Code
in two significant ways.
First, the bill increases the available investment
credit for ships built with tax-deferred capital construction
funds from a maximum of 5% to 10%.
In 1976, Congress considered whether shippers should be
given tax-deferral plus the full investment credit on new
ships. Congress then decided to provide 50% of the
applicable tax credit, but to allow the courts to decide
whether the remaining 50% of the credit was already provided
by pre-existing law. Congress expressly provided that
taxpayers must inform the Internal Revenue Service on their
tax returns that they are claiming the entire 10% credit, so
that the Service and the taxpayer can litigate the issue in
court. Some companies have successfully sued in court to
obtain the full credit. Cther cases are now in the process
of litigation.
The Treasury Department strongly opposes this provision
of the bill. When a ship is purchased with tax-deferred
construction funds, the Federal Government has in effect
provided a 46% reduction in the cost of the investment,
compared to only 10% for other investors. This is so because
reinvestment in capital construction funds means shippers
have an effective tax deferral indefinitely. Allowing half
of the investment credit reduces the cost of investing in
ships by 51% compared to 10% for other investments. It is
our position that even with no investment credit our tax law
strongly favors investment in U.S. shipping assets over other
types of investment; as noted above, U.S. shipowners in the

-5aggregate pay little or no U.S. tax. We cannot support
widening that tax preference still further.
In addition, providing an increased credit will have two
very undesirable effects. First, since most shipowners
already pay little or no U.S. tax, the increased credit will
provide a "negative tax" and lead to tax shelter abuses.
Second, shipowners who otherwise might avoid tax through use
of capital construction funds (which must be used to build
ships in the U.S.) may instead use the credit to shelter
income. U.S. shipyards, who presumably are indirectly
assisted by capital construction funds, will hardly benefit.
Second, the bill permits foreign-built vessels to be
depreciated over 10 years and U.S.-built vessels over 5
years.
Current law already provides generous accelerated
depreciation of capital expenditures for ships. Half the
cost of a new ship can be written off by the fifth year and
75% by the eighth year.
We must oppose increasing the acceleration of
depreciation deductions for ships. In many cases, such
acceleration would reduce the U.S. tax on shipping income
below zero, thus creating a "negative tax" and tax shelters
for other taxpayers and other types -of income. Once again,
shippers who might otherwise avoid tax through use of capital
construction funds might not need to do so as a result of
the proposed accelerated depreciation deductions.
As you know, we are not in principle opposed to a new
look at depreciation generally. However, now is not the time
to provide unneeded assistance to only one segment of our
economy. Cur priority now is to balance the budget. Cnce
this has been achieved, we can then provide tax relief where
effective to encourage investment.
That concludes my statement. I would be happy to answer
any questions.

FOR IMMEDIATE RELEASE
EXPECTED AT 12:00 NOON EST
TUESDAY, MARCH 18, 1980
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
AMERICAN ARAB ASSOCIATION FOR COMMERCE & INDUSTRY
NEW YORK, NEW YORK
U.S.- SAUDI ECONOMIC INTERESTS
INTRODUCTION
There are few areas in the world where as many compelling
American interests intersect as in the Middle East. With each
passing month, the region seems to take on increasing significance. I would like to focus my remarks today on one
country in this critical area — Saudi Arabia.
Three years ago during Crown Prince Fahd's visit to the
United States, President Carter said, "I think it is accurate
to say that the future of Saudi Arabia and the future of the
United States are tied together very closely in an irrevocable
way. It is very valuable to us to understand, to preserve,
and to strengthen this important friendship."

M-378

- 2 There are many important aspects to the United StatesSaudi relationship. Energy and finance are key elements, with
considerable impact not only on our own economies but on the
entire world. Trade in non-energy products is becoming
increasingly important, as well. The United States-Saudi
Joint Economic Commission offers a third facet of our economic
relations which is important to Saudi economic development
and our continued close cooperation in the future.
I would like to touch on our mutual interests in energy,
finance and trade, and then talk in some detail about the
ongoing work of the Joint Commission.
ENERGY/FINANCE
Oil is the historic basis of the United States-Saudi
Arabian relationship. Saudi Arabia's supplies of energy are
crucial to the United States and world economies. Without
sufficient petroleum at reasonable prices, stable noninflationary growth becomes very difficult to achieve. Saudi
Arabia is now the leading supplier of oil to the United States
accounting for almost 20 percent of our imports. It also
accounts for 19 percent of free world crude oil production.
The United States and Saudi Arabia have mutual interests
in three key areas: investments, energy conservation and the
security of oil supplies. First, because its oil income
has exceeded its revenue needs, Saudi Arabia has accumulated
substantial financial resources for which it has sought appro-

- 3 priate investment opportunities.

The United States has been and

continues to be the single largest recipient of Saudi investments.
Most of Saudi Arabia's non-U.S. investments are also dollardenominated.

The strength of the dollar thus depends importantly

on Saudi management of their surpluses. In turn, the value
of Saudi investments depends on a strong and stable dollar.
A second interdependence relates to Saudi oil production
and U.S. energy consumption.

Since Saudi Arabia would prefer

to limit oil production, it is interested in implementation
of a U.S. energy program which emphasizes both conservation
and the development of alternate energy resources.

Saudi

spokesmen in fact have linked price moderation on their
part to conservation on our part.
Third, as the world's largest oil supplier, Saudi Arabia's
security is vital to the United States and other consumers.
Any disruption to Saudi oil supplies would have major adverse
effects on us, as well as on Saudi Arabia itself.
These issues are intimately linked but I believe oil
supplies and price, petrodollars, and the dollar are of
most interest to this group.
OIL SUPPLY AND PRICE
On the supply side, Saudi Arabia has the world's largest
proved reserves of petroleum (roughly 20 percent of the world's
total) and possesses the capacity to become the world's

- 4 largest oil producer.

In the past, it has clearly been the

dominant force within OPEC. While the sheer size of its oil
reserves and production are important, a major source of its
political power within OPEC has been its ability to vary oil
production over a very wide range. Because of its lower revenue
needs relative to its export earnings, it was able to reduce
production to avoid intra-OPEC competition for market shares
at times when supplies were slack. On the other hand, because
of its considerable excess production capacity, it was capable
of increasing its supplies to the oil market if other producers
sought to raise prices above levels it believed appropriate.
The results of the Iranian crisis and the Caracus
meeting last December are clear indications, however, that
at least one of the major conditions for Saudi price
leadership within OPEC is disappearing. With very little
spare capacity available, Saudi Arabia has been less influential than in the past in moderating OPEC pricing
decisions. Similarly, it was not able to fill the gap in
supply caused by the loss of 4.5 to 5.0 mmb/d of Iranian
exports in the early part of 1979.
Nevertheless, Saudi Arabia has played a most helpful
role during the last year. For example, it increased production
in late 1978 to the maximum sustainable capacity of over
10 mmb/d, and to 9.5 mmb/d during four of the last five

- 5 quarters —

the latter being 1 mmb/d above the normal Saudi

production ceiling.

Similarly, on the price side, Saudi

Arabia alone is charging the lowest price, $26 per barrel,
for its Arabian light crude, the traditional OPEC benchmark.
We hope that Saudi Arabia will continue to display this strong
sense of reasonableness towards the international economy
with respect to both oil supply and price.
We assume the Saudis will be considering substantial
investments in new productive capacity if they are to
continue to play a restraining role within OPEC.

Saudi

intentions in this area are not completely clear, but on a
sustainable basis their current target appears to be 12 mmb/d.
The main obstacle has been self-imposed investment constraints.
Saudi Arabia is requiring that all investment by Aramco to
maintain or expand productive capacity be derived from internally
generated funds.

Before the recent price increases, it appeared

that this would delay attainment of the 12 mmb/d target, but
the additional revenues now foreseen may change this situation.
In any event, the year 1984 has recently been mentioned by
several Saudi spokesmen for attainment of this target.
The Saudis can be expected to take a number of considerations into account in deciding how to implement the
present target and whether to expand the target further.

- 6 Some of these are political, but a number are economic:
—

Substantial investment funds are required merely
to maintain existing capacity, as is the case
with any aging oil fields;

—

Additional investments would be required to
expand capacity;

—

The Saudis are giving high priority to other
investments:

refining, petrochemicals,

modernization more broadly;
-- There is growing concern in Saudi Arabia about
producing oil at levels in excess of current
income needs;
—

Many also argue that oil in the ground is a better
investment than financial assets abroad.

The situation, thus, is as follows:
—

The Saudis have played a constructive leadership
role in OPEC.

They have normally attempted

to moderate OPEC price increases and
help assure the supplies needed for world economic
health.
—

Continuation of a Saudi leadership role requires
substantial investments so as to create sufficient
excess capacity.

—

Some Saudis are doubtful that this is in their

- 7 interest, particularly since they have seen consuming
countries like the United States as slow to take
the steps necessary to conserve oil use.
— The Saudi position to date, however, has recognized
that Saudi production levels must take into account
the economic health and political stability of the
free world.
There is much the United States and other oil
consuming nations can do to sustain this sense of international
responsibility. It is also important to continue the bilateral
dialogue which to date has been profitable to both countries,
and attempt to find a resolution of any real differences
between us.
SAUDI INVESTMENTS
The other side of the coin to expanding Saudi oil
production — above that needed for its own internal
development -- is the need for attractive investment
opportunities.
Saudi Arabia has run large current account surpluses,
totaling almost $80 billion since 1974. The size of the
surplus has declined since the extraordinary $23 billion
in 1974, as Saudi Arabia's ambitious development program
has taken hold. However, the recent oil price increases
have lead to a reversal of this trend. We expect Saudi
Arabia to run substantial surpluses in the near term.

- 8 The Saudi Arabian Government has been most explicit
in detailing the approach it takes toward investments.
Tlic Saudis have stated that they seek to play a constructive
role, recognizing the need to act with larger issues in
mind than solely their own profit.

In this regard, they

have avoided speculative transactions and investment in
such sensitive areas as real estate or controlling interests
in U.S. firms.

According to Governor Quraishi, head of the

Saudi Arabian Monetary Agency, their investment managers
in this country have been instructed that at no time may
Saudi investments reach 5 percent of the voting stock of
any company.

He has further indicated that their holdings

of U.S. Government securities constitute the largest single
component of their international reserves.
It is also evident that Saudi Arabia views its
investments as crucial for its future and believes they
will have to be increasingly employed to finance domestic
development as oil reserves decline.

Accordingly, the

Saudis have followed a conservative investment policy with
emphasis on income, security and liquidity.
Fulfillment of such a policy is not an easy task, however.
Very few markets offer the Saudis sufficient liqudity and
choice of investment opportunities, combined with minimal

- 9 sovereign, exchange rate and convertibility risks. The U.S.
capital market, and the closely related Eurodollar market,
are easily the largest, broadest, most liquid, and most
accessible. Thus, it is not surprising that Saudi Arabia has
chosen to invest around 85 percent of its funds in the United
States and in deposits in the Eurobanking market, the bulk
of which are in dollars. We hope it will continue to do so.
U.S. ENERGY/INFLATION PROGRAMS
From its own perspective, Saudi Arabia clearly has a keen
interest in U.S. domestic policy efforts to develop a
comprehensive energy program and to effectively fight inflation.
The United States has recently taken a number of steps toward
comprehensive programs in both of these key areas. I would
like to discuss them briefly.
In the energy area, the President's decision to decontrol
domestic oil prices was a critically important step, complemented
by the numerous other measures we have taken to cut domestic
demand: mandatory automobile mileage standards, mandatory
thermostat settings, switching from oil to gas, savings in
federal government operations, changed environmental regulations,
and appeals to voluntary conservation. The President has
established ceilings for net oil imports of 8.2 mmb/d in 1979
and 1980 — 300,000 below the actual 1978 level - and has

- 10 indicated he is prepared to lower this ceiling further if other
oil consuming countries will join in mutual reductions.
To stimulate production of alternatives to imported oil from
our domestic energy resources, the President has proposed
a Synthetic Fuels Corporation to encourage the production
v
of synthetic fuels. He has proposed the creation of an Energy
Mobilization Board to minimize delays in reviews of the
construction of energy projects of major national interest,
consistent with safeguarding the environment. The House
of Representatives has passed a windfall profits tax which
will provide additional funds for developing alternative
energy sources, a similar bill has now gone to the Senate
floor .
Finally, new targets have been established for nationwide
gasoline consumption through agreement with the State Governors.
This will result in savings of about 400,000 gallons per day,
roughly a 5.5 percent decrease from average U.S. daily consumption in 1979. Last Friday the President also announced
the imposition of a gasoline conservation fee on imported
oil of $4.62 per barrel, which will be applied solely to
gasoline in an amount equal to about 10 cents a gallon.
This should reduce U.S. gasoline consumption by 100,000
barrels per day after one year. The President also will
send to Congress legislation establishing a motor fuels tax
designed to replace this gasoline conservation fee.

- 11 These measures represent a strong U.S. effort to achieve a
comprehensive energy program to both increase domestic energy
production and curb U.S. energy consumption, in recognition
of our own responsibilities in this key area.
Last Friday the President also announced a major new antiinflation program.

In addition to the energy conservation

measures I have already summarized, this program includes:
(1)

Stringent efforts to achieve a balanced budget in FY 1981

through reductions in virtually every area of the budget not
essential to our national security; direct expenditure cuts
for government personnel, operations, and maintenance; a
freeze in Federal civilian employment, aiming at an overall
reduction of 20,000 employees by the end of 1980; a reduction
in ongoing spending programs; increased Defense Department
efficiencies to offset a large part of its cost increases;
intensified pay and price monitoring; and proposed legislation
to permit withholding of taxes on interest and dividend
payments;
(2)

authorization for new restraints on the growth of credit

including consumer loans; restraint on large non-member banks
and money market mutual funds; voluntary restraint on excessive
growth in loans by large banks and other lenders; a surcharge
of 3 percent on borrowing by large banks at the discount
window; and a $4 billion cut in Federal loans and loan guarantees
in FY 1981;

- 12 (3) Long-term economic structural changes including
renewed appeal to Congress to deregulate the banking, trucking,
railroad and communications industries and to lift the ceiling
on returns for small savers, and tax measures to spur
productivity once the budget is balanced and overall fiscal
discipline is achieved.
These strong and decisive measures on both inflation and energy

should carry the United States a substantial way toward meeting ou

major priorities of reducing inflation, adjusting to higher energy
prices, reducing our vulnerability to OPEC price and supply
decisions, and improving the efficiency and productivity
of our economy. They should be most welcome to Saudi Arabia
and, indeed, all countries which have a vital stake in the

stability of both our own economy and that of the world as a whole
COMMERCIAL TIES
The Saudis have also been using their oil revenues
to import ever increasing quantities of goods and services.
Total Saudi imports have grown from $2 billion in _1973
to around $24 billion in 1979. The United States has
captured the largest share of the Saudi market in recent
years, usually over 20%. United States exports to Saudi
Arabia have increased dramatically, from $400 million in
1973 to $4.9 billion in 1979. Saudi Arabia has become
the United States' seventh largest export market. In
terms of two-way trade, Saudi Arabia is also our seventh
largest trading partner.

- 13 Continued strong growth in U.S. exports to Saudi Arabia
is anticipated in the future, despite active European and
Asian competition. U.S. exports to Saudi Arabia reflect
the technological superiority of U.S. products and U.S.
responsiveness to Saudi needs. However, this favored
position is dependent upon U.S. goods remaining cost
competitive since there are few areas in which alternatives
to American technology are not available. In addition,
Saudi Arabia is increasingly cost-conscious as it seeks
to maximize the developmental impact of its oil earnings.
In addition to mechandise trade, United States business
involvement in the Kingdom includes an estimated $1 billion
in service transfers such as architectural, consulting,
engineering and construction services which affect all phases
of Saudi development programs. For example:
— U.S. companies prepared the master plans for major
industrial complexes at Jubail and Yanbu and are
managing construction of these projects.
— U.S. firms designed huge new airports at Jidda,
Riyadh and Dhahran/Jubail and are managing construction at the first two.
— U.S. firms are involved in city planning at Jidda
and Dammam, sewer construction in Jidda and the
transpeninsular crude oil pipeline from the oil
»

fields to Yanbu.

- 14 Over 400 U.S. firms currently have offices in the
Kingdom. Over 30,000 Americans are living in Saudi Arabia, as
testimony to U.S. industry's involvement. We want to encourage
and expand U.S.-Saudi commercial ties, with mutual benefits for
both the United States and Saudi Arabia. The Saudis are particularly interested in using more small and medium sized American
firms as joint venture partners. This is an area on which your
group may wish to focus.
The United States has taken a number of practical steps to
expand its commercial ties with Saudi Arabia. In 1978, the
President signed into law amendments to the Internal Revenue
Code concerning the tax treatment of Amercians working overseas.
These amendments afford qualified U.S. taxpayers living in Saudi
Arabia, as well as in other foreign countries, heretofore
unavailable deductions for the costs associated with living
overseas. An additional $5,000 deduction is allowed to Americans
living in Saudi Arabia and other hardship posts. In addition,
the amendments restored the $20,000 exclusion for construction
personnel and others living in work camps in Saudi Arabia and
other hardship posts. Although the definitions relating to work
camps were somewhat restrictive when initially proposed, those
definitions have been substantially liberalized so the American
employees living in typical Saudi Arabian work camps will be
able to claim the $20,000 deduction.

- 15 In the area of U.S. anti-boycott laws, we are continuing
our efforts to minimize the negative trade consequences of
enforcing the law. Quite obviously, the anti-boycott
provisions contained in the Internal Revenue Code and the
Export Administration Act are not entirely consistent with
an expanding U.S.-Saudi trading relationship. Nonetheless,
the United States has been anxious to accommodate Saudi
policies and practices in this area within the limits of U.S.
law.
We hope the U.S. will maintain and, hopefully, expand its
share of the Saudi market. A possible means of achieving
this may be through more frequent dialogue between American
and Arab businessmen perhaps using organizations such as
this one. You and your colleagues may want to give some
thought to ways of strengthening our commercial ties with
the Arab world.
THE JOINT ECONOMIC COMMISSION
I would now like to discuss another important aspect of
our overall relationship — the U.S.-Saudi Joint Economic
Commission. This subject is particularly timely because the
fifth annual meeting of the Commission will take place in
Washington on April 1st and 2nd with Secretary Miller and
Saudi Finance Minister Abalkhail heading up the respective
delegations.

-16 The Commission has been in existence for almost six years.
The traumatic events of the fall of 1973 — the Yom Kippur War
and the oil embargo — obviously did not create economic interdependence but they did serve to highlight the fact of international interdependence. During the following year the United
Satess established a series of Joint Commissions with Egypt,
Jordan, Saudi Arabia and others. These were conscious efforts
to strengthen political and economic - primarily economic-ties
with countries of the Middle East region. The Joint Statement
issued by Crown Prince Fahd and former Secretary of State
Kissinger in 1974 expressed the mutual desire of Saudi Arabia
and the United States to work together to "promote programs
of industrialization, trade, manpower training, agriculture,
and science and technology." Since that time, the Joint
Commission has become an active mechanism to bring together
the expertise of various parts of the U.S. and Saudi Arabian
governments and their respective private sectors to pursue
Saudi development goals.
Structurally, the Joint Commission has a system of
parallel direction in which Secretary of the Treasury Miller
and Minister of Finance and National Economy Mohammed
Abalkhail serve as co-chairmen, and Dr. Mansoor Al Turki
and I serve as coordinators. All U.S. project personnel
have counterparts from Saudi Government agencies.

- 17 In order to support and coordinate Joint Commission
work on the U.S. side, the Treasury Department established an
Office of Saudi Arabian Affairs in Washington, and later
an office of the U.S. Representation to the Joint Commission
in Riyadh.
Technical cooperation programs under the Joint Commission
are provided by the United States to the Saudi Arabian
Government on a cost-reimbursable basis in accordance with
a technical cooperation agreement initially signed early in
1975.

During Secretary Miller's visit to Riyadh last

November, this agreement was formally extended for another
five year period.

Projects are financed by drawing against

a Saudi Arabian Trust Account which is held by the U.S.
Treasury Department.

United States specialists work

side-by-side with Saudi counterparts on a multi-year
basis in the various ministries and agencies.

More than

150 of these specialists are now in Saudi Arabia.
To date, agreement has been reached on 20 major projects which cover a broad range of economic activities and
which have a total ultimate value in excess of $750 million.
Projects are being carried out in areas as diverse as
vocational training and highway transportation.
share a common goal:

the expansion of the Saudi Govern-

ment's capability to plan, guide, and monitor its
development effort.

They

- 18 I would like to focus on three project areas which
offer major developmental benefits to Saudi Arabia: an
electrification plan, cooperation in solar power development
and the building of vocational training centers through the
Kingdom.
POWERGRID PROJECT
One of the most significant tasks we have been asked
by the Saudis to undertake, under the auspices of the
Joint Commission, is the development of an Electrification
Plan for the Kingdom which will cover the next 25 years.
Saudi hopes for establishing a strong, relatively diverse
economic base hinge directly on their ability to provide
electrical power in adequate amounts in a cost-effective
manner. And, by making electricity available to every
Saudi, regardless of his station or location, the Goverment
is able to demonstrate its interest and concern for the
well being of the populace.
When Minister Ghazi Al-Gosaibi of the Ministry of
Industry and Electricity approached the Joint Commission
to undertake this project, he stated that his goal was to
"bring electricity into every home in the Kingdom." The
enormity of that task can be realized only when we recognize
that there has been no similar effort — on such a scale —
anywhere in the world before. Saudi Arabia is a country

- 19 about a third the size of the United States, and many of
its people are sparsely settled in small villages and
towns scattered over much of the countryside.
Through this plan, the Saudis are trying to do in 25
years what it took us to accomplish in this country in
over 75. The plan calls for a nearly forty-fold increase
in the generating capacity of the Saudi power industry.
Demand .is increasing at a rate of about 25 percent a year,
compared to an annual increase of about five percent in
the United States since 1973. The capital cost for the
new generating, transmission and distribution facilities
over the life of the plan will be over $70 billion when
figured with a 7 percent annual inflation rate. Such an
incredible expenditure will provide the Saudis with an
electrification system about equal to what we enjoy in
this country today.
SOLERAS
A second major program involves U.S.-Saudi cooperation
for solar energy development. This unique agreement is a
jointly funded program under the auspices of the Joint
Commission. Over the next five years, both the United
States and Saudi Arabia will provide $50 million to the
$100 million program agreement.

- 20 The first projects will include the design and
installation of the world's largest solar photovoltaic
electrical system for two existing villages about 50 kilometers from Riyadh.
national power grid.

The villages are not reached by the
Household appliances, street lighting

and agricultural water pumps, now serviced by diesel
generators, will be powered by this solar energy system.
In time, this $12 million solar village project could
serve as the prototype for rural electric development in
Saudi Arabia and other developing countries.

The United

States, the leader in photovoltaic cell manufacturing,
could reap major benefits through the marketing of this
sophisticated new technology.
Other projects expected to be initiated under the
Solar Agreement this year include an engineering test of a
large sun powered air conditioner mounted on a commercial
building in the United States.

We also are planning projects

to study the socio-economic effects of the solar system on
the two villages and the establishment of solar insulation
measuring stations at several sites in Saudi Arabia.

Dis-

cussion will begin soon also for the testing of solar
air conditioners in Saudi Arabia, and the design and construction in the United States of a solar desalination device.

- 21 This exciting, innovative area of cooperation under
the Joint Commssion directly involves the U.S. Department
of Energy and the Saudi Arabian National Center for Science
and Technology, and the U.S. Treasury and the Saudi Ministry
of Finance. The Solar Energy Research Institute, which is
the national center for solar development in the United
States, serves as the secretariat and program manager for
the Agreement.
The U.S.-Saudi Solar Agreement is a practical statement
about the need to reach quickly into the future for clean,
economic, renewable technologies to provide energy for future
generations. It is also one more manifestation of close
collaboration between the United States and Saudi Arabia.
Aside from making a very real contribution to the
advancement of solar technology, the SOLERAS agreement testifie
to the importance Saudi Arabia places on the development of
alternative energy resources and on encouraging energy
conservation in general. This solar energy program mates the
world's largest exporter of petroleum with the world's largest
importer of petroleum. While it would be overly sanguine
for us to expect major technological breakthroughs under
the US-Saudi Solar Energy Program, we believe that this
cooperative effort will contribute substantially to stimulatin(
research and development and could result in longterm

- 22 payoffs in developing solar powered alternatives to petroleum.
We are especially pleased that the solar energy program includes
educational exchanges and training programs for U.S. and Saudi
students.
VOTRAKON -,....
Vocational training is the largest of the Joint Commission
projects, both in terms of anticipated total costs and in
terms of numbers of Americans who are living in Saudi Arabia
and working on the project. A lack of skilled manpower is
widely acknowledged as one of the major obstacles to smooth.
and rapid development of the Kingdom and the first Five
Year Development Plan identified man-power development and
training as one of the Kingdom's highest priority needs.
The VOTRAKON project is designed to increase both the
number and skills of Saudi craftsmen through systematic
strengthening of vocational training curricula and construction of additional training facilities. Work is well
underway in the areas of machine shop trades, automotive
repair, welding, diesel engine repair, air conditioning
repair and refrigeration, electricity and plumbing..
Saudi Arabians will be trained in developing and using
instructional materials incorporating the most modern
techniques and equipment. High priority is also being
given to building an effective on-the-job training program
throughout the Kingdom.

- 23 Saudi and U.S. project personnel are working together
to strengthen the administration of training programs, to
establish an instructor training institute and an
instructional materials development center.

Labor market

analysts are continually gathering and analyzing statistical
information to assist the Ministry of Labor and Social Affairs
in planning and managing all these training activities.
To expand the capacity of the Ministry's vocational
training system, the U.S. Department of Labor and the General
Services Administration are heavily involved in the design
anc construction of the new Instructor Training Institute
as well as ten new training facilities and housing for both
students and instructors at fifteen existing training sites.
As part of the overall project effort, a competitive
plan is being prepared to expand an existing effort in the
United States for preparing Saudi administrators and
instructors for their jobs in the new training system.

It

is estimated that over 300 Saudi personnel may be trained
here in the United States as part of this project.
CONCLUSION
I have emphasized the significance of U.S. interests
vis-a-vis Saudi Arabia in the areas of oil, finance, commerce
and bilateral cooperation characterized by the Joint Economic
Commission.

The Joint Commission symbolizes the close

relationship between the United States and Saudi Arabia, and
has emerged in its own right as an important vehicle for

- 24 bilateral technical cooperation. The Commission work does
not by any means encompass all American involvement in Saudi
development. In fact, the vast majority of trade is carried
on outside the aegis of the Commission. As in any relationship,
certain differences may occur from time to time — hopefully,
without imposing serious strains on the totality of that
relationship. Our overall dealings with Saudi Arabia have
been, and should continue to be, characterized by mutual
understanding and confidence.
It is clear that Saudi Arabia, as the world's largest
exporter of oil, and the United States, as the largest
producer of goods and services, have interests which extend
beyond our bilateral relationship to include a mutual desire
for a strong global economy and world peace. For our part,
the United States will continue to work diligently toward
this objective in all the areas I have mentioned.

1
tpartmentoftheTREASURY

FOR RELEASE AT 4:00 P.M.

1EK
March 18, 1980

TREASURY OFFERS $6,000 MILLION OF 37-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $6,000 million of 37-day
Treasury bills to be issued March 25, 1980, representing an
additional amount of bills dated November 1, 1979, maturing
May 1, 1980 (CUSIP No. 912793 4C 7). Additional amounts of the
bills may be issued to Federal Reserve Banks as agents for
foreign and international monetary authorities at the average
price of accepted competitive tenders.
Competitive tenders will be received at all Federal Reserve
Banks and Branches up to 12:30 p.m., Eastern Standard time,
Thursday, March 20, 1980. Wire and telephone tenders may be
received at the discretion of each Federal Reserve Bank or
Branch. Each tender for the issue must be for a minimum amount
of $1,000,000. Tenders over $1,000,000 must be in multiples of
$1,000,000. The price on tenders offered must be expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Noncompetitive tenders from the public will not be
accepted. Tenders will not be received at the Department of the
Treasury, Washington.
The bills will be issued on a discount basis under
competitive bidding, and at maturity their par amount will
be payable without interest. The bills will be issued entirely
in book-entry form in a minimum denomination of $10,000 and in
any higher $5,000 multiple, on the records of the Federal
Reserve Banks and Branches.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such
securities may submit tenders for account of customers, if the
names of the customers and the amount for each customer are
furnished. Others are only permitted to submit tenders for
their own account. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. 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
M-379

-2"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. 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, when submitting tenders for
customers, must submit a separate tender for each customer whose
net long position in the bill being offered exceeds $200 million.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized
dealers in investment securities. 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 Tuesday, March 25, 1980.
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.

March 20, 1980
FOR RELEASE AT 10:00 a.m.

The Department of the Treasury announced today the
following schedule of sales:
$4 billion of 359-day Treasury bills to
refund $3.3 billion of bills maturing
April 1, 1980 and to raise $.7 billion new
cash. Tenders will be received up to
1:30 p.m., March 26, 1980.
$5 billion of 77-day Treasury bills to be
issued on April 3, 1980, representing an
additional amount of bills maturing
June 19, 1980. Tenders will be received
up to 1:30 p.m., March 27, 1980.
$1.5 billion of 15-year, 1-month bonds to be
issued April 8, 1980, and to mature May 15, 1995.
Tenders will be received up to 1:30 p.m.,
April 2, 1980.
The details of these offerings were provided in separate
announcements.
The Treasury also announced its intention to auction on
April 1, 1980 approximately $5 billion of 83-day Treasury bills
to be issued April 4, 1980, representing an additional amount of
bills maturing June 26, 1980. The actual amount of this sale
will be announced March 27, 1980.
Treasury announced that these financings reflect somewhat
increased cash needs due to foreign central bank redemptions
of non-marketable securities as a result of the recent strength
of the dollar, and also to continued large redemptions of
savings bonds.

M-380

FOR RELEASE AT 10:00 A.M.

March 20, 1980

TREASURY OFFERS $5,000 MILLION OF 77-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $5,000 million of 77-day
Treasury bills to be issued April 3, 1980, representing an
additional amount of bills dated December 20, 1979, maturing
June 19, 1980 (CUSIP No. 912793 4K 9 ) . Additional amounts of
the bills may be issued to Federal Reserve Banks as agents for
foreign and international monetary authorities at the average
price of accepted competitive tenders.
Competitive tenders will be received at all Federal Reserve
Banks and Branches up to 1:30 p.m., Eastern Standard time,
Thursday, March 27, 1980. Wire and telephone tenders may be
received at the discretion of each Federal Reserve Bank or
Branch. Each tender for the issue must be for a minimum amount
of $1,000,000. Tenders over $1,000,000 must be in multiples of
$1,000,000. The price on tenders offered must be expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Noncompetitive tenders from the public will not be
accepted. Tenders will not be received at the Department of the
Treasury, Washington.
The bills will be issued on a discount basis under
competitive bidding, and at maturity their par amount will
be payable without interest. The bills will be issued entirely
in book-entry form in a minimum denomination of $10,000 and in
any higher $5,000 multiple, on the records of the Federal
Reserve Banks and Branches.
^.

Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such
securities may submit tenders for account of customers, if the
names of the customers and the amount for each customer are
furnished. Others are only permitted to submit tenders for
their own account. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. 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
M-381

-2"when issued" trading, and futures and forward transactions as
well as holdings of outstanding bills with the same maturitydate as the new offering; e.g., bills with three months to
maturity previously offered as six month bills. 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, when submitting tenders for
customers, must submit a separate tender for each customer whose
net long position in the bill being offered exceeds $200 million.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized
dealers in investment securities. 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 Thursday, April 3, 1980.
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.

IINGTON, D.C. 20220

FOR RELEASE AT 10:00 A . M .

M a r c h 2 0 , 1980

TREASURY TO AUCTION $1,500 M I L L I O N OF 15-YEAR 1-MONTH
The Department of the Treasury will auction
million of 15-year 1-month bonds to
Additional amounts of the bonds m a y
Reserve Banks as agents for foreign
monetary a u t h o r i t i e s at the average
competitive t e n d e r s .

BONDS

$1,500
raise^ new cash.
be is'sued to Federal
and international
price of accepted

Details about the new security are given in the
attached highlights of the offering and in the official
offering c i r c u l a r .

oOo

Attachment

M-382

(over)

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 15-YEAR 1-MONTH BONDS
TO BE ISSUED APRIL 8, 1980
March 20, 1980
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation

$1,500 million
15-year 1-month bonds
Bonds of 1995
(CUSIP No. 912810 CN 6)

Maturity date May 15, 1995
Call date
Interest coupon rate

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 15 and May 15
(first payment on November 15,
1980)
Minimum denomination available
$1,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank
within FRB district where
submitted
c) check drawn on bank outside
FRB district where
submitted
Delivery date for coupon securities.

Wednesday, April 2, 1980,
by 1:30 p.m., EST
Tuesday, April 8, 1980

Friday, April 4, 1980

Friday, April 4, 1980
Wednesday, April 16, 1980

FOR RELEASE AT 10:00 A.M.

HAR H 'S&rch 20, 1980

TREASURY'S 52-WEEK TBTLL OFFEfMft?ti£^T
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,000 million, of 359-day
Treasury bills to be dated April 1, 1980,
and to mature
March 26, 1981 (CUSIP No. 912793 5Z 5 ) . This issue will
provide about $650 million new cash for the Treasury as the
maturing issue is outstanding in the amount of $3,346 million,
including $470
million currently held by Federal Reserve
Banks as agents for foreign and international monetary
authorities and $1,074 million currently held by Federal
Reserve Banks for their own account.
The bills will be issued for cash and in exchange for
Treasury bills maturing April 1, 1980 . Tenders from Federal
Reserve Banks for themselves and as agents for 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 for 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 Standard time, Wednesday,
March 26, 1980.
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.
M-383

-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. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. 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. 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, when submitting tenders for customers, must
submit a separate tender for each customer whose net long
position in the bill being offered exceeds $200 million.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual issue
price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the bookentry records of Federal Reserve Banks and Branches. A deposit
of 2 percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action shall be
final. Subject to these reservations, noncompetitive tenders for
$500,000 or less without stated price from any one bidder will be
accepted in full at the 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 April 1, 1980,
in cash or other immediately available
funds or in Treasury bills maturing April 1, 1980.
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.

FOR IMMEDIATE RELEASE

March 20, 1980

RESULTS OF TREASURY'S 37-DAY BILL AUCTION
Tenders for $6,004 million of 37-day Treasury bills to be issued
on March 25, 1980, and to mature May 1, 1980, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

Price

Discount Rate

High - 98.384 15.723%
Low
98.281
Average 98.343

Investment Rate
(Equivalent Coupon-Issue Yield)
16.20%

16.725%
16.122%

17.25%
16.62%

Tenders at the low price were allotted 1%.

TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICT:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL

Received

Accepted

$ 27,000,000
7,575,000,000

$ 27,000,000
5,130,000,000

3,000,000

3,000,000

375,000,000

325,000,000

10,000,000

10,000,000

509,000,000

509,000,000

$8,499,000,000

$6,004,000,000

An additional $ 900 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

M-384

FOR IMMEDIATE RELEASE

March 20, 1980

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $3,500 million of
$6,907 million of tenders received from the public for the 2-year
notes, Series Q-1982, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 14.94%-'
Highest yield
Average yield

15.07%
15.01%

The interest rate on the notes will be 15%. At the 15% rate,
the above yields result in the following prices:
Low-yield price 100.101
High-yield price
Average-yield price

99.883
99.983

The $3,500 million of accepted tenders includes $819 million of
noncompetitive tenders and $2,391 million of competitive tenders from
private investors, including 15% of the amount of notes bid for at
the high yield. It also includes $290
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 $3,500 million of tenders accepted in the
auction process, $500
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 March 31, 1980.

1/ Excepting 3 tenders totaling $115,000.

M-385

tf c/A

fb

&

TREASURY NOTES OF SERIES

Q-1982

DATE:. 3-20-80
HIGHEST^SHIW?

LOWEST SINCE:

LAST ISSUE:

TODAY:

/gfo

/$ nf$6,s ffM^h,<f &

iSad °/0 yteit

FOR IMMEDIATE RELEASE
March 24, 1980

Contact:

Robert E. Nipp
202/566-5328

U.S. - SAUDI ECONOMIC COMMISSION TO MEET
AT THE TREASURY DEPARTMENT
The Fifth Session of the United States - Saudi Arabian
Joint Commission on Economic Cooperation will be held April
1 and 2 at the Treasury Department to review the status and
progress of 19 technical cooperation projects being carried
out by the Commission and to discuss plans for the future
activity of the Commission.
Secretary of the Treasury G. William Miller and the
Saudi Arabian Minister of Finance and National Economy
Muhammed Al-Ali Abalkhail are Co-Chairmen of the Commission.
Secretary Miller and Minister Abalkhail will open the
meeting with introductory statements at 2:30 p.m. on April
1st. The closing plenary session on April 2 will include a
review of Joint Commission Projects, concluding statements
by the co-chairmen on the work of the Joint Commission and
the issuance of a Joint Communique. This session will be
followed by a press conference by Secretary Miller and Minister Abalkhail at 4:30 p.m., in the Treasury Cash Room.
Since the establishment of the Joint Commission on
June 8, 1974, the two governments have launched a broad
range of technical cooperation projects. The Joint Commission
is served by a professional staff of about 180 in Riyadh,
Saudi Arabia. Funding for the Commission's activities which
is by the Saudi Arabian Government, has totalled $365 million.
o 0 o

M-386

For Release Upon Delivery
Expected at 10:30 a.m.
STATEMENT OF DAVID J. SHAKOW
ASSOCIATE TAX LEGISLATIVE TAX COUNSEL
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE HOUSE COMMITTEE ON WAYS AND MEANS
March 24, 1980
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to present the views
of the Treasury Department concerning six bills: H.R.
5716, H.R. 4155, H.R. 4725, H.R. 5124, H.R. 5968, and
H.R. 4070.
H.R. 5716
H.R. 5716 would amend the special provisions
governing the tax treatment of the ConRail reorganization. The bill would change the consolidated
return rules as they apply to an affiliated group of
corporations one of whose members participated in the
ConRail reorganization.
Under the consolidated return rules, the losses of
a subsidiary corporation generally are taken into
account in calculating the income of an affiliated
group. The regulations provide a mechanism to measure
the losses of each corporation in the group that are
used in calculating the group's taxable income for the
year. Generally, the affiliated group is permitted to
use losses from one corporation in excess of its
investment in that corporation. However, if the total
losses of a subsidiary that are used by the group exceed
the group's investment in the subsidiary, those excess
losses are taken into account in calculating the income

M-SSf-

-2realized on the disposition of the subsidiary's stock.
For this purpose, if the stock of the subsidiary becomes
worthless, a disposition is considered to have occurred,
since it can be concluded at that point that the losses
claimed by the group will permanently exceed out-ofpocket investment.
H.R. 5716 would alter the application of the normal
consolidated return rules where the determination of the
worthlessness of the subsidiary's stock depends on a
determination of final value by the special ConRail
court that is determining the value of assets
transferred by the transferor railroads to ConRail. It
provides that the stock of the transferor railroad
cannot be considered worthless for purposes of the
consolidated return rules in such circumstances before a
determination of the special court becomes final. At
present, it is not expected that a final decision in the
ConRail valuation proceeding will be made for a number
of years.
The issue touched upon in this bill affects
particularly the consolidated return of the Norfolk and
Western Railway for the year 1976. The Internal Revenue
Service has taken the position that Norfolk and
Western's stock holdings in the Erie Lackawanna Railway
became worthless in 1976, thus triggering the excess
loss account Qf the Norfolk and Western affiliated group
in the Erie Lackawanna.
While the precise issue raised by the IRS in
respect of Norfolk and Western's 1976 tax return is not
the same as the issue raised in the ConRail valuation
proceeding, we believe that many of the same issues
would arise in both proceedings. Accordingly, we would
not oppose legislation that would effectively hold in
suspense the 1976 determination in respect of Norfolk
and Western's tax return until the ConRail valuation
proceeding becomes final. However, under such
legislation, if the amount received in the ConRail
proceeding were insufficient to give value to the Erie
Lackawanna stock, it might well be appropriate for the
excess loss account to be triggered as of 1976. Under
H.R. 5716, a determination of worthlessness would not be
made before the date on which the ConRail valuation
court's determination becomes final. Thus, the
difference between the legislation I have described and
the bill before you, as a practical matter, appears to
be the interest that would be owed on any tax that would
finally be determined as due.

-3If H.R. 5716 is passed, it should not put the IRS
in a worse position than it would be in if the excess
loss account were triggered as of 1976 (except for the
interest factor referred to before). Accordingly, it
should be clear that the IRS can collect the tax on the
excess loss account at some point. Presumably, the tax
on the excess loss account should be collected no later
than the year the Erie Lackawanna is removed from the
Norfolk and Western consolidated return. Further, it
should be made clear that no action subsequent to 1976
may be taken which would have the effect of preventing
the tax consequences that would have resulted if the
excess loss account had been triggered in 1976.
H.R. 4155
H.R. 4155 would permit the disclosure to the
Commissioner of Education* of the mailing addresses of
students who have defaulted on loans under the Migration
and Refugee Assistance Act of 1962 (the Cuban Student
Loan Program) solely for the purposes of locating the
defaulting student for purposes of collecting the loan.
Under current law, the mailing addresses of students who
have defaulted on loans under the National Direct
Student Loan Program may be disclosed to the
Commissioner of Education who in turn may disclose the
addresses to the educational institutions involved. The
institution's officers, employees and agents may use the
addresses to collect the defaulted loans.
We see no reason to draw a distinction between the
two loan programs and therefore do not oppose enactment
of H.R. 4155.
In addition, we would not oppose extending this
limited disclosure authority to allow disclosures to
lenders and State and non-profit guaranty agencies in
regard to students who have defaulted on loans under the
Guaranteed Student Loan Program, a separate program from
the programs already mentioned. Extending the
disclosure authority with respect to the Guaranteed
Student Loan Program is supported by HEW.
*
Reference in the statute should now be to the
Secretary of Education.

-4H.R. 4725
H.R. 4725 would eliminate one of the requirements
under Code Section 7275(a) regarding certain airline
tickets. Section 7275(a) now has two requirements with'
respect to airline tickets which are subject entirely to
the eight percent excise tax imposed by Section 4261.
First, the ticket is required to show the total of the
amount paid for transportation and the amount of the
Federal excise tax. Second, if the ticket shows the
amount for transportation paid with respect to any
segment of the transportation, the total of the amount
paid for such segment and the tax relating to such
segment must be shown. H.R. 4725 would repeal this
separate segment rule in order to eliminate the clerical
work involved in computing and adding the excise tax for
segments.
The Treasury Department does not oppose the repeal
of this requirement.
H.R. 5124
This bill would permit transfers of proven oil and
gas properties to a controlled corporation, without the
loss of percentage depletion, if the controlling
shareholder elects to allocate his 1,000 barrels per day
allowance for percentage depletion with the controlled
corporation.
Under present law, certain independent producers
and royalty owners are permitted a percentage depletion
deduction on up to 1,000 barrels of oil or gas per day.
Certain related parties are treated as one taxpayer and
are required to share one 1,000 barrel per day
allowance. Related parties are defined as component
members of the same controlled group of corporations,
businesses under common control, and members of the same
family. An individual and a controlled corporation are
not, however, related parties under current law. Thus,
an individual and a controlled corporation each has a
separate 1,000 barrel per day allowance for purposes of
percentage depletion. An individual and a controlled
corporation are therefore eligible for a percentage
depletion deduction on as much as 2,000 barrels per day.

-5To prevent taxpayers with production in excess of
1,000 barrels a day from increasing aggregate percentage
depletion deductions by transferring proven oil or gas
properties to taxpayers with production of less than
1,000 barrels a day, present law generally provides that
the transferee of a proven oil or gas property may not
take percentage depletion with respect to that property.
Among the exceptions to this general rule are transfers
between related parties. Because related parties must
share one 1,000 barrel per day allowance, transfers
between related parties generally cannot increase the
aggregate percentage depletion deductions within the
related group. Because an individual and a controlled
corporation are not related parties for this purpose,
this exception does not apply to transfers between such
parties and the transferee is not allowed a percentage
depletion deduction with respect to the transferred
property.
The bill would permit shareholders of a controlled
corporation to elect to treat themselves and the
corporation as related parties. An election would
require a shareholder to allocate his 1,000 barrel per
day allowance with the corporation and would thus permit
transfers of proven properties by an individual to the
controlled corporation without loss of percentage
depletion.
The Treasury Department is not opposed to allowing
a controlling shareholder to elect to allocate his 1,000
barrel per day allowance between himself and the
corporation. There are, however, certain technical
changes in the language of the bill that we believe
should be made. Most of these changes have been
incorporated in an amendment to H.R. 1212 which was
reported by the Senate Finance Committee in December of
1979. We are confident that these changes can be worked
out with the staff of the Committee.
H.R. 5968
Section 501(c)(9) of the Code exempts from tax
associations of employees which provide life, sick,
accident or other benefits to the members of the
association, their dependents or their designated
beneficiaries. H.R. 5968 specifically would allow such
associations to provide permanent as well as term life
insurance.

-6While the predecessor of section 501(c)(9) was
enacted during the 1920's, the statute subsequently was
modified several times and the first notice of proposed
rulemaking was not published under section 501(c)(9)
until 1969. Those regulations would have precluded the
use of permanent life insurance contracts, limiting the
provision of life benefits to term insurance. Because
of controversy over various aspects of the first notice
of proposed rulemaking the Treasury has not finalized
the proposed regulations, but has instead been at work
preparing a new notice of proposed rulemaking. It is
anticipated that those proposed regulations, which
should be promulgated before summer, will be far less
controversial than the prior notice. There is no danger
that the provision of life benefits involving permanent
insurance contracts will cause the exemption of any
section 501(c)(9) organization to be revoked before
these regulations are published in final form.
Therefore, we urge the Committee to delay action on H.R.
5968 until there has been adequate opportunity to review
and consider the new proposed regulations.
The question raised by H.R. 5968 is, of course,
under consideration in reviewing the new notice of
proposed rulemaking. It is one of the more difficult
remaining issues. While we have not reached a final
resolution of the matter we can point out the basic
considerations that are involved.
In the case of section 501(c)(9) trusts funded
through deductible employer contributions, allowing a
trust to utilize permanent life insurance contracts may
create opportunities to provide deferred compensation
through such trusts. There is an existing set of
detailed rules regarding the provision of deferred
compensation. In particular, in order for an employer
to obtain a current deduction on funding without tax to
employees, it is necessary to satisfy the conditions for
qualified plans. Allowing section 501(c)(9) trusts to
provide permanent benefits raises the possibility that
such trusts could be used to undermine these rules.
To the best of our knowledge, the principal
proponents of H.R. 5968 are not trusts that are funded
with employer contributions, but rather associations
from which members directly purchase insurance
protection. Nevertheless, it should be recognized that
H.R. 5968 draws no distinction between these two classes
of organizations. Moreover, in the case of section

-7501(c)(9) trusts which in effect sell life insurance
products to association members, who purchase them with
tax-paid dollars, there are questions about how to draw
the line between an exempt trust and a taxable life
insurance company.
In reworking the regulations under section
501(c)(9) the Treasury has been endeavoring to fashion
rules that would minimize the problems to which I have
just adverted, while at the same time maintaining
fidelity to the statutory purposes. As I have noted, we
anticipate that these regulations should be promulgated
within the next several months. And, as I also noted,
there is no risk that any organization providing
permanent life insurance benefits would be in jeopardy,
if at all, until final regulations are promulgated. We
therefore suggest that the Congress defer action on H.R.
5968.
H.R. 4070
H.R. 4070 would amend section 501(c)(19) of the
Code, which provides an exemption from income tax for
war veterans organizations. That section now requires
that 75 percent of the membership consist of war
veterans, and that substantially all of the balance of
the membership consist of veterans (other than war
veterans), cadets, and the spouses, widows and widowers
of such persons. The bill would amend section
501(c)(19) to provide that 75 percent of the membership
must consist of present or past members of the Armed
Forces, with substantially all of the balance consisting of the other persons named above.
Section 501(c)(19) was added to the Code in 1972,
together with a special amendment to section 512
concerning the taxation of unrelated business income.
The latter provision, which excludes from the unrelated
business income tax the income derived by a war veterans
organization from certain insurance activities, was the
basic reason for providing a separate exemption for war
veterans organizations. Prior to 1972, war veterans
organizations were usually recognized as exempt social
clubs described in section 501(c)(7). One of the
activities typically engaged in by such groups was the
provision of insurance for their members at group rates.
Prior to 1969, there was no tax on this insurance
activity since the unrelated business income tax did not
apply to social clubs. After 1969, the question was

-8raised as to whether the income derived by veterans
organizations from this activity should be subject to
the unrelated business income tax. That question was
resolved favorably to the veterans organizations by
enactment of the amendments to sections 501 and 512,
which provided a separate organizational exemption for
war veterans organizations and excluded the insurance
income from the unrelated business income tax as long as
it was used either to provide for insurance benefits for
members, or for charitable purposes.
As a result of this legislation, therefore, war
veterans organizations, although essentially operated as
social clubs for the benefit of their members, are
treated more favorably than social clubs exempt under
section 501(c)(7) in two respects. First, by reason of
the special unrelated business income tax treatment for
their insurance activities, amounts received in respect
of these activities generally are not subject to the
unrelated business income tax, even though, if carried
on by other social clubs, the provision of such benefits
might very well give rise to tax or, in some instances,
to loss of exemption under section 501(c)(7). In
addition, unlike social clubs exempt under section
501(c)(7), the passive investment income of war veterans
organizations is exempt from tax, even though such
income may be applied to defray personal recreational
activities of the members of the organization with
tax-free, rather than tax-paid dollars. In the case of
social clubs exempt under section 501(c)(7), investment
income is subject to tax unless set aside and then used
for charitable purposes.
In view of the fact that, despite the essentially
social nature of war veterans organizations, they are
treated more favorably than other social clubs both in
terms of investment income and in terms of income from
the active conduct of an insurance business, we do not
feel it would be appropriate to relax the qualifications
for exemption under section 501(c)(19). There is no
basis that we can see for doing so other than to widen
the class of people who may participate in the use of
war veterans organizations. Perhaps the rather generous
statutory scheme that is available to organizations
described in section 501(c)(19) is justifiable where it
is limited to those who have been in combat in service
of the country. We do not see why it should be extended
to all who are, or have been, members of the Armed
Forces.
oOo
The Treasury therefore opposes H.R. 4070.

March 24, 1980

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,401 million of 13-week bills and for $3,400 million of
26-week bills, both to be issued on March 27, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing June 26, 1980
Discount Investment
Rate
Rate 1/

High
95.8 62^' 16.370%
Low
95,803
16.604%
Average
95.821
16.532%
a/ Excepting 1 tender of $500,000

17.31%
17.57%
17.49%

26-week bills
maturing September 25, 1980
Discount Investment
Price
Rate
Rate 1/
92.174
91.936
92.063

15.480% 17.03%
15.951%
17.59%
15.700%
17.29%

Tenders at the low price for the 13-week bills were allotted 42%.
Tenders at the low price for the 26-week bills were allotted 39%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands]
Received
Accepted
Received
60,235
$
66,305
$
66,305 $
230,390
4
2,733,415
7,244,235
25,675
38,795
42,325
29,010
64,460
95,620
47,585
55,030
80,030
66,855
69,750
77,750
307,035
77,315
400,425
42,665
26,865
51,780
8,105
19,370
19,370
43,960
48,030
50,250
13,500
25,425
25,425
355,825
120,380
360,380
74,520
55,990
55,990

Accepted
$
60,235
2,562,340
25,675
29,010
47,585
56,855
187,035
25,665
8,105
43,960
13,500
265,575
74,520

$8,569,885

$3,401,130

$5 ,305,360

$3,400,060

Competitive
Noncompetitive

$6,265,340
1,016,995

$1,096,585 :
1,016,995 :

$3,655,270
680,025

$1,749,970
680,025

Subtotal, Public

$7,282,335 $2,113,580' : $4,335,295 $2,429,995

Federal Reserve
Foreign Official
Institutions

935,000 935,000 : 944,165 944,165

TOTALS

$8,569,885 $3,401,130 : $5,305,360 $3,400,060

TOTALS
Type

352,550 352,550 : 25,900 25,900

J/Equivalent_£&ujafiAsfc»£.sue yield.
-M-388

DATE:

March 24, 1980

13-WEEK

TODAY:

/£. ^3vft

2 6-WEEK

/5>7*0 fy

LAST WEEK: A/^3 % /*/, <? $<> V*

HIGHEST SINCE:

Jt/G/%6 /Sif/7. 14, cr5tc4
LOWEST SINCE:

VepartmentoftheTREASURY

0 0 278

ASHINGT0N,D.C. 20220

I

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

LIBRARY
ROOM 5004

TREASURY'S

HAR

March 25, 1980

28 *

WEEKLY BILL OFFERING
',v!VlMENT
The Department of th TriLAiUHl OLF by this public notice,
invites tenders for two s e Treasury, asury bills totaling
aooroxim ately $6,800 mill eries of Tre ssued April 3, 1980.
This off ering will provid ion, to be i on of new cash for the
Treasury as the maturing e $500 milli tstanding in the amount of
S6,306 million, including bills are ou on currently held by
milli
Federal Reserve Banks as $515
agents
for f oreign and international
monetary authorities and
on currently held by
Federal Reserve Banks for $1,746 milli
their own a ccount. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,400
million, representing an additional amount of bills dated
January 3, 1980,
and to mature July 3, 1980
(CUSIP No.
912793 4U 7 ), originally issued in the amount of $3,373 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
April 3, 1980,
to mature October 2, 1980
(CUSIP No.
and
912793 5H 5 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing April 3, 1980.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
3anks, 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. 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,
Eastern Standard time,
D. C. 20226, up to 1:30 p.m
PD 4632-2 (for 26-week series)
Monday, March 31, 1980.
or Form PD 4632-3 (for 13-we
ries) should be used to submit
d on the book-entrv records of
tenders for bills to be main
the P ^ - r t n p n r ~f the Treasu

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. 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. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
^
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
oidder
will
be accepted
in full at
the weighted
respective
(in three
decimals)
issues.
of accepted
competitive
bids average
for the price

-3Settlement 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 April 3, 1980,
in cash or other immediately available
funds or in Treasury bills maturing April 3, 1980.
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.
Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills are
sold is considered to accrue when the bills are sold, redeemed
or otherwise disposed of, and the bills are excluded from
consideration as capital assets. Accordingly, the owner of these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on
original issue or on subsequent purchase, and the amount actually
received either upon sale or redemption at maturity during the
taxable year for which the return is made.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, and this notice, prescribe the terms of
these Treasury bills and govern the conditions of their issue.
Copies of the circulars and tender forms may be obtained from any
Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

FOR IMMEDIATE RELEASE

March 25, 1980

RESULTS OF AUCTION OF 4-YEAR NOTES
The Department of the Treasury has accepted $2,500 million of
$6,508 million of tenders received from the public for the 4-year
notes, Series D-1984, auctioned today.

\:
The range of accepted competitive bids was as follows:
Lowest yield 14.20%Highest yield
Average yield

14.33%
14.29%

The interest rate on the notes will be 14-1/4%. At the 14-1/4% rate,
the above yields result in the following prices:
Low-yield price 100.149
High-yield price
Average-yield price

99.763
99.881

The $2,500 million of accepted tenders includes $ 498 million of
noncompetitive tenders and $1,693 million of competitive tenders from
private investors, including 16% of the amount of notes bid for at
the high yield. It also includes $309 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 $2,500 million of tenders accepted in the
auction process, $309 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 March 31, 1980, and
$ 66
million of tenders were accepted at the average price from Federal
Reserve Banks as agents for foreign and international monetary authorities
for new cash.
1/ Excepting 1 tender of $5,000

M-390

FOR IMMEDIATE RELEASE
March 25, 1980
\

Contact:

George G. Ross
202/566-2356

UNITED STATES AND UNITED KINGDOM
EXCHANGE INSTRUMENTS OF RATIFICATION
ON INCOME TAX TREATY
Instruments of ratification were exchanged in
Washington, D.C. today with respect to the "Convention
between the Government of the United States of America
and the Government of the United Kingdom of Great
Britain and Northern Ireland for the avoidance of
Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income and Capital Gains."
Secretary G. William Miller represented the United
States, and Ambassador- Sir Nicholas Henderson represented the United Kingdom at the exchange of instruments
ceremony.
The exchange of instruments encompasses the
Convention, which was signed on December 31, 1975 and
its subsequent amendments which were effected by an
exchange of notes signed on April 13, 1976 and by the
Protocols signed on August 26, 1976, March 31, 1977
and March 15, 1979.
The income tax treaty, as amended by the exchange
of notes and the three Protocols, will enter into force
on April 25, 19 80. It will have effect for most purposes for taxable periods beginning in 1975, except
that for dividends paid by United Kingdom corporations
to the United States portfolio investors, the effective
date is April 6, 1973.
o

M-391

0

o

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M., EST
WEDNESDAY, MARCH 26, 1980
STATEMENT BY THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL
DEVELOPMENT INSTITUTIONS AND FINANCE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
Authorization Requests
for the Multilateral Development Banks for 1980
Introduction
It is a pleasure, Mr. Chairman, to appear before you today
to present the Administration's proposals for U.S. participation
in the replenishment of resources of the International Development
Association (IDA), for membership of the United States in the
African Development Bank (AFDB) and subscriptions to that
institution, and for changes in the budgetary and appropriations
treatment of U.S. subscriptions to the callable capital of the
World Bank (IBRD) and Asian Development Bank (ADB).
The 1979 Legislation
Before discussing this bill, I want to express the grave
concern of the Administration over the substantial reductions
in the last year's authorization bill for the regional banks,
voted earlier this month by the House, despite recommendations
by this Committee for authorization of the full amounts. Those
cuts, consisting of $1.2 billion out of $3.4 billion requested

- 3 If the recent House action on the IDB were sustained, other
donors would in all likelihood call for a renegotiation of the
entire replenishment package. At the outset, this would force
out over $2 billion in other donor contributions to the
replenishment, because the IDB Charter does not permit the U.S.
share to drop below the current threshold of 34.5 percent.
Moreover, given the extremely favorable results of the IDB Fifth
Replenishment, from U.S. policy and budgetary perspectives, a
renegotiation would not be in the U.S. interest.
As part of the Fifth Replenishment package the United
States achieved:
agreement that 50 percent of total Bank lending from
this replenishment would directly benefit low income
groups
a lowering of the share of paid-in capital from
10 percent to 7-1/2 percent (saving U.S. $69 million)
a reduction in U.S. annual contributions to the Fund
for Special Operations (FSO) from $200 million to
$175 million
a substantial increase in the convertable currency
contributions of the larger Latin American countries
to the FSO
a tripling of the shares of the nonregional members
over their initial shares of capital
It is probable that some, maybe all, of these hard fought
achievements would be lost in any renegotiation, particularly
if the U.S. were to reduce substantially its total contribution.
Any renegotiation would take from six months to a year , or
longer, given the necessity for parlimentary approval in
some member governments. In the meantime, the lending program
would come to a halt.

- 4 A cessation of lending by the IDB and ADF would have
serious adverse repercussions on our national security and
foreign policy.

Countries and regions of growing importance

to U.S. national security, such as Pakistan, Central America,
and the Caribbean, would be especially hard hit as a result.
Obviously such action would also raise fundamental questions
about the reliability of the United States in fulfilling its
international commitments and this country's intentions as regards
its leadership role in Latin America and Asia.
Authorization of the full amounts in the bill is entirely
consistent with current efforts to achieve savings in budgetary
outlays during FY1980 and FY1981.
authorized, $2.5 billion —
request —

Of the $4.0 billion to be

more than 60 percent of the total

is for callable capital subscriptions to the IDB,

which are virtually certain never to result in budgetary outlays.
For the $1.5 billion in the request which eventually will
result in budgetary outlays, appropriations are being sought
over the period FY1980 - FY1983.

However, the budgetary

impact of the drawdown of these funds will be minimal because
that drawdown is tied to disbursements required to implement
bank projects which take a minimum of five years to complete.
We estimate that this bill will result in zero budgetary outlays
in FY1980.

Budgetary outlays for the total request of

$4.0 billion will be less than $7.0 million in FY 1981 and
less than $33 million in FY 1982.

Furthermore, as directed in

the authorization and in the Conference Report, procedures for
drawdowns will be changed to delay outlays as long as possible.

- 5 It is important that the House act promptly to restore
full funding to last year's authorization request.

Such action

is essential to U.S. national interests.
The 1980 Legislation
This year's bill focuses on the poorest countries of the
world.

IDA recipients include virtually all countries with

annual per capita incomes below $320, in addition to scattered
countries with slightly higher income levels.

Their total

population is more than one and one-quarter billion.

The

AFDB lends to African countries with incomes averaging $460
per year, and with a total population of 200 million.
There should be no doubt about the overwhelming need among
the prospective IDA and AFDB recipients for these programs to
be undertaken during the 1980s.

Not only do these countries

have the lowest per-capita incomes in the world, they have
also experienced the slowest economic growth in the post-OPEC
era, barely outpacing population growth.

On average, over

one half of their populations is mired in absolute poverty
where hunger, malnutrition, illiteracy, disease, high infantmortality, and low life-expectancy are an inevitable way of life.
The sum effect of these proposals will be to provide additional
lending of over $15 billion during the first half of the decade
to the world's very poorest.

This means new programs to

increase food production and alleviate hunger, to improve
health, sanitation, housing, nutrition, and education, to
build critical development infrastructure, and to limit burgeoning

- 6 Channelling assistance through the multilateral, development
banks (MDBs) has the advantage of complying fully with our
domestic requirements for budget stringency. U.S. participation
in the MDBs is the most cost-effective approach available
to providing substantial amounts of development assistance
to the Third World. Enormous fiscal advantages derive from
our MDB participation because the burden for providing
development assistance is shared with other countries, because
the MDBs leverage our paid-in contributions through borrowings
in world private capital markets, and because the MDBS, through
increased purchases of U.S. goods and services, return substantial
economic benefits to the U.S. economy — including additional
tax receipts which nearly offset U.S. budgetary outlays.
Furthermore, international burden-sharing through the
banks is becoming more equitably and widely spread. The U.S.
share in nearly every MDB in which the United States is currently
participating has declined in recent years, while the lending
levels of these institutions have increased. Other donor
countries now contribute 75 percent of total MDB resources.
Moreover, increasing amounts of our contributions are provided
via callable capital, not a penny of which has ever left
or is likely to ever leave the U.S. Treasury.
Burden-sharing, use of callable capital and the return of
economic benefits to the U.S. economy provide a cost-effective
combination to reconcile the need for a substantial, viable foreign
assistance program with our current requirement for fiscal

- 7 austerity.

Through that combination, for example, the World Bank

can now lend approximately fifty dollars for each dollar paid-in
by the United States at no net cost to the U.S. taxpayer.
Although the concessional MDB institutions such as IDA,
where there is no callable capital, do not provide this
leverage, major cost-effective advantages —

through burden-

sharing and greater tax receipts via expanding U.S. exports

—

accrue to the United States.
The authorization request for the United States' share of
the Sixth Replenishment of IDA (IDA VI) totals $3.24 billion.
The Sixth Replenishment will provide IDA with $12 billion in
new resources for lending on concessional terms, over the period
FY1981-FY1983, to the world's poorest countries. IDA VI cannot
become effective without the participation of the United States.
This bill also would authorize United States membership in
the African Development Bank, which for the first time will open
its doors to nonregional members, thereby broadening the Bank's
financial base, enhancing its access to private capital markets,
and thus contributing more effectively to Africa's development.
In conjunction with nonregional membership, the capital of
the AFDB will be increased from $1.5 billion to $6.3 billion
to support a lending program for a minimum of five years.
The proposed U.S. subscription to the AFDB would total
$359.7 million, or 5.7 percent of the Bank's total capital.
This share is sufficient to allow the United States to elect
an Executive Director to the Bank Board.

Twenty-five

percent of the U.S. subscription, or $89.9 million, would be

- 8 paid-in.

The remainder would take the form of callable capital.

The Multilateral Development Banks in the 1980s
It is the view of the Administration that active, undiminished
U.S. support for the multilateral development banks throughout
the 1980s will be critical to fundamental U.S. economic, political,
and security interests. Those interests include:
—

national security.

The banks comprise an important part of the international
institutional framework which the United States must rely upon
to enhance world security.

The United States was the principal

architect of that framework and recent events in Southwest
Asia have demonstrated its importance to a secure, stable world
environment.

U.S. security interests are so far-reaching that

defense of those interests would be unthinkable without relying
upon the multilateral process through the existing institutional
framework.

The responses of the United States to the crises

in Iran and Afghanistan and the results of those collective,
collaborative efforts with much of the developing world,
have demonstrated the importance of the multilateral process
in promoting our foreign policy and national security interests.
The United States must therefore give its fullest support
to the process in order to keep it working to support U.S.
interests.
In support of collective security action, the banks are
critical to the maintenance of political stability in each of
the major regions of the world and in key countries.

One need

- 9 only scan the list of the largest MDB borrowers — Mexico,
Brazil, India, Korea, Pakistan, Egypt, Indonesia, Colombia,
Yugoslavia, Kenya and Turkey — to grasp the importance
of the MDBs to U.S. security by way of their contributions
to growth and material well-being, and thus to political
stability in key regions of the world.
Finally, there is the growing importance of U.S. dependence
on critical raw materials from the developing world. The United
States is nearly totally dependent upon the developing countries
for supplies of bauxite, tin, manganese, and natural rubber, as well
as certain food-stuffs. The United States and the rest of the
Western World have a vital stake in promoting the stability and
growth of the economies of developing countries which produce
critical new materials and in retaining access to these supplies.
the health of the international economic system.
In 1979, MDB loan commitments totalled nearly $14 billion.
This represents by far the largest official source of external
capital for the developing world. As such, the MDBs contribute
in a major way to economic growth and stability in recipient
developing countries and in rapidly expanding trade between
the Third World and the developed countries. In providing
dispassionate policy advice, in preparing development projects
based upon objective economic criteria, and in insisting
upon rational economic policies within recipient countries,
the MDBs are an important, respected force for the maintenance
of an efficient, responsive international market economy.
The impact of the banks in this regard, and their resulting

- 10 contribution to the health and resilience of the world economy,
is often overlooked but cannot be overstated.
Another intangible is the inducement of the banks to
cooperative efforts among developed and developing countries,
where relations in the recent past had too often been
characterized by confrontation and hostility, to resolve pressing
international economic problems.

Cooperation here means developed

and developing countries working together to focus bank policies
and resources to respond to critical world needs.

Most recently,

this has meant both shifting MDB lending away from traditional
infrastructure to agriculture and rural development to more directly
benefit the poor and to increase food production, and greatly expandin'
lending to increase developing country energy production.
The banks also contribute to the effort to recycle funds
from the oil producing countries to the developing world.
Recent oil price increases will add about $14 billion to
the current account deficits, totaling approximately $50 billion,
for the oil-importing developing countries this year.

Though the

basic objective of bank loans is to promote long-run development
in recipient countries, their role in this regard will become
more prominent and vital to the world economy in the 1980s.
—

direct U.S. economic benefits

The most rapidly growing developing countries which, not
coincidentally, are among the largest MDB borrowers, are also
the most rapidly growing export markets for the United States.
Generally, non-oil developing countries account for about 25 percent
of U.S. exports, includina one-quarter of U.S. manufactured exports.

- 11 These markets have become more important to U.S. trade than the
entire European Community.
Through the contributions of other MDB donors, which on average
comprise 75 percent of the total, and through the use of callable
capital, MDB loans result in expenditures on U.S. goods and services
well in excess of U.S. contributions to the banks. From the inception
of the banks through 1978, the cumulative current account surplus
for the United States directly attributable to MDB activities
(the purchase of U.S. goods and services, net interest payments
to U.S. MDB bondholders, and MDB administrative expenses in the
United States), has been $11 billion. Cumulative U.S. paid-in
contributions to the banks, by comparison, totaled $7 billion.
This means that every dollar contributed to the MDBs results in
$1.57 being injected directly into the U.S. economy.
The total economic effects, however, are much larger and more
broadly based than the effects directly observable from our balance
of payments. That $1.57 becomes the income of a U.S. exporter,
bondholder or Bank employee residing in the United States. It
is in turn respent, resulting in multiple increases in U.S. national
income, employment, and Federal Government and local tax receipts.
Treasury analysis shows that over the period 1977-1978
every dollar contributed to the MDBs has resulted in an increase
of U.S. GNP of $3.00. This three for one multiplier effect is
sizable and stems, in part, from the unique characteristics of
the MDBs, i.e., their multilateral character which provides for
other donor country contributions and the availability of callable
capital jjjhich permits substantial borrowing on private capital

- 12 markets. Total U.S. GNP growth directly attributable to
MDB activities averaged $2.7 billion over 1977-1978, raising
net Federal tax receipts by $720 million annually and reducing
the net cost to the Federal budget for our participation
in the banks to $170 million each year. If increased local
tax receipts were included the net cost to the American
taxpayer probably would be minimal.
Developing Country Prospects for the 1980s
The record for the developing countries over the past
two decades, which spans the work of the MDBs including IDA,
shows clear progress. During the decade of the 1960s and
up to the 1974 surge in OPEC oil prices, gross domestic product
for the developing countries grew at six percent or more annually,
exceeding growth in the industrialized countries. Developing
countries' exports of manufactured goods grew at nearly 13
percent annually and their share of total world manufactured
exports grew from six percent to ten percent during that period.
Moreover, each of the quality-of-life standards — life
expectancy, infant mortality, literacy, access to potable
water and calories as a percent of daily requirements — showed
significant improvements during the 1960s and 1970s and
a narrowing of the gap with the industrialized countries.
Average per-capita income for the developing countries also
has approximately doubled in real terms since 1960.
Despite recent progress in many areas, the prospects
for the developing countries in the 1980s are not optimistic.
In pact this is because the world economy has moved haltingly,

- 13 -

at best, to recover from the oil price increases and subsequent
recession of the mid-1970s, and because the recovery remains far
from complete. Thus, for the 1970s, while the per capita GDP of
the major oil exporting countries grew at 6.6% per annum, per capita
income grew at 3.6% for the middle income developing countries and
fell off to only 1.7% per year for the poorest developing countries.
For the poorest countries in Africa per capita growth was an
imperceptible 0.2%.
In large part these meager results reflect a general slow-down
in growth throughout the developing world in the 1974-1979 period.
The causes of that slow-down — surging oil prices, worldwide inflation
slower growth in the industrialized countries, and declining real .
supplies of external capital — cast long shadows over prospects
for the 1980s.
Under the most optimistic assumptions of vigorous economic
growth in developing countries in the 1980s, the World Bank has
projected that their per capita income will increase 4.2 percent
per annum. However, per capita income would increase by only 3.5
percent in the poorest developing countries and under 2 percent
in Sub-Saharan Africa. Under more realistic assumptions, the per
capita income of the developing countries can be expected to increase
at an average rate of between 2.4 percent and 3.3 percent, but at
only one percent or less in the poorest countries of Africa and
under three percent in the low-income Asian countries.
Hence, per capita income in the poorest developing countries,
with a billion and a quarter people, will probably increase only

- 14 $1-$10 per year over the next decade. The World Bank also estimates
that, realistically, we can only expect to reduce the numbers of
people living in absolute poverty — that bare survival
state conditioned by malnutrition, illiteracy, disease,
high infant-mortality and low life-expectancy — from 800
million to 600 million by the end of the century.
Equally disturbing is the fact that, while developing
country food production is barely keeping abreast of overall
population growth, in the poorest developing countries population growth at 2.4 percent a year has been outpacing food
production which has grown at less than one percent annually
since 1961. The combined effects of poverty and food insecurity,
neither of which is being ameliorated in the poorest countries,
are interacting to cause a worsening problem of hunger.
Millions of people —more than three-quarters of whom live
on the Indian subcontinent, in Southeast Asia and in Sub-Saharan
Africa — are afflicted by hunger. Short of a massive effort
at increasing food production in the poorest developing
countries themselves, this condition will remain widespread
throughout the 1980s.
The Role of the Multilateral Development Banks and U.S.
Objectives in the 1980s
These somber prospects have led us to conclude that the
multilateral development banks must play a major world-wide
development role in the 1980's. The MDBs have the technical
expertise and the experience to use the capital resources which

- 15 we propose to provide them for the coming years.

Moreover,

they do so in an extremely cost-effective manner through
the sharing of the burden of foreign assistance with other
donor countries and long term borrowing on capital markets
with the backing of callable capital, at minimum cost to
the U.S. taxpayer.
The MDBs are the most efficient, effective instruments
to pursue broad-based development strategies in the developing
world.

At the micro-economic level, they follow detailed and

rigorous loan appraisal processes to ensure that every dollar of
development lending yields maximum benefits.

Loan analysis is

performed solely on the basis of relevant economic and technical
considerations.

Their apolitical nature also carries with it a

special trust which enables the staffs of MDBs to influence
strongly borrowing countries in the adoption of sound policies.
The United States also has significant policy leverage
in the banks relative to both the proportion and dollar amounts
of its contributions.

Over the recent past, the United States

has pursued a number of policy objectives in the MDBs to
promote further their objective of helping the developing
countries attain higher standards of material well-being and
to help alleviate the conditions of absolute poverty.

Among

these objectives have been to reach the poor more effectively
and efficiently, to increase food production substantially,
and to increase both the the amounts and proportion of
lending for projects designed to increase world energy supplies.

- 16 In response to U.S. urging, all of the MDBs have redirected
the sectoral composition of their lending better to meet basic
human needs and to ensure that proportionally more project
benefits flow to lower income groups in borrowing countries.
This redirection is reflected in the rapid growth of lending
for agricultural projects.
World Bank Group lending for agriculture, one third of
which is coming from IDA, has increased 145 percent in the
past five years.

For IDA alone, loans for the agricultural

sector have grown by 427 percent.

During that period,

IBRD/IDA activities have provided the base for producing
one third of all increased fertilizer production in the
developing countries for the first half of the 1980s, one
fifth of the total investment in rural road networks in
developing countries, and one quarter of total public investment
in developing country irrigation systems.

Furthermore, 358

IBRD/IDA agricultural projects over these past five years have
had the rural poor as their principal beneficiaries, and an
estimated 60 million of the 100 million direct beneficiaries
of these projects had incomes below the absolute poverty levels
in their respective countries.
Currently, approximately 46 percent and 30 percent of IDA
and IBRD lending, respectively, flows to the agricultural sector,
up from 37 percent a'nd 11 percent respectively in the early 1970s.
Over 75 percent of combined IBRD/IDA agricultural assistance
is now directed towards expanding food production.

As noted in the

forthcoming report of the President's Commission on World Hunger,
the World Bank Group is the world's largest single source of

- 17 external funding for developing world agriculture. The World
Bank expects to finance projects which will contribute up to 20
percent of the increase in annual food production in its developing
member countries in the 1980s.

It is due to this effort

that the President's Commission on World Hunger has concluded
that the United States should strongly support the activities
of the MDBs including an increase in U.S. contributions
to the concessional windows of the banks.
An important means to implement the objective of more
effectively and directly reaching the poor has been to encourage
greater utilization of capital saving technologies. Such
technologies have the advantage of increasing the productivity
and incomes of poor people at low per capita costs by insuring
that the maximum numbers of people benefit from MDB projects
and by promoting the most efficient use of factor availabilities.
The United States has sought greater utilization and development
of capital saving technologies in the MDBs by encouraging
policy decisions in the banks, urging increased MDB staff
focus on the appropriateness of technologies, and constantly
reviewing project loans to assure improved application.
The United States has also been at the forefront in urging
the MDBs to adopt a comprehensive energy program.

In the World

Bank Group in January 1979, the Board of Executive Directors
approved an expansion of the IBRD/IDA energy program.

That

program is now planned to grow to at least 15 percent
of total Bank lending within five years.
Over the 1980-84 period, the World Bank Group will lend
$7.7 billion for thev exploration, production, and development

- 18 of oil, gas, and coal, and for the construction of new
hydroelectric facilities.

The loans will be combined with

approximately three times as much private and government
financing.

When the projects are in operation, they will

produce additional primary energy fuel in oil importing
developing countries estimated to equal between 2 and
2.5 million barrels a day of oil.

This should help to

increase world supply and thereby reduce pressures on
world oil prices, as well as deal directly with one of the
most critical bottlenecks to development.
The International Development Association
The International Development Association (IDA) is central
to the attack on poverty in the poorest countries in the
world.

The record of that institution demonstrates clearly

that developed and developing countries can work successfully
to resolve common problems. Rhetoric and confrontation have
no part to play in IDA programs.

IDA recipients have come

to appreciate and depend upon concrete development projects
and programs which are designed to resolve real economic problems
and to produce material improvement in the lives of their
people.
It is important that the United States strongly support
cooperative programs for mutual gain such as IDA.

It serves

to undermine those in the developing world who favor confrontation
with the United States, to preempt proposals in North/South
fora which are adverse to U.S. economic and political interests,
and to enhance prospects for developing country support on
issues of primary importance to the United States.

At a time

- 19 when global economic difficulties are exposing nearly all of
the poorer developing countries to serious threats of
political, economic, and social instability, IDA is making
an invaluable contribution to our national security and other
U.S. foreign policy objectives, via the multilateral process.
The rather bleak prospects for the low-income countries
of Africa and Asia give IDA a vital development role to play
in the 1980s. IDA is the largest source of concessional resources
in the world, the largest source of external financing for
the countries of Africa, and the centerpiece of multilateral
efforts to utilize concessional resources effectively within
broad-based development strategies. As such, it will be
the major hope for the poorest developing countries and
their one and one-quarter billion people over the next decade.
IDA will be crucial in determining whether per capita
food production in the poorest LDCs will increase and whether
real progress is made in alleviating world hunger. Nearly
two-thirds of the external financing requirements of the
low income developing countries will need to be met through
disbursements of concessional capital, of which IDA will be
the largest single source, during the last half of the 1980's.
IDA will be key in determining whether the more than 800
million persons mired in absolute poverty can be significantly
reduced by the end of this century. It will depend largely
upon IDA as to whether the poorest developing countries
will be able to undertake programs to improve education,
health, sanitation, housing, nutrition, and population control

- 20 throughout the 1980's.
About 90 percent of IDA lending goes to countries with
annual per capita incomes below $320 (1978 dollars).

None of

IDA'S recipients has a per capita income above $625.

The 54

current IDA borrowers account for approximately 31 percent of the
world's population, but only three percent of global gross
national product.

Average life expectancy in these countries

is about 50 years, the adult literacy rate is 36 percent, and the
labor force is expanding at two percent per year.

Most of these

countries are in South Asia and in Sub-Sahara Africa, two regions
which borrowed 80 percent of IDA resources in FY1979.

IDA'S

lending policy also focuses on development projects which reach
the lowest 40 percent of the income earners within the recipient
borrowing countries.
All IDA credits to date have been for a term of 50 years.
After a 10-year period of grace, one percent of the credit is
repaid annually for ten years, while in the remaining 30 years,
three percent is repaid annually.

There is an annual service

charge of 0.75 percent on the disbursed portion of each
credit to cover administrative costs.

All credits are

repayable in convertible currency.
During 19 years of operations through June 30, 1979,
IDA has made development credits aggregating $16.7 billion
to 74 countries.

There has never been a default on an IDA

loan by any borrower.
IDA VI Replenishment
A major step in assuring that IDA will be adequately

- 21 financed to carry out its current task in the 1980s is tne
agreement which has been reached on a $12 billion replenishment
of IDA for lending over the years FY1981 through FY1983.
The proposed Sixth Replenishment will enable IDA to expand
its lending from an average of $3 billion per year during
IDA V, to $3.5 billion in FY1981, $4.0 billion in FY
1982, and $4.5 billion in FY1983. The $12 billion IDA VI
replenishment represents a real increase of only 4.5 percent
over IDA V, the minimum considered necessary to spur additional
growth in the poorest developing countries. The increase
in IDA VI is far below those of previous IDA replenishments.
It must be noted that IDA VI cannot become effective

r

without full U.S. participation. Unless additional funds become
available, the Association will exhaust its commitment
authority by June 30, 1980, with drastic consequences for the~
poorest, most populous countries of the world.
The IDA VI negotiations were protracted and difficult. On
the one hand, it was widely recognized that the needs of the

t0

poorest developing countries are immense and growing and that
growth among a number of the countries had been stagnating in
recent years. As a result, the World Bank originally proposed
a replenishment of $15 billion. On the other hand, a number
of donors, including the United States, faced severe budgetary
constraints. These opposing views eventually reached a
compromise agreement for a $12 billion replenishment despite the
views of a number of donors that the urgency of the poverty problem
among the poorest developing countries demanded a larger replenishment

- 22 package.

Nevertheless, the agreement reached will permit a

4-5 percent annual real growth in IDA lending over the period,
FY1981-FY1983.
The U.S. share of IDA VI will be 27 percent, sharply lower than
the 31.04 percent U.S. share of IDA V.

The U.S. decline will enable

the level of the U.S. contribution to show no real growth relative
to IDA V —

total lending will rise 4-5 percent while the U.S. share

declines by 4 percent.

The U.S. share will total $3.24 billion, or

an annual U.S. contribution of $1,080 million.
bution must be authorized.

The full U.S. contri-

Otherwise the United States could not

participate in the replenishment and IDA VI, which took more than
a year to achieve, would have to be renegotiated.

In the interim

IDA lending would cease.
It was through improved burdensharing in IDA IV that a modest
real increase in IDA's development resources will be achieved.

The

large reduction in the U.S. share was offset by substantial increases
in the shares of Germany (from 10.9 percent to 12.5 percent) and
especially Japan (from 10.3 percent to 14.7 percent).

For the first

time in an IDA replenishment the combined shares of these two countries
will exceed that of the United States.

Six members mostly developing

countries, including Mexico, Argentina and Brazil, will provide IDA
with resources for the first time.

These burdensharing achievements

were explicit negotiating objectives of the United States under the
mandate of the Congress to reduce significantly the U.S. share in IDA.
Other negotiating accomplishments included agreement that:
Energy lending would expand rapidly during IDA VI,
thus increasing world supplies and helping to ease
upward price pressure.
IDA's major thrust would continue to be in
reaching the poor. The proportion of IDA

- 23 lending to agriculture and rural development would expand through FY1983. Lending
for the urban poor would also increase.
Supervision and evaluation of IDA projects
would be stepped-up using standards and
procedures set out in detail during the
negotiations, thereby enhancing the operating
efficiency of what is universally recognized
as a superbly run institution.
Replenishment of IDA, as agreed in these negotiations, is
essential if the poorest developing countries are to have any
prospect of achieving meaningful growth in the 1980s. IDA VI is
also necessary if we are to move toward alleviating world hunger,
and reducing absolute poverty during the decade. It will make an
important contribution toward meeting worldwide energy needs in
the coming years. Finally, the continued strong presence of IDA
throughout the poorest regions of the Third World will be critical
to the maintenance of political and economic stability, and ultimately
peace. We could pay a heavy price by its absence.
U.S. national interest dictates that we fully support
this replenishment of IDA.
United States Membership in the African Development Bank
Development performance in Africa throughout the 1970s has
been particularly disappointing. For the poorest countries the bulk of the countries in Sub-Saharan Africa - per capita income
growth for the decade averaged 0.2% per year. This means that
throughout the 1970s much of the population of Sub-Saharan Africa
increased their incomes by less than one dollar per year. The
"middle income" countries of Sub-Saharan Africa with an average
annual per capita income of $460 fared little better. Per
•* capita income for these countries increased at 1.4 percent per
Year, the lowest growth rate of any region of the world, including
the poorest. mn«.fc~^opulous countries of Asia.

- 24 Furthermore, prospects are that per capita income growth will
continue to either stagnate or improve imperceptibly throughout
the decade of the 1980s.

The World Bank projects an annual

increase of between 0.7 and 1.9 percent for the poorest African
countries and between 0.7 and 2.2 percent for the "middle income"
countries, depending upon low or high growth assumptions.
Even such per capita income growth notions fail to reflect
the immense development problems facing the developing
countries of Africa in the 1980s.

These countries have the

lowest literacy rates, the lowest life expectancies, the highest
population growth rates, and the largest percentage of people
living in absolute poverty of any major developing region
on the globe. This is somewhat ironic given that Africa is
perhaps the richest of the developing country continents in
natural resources - with large sources of bauxite, oil, potential
hydroelectric power, manganese, copper, precious minerals,
and vast potential for agricultural production.
It is concern over the development prospects for the
countries of Africa, our common cultural heritage with the
Sub-Saharan countries and the long-standing policy of this
Administration to expand and strengthen U.S. ties with Africa
that has resulted in our proposing U.S. membership in the
African Development Bank (AFDB).
The AFDB was established in 1964, to lend at near-market
terms for the economic and social development of its African
members and to promote regional cooperation.

To meet the

- 25 challenge of Africa's poverty, loans are provided primarily
to strengthen the agricultural sector and to finance critically
needed infrastructure. The AFDB's lending activities are financed
through member country paid-in capital subscriptions
and borrowings in international capital markets.
While the United States and other nonregional countries
are members of the AFDB's concessional loan affiliate, the
African Development Fund, membership in the Bank to date has
been restricted to African nations.

The limited capital

resources of its African members have severely restricted
the AFDB's lending program and its access to private capital
markets.
Consequently, in May 1979, the Governors of the AFDB invited
nonregional countries to join their institution. Nonregional
membership will expand and diversify the Bank's financial
base and greatly enhance its access to private capital markets.
As a result, the Bank will be able to increase its lending
program substantially over the next five years and contribute
more effectively to development, of the continent.
Results of the AFDB Negotiations
Active United States participation in the nonregional
membership negotiations and support for U.S. membership in the
AFDB were based on numerous U.S. interests which Bank membership
would serve.

The U.S. has rapidly expanding economic and

political interests in Africa which would be furthered by
supporting the continent's development through the AFDB.

- 26 In addition, United States membership in the African Development
Eank was seen as another means to concentrate increasing development
assi^ .ncc cn the poor.
income" for Africa —
loans —

Most of the cou^^ies which are "middle

and thus receive nonconcessional AFDB

are at a level of development far below that of the

"middle income" countries of other regions. The middle income
countries of Sub-Saharan Africa have an average per capita income
of $460 compared to $990 in other developing regions.
The multilateral character of the AFDB would provide a firm
basis for sharing the cost of Africa's development with other
countries.

In the 1960s, the United States had already entered

into similar multilateral partnerships with the nations of Latin
America and Asia through the Inter-American Development Bank
and the Asian Development Bank.

Participation in the AFDB would

complete this series of partnerships in an established and
recognized pan-African institution.
In addition, by financing the basic infrastructure needs
of African countries (roads, power, water supply, and sewerage)
and agricultural projects, the Bank would complement increasing
U.S. bilateral assistance efforts in Africa which focus more on
meeting basic human needs.

The AFDB would also complement

IDA's activities by directing two-thirds of its lending to African
countries with annual per capita incomes between $320 and $700,
while IDA concentrates its resources on those African nations
with less than $320 per capita.
In conjunction with the entry of nonregional members the
capital of the Bank will be increased from about $1.5 billion

- 27 to $6.3 billion, over a five year period.

Of this increase, the

regional members would provide 57 percent or $2.8 billion. The
21 nonregional countries seeking membership — the countries
of Western Europe, Canada, Japan, Korea, Yugoslavia and Kuwait
as well as the United States — would subscribe $2.1 billion.
Twenty-five percent of the increase, or $1.2 billion, will
be paid-in capital with the remaining seventy-five percent
($3.6 billion), in callable capital.
The proposed U.S. subscription would total $360 million —
5.7 percent of the Bank's total capital and 17 percent of the
nonregional share. The U.S. nonregional share is equivalent to the U.S. share of the current replenishment of the
African Development Fund. This share represents an effort
to balance our interest in increased burden-sharing with other
donor countries with our desire to become more actively involved
in the economic and social development of Africa.
In order to accommodate adequate representation on the
Board of Directors by the nonregional countries, the Board will
be expanded from the current nine to eighteen members. Twelve
Directors will be elected by the regional members and six by
the nonregional members, reflecting the proportional participation
of each group in the capital stock of the AFDB. The size of the
proposed U.S. share of AFDB capital will enable the United States —
alone among non-regional countries — to elect its own Director
to the Bank's Board.
U.S. membership in the AFDB comes at an opportune time.
It is fitting that the United States should join a major panAfrican institution, as the largest nonregional member, during

- 28 a period when our overall relations with the nations of
Africa have experienced dramatic improvement.

The Sub-

Saharan region remains politically volatile and the rapid
expansion of the AFDB will help to stabilize the region by
strengthening the healthier independent African nations, promoting pan-African cooperation, and assisting the region to
evolve peacefully toward full political autonomy.
Finally, recent poor growth performance of the middle-income
African countries and cloudy prospects for the 1980's show the
necessity for a sizeable expansion of the African Bank's lending
program.

These countries have a critical need to diversify their

economies:

low growth projections for the 1980's are due, in

large part, to the high share of slow growing primary products
in their exports which will limit overall export expansion.
Furthermore, many of these countries, including Kenya, Ivory
Coast, Morocco, Nigeria and Gabon, among others, have demonstrated
rapid development potential and the capability of absorbing
capital resources efficiently.
Treatment of U.S. Subscriptions to IBRD and ADB Callable Capital
The Administration is also proposing amendments to those
legislative provisions enacted by the Congress in 1977 which
require that full appropriations be obtained prior to U.S.
subscriptions to the Selective Capital Increase of the IBRD
and the Second Capital Increase of the ADB.

Under the proposed

amendments, subscriptions to IBRD and ADB callable capital
stock could be made after program limitations on the subscriptions
are enacted in the Foreign Assistance Appropriations Act,
rather tjxaj^^etjoal^appropriations.

- 29 The proposed amendments would make consistent the statutory
terras under which the United States can subscribe to IBRD and ADB
callable capital stock with the terms provided in the authorizing
legislation for the proposed replenishment of the IDB, as well
as with the provisions in this bill for initial subscriptions
to the capital stock of the AFDB. The amendments are essential
to allow implementation of the President's FY 1981 Budget
which proposes enactment of program limitations in the FY
1981 Foreign Assistance Appropriations Act for U.S. subscriptions
to callable capital stock in the MDBs, including the IBRD
and ADB.
The change in the treatment of callable capital is being
proposed because the appropriation for the full amount of callable
capital and the resulting scoring of the appropriated amounts as
budget authority distort the true size of the request for the
MDBS.
The budgetary and appropriations treatment of callable
capital is an issue that has been under intense consideration
for over a year both within the Administration and between the
Administration and Congress. Changing the treatment of callable
capital was discussed last year during consideration of H.R.
3829. At that time, the Committee approved language which
authorized U.S. subscriptions to callable capital of the InterAmerican Development Bank without requiring prior appropriations
to fund these subscriptions.

- 30 The "callable capital" concept is one of the most attractive
features of the multilateral development banks and results in
considerable budgetary savings for the U.S. Government. With
callable capital as backing, the MDBs are able to borrow most
of the non-concessional funds they require in international
capital markets. The cost to the U.S. Government of subscriptions to callable capital is solely contingent in nature, since
callable capital can only be used to meet obligations of the
MDBs for funds borrowed or guaranteed by them in the unlikely
event that the banks' other resources are insufficient to
meet those liabilities.
The risk of a "call" is extremely slight. The loan
portfolios of the MDBs are distributed broadly, and major defaults
are unlikely. Even if a number of their largest borrowers were
to default, the MDBs have very considerable financial assets
upon which they could draw. Moreover, prior subscriptions to
individual MDBs totalling $11.5 billion have been funded by the
Congress against potential U.S. liabilities, of which $8.4 billion
relates to U.S. subscriptions to IBRD and ADB callable capital,
the two institutions for which amendments are being proposed.
In the IBRD, all prior U.S. subscriptions to callable capital have
been fully funded. In the ADB, of the $736 million in U.S.
subscriptions to callable capital, all but $126 million has been
appropriated.
It is therefore virtually certain that there will never be
budget outlays resulting from U.S. subscriptions affected by these
amendments. Thus, as in other donor countries, we propose to cease

- 31 treating callable capital subscriptions as though they would
have an outlay impact, when that is not the case.
Conclusion
There is a very real need for continued growth in IDA
lending, and for a strengthening and expansion of the African
Development Bank's activities in the 1980s, as provided
in this bill.

Together, these proposals will act to improve

materially the lives of one and a half billion of the world's
poorest people, residing in the world's poorest countries.
The Sixth Replenishment of IDA is essential if the poorest
countries, in the 1980s, are to increase per capita income
levels meaningfully, reduce the numbers of people living
in absolute poverty, make progress toward alleviating world
hunger, continue to narrow the gap with the middle-income and
developed countries in life expectancy, literacy and infant
mortality, build the basic infrastructure required for
development, and meet their energy needs.
U.S. membership in the AFDB and expansion of that
institution's capital base are required to promote economic
progress in Africa, expand U.S. economic and political
interests there, and solidify recent improvements in U.S.
relations with a large number of African nations.
Continued emphasis on the MDBs to channel an increasing proportion of U.S. development assistance is fully consistent with
our domestic concerns over cost-effectiveness and fiscal
austerity.

The MDBs allow us to reconcile the overwhelming need

- 32 for a viable development assistance program throughout the 1980s
with the pursuit of a tough domestic anti-inflation program,
because they provide enormous fiscal advantages.

These include

burdensharing of development assistance with other countries, the
leveraging of U.S. contributions through borrowings in world
capital markets and purchases of U.S. goods and services which
return substantial economic benefits including increased tax
receipts which nearly offset U.S. budgetary outlays for our
participation in the banks.
I strongly urge your support for U.S. participation in the
Sixth Replenishment of the International Development Association,
for U.S. membership in the African Development Bank, and for
changes in the budgetary and appropriations treatment of U.S.
subscriptions to the World Bank and Asian Development Bank
callable capital.

FOR IMMEDIATE RELEASE
EXPECTED AT 1:30 P.M., EST
MARCH 26, 1980
STATEMENT OF THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON FOREIGN OPERATIONS
AND RELATED PROGRAMS
COMMITTEE ON APPROPRIATIONS
HOUSE OF REPRESENTATIVES
I. INTRODUCTION
I am pleased to be here today to endorse legislation
providing for the maintenance of the U.S. share of International Monetary Fund quotas and the Administration's
Fiscal Year 1981 appropriations request for the multilateral development banks (MDBs). We meet in the context of
a difficult international situation which is characterized
by greater tension — in both the strategic and economic
spheres — than has been the case in recent history.
The tension affecting our strategic interests is most
clearly linked to events in Southwest Asia. The unrest
in Iran and the Soviet aggression in Afghanistan have
heightened awareness throughout the world of the vulnerability of the world's major oil-producing region to both
internal instability and external aggression. These

M-393

- 2 developments clearly threaten our national interests, and
we have set in motion a comprehensive program of action to
reinforce the U.S. political and military position in the
region and elsewhere.
The economic tension stems from the somber global
economic outlook.

Much of the 1970's was characterized by high

inflation, soaring energy costs, low growth rates, and unprecedented imbalances in external payments.

Largely as a result

of various cooperative efforts, the international community
weathered the economic turbulence reasonably well.

Nevertheless,

adverse oil market developments have again radically affected
economic prospects.

Many economic problems are not only

likely to persist for the foreseeable future but may well
intensify.

The re-emergence of a large current account surplus

in the OPEC countries —
1980 —

projected at about $120 billion for

and the inevitable generation of a corresponding deficit

in non-OPEC countries will make serious balance of payments
pressures inevitable for a growing number of countries.
Events in the Middle East have driven home dramatically
the linkages between foreign policy and economics.

Political

and military concerns cannot be addressed in isolation from
the realities of the world economy, and conversely all basic
economic issues have a large political element.

We can be

successful in the pursuit of our broad global objectives

- 3 -

only if we deal with both the strategic and economic crises
which we face, and the inter-relationships between them.
The Administration response to the increased tensions in
both the strategic and economic arenas has relied heavily
on the international institutional framework which has evolved
since World War II.

This framework was designed under U.S.

leadership to provide a system whereby all countries, large
and small, could turn to seek cooperative solutions to their
fundamental concerns.

In the foreign policy area, the

United States has recently turned to NATO, the United Nations,
and the World Court.

Economically, we rely heavily on the

institutions which are the subject of today's hearings.
The International Monetary Fund (IMF) and the multilateral
development banks (MDBs) are the front lines of defense for the
world economy.

During the 1970's, they were pivotal factors which

both facilitated needed economic adjustments and helped sustain
growth:

the IMF through its surveillance and oversight activities

and also through its expanded and liberalized financing facilities,
and the MDBs through their increasingly important role in Third
World development.
The distinct but complementary operations of these institutions serve U.S. interests greatly.

They will be invaluable

assets in facing the growing economic and financial problems
of the new decade.
—

The uncertain world economic environment

which the Soviet Union will seek to exploit —

makes it

- 4 all the more important for the United States to assure that
the IMF and the MDBs can respond effectively to the needs
of their members. In the economic arena, as in the international
political and military spheres, the United States cannot maintain
an effective leadership role — and assure our national security
— unless we are willing to provide resources adequate to
the dangers confronted.
The Administration's requests for both the International
Monetary Fund and the multilateral development banks are designed
to do that. I am submitting for the record a detailed background
paper which deals fully with the Administration's request and
provides specific material on the operations of the Fund and the
banks.
In today's testimony I want to emphasize my conviction
that it is absolutely crucial for the United States to
continue its strong support for these institutions. They
are valuable examples of successful international cooperation.
More importantly they are directly supportive of vital long-term
U.S. foreign policy interests. Now is not the time to undermine
our influence in these institutions or reduce the constructive
role they play in global economic developments. The stakes are
too high.

- 5 II.

THE INTERNATIONAL MONETARY FUND
The purpose of the IMF is the maintenance of a strong

and orderly international monetary system.
aid.

It is not commodity financing.

It is not foreign

It is not like any other

institution in which our country participates.
The IMF has two basic functions, and they are closely
related.

The first is general guidance over the operation

and evolution of the international monetary system.

The

second is provision of temporary financing in support of
adjustment programs by IMF members facing balance of payments
problems.
In its first function, the Fund has been given important
new powers of surveillance over exchange rates and the balance
of payments adjustment process.

The IMF membership has also

established the objective of making the Special Drawing Right
the principal reserve asset in the system, in order to avoid the
instabilities inherent in a system based on a multiplicity of
national currencies.
These changes have paralleled and to a large extent
reflected changes in the position and role of the dollar
in the system.

The original Bretton Woods arrangements

assumed a fixed and central role for the dollar with the
U.S. position essentially passive and the product of other
countries' actions in pursuing their own balance of payments
policies and objectives.

That arrangement ultimately became

- 6 both unsustainable and intolerable in terms of U.S. economic
interests.

The new arrangements have provided much more scope

for balance of payments adjustment by the United States and
recognize the need for greater symmetry in encouraging adjustment by all nations —

those in surplus as well as those in

deficit.
At the same time, the world's reserve system has been
undergoing significant change.

Increases in the relative

economic size and financial capacity of other major countries
have tended to bring some growing use of their currencies in
international transactions and reserves.

On the one hand,

such a development could help to mitigate some of the burdens
on the dollar and U.S. financial markets that arose from its
extremely large international role.

On the other hand, the

process of change can itself be unsettling and disruptive,
and there is a widespread view that increasing reliance on
the SDR —

an internationally created and managed reserve

instrument —

would be preferable to development of a full-

scale multiple currency reserve system.

The IMF over the

past few years has taken a number of important steps to promote
the role of the SDR and is presently considering a potentially
significant further step in its examination of the substitution
account.
The dollar nonetheless remains critically important to
the operation of the international monetary system, and the

- 7 U.S. economy remains a powerful element of that system.
This will continue to be the case, and we recognize and
accept the responsibilities incumbent on the United States
to maintain a sound economic position and a stable dollar.
At the same time, a strong IMF —

able to encourage effective

economic and balance of payments adjustment by all countries
and able to guide the orderly evolution of the resersve
system —

is of direct and immediate importance to our

economy and to our efforts to maintain the integrity and
strength of the dollar.
The IMF's second main function, balance of payments
financing for its members, is closely linked to its broader
role in guiding the overall balance of payments adjustment
process.

The aim is to encourage timely adjustment by individual

countries through policies that disrupt national or international
prosperity as little as possible.
This objective is in the interest of every country and
every IMF member is obligated to support it in concrete, financial
terms.

This is a critically important point to bear in mind.

The IMF is a revolving fund of currencies, provided by every
member.

Every member must allow its currency to be used by

the IMF, and every member in turn has a right to draw on the
IMF's currency pool when in balance of payments need. When a
country's currency is used by the IMF, that country receives
an automatically available claim on the IMF, which it can use
to get needed foreign exchange if it runs into trouble.

- 8 Financing flows back and forth through the IMF depending
on balance of payments developments.
of lenders or borrowers.

There is no set group

Many IMF members, both developed and

developing, have been on both sides of the financing and drawing
ledger, providing their currency at times and drawing other currencies at other times. In fact, while the U.S. quota subscription
has been drawn upon many times over the years, our own drawings
of $7.3 billion on the IMF are the second largest of the entire
membership.

As a net result of all IMF transactions in dollars

over the years —

dollar drawings and repayments by others,

and U.S. drawings —

the IMF's holdings of dollars currently

exceed the U.S. currency subscription to Fund resources.
Consequently, there has been no net use of the U.S. currency
subscription by the Fund over its 35 year history.
Quotas are absolutely central in the IMF.
IMF's permanent resources.
can draw.

They are the

They determine the. amounts countries

They determine the distribution of SDR allocations.

They determine voting power.

Because of these important advantages,

the competition is always for increases in shares —

not for

reduction, as is the case in many other institutions.
IMF quotas are reviewed periodically and have been
increased four times in the IMF's history in response to
growth in the world economy and international trade and finance.
These increases have been needed to keep the Fund's financing
capability in some reasonable relation to demands that may arise.

- 9 The proposal for this quota increase resulted from a
review that began in 1977.

Quotas had fallen to an unrealis-

tically low level, about 4 percent of world trade compared
to 12 percent earlier, during a period of massive expansion
of payments imbalances and international financing needs.
The recognition that an increase was necessary came early
in the review —

even though a long period of negotiation was

required to reach agreement on the precise amount and shares.
The 50 percent increase ultimately agreed in December 1978
—

raising total quotas from about SDR 39 billion to SDR 58

billion —

will barely halt the decline in the relative size of

the IMF over the next five years.
a larger increase.

Many countries pressed hard for

The quota increase proposed for the United

States is 50 percent, amounting to SDR 4,202.5 million or about $5.3
billion at current exchange rates, and will raise our quota from
SDR 8,405 million to SDR 12,607.5.

This maintains the U.S.

quota share intact at 21.5 percent.

Given the continuing large

role of the U.S. economy and the dollar in the international
monetary system, maintenance of an appropriate U.S. share
and influence over decisions on the international monetary
system is particularly important.

An increased U.S. quota

will augment the foreign exchange resources available to us
should we need them for balance of payments purposes.

Without

the proposed increase in the U.S. quota, our veto power over
major IMF decisions affecting the operations of the entire
system could be jeopardized.

- 10 Developments since completion of the quota review and the
IMF Governors' resolution formally proposing the increase have
only strengthened the need.
We are now faced with the consequence of another round
of huge oil price increases and with events in Iran and
Afghanistan that greatly heighten the level of world concern
and tension.

These developments make it absolutely essential

that we have in place the institutional framework for assuring
monetary stability and providing advice and support to countries
as they contend with radically altered economic prospects.
Both financing and economic adjustment are going to be
more difficult in this environment.

The private financial

markets will have to meet the bulk of expanded international
financing needs —

no other source is available —

aid must continue to increase.

and development

But some countries will run

into growing financing difficulties and pressures to bring
their external balances into line with sustainable flows of
financing.
Without adequate financing, the efforts of deficit countries
to adjust would necessitate curtailing economic growth so abruptly
that it would cause severe human hardships and could well jeopardize the political stability of a number of countries.

Countries

could also be forced to adopt restrictive trade policies in an
attempt to ration the foreign exchange available to them, or to
resort to aggressive exchange rate behavior.
pendent world, the adoption of such policies —

In today's interdeparticularly

- 11 because it could lead to retaliatory policies or emulation by other
countries —

could have disastrous worldwide repercussions and

would be reminiscent of the self-defeating economic policies
followed in the 1930's.
The task of assuring a strong and stable international
monetary system in the circumstances of the 1980's will be
formidable.

We cannot predict the amount of IMF financing that

will be needed.

No one can.

But we can foresee very tangible

dangers to the system and to ourselves if the Fund's resources
prove to be insufficient when they are called on.

It is

therefore Critical that IMF operations in this period of stress
be buttressed by prompt Congressional approval of the proposed
quota increase.

In so strengthening the base of the international

monetary system, the United States will not only be contributing
enormously to an international environment conducive to effective
foreign policy but will also be strengthening a source of balance
of payments financing on which it has drawn many times itself.
Before concluding this discussion of the IMF, I would like
to note that the Supplementary Financing Facility, for which
U.S. participation was approved by the Congress late in 1978,
has proved to be an extremely important temporary reinforcement
of IMF resources during a period of growing financial strain.
The Facility began operation in early 1979 on the basis of
financial commitments amounting to about SDR 7.8 billion.

OPEC

is providing over 40 percent the total with Saudi Arabia the
largest single participant.

To date, the facility has been

- 12 used in conjunction with IMF programs totaling $3.0 billion
and is assisting a wide variety of countries of special
interest to the U.S. — including Turkey, Jamaica, Peru, Korea,
the Philippines and Sudan — in dealing with severe payments
difficulties. A number of countries are now discussing with
the IMF programs under the Facility, and total use before the
Facility expires (scheduled for early 1981 or 1982) should
be substantial. This Facility, designed as a temporary
bridge to the quota increase now in process, is a timely and
valuable source of support for the Fund's operations in this
period, and Congressional approval for it has proven to be
extremely wise.
Finally, let me mention the question of the budget and
appropriations treatment of this quota increase. The President's

budget proposes that a program ceiling on the increase be provided
in an appropriations act. We have been consulting closely on
this question with interested committees, and it appears that
considerable interest is developing in an alternative approach
which would involve the following:
Appropriations would be required in the full amount
of the increase, and that sum would be included in
budget authority totals for fiscal year 1981.
Payment of the quota increase would result in budgetary
outlays as cash transfers are actually made to the IMF on
the U.S. quota obligation.

- 13 —

Simultaneously with any cash transfer, an offsetting
budgetary receipt representing an increase in the
U.S. reserve position in the IMF would be recorded.

—

As a consequence of these offsetting transactions,
transfers to and from the IMF under the quota obligations would not result in net outlays or receipts.

—

Net outlays or receipts resulting from exchange rate
fluctuations in the dollar value of the SDR-denominated
U.S. reserve position in the Fund would be reflected
in the Federal budget.

These net changes cannot be

projected and thus would be recorded only in actual
budget results for the prior year.
We are continuing consultations on this matter.

The

point I would stress today is that under either the program
ceiling contained in the President's budget or this alternative
approach, U.S. payments on its quota subscription would not
affect net budget outlays or, therefore, the Federal budget
deficit.
Also under either approach, it is important that the
appropriations action be denominated in SDR although I know
this is a departure from normal practice.
IMF quota —

This is because our

and those of all other countries —

in SDR, the IMF's unit of account.

is denominated

We negotiated hard to main-

tain our quota share and influence over IMF decisions.

There were

many who sought increases in their own shares at our^ expense.

We

- 14 should not allow a cut through inadvertence, which could happen
if the appropriation number were expressed in dollars and the
dollar depreciated in terras of the SDR prior to implementation
of the quota increase. An SDR denomination of the appropriation
figure — SDR 4,202.5 million — will protect us against that danger

- 15 III.

THE MULTILATERAL DEVELOPMENT BANKS
The United States has an important responsibility in

working to establish and maintain an international economic
environment which furthers the process of equitable economic
growth in the developing countries.

This reflects the realities

of economic interdependence, in which the prosperity of each
nation depends upon the well-being of others.

The non-oil

developing countries have, for example, become the largest
single market for U.S. exports.

In addition the countries

of the developing world are an increasingly important factor
in protecting U.S. security and other foreign policy interests.
It is a simple truism to recognize that the prospects for
developing country support on global issues of importance, to
the United States will be enhanced by U.S. cooperation on issues
of keen interest to them. In the case of most of the third world
countries, the fundamental concern is development.
Poverty exists on a large and pervasive scale in developing
countries throughout the world.

There are large gaps between

developed and developing countries in terms of living conditions
and the quality of life; in health and nutrition, literacy and
education, life expectancy, and in the overall physical and
social environment.

The natural growth of population and the

process of industrialization have compounded already immense
problems of unemployment and underemployment and fueled a rapid
increase in the size of urban populations most of which are

- 16 without access to rudimentary health and sanitation services.
In addition to new problems generated by this rapid urban
growth, the primary concerns in low income countries — with
large numbers of rural poor and heavy reliance on agriculture —
remain with the requirements of the rural economy and the need
to improve production of the small farmer.
The multilateral development banks (MDBs) are at the heart
of international efforts to address these development concerns.
They are unique institutions'by which the United States can
work cooperatively with developing countries in support of their
aspirations for economic and social progress.
The banks have proven themselves to be effective instruments
for promoting growth with equity. Last year they made loan
commitments totaling nearly $14 billion which helped to finance
425 projects in 90 developing countries. During the past five
years, IBRD/IDA activities have provided the base for producing
one third of all increased fertilizer production in the developing
countries for the first half of the 1980s, one fifth of the
total investment in rural road networks in developing countries,
and one quarter of total public investment in developing country
irrigation systems. Furthermore, 358 IBRD/IDA agricultural
projects over these past five years have had the rural poor
as their principal beneficiaries, and an estimated 60 million
of the 100 million direct beneficiaries of these projects had
incomes below the absolute poverty levels in their respective
countries.

- 17 The banks now account for between 10 and 15 percent of the
total external resources moving to the developing world. This
proportion is much higher for the poorer countries which do not
have access to the international capital markets.
Important as this transfer of resource function is for the
MDBs, a far more important contribution to development lies in
the way their projects have become the principal catalyst for
growth and contributed to rational sector and macro-economic
policies in developing countries. In this regard, they have
organized increasing amounts of co-financing from private
as well as from other public sources.
The MDBs also have a key role in the transfer of
technology and in providing sound advice on economic policy
associated with their lending activity. This contribution
to "institution building" and "human capital formation"
permeates the process of project implementation and is perhaps
the greatest contribution made by the banks to the long-term
economic prospects of the developing countries.
It is the combination of project financer, financial
catalyst, and institution builder which makes the MDBs such
unique and important agents in the development process.
Throughout the history of bank operations, the United
States has supported and encouraged those adaptations in bank
operations which we believed would further increase the
effectiveness of bank lending. Among the more important results

- 18 of past U.S. initiatives are the shift in the sectoral composition of MDB lending to those sectors — such as agriculture
and rural development — where project benefits, accrue more
directly to the poor, the use of the MDBs' considerable aid
leverage to promote policy changes in the borrowing countries
which favor the poor, and the recently emphasized stepped-up
MDB lending to increase developing country energy supplies.
Reaching the Poor
To more effectively reach the poor, all the MDBs are
engaged in modifying their organizational structures
and their project identification and appraisal procedures.
The World Bank has established a Rural Operations
Review and Support Unit (RORSU) and an Urban Operations
Review and Support Unit (UORSU) to develop poverty impact
methodology and to monitor and evaluate poverty-lending
projects in their beginning, intermediate, and final stages.
Ninety percent of the World Bank's rural development projects
have had provisions for monitoring and evaluation units.
These units assist in the identification of the project's
beneficiaries, insure during the project implementation
stage that the benefits are actually going where intended,
and, finally, evaluate the impact of the project in terms
of what changes were made in the lot of the poor.

- 19 The Inter-American Development Bank has designated a
specific unit within the Bank's organizational structure
to define low income groups and to monitor the bank's
progress in reaching its current replenishment (1979-1982)
goal to provide 50 percent of total lending to low income
groups. In addition, the Asian Development Bank is undertaking a major expansion of its Post Evaluation Unit to
facilitate its greater attention to data collection and
benefit monitoring.
Capital Saving Technology
The United States has also been successful in seeking
policy decisions through which the MDBs will place
increased emphasis on the use of capital saving technologies
in their projects. Since these technologies involve the
productive and often innovative use of small-scale and
labor-intensive processes, techniques, equipment, and tools
which are less complex and costly than those usually employed
by more developed countries, their application generally
will: (1) create employment opportunities, increase productivity,
and raise the incomes of poor people at lower per capita
costs; (2) ensure that the greatest number of people benefit
from development projects; and (3) promote the most efficient
use of scarce resources within developing countries in accordance
with relative factor endowments.

- 20 By strengthening their project appraisal activities
at the preinvestment stage, the MDBs have enhanced their
ability to select projects which incorporate techniques
most appropriate to the circumstances and requirements of
the borrowing countries. This has resulted in increased
utilization of capital saving technology in individual bank
projects. Most recently, capital saving technology —
in addition to continuing its important role in civil works
construction projects — has become an integral element in MDBfinanced renewable energy and urban and rural development
projects.
Economic Benefits of U.S. MDB Membership
As the Administration's chief fiscal officer, I am
committed to budget restraint. At the same time, for the
reasons I have outlined, the United States must maintain
a reasonable program of foreign assistance. The multilateral
development banks reconcile these needs.
First, other members contribute $3 for every $1 contributed by the United States. Second, supported by callable
capital, the banks finance the bulk of their lending program
through borrowings in the private capital markets. The result
is that U.S. budget expenditures are multiplied many times
over in actual MDB lending. For every dollar the United States
has paid into the World Bank over the past 35 years, for example,
the Bank has lent over $50 (at no net cost to the U.S. taxpayer,
because increased federal tax receipts from IBRD activities,

- 21 i.e. procurement, administrative expenses, and net interest,
have been more than double U.S. paid-in contributions to the
bank). Our development assistance gets maximum leverage when
channeled through the MDBs.
In addition, U.S. producers and consulting firms have
received the largest share of MDB-financed procurement contracts.
This has led to a significantly beneficial impact on U.S.
employment and GNP. For every dollar we have paid into the
MDBs for the years 1977 and 1978, the U.S. economy has grown
by an average of $3. Over the life of the institutions, they have
contributed a net surplus of $11 billion to our current account.
The cooperation among countries within the MDBs contributes
significantly to the substance as well as the atmosphere of U.S.
ties with developing countries. U.S. participation in the
banks also reflects a successful partnership with Europe,
Japan, and Canada — with whom we work closely on MDB financing
arrangements. Any significant slackening of traditional
U.S. support for the MDBs would both seriously jeopardize
our relations with the developing world and weaken the confidence
of our allies in U.S. ability to play a cooperative role
across a broad range of international activities. Undermining
such a pillar of the international institutional framework
would also make it much more difficult for us to get the
support of the developing countries for our positions in

- 22 other international bodies on issues of central concern to
our own national interests.
The FY 1981 Appropriations Request and Callable Capital
For FY 1981, the Administration has requested total budget
authority of $1,666 million for U.S. subscriptions and contributions to the MDBs.

In addition, because of the shortfall

in actual appropriations for FY 1980 from what had to be
assumed when the FY 1981 budget was prepared, we will be
submitting budget amendments which will increase this amount
modestly.

The outlay effect of the request will be spread

over time and, thus, will have only a minimal impact on this
year's or next year's budget.
The amount of the FY 1981 request is much lower than that
for last year.

This is principally because we are seeking

a program ceiling rather than budget authority for the callable
portions of our capital subscriptions to the banks.
The "callable capital" concept is one of the most attractive
features of the multilateral development banks and results in
considerable budgetary savings for the U.S. Government.

With

callable capital as backing, the MDBs are able to borrow most
of the non-concessional funds they require in international
capital markets.

The cost to the U.S. Government of subscrip-

tions to callable capital is solely contingent in nature, since
callable capital can only be used to meet obligations of the

- 23 MDBs for funds borrowed or guaranteed by them in the unlikely
event that the banks' other resources are insufficient to meet
those liabilities.
The risk of a "call" is virtually nil.

The loan port-

folios of the MDBs are distributed broadly, and major defaults
are almost inconceivable.

In the more than thirty year history

of the World Bank, there has never been a loan default.
Similarly there has never been a default at the Asian Development
Bank (ADB).

At the Inter-American Development Bank two very

small loans were defaulted in the 1960's, but this was before
institution of the policy that all loans have the recipient
country's government guarantee for loan repayment.

(One

of the IDB loans was fully recovered and the loss on the
other was $1.8 million.)
Even if a number of their largest borrowers were to default,
the MDBs have considerable financial assets upon which they
could draw.

The first line of defense of the MDBs is their

paid-in capital and accumulated reserves, which total over
$6.0 billion at the World Bank, over $1.9 billion at the IDB,
and $1.5 billion at the ADB.

Moreover, prior U.S. subscriptions

to MDB callable totaling $11.5 billion have already been funded
by the Congress against the potential U.S. liabilities
and other donor countries have committed themselves to
much larger amounts. It is therefore virtually certain
that there will hot be budget outlays resulting from the

—

- 24 callable subscriptions proposed in the legislation before
the Committee.
Unlike other donor countries, however, the United States
in its budgetary procedures has heretofore treated callable
capital subscriptions as though they would have an outlay
impact. The issue of changing the appropriations and budgetary
treatment of callable capital has been under serious consideration
for over a year both within the Administration and between
the Administration and Congress. The Administration has concluded
that appropriation for the full amount of callable capital,
and the resulting scoring of the appropriated amounts as budget
authority, distort the true size of the request for the MDBs
and is not consistent with the treatment of other contingent
obligations of the United States Government.
The Administration therefore proposes enactment of program
limitations in the FY 1981 Foreign Assistance Appropriations Act
for U.S. subscriptions to callable capital instead of actual
appropriation and budgetary authority.

We have also submitted

proposed changes in the authorizing legislation which will enable
us to make the subscriptions after program limitations are enacted.
Full Congressional control over callable capital subscriptions is
retained both by the program limitations and because subscriptions
to callable capital and paid-in —
full —

which must be appropriated in

must be made in specified proportions.

The General

Counsel of the Treasury Department issued opinions in 1975

- 25 and 1979 that appropriations are not legally required to back
subscriptions to callable capital unless and until payment is
required of the United States on a call made by an institution.
The Sixth Replenishment for the IDA (IDA VI)
The background paper submitted for the record details the
specifics of the Administration's full appropriations request.
I would like to highlight two of the larger components of the
request: the sixth replenishment for the IDA and our remaining
subscription to the Special Capital Increase of the World Bank
itself.
The United States has important reasons for continuing
to support IDA.

We have a strong tradition of international

leadership in mobilizing the international community to give
special attention and effort to those most in need of help,
and that is IDA's reason for existence.

In this context,

IDA has an excellent track record as an effective instrument
for reaching the poor, providing job opportunities, and
helping to meet basic human needs.
IDA is, in effect, the centerpiece of U.S. North/South
strategy, and the symbol of our commitment to Third World
Development.

It serves to undermine those in the developing

world who favor confrontation with the United States, to
bolster U.S. economic and political interests in North/
South fora, and to improve prospects for multilateral
cooperation on issues of primary importance to the United

- 26 States.

At a time when global economic difficulties have

exposed a large number of the world's poorest countries
to serious threats of political, economic, and social
instability, IDA operations make an invaluable contribution
to our national security and other U.S. foreign policy
objectives.
The extremely somber economic prospects for the low-income
countries underscores the importance of IDA's development
role in the 1980's.

IDA is the world's largest source of

concessional resources.

It is particularly important to

Black Africa, providing valuable assistance to such key
countries as Kenya, Somalia, and Sudan.
are also important IDA borrowers.

Egypt and Pakistan

IDA will be crucial in

determining whether per capita food production in the poorest
countries will increase and whether real progress is made
in alleviating world hunger.
IDA resources —
strategies —

It will also depend largely on

utilized within broad-based development

whether these countries will be able to improve

education, health, sanitation and housing standards and
produce material improvements in the lives of the poor
throughout the 1980*s.
IDA expresses the determination of the more advanced
countries to reduce, albeit slowly, the problems of absolute
poverty in the poorer nations of the world.

The 54 IDA

- 27 borrowers account for approximately 31 percent of the world's
population but only about 3 percent of the global gross
national product.

Approximately 90 percent of IDA's funds

go to countries whose per capita income is below $300 per
year (1977 dollars).

Lending is concentrated on those sectors

which promise to improve most directly the lives of
the very poor.
With few exceptions, IDA recipient countries lack the
physical and human resources to adapt quickly to the problems
confronting the global economy.
rated.

Their terms of trade have deterio-

They have not been able to attract sufficient capital to -

maintain imports and thus sustain even their already low growth
rates.

Since 1974, the real value of their imports has declined.

As a result, most of the poorest countries achieved per capita
growth of only around 1 percent per annum during the 1970's.
Even with a major effort by the poorest countries themselves,
additional concessional resources are required to achieve both
higher rates of growth and greater progress in poverty alleviation.

More than one-third of the total population of the developing

world —

800 million people —

still subsist in conditions of

absolute poverty.
After eighteen months of negotiation, donor countries
reached agreement last December on a $12 billion IDA VI to
permit continued IDA lending for the three year period

- 28 beyond June 1980.

Relative to donors' gross domestic products,

the size of the replenishment remains at roughly the ratio
of IDA V and will thus permit a modest annual growth in IDA
lending.
The United States joined other donors in supporting this
replenishment —

noting, however, that our support was contingent

on the enactment of necessary authorization and appropriations
legislation.

The United States insisted on a sharp reduction

in the U.S. share.

After lengthy negotiation, we achieved a

reduction in our share from 31 percent in IDA V to 27 percent in
IDA VI.

This decline continues the downward trend in the U.S.

share of IDA from its initial level of 42 percent and was accompanied by a substantial increase in the shares of Germany (from
10.9% to 12.5%) and Japan (from 10.3% to 14.65%).

The reduction

of four percentage points in the U.S. share constitutes a very
significant improvement in the distribution of responsibility for
providing funds for IDA, saving us $480 million over the life of
the agreement.
A U.S. share of 27 percent of a $12 billion IDA VI replenishment results in an average annual U.S. contribution of
$1,080 million.

This represents virtually no increase in real

terms in U.S. funding for IDA —

its annual lending rises by a

modest amount, but our share declines by 4 percent.

All real

growth in IDA lending will be financed by other donors.

- 29 World Bank Selective Capital
In 1977, Congress authorized United States participation
in a Selective Capital Increase (SCI) for the IBRD.

The

United States has been behind in its scheduled SCI payments
since the first installment, however, even though 90 percent
of our subscription represents callable capital and thus
no budget outlays.
Reluctance to meet our full SCI subscriptions is ironic
because the Bank's great success is to a large extent due to
the leadership the United States has provided in it since
its creation in 1946.

The shortfall in U.S. funding is particu-

larly inopportune now that the Bank, at U.S. initiative,
has mounted a major program to increase world energy supplies.
The World Bank's energy program will grow to at least 15
percent of total Bank lending within five years.

It will

amount to $7.7 billion over the period as part of projects
totaling about $30 billion for the exploration, production,
and development of oil, gas, and coal, and for the construction
of new hydroelectric facilities.

In operation, these Bank

projects will produce additional primary energy estimated
at 2-2.5 million barrels of oil a day, thus reducing by
that amount potential world demand for OPEC oil.
A U.S. failure to complete our SCI subscription could lead
other members to insist on a significant cutback in the Bank's
annual lending program because doubts would be generated about

- 30 U.S. support for Bank lending throughout the 1980's.

Such

a cut-back in the lending program would be disastrous for
our relations with the developing world, undermining Eank
programs in countries and regions of particular concern to
the United States (e.g. Egypt, Turkey, the Caribbean, and
Central America) and heightening international monetary
problems by increasing demand on private capital markets.
Subscription of the full SCI amount is also essential
to maintain United States voting strength above 20 percent
and thus protect the U.S. veto in the Eank.

The veto ensures

that no changes are made in the Charter which would have a
detrimental impact on U.S. interests.
The African Development Bank
The U.S. subscription to the African Development Bank
(AFDB) is an important new component of the FY 81 appropriations
request.

Subject to receiving authorization for U.S. membership

in the bank, an initial appropriation of $18 million is being
sought.
Membership in the AFDB to date has been restricted to African
nations.

The limited resources of the African members have,

however, severely restricted the Bank's access to the private
capital markets and its lending program.

As a result, in May

1979, the Governors of the Bank agreed, subject to necessary

ratification by member governments, to invite nonregional countriei
to join their institution.

The proposed U.S. subscription would

- 31 represent 5.68 percent of the AFDB's total capital and 17.04 percent
of the non-regional subscription.

The United States will

therefore have its own Executive Director on the Board
of the Bank.
The United States has direct economic, humanitarian, and
political interests in assuring a strong and viable Africa
where poverty is reduced, the pace of economic growth accelerated,
and serious financial problems avoided.

While a wide range of

U.S. political and economic policies already contribute toward
these objectives, our membership in the AFDB, the most prominent
pan-African development institution, would help strengthen our ties
with African nations and meet our growing interests in the region.
Other Regional MDBs
The remainder of the Administration's request is for appropriations for capital subscriptions and contributions for the
Inter-American Eank (IDB), the Asian Development Bank (ADB)
and Fund (ADF), and the African Development Fund (AFDF):
$51.6 million in paid-in capital for the IDB and
$318 million for the Fund for Special Operations,
the IDB's concessional lending window;
$25.2 million in paid-in capital for the ADB
and $111.2 million for the ADF, the Eank's
concessional window; and
$41.7 million for the AFDF, which provides concessional financing for Africa's poorest countries.

- 32 As noted above, most of these numbers will have to be
supplemented by budget amendments to reflect the shortfall
in actual FY 1980 appropriations.
These regional institutions were established to complement
the activities of the World Bank Group and increase the direct
involvement of the recipient countries in the development process.
They now provide a central element in the development strategies
of many friendly nations and are unique positioned to bring
to bear a special regional expertise to local problems.

The

regional MDBs also facilitate the mobilization of additional
resources from the developing countries themselves.
The Decision-Making Process
I recognize that one of the major concerns regarding the
MDBs is whether the United States has adequate influence to
promote its interests effectively through such multilateral
institutions.

The formulation of MDB policy and the extent

of influence exercised by the United States in their decisionmaking involve both a formal and informal process.
The MDBs are like any other bank, or, indeed, any other
corporate entity.

They are controlled by a board —

in their

case, of member country Governors and, through them, their
appointed Executive Directors.

Management is hired by the

national representatives of the member countries to carry
out the day-to-day functions of the banks within the policy
framework set for the banks by the member governments.

The

- 33 management of the banks executes that policy under the general
guidance of the Boards of Executive Directors. Their task
is facilitated greatly by the fact that there exists among
bank members a broad consensus on both the aims and the
most effective usage of development lending.
In practice, influence also is manifest in a variety
of informal ways —

official and unofficial meetings of

national officials at the bilateral and multilateral level;
informal discussions among the Governors at the annual
meetings; informal meetings preceding and during the
periodic replenishment negotiations; and countless exchanges
between bank officials and national representatives at all
stages of the formulation and implementation of the banks'
lending programs.

Subtly, and often imperceptibly, a

country's interests are advanced in such ways, and these
interests become woven into the fabric of MDB activities.
The cardinal test of U.S. influence is of course
not procedure but substance —

whether the institutions

have consistently pursued policies which promote the national
interests of the United States.

In my judgment, they clearly

have done so and continue to do so.

We have only to consider

MDB lending programs in agriculture aimed at increasing
production and providing employment, and now more effectively
concentrated on reaching the poorest rural inhabitants.

The

expansion of developing country energy supplies is a second

- 34 priority that the MDBs are employing -which is also very
much in our interests.

The facts are that the United

States has steadily reduced its share of contributions to
the MDBs while preserving its influence.

The MDBs are,

moreover, a constructive arena for North/South cooperation
on practical problems with the great confluence of interests
among all MDE member countries making these institutions
unique among North/South fora.
Restrictive Amendments
The majority of MDB recipient countries operate economic
systems which are compatible with western oriented market
systems.

Moreover, most MDB lending is directed to countries

which occupy strategic geographic positions, which are important
sources of critical raw materials, or where the United States
has other key political and economic interests.
There has understandably been serious concern however
about loans by the MDBs to Vietnam and perhaps a few other
countries.

Eut this issue is largely moot, given the sus-

pension of MDB lending to Vietnam and Afghanistan.

I must

urge you to oppose inserting restrictions on U.S. MDE contributions into law.
Under their charters, the banks cannot legally accept
contributions which are subject to unilaterally imposed conditions from the United States or any other bank members.

- 35 Acceptance of such restricted contributions would be inconsistent with Charter provisions dealing with (1) the purposes
of the banks, (2) the permitted uses of Bank resources, (3)
the prohibition on political considerations affecting loan
decisions, and (4) callable capital.
The fact that the MDBs could not accept U.S. contributions
with country restrictions has been confirmed by legal opinions
from the MDBs themselves, the Executive Branch, the General
Accounting Office, the Congressional Reserach Service, the
American Ear Association, and an expert group of the District
of Columbia Bar.

In 1975, the Inter-American Development refused

to accept contributions earmarked for a specific purpose by
the United States because such acceptance would have violated
the charter of the Bank.

The funds were accepted only after

the earmarking requirement was repealed in subsequent legislation.
The imposition of restrictions by the United States would
also be unwise from a policy standpoint.

Other countries,

which are increasingly important contributors, could well
emulate the United States and impose restrictions which would
not be acceptable to us.

Clearly to start down this path

would run the very serious risk of damaging the global
development effort by crippling the ability of the MDEs to
execute their operations objectively and efficiently.
The real issue posed by restrictive amendments, therefore,
is continued U.S. participation in the MDBs.

The adoption of

- 36 such amendments would have the effect of taking the United
States out of the banks.

Such an outcome would have a

disastrous impact on U.S. foreign policy and national
interests, and would undermine greatly world confidence
in the United States just at a time when we are striving
to mobilize a cooperative global response to the challenges
emerging in Southwest Asia and other regions of the
world.
IV.

CONCLUSION
In conclusion, Mr. Chairman, I would like to re-emphasize

that the International Monetary Fund and the multilateral
development banks are essential to U.S. interests.
The international monetary system is undergoing a period
of major change and political strain.

The IMF is our central

institution for monetary cooperation and an important source
of strength, stability, and broad direction as we try to contend
with these changes.

We need, of course, to recognize our own

continuing large role in the world economy, and our responsibility for maintaining a strong U.S. economy and a sound
dollar.

But we need also to understand that a strong IMF

role in guiding the system is of direct importance to our own
efforts to strengthen the economy and maintain the integrity
of the dollar.

In strengthening the IMF, the United States

will be making an important contribution to an international
environment which greatly facilitates effective foreign policy.

- 37 We will also be strengthening a source of balance of payments
financing on which we can and do draw ourselves.
U.S. national interests clearly require that we maintain
a reasonable program of foreign assistance. Such a program
directly supports U.S. economic, foreign policy, and national
security objectives which we have in the less developed
countries of the world. It also directly benefits substantial
numbers of the most deprived and disadvantaged people in the
poorest countries. Foreign assistance is a particularly
important and necessary complement to other parts of the
President's budget request which have been designed to enhance
the protection of our national security and foreign policy
interests. We need the support of developing countries on
a broad range of international issues. We cannot expect this
support unless we, in turn, help address their fundamental
concern of development.
The multilateral development banks are the most costeffective instrument for promoting economic growth and political
stability — and hence U.S. interests — in the developing
world. They encourage sound national economic policies and
provide an effective framework for bringing the developing
countries into the open market system we espouse. Moreover,
the banks give us good value for our money with U.S. budgetary
expenditures multiplied many times over in actual bank lending.
They benefit borrowers and lenders, developing and developed

- 38countries alike.

The importance of the banks have been reinforced

by the fact that recent economic difficulties have exposed
a number of developing countries to serious threats of political,
economic, and social instability.
These problems have a direct bearing on our national
security interests.
able.

They are difficult but not unmanage-

Given a reasonable degree of international cooperation,

we have the resources to assure a gradual expansion of the world
economy.

Healthy and growing economies strengthen the

foundation of the international economic system and maintain
an environment conducive to multilateral cooperation on a
broad range of other issues critical to the United States.
The seriousness of the current world situation leaves
little doubt about the importance of a sound international
structure for dealing cooperatively with vital issues.

Now

is clearly the time for renewed.United States leadership in
support of the Fund and the multilateral development banks and
of the mutually beneficial endeavors which they represent.

For

these reasons, the Administration urges Congress to provide the
necessary funding to sustain the operations of these institutions
and to encourage their pivotal role in building a cohesive and
stable world.

FOR IMMEDIATE RELEASE

March 26, 1980

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $4,000 million of 52-week bills to be issued April 1, 1980,
and to mature March 26, 1981, were accepted today. The details are as
follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 5 tenders totaling $4,625,000)
Investment Rate
Price

Discount Rate

(Equivalent Coupon-issue Yield)

High - 85.660 14.380% 16.36%
Low
85.543
14.497%
Average 85.581
14.459%

16.51%
16.46%

Tenders at the low price were allotted 74%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Location

Received

$ 13,635
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

$ 43,635
5 ,427,175

$4,000,005
TOTALS

$6 ,437,605

4,755
61,165
48,730
51,405
338,770
47,990
22,920
20,185
10,160
339,760
20,955

3,572,675
4,755
31,165
25,710
51,405
81,690
26,990
19,920
20,185
10,160
120,760
20,955

Type
Competitive $4,737,940 $2,300,340
Noncompetitive
272,715

272,715

Subtotal, Public $5,010,655 $2,573,055
Federal Reserve 1,098,450 1,098,450
Foreign Official
Institutions
328,500
TOTALS $6,437,605 $4,000,005

328,500

52-WEEK BILL RATES

DATE:

3-26-80

HIGHEST 31IIOB*

LAST MONTH

__£*/**

13.SVJ7.

LOWEST SINCE

TODAY

—

/H'-'TJ^/O

OFFICE OF PUBLIC AFFAIRS

Contact:

Carolyn Johnston
(202) 634-5377

FOR IMMEDIATE RELEASE March 26, 1980
TREASURY SECRETARY MILLER NAMES JOHN W. ELLIS
SAVINGS BONDS CHAIRMAN FOR THE STATE OF WASHINGTON
John W. Ellis, President and Chief Executive
Officer, Puget Sound Power & Light Company, has been
appointed Washington Volunteer State Chairman for
the Savings Bonds Program by Secretary of the Treasury
G. William Miller.
He succeeds William P. Woods, President of the
Board of Directors, Washington Natural Gas.
Mr. Ellis will head a committee of business,
financial, labor, media, and governmental leaders,
who — in cooperation with the U.S. Savings Bonds
Division -- will assist in promoting the sale of
Savings Bonds.
Mr. Ellis joined Puget Sound Power & Light Company
in 1970 as Vice President-Utility Management and
Chief Operating Officer, serving in that capacity
until 1973. From 1973 to 1976 he was Executive Vice

( over )

- 2 -

President and Chief Operating Officer.

He was named

to his present position January 30, 1976.
Mr. Ellis' directorships include the Overlake
Hospital, Pacific Science Center Foundation, National
Conference of Christians and Jews and Edison Electric
Institute. He is Chairman of the Association of
Washington Business Natural Resources Council.
Mr. Ellis has a BS and Juris Doctor degrees
from the University of Washington. Prior to joining
the Puget Sound Power & Light Company he worked with
Perkins, Coie, Stone, Olsen & Williams.

For Release Upon Delivery
Fxpected at 9:30 a.m.
STATEMENT CF
DANIEL I. FALPERIN
DFPUTY ASSISTANT SFCRFTARY (TAX LEGISLATION)
DFPARTMENT OF THE TREASURY
PEFORF THE
HOUSE COMMITTEE ON SMALL BUSINESS
March 27, 1980
Mr. Chairman and Members of the Committee:
I am pleased to appear this morning to present the
views of the Department of the Treasury on the income tax
provisions of P.P. 5607, the "Small Business Innovation
Act of 1979."
First, I would like to assure you that the Treasury
Department shares your concern as to the continued
vitality of small business. All of us, I am sure,
strongly believe that the small business sector is
essential to the maintenance of an innovative and
competitive American business community.
In evaluating income tax provisions intended to aid
small business, the Treasury's perspective may be
summarized as follows: What specific areas require
financial assistance from the Federal government? How
much should we spend? What are the most cost-efficient
means of providing that assistance — that is, for every
dollar of the public's money spent on a tax subsidy, what
amount of public benefit can we expect? How can
expenditures best be directed and monitored? Can the
assistance be provided without damaging the equity and
fairness of our self-assessment tax system? These are the
tax policy questions which I know this Committee wishes to

rV3&(*

-2address, particularly in light of the need for fiscal
responsibility by government and the private sector in
today's difficult economic conditions.
I will now address the eight specific tax proposals
container* in Title II of P.P. 5607.
1. Section 201 of the bill provides for the deferral
of recognition of capital gain on the sale of an equity
interest in a small business concern, provided the sale
proceeds are "rolled over" and reinvested within 18 months
in another small business. This provision applies to all
"small businesses" as defined under the Snail Eusiness
Act.
The Treasury Department opposes any such "rollover"
proposal, for the following reasons:
o Rollover is not an economically efficient
incentive for increasing the flow of new equity
capital to small business. This is because the
probabilities that a new venture will succeed and
that a successful investor will wish to "roll
over" his appreciation into yet another untried
company in order to defer payment of capital gains
tax, are together very low. Thus, the tax subsidy
will not be cost-effective in creating new
capital. Instead, the tax subsidy will go
primarily to those lucky few who have already made
a successful investment and to venture capitalists
who will probably make many of the same
investments without the added tax incentive.
Rollover increases tax inequity by increasing the
already substantial tax advantages of passive
holding of property as compared to earning income
such as wages.
Pollover presents very complex accounting problems
relating to multiple sales and reinvestments in
the same period.
Pollover in fact does not provide deferral, but
instead results in complete exemption of capital
gains. As a result of the expected repeal of the
1976 reform provision for carryover basis at
death, the tax basis of property will be increased

_*a-

at death, and both the original investor and his
heirs will avoid any income tax on appreciation.
Pollover of small business investments is an
undesirable precedent, which may lead to proposals
for rollover of marketable securities and
liberalized rollover of real estate.
o
Finally,
as this Committee is well aware, the
definition of what constitutes a "small business
concern," deserving of special assistance, is a
very difficult and controversial matter. The
difficulty and complexity of providing an
equitable and even-handed approach covering all
industries cannot be easily resolved. Adding this
complexity to our tax Code is surely not the best
way to assist small business taxpayers who are
already burdened by a complex and technical
statute. The problem of defining "small business"
exists, of course, throughout Title II of the
bill.
?. Section 202 of the bill restores the availability
of "qualified stock options" for a "qualified" small
business concern -- i.e., defined in the bill as a small
business whose research and experimental expenditures
exceed 3* of gross income for each of three consecutive
years or 6% for any one year.
Present law permits both large and small employers to
grant only "nonqualified" options, under which the
employee recognizes taxable income, and the employer
receives a corresponding deduction, equal to the bargain
"spread" between the market value of stock purchased and
the employee's purchase price under the option. A
"qualified" option, on the other hand, permits the
employee to defer paying tax until he sells the stock
(assuming he holds it for three years) and then to
recognize capital gain rather than compensation inccme.
The employer is denied any deduction.
The qualified stock option was removed from the Code
in 3 976, primarily because Congress believed it did not
provide key employees any more incentive than other forms
of compensation and, in any case, because it should not be
taxed more favorably than other compensation.

-t-

This rationale is correct, since employers can
provide the benefits of a qualified option in another way
under present law. This can be done by giving an employee
a nonqualified stock option together with a cash stock
appreciation right ("SAP"). For example, suppose an
employee is given a nonqualified option and an SAP at $10
per share, and the employee exercises when the stock price
is $30. Fe pays $10 for stock worth $30 and receives $20
in cash from the company under the SAP. His taxable
income is $20 on the stock plus $20 of cash (total $40),
on which he pays a maximum of $20 tax (50% maximum rate).
Since the cash received for the SAP covers his tax"
liability, the employee is in exactly the same economic
position he would have been in if he had received a
qualified option and no SAP. In fact, he is better off
tax-wise, since his tax basis in the stock is $30 in the
nonqualified case but only $10 in the qualified case.
This added benefit to the employee does cost the
company a small amount. Under the SAP approach, the
company is out of pocket $20, but receives $10 from the
employee on the option and an income tax deduction of $40
($20 on the SAP plus $20 on the option), worth $18.40 (46%
rate), for a net cash gain of $8.40- The qualified option
yields the company a $10 cash gain. This $1.60 difference
on S?0 stock may well be worth it, considering the benefit
to the employee of receiving a $20 increase in tax basis
without tax cost.
Cf course, some businesses may not be able to utilize
fully the deduction for compensation paid when a
nonqualified option is used. This problem exists for
payments of cash wages, as well as SAP's and ncnqualifed
options. We question whether it is good tax policy to use
this rationale to permit the employee to avoid accurate
reflection of income and the proper tax on compensation
received.
Some employers may favor the qualified option if it
permits them to pay compensation without adding an expense
item to the profit and loss statement.
We question
whether such reporting motivations outweigh good tax
policy.
Accordingly, we must express serious reservations as
to the wisdom of re-instituting qualified options.

-5?. Section 203 reduces the capital gains tax on
investments in research-oriented "qualified" small
businesses, held for 5 years, to 1/2 the normal tax. Here
too, as in the case of rollover, the tax subsidy is
inefficient, inequitable, too broad and a bad precedent.
The capital gains maximum rate was reduced to 28% in 1978
and further reduction for one segment of our economy
simply is not warranted at this time, particularly in
light of the need for fiscal restraint.
4. Section 204 extends the period for a capital loss
carryover of a corporate taxpayer from 5 to 10 years for
investment losses from a "qualified" small business
concern. While we are not philosophically opposed to
increased carryover periods, we are troubled by the
increased record-keeping and audit burdens which will be
placed on the IPS and taxpayers. We are also troubled by
the inequity which will be created among taxpayers with
similar economic losses who will be forced to observe
different carryover rules. We question whether the added
complexity and inequity are justified.
5. Section 205 creates a tax-exempt "research and
experimental expenditure reserve." Cash contributions to
such a reserve would be deductible by a small business to
the extent of the amount of its otherwise deductible
research expenditures, under section 174 of the tax Code,
but not to exceed the lesser of $100,000 or 10% of gross
income. Distributions from the reserve would be tax-free
if applied to research and experimental expenditures.
We must
this proposal,
foristhe
o Aoppose
tax-exempt
reserve fund
an following
inefficient way to
reasons:provide tax subsidy assistance, because the
benefits of deferral vary with the taxpayer's
marginal tax rate and with the period of time
during which taxes are deferred. Large businesses
in the top 46% bracket will benefit more than
small businesses in lower brackets. Similarly,
the greatest benefits will accrue to those
companies whose funds remain on deposit the
longest, not those who expend the most on research
and experimentation. In sum, small businesses
which devote the most resources to research will
benefit the least.

-6-

Complex administrative controls would be needed.
For example, extremely complex accounting would be
required to define the appropriate tax treatment
of taxable and nontaxable withdrawals.
Presumably, Congress would wish to provide that a
business which in fact made no, or only insubstantial, research expenditures from a reserve
fund should not be permitted to reap any tax
benefits of deferral. It would not be sufficient
merely to tax non-qualified withdrawals, but
instead additional complex accounting would be
needed to "recapture" the benefits of deferral.
6. Section 206 would increase the permissible number
of subchapter S shareholders from 15 to 100 and would
permit corporations to be shareholders.
The proposed increase in the number of eligible
shareholders is contrary to the original intent of the
subchapter S provisions, which was to permit essentially
family-owned businesses to use the corporate form without
double tax. Only a very tiny percentage of truly small
businesses would ever consider having more than 15
shareholders. A 100 shareholder rule will merely permit
tax shelter abuses by wealthy passive investors (similar
to partnership shelter syndication abuses) and will not
assist the hard-working family which desires to build a
business with its own efforts. Moreover, permitting 100
shareholders will create extremely difficult audit and
enforcement problems for the IRS.
Permitting corporate shareholders also is clearly
counter to the purpose of the subchapter S provisions,
which do not envision such passive investors. Adding
additional tiers of corporations would provide no benefit
to the vast majority of small subchapter S companies and
would be used only by the sophisticated. Finally, the
corporate shareholder rule could be used to avoid the 15
shareholder limit, for example, by using several
subchapter S corporations, each with 15 shareholders, to
own stock in a second-tier subchapter S corporation.
7. Section 207 removes the existing dollar
limitations of $50,000 and $100,000 (joint return) on
losses on section 1244 small business stock for
research-oriented "qualified" small businesses.

-7-

Congress looked at this area in 1978 and the limits
on losses were then doubled. We question whether those
limits should be removed entirely at this time.
8. Section 208 modifies the present treatment of the
costs of acquiring depreciable or depletable property used
in connection with research. Under existing law, such
costs may be currently depreciated or depleted, even
though the new property has not been used to create
income-producing assets. The bill would permit immediate
deduction of the cost of acquiring research equipment and
would permit amortization over 60 months of the cost of
all depreciable or depletable property — regardless of
the rate of amortization otherwise allowed — except that
buildings are given a 120-month period. In sum, the
proposal would provide immediate expensing of research
equipment and accelerated depreciation of other property,
including buildings.
We cannot accept this proposal for the following
reasons:
° Providing selective accelerated depreciation for
only one segment of our economy will not produce
more capital, but will only distort the allocation
of existing capital. It may not produce more
labor and materials for research industries, and
hence more innovation, but only more depreciable
property. In fact, the shift of resources to
depreciable property may decrease expenditures for
labor, expenditure
and hence decrease
labor-intensive
o Direct
incentives
are more efficient
innovation.
than tax subsidies, because they can be more
effectively targeted and are subject to the
rigorous budget process.
These proposals will require new and very
complicated technical rules, and produce many more
disputes between taxpayers and the IRS, concerning
the allocation of capital costs between research,
on the one hand, and testing or quality control,
on the other. Current law eliminates the need for
such complexity and litigation, by permitting a
deduction for all expenses, whether or not for

-8research and experimentation, and denying current
deductions for all capital costs.
We note that this very serious line-drawing question
recurs in several sections of the bill (i.e., sections
202, 20?f 204, 205, ?07 and 208) which require identification of "research and experimental expenditures."
Both the AICPA Accounting Principles Board and its
successor as arbiter of financial accounting standards,
the FASB, have concluded that this identification problem
is so difficult that no financial reporting guidelines
have been devised.
We agree that there is a need to take a fresh look at
simplifying depreciation methods. But with today's
difficult economic conditions, now is not the proper time
for such proposals. Moreover, when changes are
undertaken, comprehensive proposals should be considered,
not just ideas for helping only one segment of our
economy.
In summary, and viewing these eight proposals
together, we believe that if targeted Federal assistance
is needed, then non-tax direct expenditure incentives,
aimed where the need is greatest, are economically more
efficient and subject to tighter control through the
normal budget process. Only then can inequity and
distortion be kept out of the income tax system and the
public's funds be spent fairly and prudently.
Cur priority now is to balance the budget. Once this
has been achieved., we can then proceed to consider tax
relief, where it will be effective, so as to encourage
investment in small business.
Mr. Chairman, that concludes my testimony. I would
be happy to answer questions.

FOR RELEASE AT 10:15 A.M.

March 27, 1980

TREASURY OFFERS $4,000 MILLION OF 80-DAY
CASH MANAGEMENT BILLS

-

In its announcement of March 20, 1980, the Department of
the Treasury stated its intention to auction cash management
bills on April 1, 1980. The auction will be conducted as
scheduled but the issue date will be April 7, 1980, rather than
April 4 as originally announced.
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,000 million of 80-day
Treasury bills to be issued April 7, 1980, representing an
additional amount of bills dated December 27, 1979, maturing
June 26, 1980 (CUSIP No. 912793 4L 7). Additional amounts of
the bills may be issued to Federal Reserve Banks as agents for
foreign and international monetary authorities at the average
price of accepted competitive tenders.
Competitive tenders will be received at all Federal Reserve
Banks and Branches up to 1:30 p.m., Eastern Standard time,
Tuesday, April 1, 1980. Wire and telephone tenders may be
received at the discretion of each Federal Reserve Bank or
Branch. Each tender for the issue must be for a minimum amount
of $1,000,000. Tenders over $1,000,000 must be in multiples of
$1,000,000. The price on tenders offered must be expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Noncompetitive tenders from the public will not be
accepted. Tenders will not be received at the Department of the
Treasury, Washington.
The bills will be issued on a discount basis under
competitive bidding, and at maturity their par amount will
be payable without interest. The bills will be issued entirely
in book-entry form in a minimum denomination of $10,000 and in
any higher $5,000 multiple, on the records of the Federal
Reserve Banks and Branches.
Banking institutions and dealers who make primary markets
in Government securities and report daily to the Federal Reserve
Bank of New York their positions in and borrowings on such
securities may submit tenders for account of customers, if the
names of the customers and the amount for each customer are
furnished. Others are only permitted to submit tenders for
their own account. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect
held at the close of business on the day prior to the
M positions
^Q~7auction. Such positions would include bills acquired throuqh

-2"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. 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, when submitting tenders for
customers, must submit a separate tender for each customer whose
net long position in the bill being offered exceeds $200 million.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized
dealers in investment securities. 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, April 7, 1980.
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

Contact:

Charles Arnold
202/566-2041
March 27, 1980

TREASURY CHANGES DEPOSIT REQUIREMENT FOR
NCN-DSTITUTIONAL PURCHASERS OF TREASURY NOTES & BONDS

Beginning with the 2 year Treasury notes to be auctioned in
the latter part of April 1980, all non-institutional investors
will have to submit full payment of the face amount with tenders
for Treasury notes and bonds. This requirement will put payment
procedures for such issues on the same basis as those currently
in effect for Treasury bill issues.
Under current operating procedures, investors other than those
defined as institutions by the Treasury have had the option of
submitting a 5 percent deposit with note and bond tenders. This
practice multiplies the processing steps and delays the issuance
of the securities since the deposit payment must be processed for
collection, the investor notified of the balance due, and the final
payment, when made, must be Hatched with the tender form and then
processed for collection before the security can be issued.
Institutions are defined as commercial banks and other banking
institutions; primary dealers, Federally-insured savings and loan
associations; States, and their political subdivisions or instrumentalities; public pension and retirement and other public funds;
international organizations in which the United States holds membership; foreign central banks and foreign states; Federal Reserve
Banks; and Government Accounts.
Since 1977 the number of tenders for Treasury notes and bonds
has more than cpadrupled. The current payment procedures have
strained the ability of the Federal Reserve Banks and the Treasury
to handle the increased demand, while assuring timely collection
of full proceeds and issuance of the securities. The increased
demand results from the significant increase in the number of
individuals and other roi-institutional investors rjarticipating in
Treasury auctions.
Since participation by investors other than institutions is
typically on a non-competitive basis, the investor is assured that
the application will be accepted for the full amount requested. A
recent sample of such tenders indicated that nearly 60 percent were
already accompanied by full payment.

y-2&&

- 2 -

Most Treasury bond and note auctions result in a price slightly
below par, and each bidder submitting full payment will usually receive
a small discount check representing the difference between the full par
amount submitted and the actual price of the security, as established
in the auction process. In cases in which the price is established
slightly above par, investors will be billed for the additional amount
due. Under the new requirement, applications submitted by non-institutional purchasers without full payment will be rejected. Personal
checks will continue to be acceptable for Treasury notes and bonds.

o 0 o

FOR IMMEDIATE RELEASE

March 27, 1980

RESULTS OF TREASURY'S 77-DAY BILL AUCTION
Tenders for $5,001 million of 77-day Treasury bills to be issued
on April 3, 1980, and to mature June 19, 1980, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
High - 96.449
Low
- 96.375
Average - 96.395

Discount Rate
16.602%
16.948%
16.855%

Investment Rate
(Equivalent Coupon-Issue Yield)
17.45%
17.83%
17.73%

Tenders at the low price were allotted 90%.

TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location

Received

Accepted

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

$ 84,000,000
12,112,000,000

$ 3,000,000
4,367,000,000

62,000,000
94,000,000
20,000,000
747,000,000
30,000,000
15,000,000
5,000,000

20,000,000
28,500,000

732,000,000

225,700,000

TOTAL

$13,901,000,000

$5,000,600,000

351,900,000

4,500,000

An additional $ 40 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

M-399

FOR RELEASE ON DELIVERY
EXPECTED AT 9:30 A.M., EST
FRIDAY, MARCH 28, 1980
STATEMENT BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY FOR INTERNATIONAL -AFFAIRS
BEFORE THE COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
Authorization Requests
for the Multilateral Development Banks for 1980
Introduction
It is a pleasure, Mr. Chairman, to appear before you today
to present the Administration's proposals for U.S. participation
N

in the replenishment of resources of the International Development

J

Association (IDA), for membership of the United States in the
African Development Bank (AFDB) and subscriptions to that
institution, and for changes in the budgetary and appropriations'
treatment of U.S. subscriptions to the callable capital of the
World Bank (IBRD) and Asian Development Bank (ADB).
The 1979 Legislation
Before discussing this bill, I want to express the Administration's appreciation for the support the Senate provided for
the regional development bank authorization request last year. We
are gravely concerned, however, over the threat of reductions
in that authorization bill. Cuts voted in the House consisting
of $1.2 billion out of $3.4 billion requested for the InterAmerican Development Bank (IDB) and $265 million out of $445

y

million for -the Asian Development Fund (ADF), would have

M-400 _

- 3 If the full amount requested for the IDB were not authorized,
other donors would in all likelihood call for a renegotiation of
the entire replenishment package. Cuts voted by the House would
force out over $2 billion in other donor contributions to the
replenishment, because the IDB Charter does not permit the U.S.
voting power to drop below the current threshold of 34.5 percent.
Moreover, given the extremely favorable results of the IDB Fifth
Replenishment, from U.S. policy and budgetary perspectives, a
renegotiation would not be in the U.S. interest.
As part of the Fifth Replenishment package the United
States achieved:
agreement that 50 percent of total Bank lending from
this replenishment would directly benefit low income
groups
a lowering of the share of paid-in capital from
10 percent to 7-1/2 percent (saving U.S. $69 million)
a reduction in U.S. annual contributions to the Fund
for Special Operations (FSO) from $200 million to
$175 million
a substantial increase in the convertable currency
contributions of the larger Latin American countries
to the FSO
a tripling of the shares of the nonregional members
over their initial shares of capital
It is probable that some, maybe all, of these hard fought
achievements would be lost in any renegotiation, particularly
if the U.S. were to reduce substantially its total contribution.
Any renegotiation would take from six months to a year, or
longer, given the necessity for parlimentary approval in
some member governments. In the meantime, the lending program
would come to a halt.

- 4 A cessation of lending by the IDB and ADF would have
serious adverse repercussions on our national security and
foreign policy.

Countries and regions of growing importance

to U.S. national security, such as Pakistan, Central America,
and the Caribbean, would be especially hard hit as a result.
Obviously such action would also raise fundamental questions
about the reliability of the United States in fulfilling its
international commitments and this country's intentions as
regards its leadership role in Latin America and Asia.
Authorization of the full amounts in the bill is entirely
consistent with current efforts to achieve savings in budgetary
outlays during FY1980 and FY1981.
authorized, $2.5 billion —
request —

Of the $4.0 billion to be

more than 60 percent of the total

is for callable capital subscriptions to the IDB,

which are virtually certain never to result in budgetary outlays.
For the $1.5 billion in the request which eventually
will result in budgetary outlays, appropriations are being
sought over the period FY1980 - FY1983. However, the
budgetary impact of the drawdown of these funds will be
minimal because that drawdown is tied to disbursements
required to implement bank projects which take a minimum
of five years to complete. We estimate that this bill
will result in zero budgetary outlays in FY1980. Budgetary
outlays for the total request of $4.0 billion will be
less than $7.0 million in FY 1981 and less than S33 million
in FY 1982.

Furthermore, as agreed by the Conferees,

procedures for drawdowns will be changed to delay outlays
as lona as possible.

- 5 For all these reasons, it is essential that the full
amounts in last year's authorization request be approved.
The 1980 Legislation
This year's bill focuses on the poorest countries of the
world.

IDA recipients include virtually all countries with

annual per capita incomes below $320, in addition to scattered
countries with slightly higher income levels.

Their total

population is more than one and one-quarter billion.

The

AFDB lends to African countries with incomes averaging $460
per year, and with a total population of 200 million.
There should be no doubt about the overwhelming need among
the prospective IDA and AFDB recipients for these programs to
be undertaken during the 1980s.

Not only do these countries

have the lowest per-capita incomes in the world, they have
also experienced the slowest economic growth in the post-OPEC
era, barely outpacing population growth.

On average, over

one half of their populations is mired in absolute poverty
where hunger, malnutrition, illiteracy, disease, high infantmortality, and low life-expectancy are an inevitable way of life.

The sum effect of these proposals will be to provide addition,
lending of over $15 billion during the first half of the decade
to the world's very poorest.

This means new programs to

increase food production and alleviate hunger, to improve
health, sanitation, housing, nutrition, and education, to
build critical development infrastructure, and to limit burgeoning
population growth.

- 6 Channelling assistance through the multilateral development
banks (MDBs) has the advantage of complying fully with our

domestic requirements for budget stringency. U.S. participation
in the MDBs is the most cost-effective approach available
to providing substantial amounts of development assistance
to the Third World. Enormous fiscal advantages derive from
our MDB participation because the burden for providing
development assistance is shared with other countries, because
the MDBs leverage our paid-in contributions through borrowings

in world private capital markets, and because the MDBS, through

increased purchases of U.S. goods and services, return substant
economic benefits to the U.S. economy — including additional
tax receipts which nearly offset U.S. budgetary outlays.
Furthermore, international burden-sharing through the
banks is becoming more equitably and widely spread. The U.S.

share in nearly every MDB in which the United States is current
participating has declined in recent years, while the lending
levels of these institutions have increased. Other donor
countries now contribute 75 percent of total MDB resources.
Moreover, increasing amounts of our contributions are provided
via callable capital, not a penny of which has ever left
or is likely to ever leave the U.S. Treasury.
Burden-sharing, use of callable capital and the return of
economic benefits to the U.S. economy provide a cost-effective

combination to reconcile the need for a substantial, viable for
assistance program with our current requirement for fiscal

- 7-

austerity. Through that combination, for example, the World Ban

can now lend approximately fifty dollars for each dollar paid-i
by the United States at no net cost to the U.S. taxpayer.
Although the concessional MDB institutions such as IDA,
where there is no callable capital, do not provide this
leverage, major cost-effective advantages — through burdensharing and greater tax receipts via expanding U.S. exports —
accrue to the United States.
The authorization request for the United States' share of
the Sixth Replenishment of IDA (IDA VI) totals $3.24 billion.
The Sixth Replenishment will provide IDA with $12 billion in

new resources for lending on concessional terms, over the perio
FY1931-FY1983, to the world's poorest countries. IDA VI cannot

become effective without the participation of the United States
This bill also would authorize United States membership in

the African Development Bank, which for the first time will ope

its doors to nonregional members, thereby broadening the Bank's

financial base, enhancing its access to private capital markets

and thus contributing more effectively to Africa's development.
In conjunction with nonregional membership, the capital of
the AFDB will be increased from $1.5 billion to $6.3 billion
to support a lending program for a minimum of five years.
The proposed U.S. subscription to the AFDB would total
$359.7 million, or 5.7 percent of the Bank's total capital.
This share is sufficient to allow the United States to elect
an Executive Director to the Bank Board. Twenty-five
percent of the U.S. subscription, or $89.9 million, would be

- 8 -

paid-in. The remainder would take the form of callable capital.
The Multilateral Development Banks in the 1980s
It is the view of the Administration that active, undiminished
U.S. support for the multilateral development banks throughout

the 1980s will be critical to fundamental U.S. economic, politi
and security interests. Those interests include:
national security.
The banks comprise an important part of the international
institutional framework which the United States must rely upon
to enhance world security. The United States was the principal
architect of that framework and recent events in Southwest

Asia have demonstrated its importance to a secure, stable world
environment. U.S. security interests are so far-reaching that

defense of those interests would be unthinkable without relying

upon the multilateral process through the existing institutiona
framework. The responses of the United States to the crises
in Iran and Afghanistan and the results of those collective,
collaborative efforts with much of the developing world,
have demonstrated the importance of the multilateral process

in promoting our foreign policy and national security interests
The United States must therefore give its fullest support
to the process in order to keep it working to support U.S.
interests.
In support of collective security action, the banks are
critical to the maintenance of political stability in each of
the major regions of the world and in key countries. One need

- 9 only scan the list of the largest MDB borrowers — Mexico,
Brazil, India, Korea, Pakistan, Egypt, Indonesia, Colombia,
Yugoslavia, Kenya and Turkey — to grasp the importance
of the MDBs to U.S. security by way of their contributions
to growth and material well-being, and thus to political
stability in key regions of the world.
Finally, there is the growing importance of U.S. dependence
on critical raw materials from the developing world. The United
States is nearly totally dependent upon the developing countries

for supplies of bauxite, tin, manganese, and natural rubber, as we
as certain food-stuffs. The United States and the rest of the
Western World have a vital stake in promoting the stability and
growth of the economies of developing countries which produce
critical new materials and in retaining access to these supplies.
— the health of the international economic system.
In 1979, MDB loan commitments totalled nearly $14 billion.
This represents by far the largest official source of external
capital for the developing world. As such, the MDBs contribute
in a major way to economic growth and stability in recipient
developing countries and in rapidly expanding trade between
the Third World and the developed countries. In providing
dispassionate policy advice, in preparing development projects
based upon objective economic criteria, and in insisting
upon rational economic policies within recipient countries,
the MDBs are an important, respected force for the maintenance
of an efficient, responsive international market economy.
The impact of the banks in this regard, and their resulting

- 10 contribution to the health and resilience of the world economy,
is often overlooked but cannot be overstated.
Another intangible is the inducement of the banks to
cooperative efforts among developed and developing countries,
where relations in the recent past had too often been
characterized by confrontation and hostility, to resolve pressing
international economicrproblems. Cooperation here means developed
and developing countries working together to focus banl^ policies
and resources to respond to critical world needs. Most recently,
this has meant both shifting MDB lending away from traditional
infrastructure to agriculture and rural development to more directly
benefit the poor and.to increase food production, and greatly expanding
lending to increase developing country energy production. ,
The banks also contribute to the effort to recycle funds
from the oil producing countries to the developing world*
Recent oil price increases will add about $14 billion to
the current account deficits, totaling approximately $50 billion,
for the oil-importing developing countries this year.r Though the
basic objective of bank loans is to promote long-run development
in recipient countries, their role in this regard will become
more prominent and vital to the world economy in the 1980s.
direct U.S. economic benefits
The most rapidly growing developing countries which, not
coincidentally, are-among the largest MDB borrowers, are also
the most rapidly growing export markets for the United States.
Generally, non-oil developing countries account for about 25 percent
of U.S. exports, including one-quarter of U.S. manufactured exports

These markets have become more important to U.S. trade than the
entire European Community.
Through the contributions of other MDB donors, which on average
comprise 75 percent of the total, and through the use of callable
capital, MDB loans result in expenditures on U.S. goods and services

well in excess of U.S. contributions to the banks. From the inception
of the banks through 1978, the cumulative current account surplus
for the United States directly attributable to MDB activities
(the purchase of U.S. goods and services, net interest payments
to U.S. MDB bondholders, and MDB administrative expenses in the
United States), has been $11 billion. Cumulative U.S. paid-in
contributions to the banks, by comparison, totaled $7 billion.
! This means that every dollar contributed to the MDBs results in
$1.57 being injected directly into the U.S. economy.
The total economic effects, however, are much larger and more
broadly based than the effects directly observable from our balance
of payments. That $1.57 becomes the income of a U.S. exporter,
bondholder or Bank employee residing in the United States. It
is in turn respent, resulting in multiple increases in U.S. national
income, employment, and Federal Government and local tax receipts.
Treasury analysis shows that over the period 1977-1978
every dollar contributed to the MDBs has resulted in an increase
of U.S. GNP of $3.00. This three for one multiplier effect is
sizable and stems, in part, from the unique characteristics of
the MDBs, i.e., their multilateral character which provides for
other donor country contributions and the availability of callable
capital which permits substantial borrowing on private capital

- 12 markets.

Total U.S. GNP growth directly attributable to

MDB activities averaged $2.7 billion over 1977-1978, raising
net Federal tax receipts by $720 million annually and reducing
the net cost to the Federal budget for our participation
in the banks to $170 million each year.

If increased local

tax receipts were included the net cost to the American
taxpayer probably would be minimal.
Developing Country Prospects for the 1980s
The record for the developing countries over the past
two decades, which spans the work of the MDBs including IDA,
shows clear progress.

During the decade of the 1960s and

up to the 1974 surge in OPEC oil prices, gross domestic product
for the developing countries grew at six percent or more annually,
exceeding growth in the industrialized countries.

Developing

countries' exports of manufactured goods grew at nearly 13
percent annually and their share of total world manufactured
exports grew from six percent to ten percent during that period.
Moreover, each of the quality-of-life standards —

life

expectancy, infant mortality, literacy, access to potable
water and calories as a percent of daily requirements —

showed

significant improvements during the 1960s and 1970s and
a narrowing of the gap with the industrialized countries.
Average per-capita income for the developing countries also
has approximately doubled in real terms since 1960.
Despite recent progress in many areas, the prospects
for the developing countries in the 1980s are not optimistic.
In part this is because the world economy has moved haltingly,

- 13 -

at best, to recover from the oil price increases and subsequent
recession of the mid-1970s, and because the recovery remains far
from complete. Thus, for the 1970s, while the per capita GDP of
the major oil exporting countries grew at 6.6 percent per annum,
per capita income grew at 3.6 percent for the middle income
developing countries and fell off to only 1.7 percent per year
for the poorest developing countries; For the poorest countries
in Africa per capita growth was an imperceptible 0.2 percent.
In large part these meager results reflect a general slow-down
in growth throughout the developing world in the 1974-1979 period.
The causes of that slow-down — surging oil prices, worldwide
inflation, slower growth in the industrialized countries,
and declining real supplies of external capital — cast
long shadows over prospects for the 1980s.
Under the most optimistic assumptions of vigorous economic
growth in developing countries in the 1980s, the World Bank has
projected that their per capita income will increase 4.2 percent
per annum. However, per capita income would increase by only 3.5
percent in the poorest developing countries and under 2 percent
in Sub-Saharan Africa. Under more realistic assumptions, the per

capita income of the developing countries can be expected to increas
at an average rate of between 2.4 percent and 3.3 percent, but at
only one percent or less in the poorest countries of Africa and
under three percent in the low-income Asian countries.
Hence, per capita income in the poorest developing countries,
with a billion and a quarter people, will probably increase only

- 14 $1-$10 per year over the next decade. The World Bank also estimates
that, realistically, we can only expect to reduce the numbers of
people living in absolute poverty —

that bare survival

state conditioned by malnutrition, illiteracy, disease,
high infant-mortality and low life-expectancy —

from 800

million to 600 million by the end of the century.
Equally disturbing is the fact that, while developing
country food production is barely keeping abreast of overall
population growth, in the poorest developing countries population growth at 2.4 percent a year has been outpacing food
production which has grown at less than one percent annually
since 1961. The combined effects of poverty and food insecurity,
neither of which is being ameliorated in the poorest countries,
are interacting to cause a worsening problem of hunger.
Millions of people —more than three-quarters of whom live
on the Indian subcontinent, in Southeast Asia and in Sub-Saharan
Africa —

are afflicted by hunger. Short of a massive effort

at increasing food production in the poorest developing
countries themselves, this condition will remain widespread
throughout the 1980s.
The Role of the Multilateral Development Banks and U.S.
Objectives in the 1980s
These somber prospects have led us to conclude that the
multilateral development banks must play a major world-wide
development role in the 1980's.

The MDBs have the technical

expertise and the experience to use the capital resources which

- 15 we propose to provide them for the coming years.

Moreover,

they do so in an extremely cost-effective manner through
the sharing of the burden of foreign assistance with other
donor countries and long term borrowing on capital markets
with the backing of callable capital, at minimum cost to
the U.S. taxpayer.
The MDBs are the most efficient, effective instruments
to pursue broad-based development strategies in the developing
world.

At the micro-economic level, they follow detailed and

rigorous loan appraisal processes to ensure that every dollar of
development lending yields maximum benefits.

Loan analysis is

performed solely on the basis of relevant economic and technical
considerations.

Their apolitical nature also carries with it a

special trust which enables the staffs of MDBs to influence
strongly borrowing countries in the adoption of sound policies.
The United States also has significant policy leverage
in the banks relative to both the proportion and dollar amounts
of its contributions.

Over the recent past, the United States

has pursued a number of policy objectives in the MDBs to
promote further their objective of helping the developing
countries attain higher standards of material well-being and
to help alleviate the conditions of absolute poverty.

Among

these objectives have been to reach the poor more effectively
and efficiently, to increase food production substantially,
and to increase both the the amounts and proportion of
lending for projects designed to increase world energy supplies.

- 16 In response to U.S. urging, all of the MDBs have redirected
the sectoral composition of their lending better to meet basic
human needs and to ensure that proportionally more project
benefits flow to lower income groups in borrowing countries.
This redirection is reflected in the rapid growth of lending
for agricultural projects.
World Bank Group lending for agriculture, one third of
which is coming from IDA, has increased 145 percent in the
past five years.

For IDA alone, loans for the agricultural

sector have grown by 427 percent.

During that period,

IBRD/IDA activities have provided the base for producing
one third of all increased fertilizer production in the
developing countries for the first half of the 1980s, one
fifth of the total investment in rural road networks in
developing countries, and one quarter of total public investment
in developing country irrigation systems.

Furthermore, 358

IBRD/IDA agricultural projects over these past five years have
had the rural poor as their principal beneficiaries, and an
estimated 60 million of the 100 million direct beneficiaries
of these projects had incomes below the absolute poverty levels
in their respective countries.
Currently, approximately 46 percent and 30 percent of IDA
and IBRD lending, respectively, flows to the agricultural sector,
up from 37 percent and 11 percent respectively in the early 1970s.
Over 75 percent of combined IBRD/IDA agricultural assistance
is now directed towards expanding food production.

As noted in the

forthcoming report of the President's Commission on World Hunger,
H I P world Bank Group is the world's largest single source of

- 17 external funding for developing world agriculture. The World
Bank expects to finance projects which will contribute up to 20
percent of the increase in annual food production in its developing
member countries in the 1980s.

It is due to this effort

that the President's Commission on World Hunger has concluded
that the United States should strongly support the activities
of the MDBs including an increase in U.S. contributions
to the concessional windows of the banks.
An important means to implement the objective of more
effectively and directly reaching the poor has been to encourage
greater utilization of capital saving technologies.

Such

technologies have the advantage of increasing the productivity
and incomes of poor people at low per capita costs by insuring
that the maximum numbers of people benefit from MDB projects
and by promoting the most efficient use of factor availabilities.
The United States has sought greater utilization and development
of capital saving technologies in the MDBs by encouraging
policy decisions in the banks, urging increased MDB staff
focus on the appropriateness of technologies, and constantly
reviewing project loans to assure improved application.
The United States has also been at the forefront in urging
the MDBs to adopt a comprehensive energy program.

In the World

Bank Group in January 1979, the Board of Executive Directors
approved an expansion of the IBRD/IDA energy program.

That

program is now planned to grow to at least 15 percent
of total Bank lending within five years.
Over the 1980-84 period, the World Bank Group will lend
$7.7 billion fo,r the exploration, production, and development

- 18 of oil, gas, and coal, and for the construction of new
hydroelectric facilities.

The loans will be combined with

approximately three times as much private and government
financing.

When the projects are in operation, they will

produce additional primary energy fuel in oil importing
developing countries estimated to equal between 2 and
2.5 million barrels a day of oil.

This should help to

increase world supply and thereby reduce pressures on
world oil prices, as well as deal directly with one of the
most critical bottlenecks to development.
The International Development Association
The International Development Association (IDA) is central
to the attack on poverty in the poorest countries in the
world.

The record of that institution demonstrates clearly

that developed and developing countries can work successfully
to resolve common problems. Rhetoric and confrontation have
no part to play in IDA programs.

IDA recipients have come

to appreciate and depend upon concrete development projects
and programs which are designed to resolve real economic problems
and to produce material improvement in the lives of their
people.
It is important that the United States strongly support
cooperative programs for mutual gain such as IDA.

It serves

to undermine those in the developing world who favor confrontation
with the United States, to preempt proposals in North/South
fora which are adverse to U.S. economic and political interests,
and to enhance prospects for developing country support on
issues=#f primary importance to the United States.

At a time

- 19 when global economic difficulties are exposing nearly all of
the poorer developing countries to serious threats of
political, economic, and social instability, IDA is making
an invaluable contribution to our national security and other
U.S. foreign policy objectives, via the multilateral process.
The rather bleak prospects for the low-income countries
of Africa and Asia give IDA a vital development role to play
in the 1980s. IDA is the largest source of concessional resources
in the world, the largest source of external financing for
the countries of Africa, and the centerpiece of multilateral
efforts to utilize concessional resources effectively within
broad-based development strategies. As such, it will be
the major hope for the poorest developing countries and
their one and one-quarter billion people over the next decade.
IDA will be crucial in determining whether per capita
food production in the poorest LDCs will increase and whether
real progress is made in alleviating world hunger. Nearly
two-thirds of the external financing requirements of the
low income developing countries will need to be met through
disbursements of concessional capital, of which IDA will be
the largest single source, during the last half of the 1980's.
IDA will be key in determining whether the more than 800
million persons mired in absolute poverty can be significantly
reduced by the end of this century. It will depend largely
upon IDA as to whether the poorest developing countries
will be able to undertake programs to improve education,
health, sanitation, housing, nutrition, and population control

- 20 throughout the 1980's.
About 90 percent of IDA lending goes to countries with
annual per capita incomes below $320 (1978 dollars).

None of

IDA's recipients has a per capita income above $625.

The 54

current IDA borrowers account for approximately 31 percent of the
world's population, but only three percent of global gross
national product.

Average life expectancy in these countries

is about 50 years, the adult literacy rate is 36 percent, and the
labor force is expanding at two percent per year.

Most of these

countries are in South Asia and in Sub-Sahara Africa, two regions
which borrowed 80 percent of IDA resources in FY1979.

IDA's

lending policy also focuses on development projects which reach
the lowest 40 percent of the income earners within the recipient
borrowing countries.
All IDA credits to date have been for a term of 50 years.
After a 10-year period of grace, one percent of the credit is
repaid annually for ten years, while in the remaining 30 years,
three percent is repaid annually.

There is an annual service

charge of 0.75 percent on the disbursed portion of each
credit to cover administrative costs.

All credits are

repayable in convertible currency.
During 19 years of operations through June 30, 1979,
IDA has made development credits aggregating $16.7 billion
to 74 countries.

There has never been a default on an IDA

loan by any borrower.
IDA VI Replenishment
A major step in assuring that IDA will be adequately

- 21 financed to carry out its current task in the 1980s is the
agreement which has been reached on a $12 billion replenishment
of IDA for lending over the years FY1981 through FY1983.
The proposed Sixth Replenishment will enable IDA to expand
its lending from an average of $3 billion per year during
IDA V, to $3.5 billion in FY1981, $4.0 billion in FY
1982, and $4.5 billion in FY1983.

The $12 billion IDA VI

replenishment represents a real increase of only 4.5 percent
over IDA V, the minimum considered necessary to spur additional
growth in the poorest developing countries.

The increase

in IDA VI is far below those of previous IDA replenishments.
It must be noted that IDA VI cannot become effective
without full U.S. participation.

Unless additional funds become

available, the Association will exhaust its commitment
authority by June 30, 1980, with drastic consequences for the
poorest, most populous countries of the world.
The IDA VI negotiations were protracted and difficult. On
the one hand, it was widely recognized that the needs of the
poorest developing countries are immense and growing and that
growth among a number of the countries had been stagnating in
recent years.

As a result, the World Bank originally proposed

a replenishment of $15 billion.

On the other hand, a number

of donors, including the United States, faced severe budgetary
constraints.

These opposing views eventually reached a

compromise agreement for a $12 billion replenishment despite the
views of a number of donors that the urgencyof the poverty problem
among the poorest developing countries demanded a larger replenishme

- 22 package. Nevertheless, the agreement reached will permit a
4-5 percent annual real growth in IDA lending over the period,
FYi98l-FY1983.
The U.S. share of IDA VI will be 27 percent, sharply lower than
the 31.04 percent U.S. share of IDA V. The U.S. decline will enable
the level of the U.S. contribution to show no real growth relative
to IDA V — total lending will rise 4-5 percent while the U.S. share
declines by 4 percent. The U.S. share will total $3.24 billion, or
an annual U.S. contribution of $1,080 million. The full U.S. contribution must be authorized. Otherwise the United States could not
participate in the replenishment and IDA VI, which took more than
a year to achieve, would have to be renegotiated. In the interim
IDA lending would cease.
It was through improved burdensharing in IDA IV that a modest
real increase in IDA's development resources will be achieved. The
large reduction in the U.S. share was offset by substantial increases
in the shares of Germany (from 10.9 percent to 12.5 percent) and
especially Japan (from 10.3 percent to 14.7 percent). For the first
time in an IDA replenishment the combined shares of these two countries
will exceed that of the United States. Six members mostly developing
countries, including Mexico, Argentina and Brazil, will provide IDA
with resources for the first time. These burdensharing achievements
were explicit negotiating objectives of the United States under the
mandate of the Congress to reduce significantly the U.S. share in IDA.
Other negotiating accomplishments included agreement that:
Energy lending would expand rapidly during IDA VI,
thus increasing world supplies and helping to ease
upward price pressure.
IDA's major thrust would continue to be in
reaching the poor. The proportion of IDA

- 23 lending to agriculture and rural development would expand through FY1983. Lending
for the urban poor would also increase.
Supervision and evaluation of IDA projects
would be stepped-up using standards and
procedures set out in detail during the
negotiations, thereby enhancing the operating
efficiency of what is universally recognized
as a superbly run institution.
Replenishment of IDA, as agreed in these negotiations, is
essential if the poorest developing countries are to have any
prospect of achieving meaningful growth in the 1980s. IDA VI is

also necessary if we are to move toward alleviating world hunger

and reducing absolute poverty during the decade. It will make an
important contribution toward meeting worldwide energy needs in
the coming years. Finally, the continued strong presence of IDA

throughout the poorest regions of the Third World will be critic

to the maintenance of political and economic stability, and ulti
peace. We could pay a heavy price by its absence.
U.S. national interest dictates that we fully support
this replenishment of IDA.
United States Membership in the African Development Bank
Development performance in Africa throughout the 1970s has
been particularly disappointing. For the poorest countries -

the bulk of the countries in Sub-Saharan Africa - per capita inc
growth for the decade averaged 0.2 percent per year. This means

throughout the 1970s much of the population of Sub-Saharan Afric
increased their incomes by less than one dollar per year. The
"middle income" countries of Sub-Saharan Africa with an average
annual per capita income of $460 fared little better. Per
capita income for these countries increased at 1.4 percent per

year, the lowest growth rate of any region of the world, includi

- 24 Furthermore, prospects are that per capita income growth will
continue to either stagnate or improve imperceptibly throughout
the decade of the 1980s.

The World Bank projects an annual

increase of between 0.7 and 1.9 percent for the poorest African
countries and between 0.7 and 2.2 percent for the "middle income"
countries, depending upon low or high growth assumptions.
Even such per capita income growth notions fail to reflect
the immense development problems facing the developing
countries of Africa in the 1980s.

These countries have the

lowest literacy rates, the lowest life expectancies, the highest
population growth rates, and the largest percentage of people
living in absolute poverty of any major developing region
on the globe. This is somewhat ironic given that Africa is
perhaps the richest of the developing country continents in
natural resources - with large sources of bauxite, oil, potential
hydroelectric power, manganese, copper, precious minerals,
and vast potential for agricultural production.
It is concern over the development prospects for the
countries of Africa, our common cultural heritage with the
Sub-Saharan countries and the long-standing policy of this
Administration to expand and strengthen U.S. ties with Africa
that has resulted in our proposing U.S. membership in the
African Development Bank (AFDB).
The AFDB was established in 1964, to lend at near-market
terms for the economic and social development of its African
members and to promote regional cooperation.

To meet the

- 25 challenge of Africa's poverty, loans are provided primarily
to strengthen the agricultural sector and to finance critically

needed infrastructure. The AFDB's lending activities are finance
through member country paid-in capital subscriptions
and borrowings in international capital markets.
While the United States and other nonregional countries
are members of the AFDB's concessional loan affiliate, the
African Development Fund, membership in the Bank to date has
been restricted to African nations. The limited capital
resources of its African members have severely restricted
the AFDB's lending program and its access to private capital
markets.
Consequently, in May 1979, the Governors of the AFDB invited
nonregional countries to join their institution. Nonregional
membership will expand and diversify the Bank's financial
base and greatly enhance its access to private capital markets.
As a result, the Bank will be able to increase its lending
program substantially over the next five years and contribute
more effectively to development, of the continent.
Results of the AFDB Negotiations
Active United States participation in the nonregional
membership negotiations and support for U.S. membership in the

AFDB were based on numerous U.S. interests which Bank membership

would serve. The United States has rapidly expanding economic an
political interests in Africa which would be furthered by
supporting the continent's development through the AFDB.

- 26 In addition, United States membership in the African Development

Bank was seen as another means to concentrate increasing developmenassistance on the poor.
income" for Africa —
loans —

Most of the countries which are "middle

and thus receive nonconcessional AFDB

are at a level of development far below that of the

"middle income" countries of other regions. The middle income
countries of Sub-Saharan Africa have an average per capita income
of $460 compared to $990 in other developing regions.
The multilateral character of the AFDB would provide a firm
basis for sharing the cost of Africa's development with other
countries.

In the 1960s, the United States had already entered

into similar multilateral partnerships with the nations of Latin
America and Asia through the Inter-American Development Bank
and the Asian Development Bank.

Participation in the AFDB would

complete this series of partnerships in an established and
recognized pan-African institution.
In addition, by financing the basic infrastructure needs
of African countries (roads, power, water supply, and sewerage)
and agricultural projects, the Bank would complement increasing
U.S. bilateral assistance efforts in Africa which focus more on
meeting basic human needs.

The AFDB would also complement

IDA's activities by directing two-thirds of its lending to African
countries with annual per capita incomes between $320 and $700,
while IDA concentrates its resources on those African nations
with less than $320 per capita.
In conjunction with the entry of nonregional members the
capital of the Bank will be increased from about $1.5 billion

- 27 to $6.3 billion, over a five year period.

Of this increase, the

regional members would provide 57 percent or $2.8 billion.
21 nonregional countries seeking membership —

The

the countries

of Western Europe, Canada, Japan, Korea, Yugoslavia and Kuwait
as well as the United States —

would subscribe $2.1 billion.

Twenty-five percent of the increase, or $1.2 billion, will
be paid-in capital with the remaining seventy-five percent
($3.6 billion), in callable capital.
The proposed U.S. subscription would total $360 million

—

5.7 percent of the Bank's total capital and 17 percent of the
nonregional share.

The U.S. nonregional share is equiva-

lent to the U.S. share of the current replenishment of the
African Development Fund.

This share represents an effort

to balance our interest in increased burden-sharing with other
donor countries with our desire to become more actively involved
in the economic and social development of Africa.
In order to accommodate adequate representation on the
Board of Directors by the nonregional countries, the Board will
be expanded from the current nine to eighteen members.

Twelve

Directors will be elected by the regional members and six by
the nonregional members, reflecting the proportional participation
of each group in the capital stock of the AFDB.

The size of the

proposed U.S. share of AFDB capital will enable the United States
to elect an American as Director to the Bank's Board.
U.S. membership in the AFDB comes at an opportune time.
It is fitting that the United States should join a major panAfrican institution, as the largest nonregional member, during

- 28 a period when our overall relations with the nations of
Africa have experienced dramatic improvement.

The Sub-

Saharan region remains politically volatile and the rapid
expansion of the AFDB will help to stabilize the region by
strengthening the healthier independent African nations, promoting pan-African cooperation, and assisting the region to
evolve peacefully toward full political autonomy.
Finally, recent poor growth performance of the middle-income
African countries and cloudy prospects for the 1980's show the
necessity for a sizeable expansion of the African Bank's lending
program.
economies:

These countries have a critical need to diversify their
low growth projections for the 1980's are due, in

large part, to the high share of slow growing primary products
in their exports which will limit overall export expansion.
Furthermore, many of these countries, including Kenya, Ivory
Coast, Morocco, Nigeria and Gabon, among others, have demonstrated
rapid development potential and the capability of absorbing
capital resources efficiently.
Treatment of U.S. Subscriptions to IBRD and ADB Callable Capital
The Administration is also proposing amendments to those
legislative provisions enacted by the Congress in 1977 which
require that full appropriations be obtained prior to U.S.
subscriptions to the Selective Capital Increase of the IBRD
and the Second Capital Increase of the ADB.

Under the proposed

amendments, subscriptions to IBRD and ADB callable capital
stock could be made after program limitations on the subscriptions
are enacted in the Foreign Assistance Appropriations Act,
rather than ocfo^l appropriations.

,

- 29 -

The proposed amendments would make consistent the statutory
terms under which the United States can subscribe to IBRD and ADB
callable capital stock with the terms provided in the authorizing
legislation for the proposed replenishment of the IDB, as well
as with the provisions in this bill for initial subscriptions
to the capital stock of the AFDB.

The amendments are essential

to allow implementation of the President's FY 1981 Budget
which proposes enactment of program limitations in the FY
1981 Foreign Assistance Appropriations Act for U.S. subscriptions
to callable capital stock in the MDBs, including the IBRD
and ADB.
The change in the treatment of callable capital is being
proposed because the appropriation for the full amount of callable
capital and the resulting scoring of the appropriated amounts as
budget authority distort the true size of the request for the
MDBs. .
The budgetary and appropriations treatment of callable
capital is an issue that has been under intense consideration
for over a year both within the Administration and between the
Administration and Congress.

Changing the treatment of callable

capital-was discussed last year during consideration of S. 662.
At that time, the Committee approved language which authorized
U.S. subscriptions to callable capital of the Inter-American
Development Bank without requiring prior appropriations to
fund these subscriptions.

- 30 The "callable capital" concept is one of the most attractive
features of the multilateral development banks and results in
considerable budgetary savings for the U.S. Government.

With

callable capital as backing, the MDBs are able to borrow most
of the non-concessional funds they require in international
capital markets.

The cost to the U.S. Government of subscrip-

tions to callable capital is solely contingent in nature, since
callable capital can only be used to meet obligations of the
MDBs for funds borrowed or guaranteed by them in the unlikely
event that the banks' other resources are insufficient to
meet those liabilities.
The risk of a "call" is extremely slight.

The loan

portfolios of the MDBs are distributed broadly, and major defaults
are unlikely.

Even if a number of their largest borrowers were

to default, the MDBs have very considerable financial assets
upon which they could draw.

Moreover, prior subscriptions to

individual MDBs totalling $11.5 billion have been funded by the
Congress against potential U.S. liabilities, of which $8.4 billion
relates to U.S. subscriptions to IBRD and ADB callable capital,
the two institutions for which amendments are being proposed.
In the IBRD, all prior U.S. subscriptions to callable capital have
been fully funded.

In the ADB, of the $736 million in U.S.

subscriptions to callable capital, all but $126 million has been
appropriated.
It is therefore virtually certain that there will never be
budget outlays resulting from U.S. subscriptions affected by these
amendments.

Thus, as in other donor countries, we propose to ceas

- 31 treating callable capital subscriptions as though they would
have an outlay impact, when that is not the case.
Conclusion
There is a very real need for continued growth in IDA
lending, and for a strengthening and expansion of the African
Development Bank's activities in the 1980s, as provided
in this bill.

Together, these proposals will act to improve

materially the lives of one and a half billion of the world's
poorest people, residing in the world's poorest countries.
The Sixth Replenishment of IDA is essential if the poorest
countries, in the 1980s, are to increase per capita income
levels meaningfully, reduce the numbers of people living
in absolute poverty, make progress toward alleviating world
hunger, continue to narrow the gap with the middle-income and
developed countries in life expectancy, literacy and infant
mortality, build the basic infrastructure required for
development, and meet their energy needs.
U.S. membership in the AFDB and expansion of that
institution's capital base are required to promote economic
progress in Africa, expand U.S. economic and political
interests there, and solidify recent improvements in U.S.
relations with a large number of African nations.
Continued emphasis on the MDBs to channel an increasing proportion of U.S. development assistance is fully consistent with
our domestic concerns over cost-effectiveness and fiscal
austerity.

The MDBs allow us to reconcile the overwhelming need

- 32 for a viable development assistance program throughout the 1980s
with the pursuit of a tough domestic anti-inflation program,
because they provide enormous fiscal advantages.

These include

burdensharing of development assistance with other countries, the
leveraging of U.S. contributions through borrowings in world
capital markets and purchases of U.S. goods and services which
return substantial economic benefits including increased tax
receipts which nearly offset U.S. budgetary outlays for our
participation in the banks.
I strongly urge your support for U.S. participation in the
Sixth Replenishment of the International Development Association,
for U.S. membership in the African Development, Bank, and for
changes in the budgetary and appropriations treatment of U.S.
subscriptions to the World Bank and Asian Development Bank
callable capital.

FOR RELEASE UPON DELIVERY
10:00 a.m. (E.D.T.)
March 31, 1980

STATEMENT OF THE HONORABLE DONALD C. LUBICK
ASSISTANT SECRETARY CF THE TREASURY FOR TAX POLICY
BEFORE THE HOUSE WAYS AND MEANS COMMITTEE
ON H.R. 5076
Mr. Chairman and members of this Committee:
I am pleased to have the opportunity to appear today to
present the views of the Treasury Department on H.R. 5076 which
would clarify the extent to which a state, or political
subdivision, may take account of certain income from sources
outside the United States in imposing its income taxes.
H.R. 5076 has two distinct parts, one dealing with state
unitary apportionment taxation systems as applied to foreign
corporations and the other dealing with state taxation of
dividends received by a corporation from a foreign corporation.
Under unitary apportionment systems as applied in several
states, the income of a corporation doing business in the state
is determined for state income tax purposes by applying a formula
taking account of the. income, payroll, property, and sales of the
corporation subject to tax and all related corporations which are
considered part of a unitary business (i.e. , whose activities are
dependent upon or contribute to the business of the corporation

M-401

-2whose income is being taxed). No distinction is made, in some
states, between U.S. and foreign corporations or between
corporate groups controlled by U.S. corporations and those
controlled by foreign corporations. The first part of H.R. 5076
is aimed at the practice of including foreign corporations in the
unitary apportionment system.
This practice creates three types of problems: (1) It can
result in a determination of income for state tax purposes which
is substantially different than the income which would be
attributed the corporation doing business in the state if an
arm's-length or separate accounting method were used. To the
extent that the relationship between the three apportionment
factors (payroll, property, and sales) and the income to be
apportioned differs markedly in foreign countries from the
relationship which generally applies within the United States,
the measurement of income by this method can result in serious
distortions. In practice, the unitary apportionment system
appears in comparison to an arm's length or separate accounting
method to generate substantially more taxes for the states. (2)
The practice can impose a substantial administrative burden,
involving annual translation of the books of what may be a
substantial number of foreign corporations into U.S. accounting
concepts and U.S. currency. (3) The practice has created, and
continues to create, an irritant in the international relations
of the United States. A number of foreign governments have

-3complained, both officially and informally, that the unitary
system differs from the arm's-length method used by the Federal
Government and generally accepted in international practice.
The first part of the bill, reflected in paragraphs (a)
through (d) of a proposed new section 7518 of the Internal
Revenue Code, would prohibit any state or political subdivision,
in imposing tax on any corporation, from taking into account in
its unitary apportionment formulas the income of any foreign
corporation which is a member of an affiliated group including
the foreign corporation and the corporation subject to tax,
unless the income of "the corporation" (presumably the foreign
corporation)- is subject to Federal income tax.
Although the bill makes no distinction between corporate
groups under United States control and those under foreign
control, such a distinction may be warranted.

Of the three types

of problems created by the international application of unitary
apportionment, only the first—the potential for a distorted
measurement of taxable income—applies fully with respect to U.S.
based multinational groups.

U.S. parent corporations are already

required to submit financial statements to the IRS annually with
respect to their overseas subsidiaries.

Thus, the administrative

burdens which the unitary system creates for foreign based
corporate groups are not present to the same degree for a group
controlled from the United States.

Similarly, the application of

a unitary system to U.S. controlled corporate groups represents

-4much less of an international irritant, if in fact that problem
is present at all.
The Treasury Department supports the goals of paragraph (a)
of the bill, with respect to affiliated groups controlled by
foreign persons.

We do not oppose the provisions of paragraph

(a) of the bill insofar as U.S. controlled corporate groups are
concerned.
There are, however, several technical problems in paragraphs
(a) through (d) of the proposed section 7518 which should be
addressed.

We have pointed these problems out in a written

submission to the Chairman and would, of course, be pleased to
work with the staff in any further drafting that is undertaken.
The second part of H.R. 5076, paragraph (e) of proposed Code
section 7518, would restrict state taxation of foreign-source
dividends received by corporations.

Forty-six states, including

the District of Columbia, levy taxes with respect to corporate
income; these taxes are either denominated as income taxes or as
excise or franchise taxes measured by income.

Only a few states

have special rules for the taxation of foreign source income,
that is, income from sources outside the United States.

In most

cases, the treatment of foreign source dividend income derives
from the general rules for taxing a corporation.

Dividends

received by corporations from foreign sources are generally
excluded from the tax base in about one-third of the states and
generally included in the tax base in about two-thirds of the
states.

-5Taxable dividends, whether of domestic or foreign source,
usually are apportioned by formula if they are considered
business income. Formula apportionment is a method for dividing
the tax base among the states, in which the share to be assigned
to a particular state is determined by reference to one or more
ratios in which economic values or activities within the state
are compared with the taxpayer's total activities or values of
the same kind everywhere. States differ in how they define
business income. Some presumptively consider nearly all income
to be business income. Others define business income less
broadly by following the definition of business income in the
Uniform Division of Income for Tax Purposes Act. It is:
...income arising from transactions and activity in the
regular course of the taxpayer's trade or business
[including]... income from tangible and intangible
property if the acquisition, management and disposition
of the property constitute integral parts of the
taxpayer's regular trade or business operations.
Under this narrower definition of business income, most dividends
would be considered nonbusiness income and would be specifically
allocated.
Allocation means the attribution of an income item to a
specific geographic category; the particular income is thus
attributed wholly to a given state, or is wholly excluded from
taxation by a given state. Taxable dividends that are considered
nonbusiness income, whether domestic or foreign, are usually
specifically allocated to the state of the taxpayer's commercial
domicile.

-6The bill would limit state taxation of dividends received by
corporations from foreign corporations by requiring that a
specified amount of such dividends be excluded from the state tax
base. States would be able to tax only the non-excluded portion.
The excluded amount is specified for two classes of corporations:
(1) domestic corporations (treated as foreign under the bill)
whose dividend distributions are, pursuant to Code section
861(a)(2)(A), foreign source and (2) all foreign corporations.
Domestic corporations described in section 861(a)(2)(A) are
corporations which either have an election in effect under
section 936, or which have less than 20 percent of their gross
income from United States sources.
The excluded portion of the dividend received from domestic
corporations described in section 861(,a) (2) (A) is equal to the
deduction allowed by section 243 of the Code or the amount
excluded in determining the tax liability of an affiliated group
of corporations in accordance with section 1502 of the Code.
Section 243 permits a U.S. corporation to deduct 85 percent of
dividends received from another U.S. corporation or 100 percent
of qualifying dividends received from members of its affiliated
group. Similarly, affiliated corporations, in accordance with
section 1502, are entitled to a 100 percent dividend deduction.
An affiliated group must be connected through at least 80 percent
stock ownership. Thus, the bill would exclude from state tax
bases either 85 percent or 100 percent of dividends received from
corporations with less than 20 percent U.S. source income.

-7With respect to dividends received from foreign corporations,
the excluded portion is equal to the greater of the section 78
"gross-up" or the proportion of the dividend, including the
section 78 gross-up, that the foreign tax rate bears to the
current 46 percent U.S. corporate tax rate.

For purposes of the

Federal foreign tax credit, section 78 of the Code requires that
the underlying foreign corporate taxes on the earnings out of
which foreign dividend income is paid be included in the gross
income of the corporation receiving the dividend.

In effect,

dividends from a foreign corporation are increased by the amount
of foreign taxes deemed paid by the recipient of the dividends
and for which a foreign tax credit is claimed.

By removing this

gross-up from the tax base, the bill would prohibit states from
including in their tax base amounts expended by foreign
subsidiaries for foreign taxes.

This exclusion, however, will

frequently be less than the alternative exclusion in the bill,
the proportion of the total, grossed-up dividend that the foreign
tax rate (both underlying corporate tax and dividend withholding
tax) bears to the current 46 percent U.S. tax rate.

Thus, if

total foreign taxes also are 46 percent, the excluded portion of
the dividend equals 100 percent, and the entire dividend would be
excluded from the state tax base.

If, instead, the foreign taxes

were one-half the current U.S. rate, or 23 percent, one-half the
dividend would be excluded from the state tax base.
The Treasury Department has no objection to requiring that
the section 78 "gross-up" be excluded from the state tax base.
This would merely require a state to allow an exclusion or

-8deduction for foreign taxes. Although many states already allow
this, it seems reasonable to require all states to recognize
foreign taxes as a legitimate business deduction.
The treatment of dividends provided by the remaining
provisions of the bill might, however, unintentionally favor
foreign over United States investment. Many, but not all, states
follow the Federal practice of allowing a general deduction for
intercorporate dividends from essentially domestic corporations.
Consequently, the exclusion for dividends from foreign
corporations provided by this bill might be viewed as placing
foreign dividends on an equal tax footing with domestic
dividends.
But this overlooks the fact that a multistate corporation
pays both Federal and state income taxes on
its operating income. The dividends received deduction is
intended to prevent the taxation of income that already has borne
tax at both the Federal and state levels. Neither Federal nor
state income tax is paid, however, on the income of a foreign
corporation, until that income is repatriated as a dividend to
the domestic corporate shareholder. To the extent this bill
excludes these dividends from the state tax base, it eliminates
the state level of taxation. Accordingly, multinational
operations would be taxed more favorably than multistate
operations.
The Treasury Department believes that it is undesirable to
create a tax preference for foreign investment. While this is

-9Treasury's primary objection to the second portion of the bill,
there are other troublesome aspects.

It is unclear why

individuals and other taxpayers have been excluded.

Similarly,

since the bill applies only to dividends, it would favor
corporate taxpayers receiving dividends over those receiving
rent, interest, and royalty payments.

Finally, the bill is

geared to the current maximum U.S. corporate rate of 46 percent,
rather than the maximum rate in effect at any particular time.
For these reasons, the Treasury opposes the provisions of
H.R. 5076 relating to state taxation of foreign-source dividends.

ies&ws**.-*-*••*»«*

IIIILlllllfcUl U l 1116

HpartmentofthemtASURY
MWGTON, D.C. 20220

;#

o«-

TELEPHONE 566-2041

March 31, 1980

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,403 million of 13-week bills and for $3,400 million of
26-week bills, both to be issued on April 3, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing july 3. 1980
Discount Investment
Price
Rate
Rate 1/
a/
96.223- 14.942%
15.080%
96.188
15.037%
96.199

15.74%
15.90%
15.85%

26-week bills
maturing October 2, 1980
Discount Investment
Price
Rate
Rate 1/
92.568 14.701% 16.10%
92.485
14.865%
16.30%
92.516
14.804%
16.22%

a/ Excepting 2 tenders totaling $4,345,000
Tenders at the low price for the 13-week bills were allotted 32%.
Tenders at the low price for the 26-week bills were allotted 54%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousand s)
Received
Accepted
Received
$
74,030
$
97,960 $
88,760
5,077,870
5,286,870
2,470,815
48,575
38,590
48,540
123,905
54,765
73,905
90,440
57,070
89,400
101,455
67,670
96,445
479,065
147,005
437,440
63,015
38,015
52,585
14,700
14,700
11,840
72,520
72,395
47,780
33,785
33,785
20,365
423,050
157,050
310,585
72,120
74,160
72,120

Accepted
$
64,030
2,570,170
38,590
44,695
53,070
67,670
215,480
27,585
11,840
46,760
20,365
165,585
74,160

TOTALS

$6,907,460

$3,402,935

$6,324,750

$3,400,000

Competitive
Noncompetitive

$4,493,350
1,323,740

$ 988,825 :
1,323,740 :

$4,360,780
830,870

$1,436,030
830,870

Subtotal, Public

$5,817,090 $2,312,565 • $5,191,650 $2,266,900

Federal Reserve
Foreign Official
Institutions

870,000 870,000 : 876,000 t76,000

TOTALS

$6,907,460 $3,402,935 : $6,324,750 $3,400,000

Type

220,370 220,370 : 257,100 257,100

ield.

DATE: March 31, 1980

13-WEEK

TODAY:

/So 37 7° J!LM?a

LAST WEEK:

HIGHEST SINCE:

LOV/EST SINCE:

• yfyr/S'o

2 6-WEEK ";'

U.loofo

For Immediate Release
Expected at 10:00 a.m.
March 31, 1980

STATEMENT BY
THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL FINANCE
OF THE
SENATE COMMITTEE ON BANKING, HOUSING
AND URBAN AFFAIRS

Mr. Chairman:
I appreciate the opportunity to appear before the Subcommittee
to support the proposed increase in the United States quota in the
International Monetary Fund, to comment on proposed legislation designed to limit U.S. authority to purchase and sell gold, and
to support authorization of appropriations for the international
affairs functions of the Treasury Department.
Proposed Increase in U.S. Quota in IMF
We meet this morning at a time of severe strain in the world
economy. Recent developments, both at home and abroad, have made
it necessary for us in the United States to intensify our antiinflation fight. We do so with total resolve, for I am sure that
we all share an awareness that failure to get inflation under
control could have ominous implications not only for our economy
but for our society as a whole.
The challenges we face in dealing with inflation are not, however, challenges that the United States faces alone. Soaring
inflation — and the concomitant problems of slow growth, low productivity, high interest rates and external payments imbalances —
are worldwide phenomena. During the last two reporting months,
wholesale price increases in Japan, Great Britain and and Italy
have all exceeded an annual rate of 25 percent. Even in West Germa
a country with a remarkable postwar record of price stability,
the inflation rate in wholesale prices is now at double-digit'
levels.

- 2 These somber developments come at a time when there is already
considerable tension and strain — of both a political and economic
nature — in the international community. The tension immediately
affecting our political interests is most clearly linked to events
in Southwest Asia. The revolution in Iran and the Soviet aggression in Afghanistan have heightened awareness throughout the world
of the many different sources of threats to peace and prosperity.
Just as our response to developments in Southwest Asia
requires coordination with our allies, so must our response to
the rampant inflation and other economic problems that the world
now faces be coordinated internationally. As a complement to
the domestic measures which the Administration is now taking, we
must take steps to strengthen the international monetary system.
The most effective instrument that we have to promote a strong,
stable international financial structure, the most effective
institution that we have to deal with inflation and our other
serious economic problems on a worldwide basis, is the International Monetary Fund. The legislation before you today is
designed to strengthen that institution and maintain the U.S.
role in it.
As the worldwide inflation problem indicates, the global
economic outlook as we enter the 1980 's is not favorable. The
1970's were already characterized by unprecedented economic
problems. Largely as a result of various cooperative efforts,
the international community weathered the economic turbulence
reasonably well. Nevertheless, adverse oil market developments
have again radically affected economic prospects. The re-emergence of a large current account surplus in the OPEC countries
and the inevitable generation of a corresponding deficit in
the oil-importing world will make serious balance of payments
pressures inevitable for a growing number of countries.
At present, we anticipate an OPEC current account surplus
of about $120 billion in 1980, and current account deficits,
after official transfers, of about $70 and $50 billion for the
OECD and LDC groups respectively. A world environment of slower
growth, high inflation, heightened caution in the private financial sector, and the continuing threat of energy supply disruptions will simultaneously make the financing of external deficits
and the adjustment of national economies to reduce those deficits
more difficult. The private financial sector will again meet the
bulk of expanding international financing needs — there is no
other source for the magnitudes that will be required — and flows
of official development assistance continue to rise. But we have
to anticipate that a number of countries, developed and developing,
will encounter growing financial difficulties and pressures to
adjust and bring their external positions closer into line with
sustainable flows of financing.
Role of the IMF. A strong and effective IMF is critical to
our effort to assure world monetary and financial stability, and

-- 3 to provide the broad cooperative framework we will need to overcome fundamental economic difficulties.
The IMF serves two related functions — general guidance
over the operations and evolution of the monetary system, and
provision of temporary balance of payments financing.
First, its Articles of Agreement constitute the operating
rules of the international monetary system and establish member
countries' obligations to promote a cooperative and stable world
monetary order. The decade of the seventies brought major changes
in the international monetary system and in the IMF's role in
guiding the system's operations.
In the area of balance of payments adjustment, the Bretton
Woods par value exchange rate obligations have been replaced by
obligations on members to pursue policies to achieve the underlying
economic stability that is needed for genuine and sustained
exchange rate stability. The IMF has been given the task of
surveillance over members' compliance with those obligations,
and over the operations of the balance of payments adjustment
process more generally.
In the area of international liquidity the IMF membership
has established the objective of making the Special Drawing Right
(SDR) the principal reserve asset in the international monetary
system.
These changes are not abstractions. They have paralleled
and to a large extent have reflected changes in the position and
role of the dollar in the system. The original Bretton Woods
arrangements assumed a fixed and central role for the dollar, with
the U.S. position essentially passive and the product of other
countries' actions in pursuing their own balance of payments
policies and objectives. That arrangement ultimately became both
unsustainable and intolerable in terms of U.S. economic interests.
The new arrangements have provided much more scope for balance of
payments adjustment by the United States and recognize the need
for greater symmetry in encouraging appropriate adjustments by all
nations — those in surplus as well as those in deficit.
At the same time, the world's reserve system has been undergoing significant change. Increases in the relative economic
size and financial capacity of other major countries have tended
to lead to some growth in the use of their currencies in international transactions and reserves. On the one hand, such a development can help to mitigate some of the burdens on the dollar and
U.S. financial markets that arose from its extremely large international role. On the other hand, the process of change can
itself be unsettling and disruptive, and there is a widespread
view that increasing reliance on the SDR — an internationally
created and managed reserve instrument — would be preferable
to development of a multiple currency reserve system, with its
inherent potential for large and abrupt shifts among alternative
currencies. The IMF over the past few years has taken a number of

- 4 important steps to promote the role of the SDR, and is presently
considering a potentially significant further step in its examination of the proposed Substitution Account.
Your invitation to testify, Mr. Chairman, posed several questions regarding the proposed Substitution Account. As you know, the
Account would be affiliated with the IMF, and would accept deposits
of dollars — and in time, perhaps other currencies — by foreign
central banks in exchange for claims denominated in Special Drawing
Rights. The Account would invest its dollar holdings in interestearning U.S. government securities and would pay interest to the
holders of the SDR-denominated claims.
We believe a properly designed Account could foster greater
stability in the monetary system by providing an internationally
agreed, non-disruptive mechanism for countries to diversify
reserve portfolios and by strengthening the SDR's role in official
reserves. Discussions on the Account are progressing, although a
number of major issues have not yet been resolved. Key among these
issues is the question of assuring financial balance in the Account.
A consensus appears to be emerging on use of a portion of the IMF's
gold holdings as an equitable, internationally shared means of assurin
the Account's financial position.
Some use of IMF gold to help promote the role of the SDR would
be supportive of, not inconsistent with, the continued reduction
of the monetary role of gold. It would serve to promote the role
of the SDR as the world reserve system evolves. It would involve
no transactions in gold among monetary authorites, and no addition
to countries' gold holdings. And it could, if there were an actual
need to use the gold to help balance the Account's financial position,
result in further disposal of monetary gold on the private markets.
We have no firm view on the optimal size of the Account. It
might well begin with relatively modest amounts and grow over time.
Clearly, it should be large enough and attract broad enough participation to be a meaningful step forward in the role of the SDR, but
these criteria are difficult to quantify and will require further
discussion. Participation in the Account would be voluntary, both
because real progress in developing the SDR's role requires genuine
commitment on the part of IMF members and because there will be no
way to compel countries to participate anyway.
Even with a Substitution Account and other steps to enhance
the role of the SDR, the dollar remains critically important to
the operation of the international monetary system, and the U.S.
economy remains a powerful element of that system. This will continue
to be the case, and we recognize and accept the responsibilities
incumbent on the United States to maintain a sound economic position
and stable dollar. The recent comprehensive measures announced
by the President to combat inflation reflect our firm commitment
to these objectives.

- 5 The second basic function of the IMF, closely tied to its role
in guiding the overall operation of the system, is the provision
of temporary financing in support of members' efforts to deal with
their balance of payments difficulties. Its aim is to encourage
timely correction of balance of payments problems in a manner that
is not destructive of national or international prosperity — a n d
thus to promote a smoothly functioning world payments system in
the context of a strong and stable international economy. This
is a central objective of the IMF, and one in which all must
participate as an obligation of IMF membership.
The IMF is essentially a revolving fund of currencies, provided
by every member and available to every member for temporary balance
of payments financing under prescribed criteria. Each country is
obligated to provide its currency to the IMF to finance drawings by
other countries facing balance of payments needs; and each country
in turn has a right to draw upon the IMF in case of balance of
payments need. When a country provides financing to the IMF — that
is, when its currency is drawn from the Fund — it receives an
automatic and unchallengeable right to draw that amount from the IMF
in usable foreign exchange. This is the so-called "reserve position"
in the IMF, an automatically available reserve claim on the IMF which
is normally carried in countries' international monetary reserves.
Financing thus flows back and forth through the IMF depending
on balance of payments patterns and financing requirements at any
given time. There is no fixed class or group of lenders or borrowers, no concept of "donor" or "recipient" in the IMF. It is not
an aid institution. All major industrial countries have drawn upon
the IMF at times. Many members, developed and developing alike,
have been on both sides of the financing and drawing ledger during
the history of their participation. In fact, while the U.S. quota
subscription has been drawn upon many times over the years, our
own drawings on the IMF, totaling some $7.5 billion, are the second
largest of the entire membership.
Proposed Increase in Quotas. Quotas are central in the IMF.
Members' quota subscriptions constitute the IMF's permanent
financial resources. Quotas determine both the amount of IMF
resources a member can draw when in balance of payments need,
and its obligation to provide resources when its balance of
payments is strong. Quotas determine the distribution of SDR
allocations. And, of key importance in all IMF operations, quotas
also determine voting power. Unlike the case in many institutions,
where member countries try to hold down their shares of participation, countries compete to gain the largest possible share of the
total in the IMF because of the financing and votes that a larger
quota share provides.
To ensure that IMF quotas remain realistic and adequate, they
are reviewed periodically in relation to the growth of international
transactions, the size of payments imbalances and financing needs,
and world economic prospects. Such a review was initiated in
on
1977,
December
and led11,
to1978,
a resolution
with the adopted
U.S. Governor
by the concurring,
IMF Board of calling
Governors

- b

for an increase in overall IMF quotas by 50 percent, raising total
quotas from about SDR 39 billion to roughly SDR 58 billion. The
increase proposed for the U.S. quota amounts to SDR 4,202.5 million,
equivalent to about $5.3 billion at current exchange rates.
This increase would raise the U.S. quota by 50 percent, from
SDR 8,405 million (or about $10.6 billion) to SDR 12,607.5 million
(or about $15.9 billion).
The negotiation of quota shares is always difficult, with
pressures on the U.S. to accept a smaller quota share. Given the
key roles of the dollar and the U.S. economy in the international
monetary system, and the IMF's central role in guidingfthe
operations and evolution of the system, it is essential that
the U.S. maintain an appropriate share of quotas and votes, and
thus its influence over basic decisions about the system. In
the end, the pressures for a reduced U.S. share were successfully
resisted during the most recent review, and only a very few selective
changes in quota shares were agreed.
The decision to propose a 50 percent overall increase in
quotas reflected a widely felt view that quotas had, by any measure,
failed to keep pace with potential balance of payments financing
needs. Despite quota increases on four occasions during the IMF's
history, aggregate quotas had fallen to about four percent of annual
world imports, in comparison with 8 to 12 percent during the
1960s and 10 to 14 percent during the 1950s, as illustrated in the
attached chart. The adequacy of quotas had eroded particularly
during the seventies, as the ratio of quotas to members' aggregate
current account deficits fell by two-thirds between 1971-73 and 1978.
In mid-1978 the Fund's usable quota resources — that is, its
holdings of the currencies of members then in strong payments positions — totaled only about SDR 16 billion, or just over one percent
of world imports. In November 1978, before the Supplementary Financing Facility was put in place, the amount of usable quota resources
was effectively halved to around SDR 8 billion, when the U.S. drew
the equivalent of $3 billion and the dollar was ^ ^ e n off the IMF's
"budget" of currencies used in financing current drawings.
These shifts in the IMF's "liquidity" illustrate the difficulties of projecting either the level of usable IMF resources or the
level of future drawings on the Fund. In its 1977 quota review,
the IMF estimated that the level of international transactions
between 1978 and 1983 would increase by 60 percent in SDR terms.
In fact, that 60 percent figure is now much too low as inflation,
oil price increases and other factors have caused a much more
rapid expansion in the value of world trade and financial transactions. And, even if we could accurately predict future levels
of world trade, we would not know the pattern of trade, the
size and distribution of payments imbalances, or the availability
of financing from banks and other sources.
In determining how a large quota increase would be needed, it
was recognized that the IMF's Supplementary Financing Facility would
be phased out after a 2-3 year period. That Facility, for which U.S.

- 7 participation was approved by Congress late in 1978, has proved
to be an extremely important temporary reinforcement of IMF
resources during a period of growing financial strain. The
Facility began operation in early 1979 on the basis of financial
commitments amounting to about SDR 7.8 billion. OPEC countries
are providing over 40 percent of the total with Saudi Arabia the
largest single participant. To date, the Facility has been used
in conjunction with IMF programs totaling about $3 billion and is
assisting a wide variety of countries of special interest to the
U.S. — including Turkey, Peru, Korea, the Philippines and Sudan
— in dealing with severe payments difficulties. A number of countries are now discussing with the IMF programs under the Facility,
and total use before the Facility expires (scheduled for early
1981 or 1982) should be substantial. This Facility, designed as a
temporary bridge to the quota increase now in process, is a timely
and valuable source of support for the Fund's operations in this
period, and Congressional approval for it has proven to be extremely
wise.
It was in the light of these considerations that the IMF
membership concluded that a 50 percent increase in total quotas
would be the minimum required to assure that the IMF remained in
a strong position to meet prospective needs. Even a 50 percent
increase will do little more than temporarily halt the decline
in the relative size of IMF resources into the mid-1980's. In
fact, most developing countries and some OECD members, fearing
growing world economic uncertainties, pressed hard for a much
larger increase.
Events since completion of the quota review have strengthened
the need for the quota increase. Oil market developments
have again substantially altered economic prospects and drawn the
world into a pattern of sizeable payments imbalances. Countries must,
and will begin adjusting to these developments, and that will cause
further changes in world balance of payments patterns and financing
needs that cannot now be foreseen. Moreover, events in Iran and Afghanistan have created a climate of concern and uncertainty that makes
it all the more important to have in place the institutional means for
assuring monetary stability and providing advice and financial support
to countries facing the growing economic and financial problems of the
1980s.
The IMF must have adequate resources — and this means adequate
quotas — to encourage countries to adjust in an appropriate way,
rather than adopt trade and capital restrictions, aggressive exchange
rate policies, or unduly restrictive domestic measures in order
to reduce their financing needs. Such restrictive measures could
have serious implications for the entire world economy and the
prosperity of all nations, as well as for the economy of the
country introducing them. We must not forget the lessons of the
1930*s, when serious economic troubles were worsened by ultimately
self-defeating actions of nations trying individually to preserve

- 8 employment and prosperity during times of economic distress
and international tension.
The impact on the United States today could be especially
harmful. Our economy has grown heavily reliant on world trade
and financial flows. An interdependent world brings real economic
benefits, but also greater vulnerability to outside developments.
Imported goods, from raw materials to high technology products,
are integrated into all phases of U.S. economic activity. Export
markets constitute a major source of demand for U.S. goods and
services. One out of every 7 U.S. manufacturing jobs, and one
out of every 3 acres of U.S. agricultural land produce for export.
One out of every three dollars of U.S. corporate profits comes
from foreign operations (exports and investments). For the U.S.
economy specifically and the world economy generally, prosperity
is dependent on a well-functioning international financial system.
Uncertainties about the magnitude, distribution and financing
of payments imbalances over the next few years make it impossible
to project the precise amount of IMF resources that will be used
during the next five years. But we must assure ourselves that the
IMF's resources are sufficient to enable it to meet its important
responsibilities — sufficient as measured against historic standards
and current trends, and sufficient against a realistic appreciation
of the dangers we face as we enter a new decade.
IMF Conditionality. A specific issued raised in the Chairman's
letter was whether IMF conditionality policies should be changed
so as to prevent any conflict with the fulfillment of the basic
human needs of countries drawing on the Fund. By way of background,
let me first make some general statements about IMF conditionality.
It is one of the most important and least understood aspects of
IMF assistance to its member countries. Conditionality is not
designed to change the basic character of a member's economy,
nor interfere in its socio-political evolution, nor punish the
country for economic mismanagement. The central purpose of conditionality is to provide the IMF a pragmatic means through which to
encourage the adoption of policies which will in fact correct
the economic difficulties that resulted in balance of payments
problems and the need for Fund financing in the first
place.
It is important to remember that, whatever the cause of a
country's balance of payments problem, unless it is temporary
and self-reversing, the country will ultimately have to adjust —
it cannot indefinitely spend reserves and borrow abroad. Without
policy adjustments, the country's creditworthiness and ability to
borrow abroad will inevitably decline, trade credit will evaporate,
investment will generally fall, and growth will decline or become
negative. This in itself is one form of adjustment, but it is a
harsh and inefficient adjustment. What may look like the easy
way out is in fact very costly, and can make the return to
sound economic growth an extremely difficult and slow process.

- 9 Most governments will make policy adjustments before the
situation deteriorates to that extreme, but sometimes a country
will not approach the Fund until the situation is desperate. This
is a key point to remember. The Fund does not cause the lack of
foreign exchange that interrupts vitally needed imports. Indeed
the IMF, often alone, tries to help by providing resources
to maintain the economy and balance of payments temporarily, and by
providing policy advice to restore economic stability and sustained
growth.
However, in return for this financing, the world community
expects the government to foreswear measures disruptive to the world
economy. To assure repayment, and the most beneficial results for
the country, the Fund requires that the member undertake appropriate
measures to solve its balance of payments problems. The adjustments
that have to be made often involve short-term retrenchment — with
or without the IMF. With the IMF, a short-term period of belttightening is more likely to be orderly and effective. If a country
has gotten into very serious problems, and is spending far beyond
what it can produce or finance on a sustainable basis, there will
have to be cutbacks. These may well affect virtually all segments
of the population. This is painful. But there is also pain and
harm — perhaps much greater harm to the poorest — in letting a
pervasive and destructive inflation and/or an external imbalance
go unchecked, reducing real national incomes; permanently distorting
consumption and investment patterns and eroding the basic productive
capability of the economy. If a Fund program can help establish
a functioning base for growth and development, then the longer term
benefits, social and economic, can far outweigh any shorter term costs.
Requests for IMF financing are initiated by the member country,
and the precise type of financing and its terms are settled through
discussions between the member government's representatives and the
IMF. Each member proposes its own stabilization program in support
of its financing request. The Fund does not insist on a particular
method of adjustment and recognizes that economic structure and
circumstances differ among members.
The reasons why the Fund takes this approach are practical and
philosophical. It is appropriate for the IMF to say how much
adjustment a country should undertake as a condition for obtaining
financing, and establish overall targets for monetary growth, the
budget deficit and other macroeconomic variables. But the IMF should
not tell a country whether it must cut military expenditures or social
programs, or that it must tax this and subsidize that, or cut employment
here and expand it there. These detailed implementing decisions
must be made by the government concerned. It is highly unlikely
that the United States would ever accept such interference
with U.S. sovereignty. Neither will other countries.
There are various policy combinations which would permit
a country to meet the targets negotiated with the IMF, so the member
presumably chooses one that most conforms to its particular cir-

- 10 cumstances and objectives. Of course the IMF may well have views
of what are efficient and equitable policy mixes, and can discuss
these with a prospective borrower if appropriate. There are cases
where the Fund staff has advised against certain actions because
of their likely social costs. The U.S. has, on a number of occasions,
urged the Fund to suggest programs to governments that are conducive
to development and social goals, while meeting overall economic
requirements. But in the end the individual government is responsible
for its own stabilization program — both in design and implementation
— even though the IMF is often made the scapegoat for unpopular choices
However, within these very real constraints, the IMF is
making a continuing effort to improve and better adapt itself to
the needs of its members. First, reflecting the generally increased
scale and persistence of balance of payments problems, the IMF
now provides more financing for longer periods for nations with
adjustment problems. Quota limits on drawings have been expanded
and, for drawings with higher conditionality in the upper credit
tranches, two and three year programs have become much more the
accepted rule, in contrast to the one-year program that was
traditional in earlier days.
In addition, a variety of IMF facilities are now available
to members, ranging from unconditional reserve tranche drawings
through facilities such as the Compensatory Financing Facility
and the first credit tranche (both with relatively "light" conditionality requirements) to the upper credit tranche and Extended
Fund Facility drawings. Of total drawings amounting to nearly
$30 billion since 1973, roughly two-thirds has been drawn from
unconditional or relatively unconditional facilities. Some
countries have, of course, gotten into more serious difficulty
and have had to turn to the more conditional facilities — which
have themselves been expanded and adapted — and these are the
cases one hears about most often. But it is important to bear
in mind the whole spectrum of IMF financing facilities when
assessing its role in balance of payments financing and adjustment.
Second, the IMF in 1979 undertook a major review of
conditionality and established a new set of guidelines. To an extent
the new guidelines formalize certain protections for borrowing countries
that had already existed in practice, but they also add important
new features. For example, they now emphasize the desirability of
encouraging countries to adopt corrective measures at an early
stage — before very severe adjustment policies may be needed
-- and recognize the need for more gradual and more flexible
adjustment over longer periods. They also recognize that adjustment
measures frequently encompass sensitive areas of national policy,
and provide that in helping to devise adjustment programs the Fund
will pay due regard to the domestic social and political objectives,
the economic priorities and the circumstances of members, including
the causes of their balance of payments problems. They provide that
"performance criteria" will normally be confined to macro-economic
variables
(other thanof those
performance
criteria
to of
implement
exchange
specific provisions
restrictions).
the
The
Articles,
new guidelines
such
asshould
the needed
avoidance
help dispel

-lithe idea of conditionality as a weapon for imposing unnecessary
hardships — and make clear that for countries with severe imbalances,
adequate and timely adjustment, which is the objective of IMF conditionality, is in the best interests of both the individual country
involved and the world community.
The third change in the IMF's approach to adjustment, and a
particularly important one, is one that I stressed earlier -- its
new role in surveillance. Surveillance over every IMF member's efforts
to foster orderly underlying economic and financial conditions
provides valuable IMF leverage for promoting sound adjustment
policies by all countries, surplus or deficit, whether or not
they draw on the IMF's resources. It is designed to introduce
a badly needed symmetry to the international monetary system,
more effectively encouraging adjustment efforts by surplus countries,
and not leaving the entire burden of adjustment on deficit countries.
Development of IMF surveillance can be helpful in various ways.
To the extent it encourages earlier adjustment action, it helps
to avoid the more severe corrective measures which become necessary
as a country's situation worsens; and to the extent it encourages
adjustment action by all countries with large imbalances, it
reduces the relative emphasis on those deficit countries drawing
upon the IMF.
Thus the IMF is making a continuing effort to adapt to the
changing needs and circumstances of its members. This process
should, and will, continue. But as we move to adapt IMF policies
and practices, we need to keep the IMF's basic purposes clearly
in view, and ensure that its programs do, in fact, effectively
promote adjustment by its members. This is in the individual
borrower's own interests and of the international community as well.
IMF and the Budget. Before concluding this discussion of the
IMF, let me mention the question of the budget and appropriations
treatment of this quota increase. The President's budget submitted
in January proposed that a program ceiling on the increase be provided in an appropriations act. We have been consulting extensively
on this question with interested committees, and it appears that
considerable interest is developing in an alternative approach
which would involve the following:
— Appropriations would be required in the full amount
of the increase, and that sum would be included in budget
authority totals for fiscal year 1981.
— Payment of the quota increase would result in budgetary
outlays as cash transfers are actually made to the IMF
on the U.S. quota obligation.
— Simultaneously with any cash transfer, an offsetting budgetary
receipt, representing an increase in the U.S. reserve
position in the IMF, would be recorded.
— As a consequence of these offsetting transactions, transfers
to and from thp IMF under the quota obligations, therefore,

- 12 would not result in net outlays or receipts.
— Net outlays or receipts resulting from exchange rate
fluctuations in the dollar value of the SDR-denominated
U.S. reserve position in the Fund would be reflected
in the Federal budget. These net changes cannot be projected and thus would be recorded only in actual budget
results for the prior year.
We are continuing our consultations on this matter. The point
I would stress today is that under either the program ceiling in the
President's budget or this alternative approach, U.S. payments on its
quota subscription would not affect net budget outlays or the Federal
deficit.
\
\

Conclusion on IMF. In concluding my remarks on the IMF,
I would like to reemphasize my strong conviction that the IMF
is essential to U.S. interests. The proposed quota increase is
important for a number of reasons.
From the point of view of the international monetary system
as a whole, it will help assure that the IMF can continue to meet
its responsibilities for international monetary stability in a period
of strain, danger arid financial uncertainty. From the point of
view of individual countries, it will provide additional resources
to encourage constructive balance of payments adjustment policies
— and I note that IMF resources have been of major direct benefit
to the United States when we faced severe balance of payments
pressures. From the point of view of the United States, it maintains
our financial rights and our voting share in the institution during
a time when far-reaching changes in the monetary system — for example,
a substitution account — are under consideration.
The record of the IMF is a good one, in adapting to changing
world circumstances and responding to the needs of its members.
The proposed quota increase will provide the Fund with resources
needed for its valuable work, and I urge the Committee to approve
this legislation.
Proposed Legislation to Limit U.S. Authority to Purchase and
Sell Gold
Mr. Chairman, /you have requested my views on S. 1963, a bill
that would require prior Congressional authorization for any
purchase or sale of gold by the Treasury unless the purpose
of the transaction is to maintain a permanent relationship
between the dollar and gold. We strongly oppose this bill.
The U.S. has long supported continued reduction in the
international monetary role of gold. Its key monetary functions
have in fact been eliminated. The official price of gold in the
IMF has been abolished as have related obligations for countries
to buy or sell gold. Establishment of IMF par value obligations in terms of gold has been prohibited. The use of gold
as a common denominator for IMF transactions has been eliminated.

There are no requirements for use of gold in official settlements,
and there have been no significant transactions in gold between
monetary authorities since U.S. suspension of gold convertibility
in August 1971.
Nonetheless, gold remains a substantial part of world monetary
reserves, and that is likely to remain the case for many years.
Gold represents a large part of U.S. reserves, available for use
in times of balance of payments need. The Secretary's authority
to sell gold has been extremely valuable in strengthening our balanc<
of payments position and contending with the exchange market difficulties that have arisen over the past few years. U.S. sales of gold
have, since initiation of the current program in May 1978, strengthei
the U.S. trade and current account positions by an estimated $4.1
billion, and have thus been a significant factor contributing to
dollar strength and stability. Moreover, the Secretary's flexibility
to determine the timing and amounts of sales is of great value in
dealing with instances of exchange market disturbances that are
attributable in part to speculative activity in the gold markets.
The exercise of the Secretary's authority has been prudent and in
the national interest. To limit it, as proposed in S. 1963, would
remove an extremely important element of the United States' ability
to manage its external monetary position.
Moreover, Mr. Chairman, the bill appears to envisage, or at
least welcome, efforts to reestablish a fixed price for gold. We
have no intention of making such an effort, and I believe it would
be very unwise for the Congress to indicate its receptivity to such
an effort. Limited supplies of gold, with new production subject
to natural constraints and concentrated in two countries — South
Africa and the Soviet Union — and the growth of industrial and
commercial uses, result in a supply of gold available for monetary
purposes that is wholly unrelated to the needs of an expanding world
economy. The price of gold is highly volatile, and swings in price
are huge — recently as much as $100 per ounce in the space of only
a few hours. Any attempt to fix the price of gold in terms of currenc
and tie the supply of money to gold stocks would lead to swings
in employment, output, and general price levels which no country
would tolerate. No major country today allows the value or supply
of its currency to be determined by gold. In the United States,
the monetary role of gold has been reduced through a series of actioi
and legislation spanning 40 years and enjoying wide bipartisan suppoi
That trend is sound and should be reaffirmed through Congressional
rejection of this bill.
International Affairs Budget Request
Mr. Chairman, I would now like to turn to a third issue
mentioned on your invitation, the administrative costs of the
Treasury's international affairs functions.
The foregoing discussion highlights the scope, complexity,
and importance of the Treasury's international responsibilities
and activities.

The Treasury Department, through its international affairs
functions, plays a key role in assuring that U.S. international
economic policies support the needs of our domestic economy and
enhance the economic benefits of our global interdependence. The
Secretary of the Treasury has major international responsibilities:
he is Governor for the United States in the International Monetary
Fund, the World Bank and other multilateral develoment banks;
Co-Chairman of the Saudi Arabian-United States Joint Commission
on Economic Cooperation; co-Chairman of the U.S.-U.S.S.R.
Commercial Commission; and co-chairman of the U.S.-China Joint
Economic Commission. The Secretary oversees U.S. international
monetary policy and operations, 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. Treasury's
views provide important input in the interagency determination of
U.S. policies on international trade, development, energy and
commodities issues.
Our fight against inflation, in particular, must include
international as well as domestic policy initiatives. A stable
dollar, a fair and open system of international trade and investment, and efforts to stabilize international food and commodity
prices are essential aspects of our efforts to avoid additional
inflationary pressures. Smoothly-functioning international
monetary arrangements are important to the preservation of an open
and efficient system of international trade and investment, which
are vital to our economic interests, and to the maintenance of
a strong and competitive U.S. economy.
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 of appropriations that we are requesting
for fiscal year 1981 for the international affairs function is
approximately $25.4 million — comprised of $24.3 million for
the basic expenses and $1.1 million which would be available
only for the payment of authorized cost of living increases
in pay and overseas allowances and benefits. Due to the technical
requirements of the Congressional Budget Act of 1974, we have
also requested authorization of such sums as may be necessary
for fiscal year 1982.
Secretary Miller and I are deeply concerned that the international affairs functions of the Treasury Department be carried out
in as efficient a manner as possible. While our overall
international responsibilities have grown more complex and
demanding,
we of
have
been able
to meet and
our a requirements
through more
efficient use
existing
resources
minimum of expanded

—

XJ

—

budget authority. In 1976, for example, there were 555 permanent
positions. The request before you today is for 460 permanent
positions. The basic increase in funds requested for 1981 is
slightly more than 5 percent above the authorized level for the
current fiscal year.
The nature of the Treasury's international work requires
significant foreign travel. This is unavoidable, but we have
made major and continuing efforts to reduce travel expenses.
Travel expenses in 1975 were $1,326,000. In 1979 we spent
$1,033,000 on foreign travel. In 1981 we are requesting $1,057,000
or an increase of approximately 2 percent over last year's
actual expenses. Inflation and dollar depreciation notwithstanding,
we have managed to reduce travel expenses by 20 percent in the
last five years. Other changes in the budget include an increase
of $1,308,000 to maintain current levels of operations. These
increased requirements are partially offset by expenditure
reductions totaling $824,000, including reductions of $634,000
due to productivity increases.
The one new significant item in our proposed authorization
is a program increase of $700,000 to permit us to equalize
the salaries of U.S. nationals employed by the Asian Development
Bank (ADB) with other nationals employed by the Bank.
The ADB has a well-deserved reputation for prudent policy,
effective management and low administrative costs. In part, the
Bank's ability to keep administrative costs'low resulted from
the relatively low cost of living in Manila. However in recent
years there has been a dramatic change in this situation, putting
severe pressure on U.S. nationals employed at the Bank, and leading
to a sharp erosion in U.S. representation on the Bank's staff. The
cost of living has increased by 70 percent in Manila over the last
three years, compared to a 32 percent increase in Washington. Housii
costs in particular have soared and are now a major deterrent to
accepting employment with the ADB. For example, in today's housing
market in Manila, the United States Government spends over $25,000
per year to provide a married GS-16 employee, with two or more
dependents, with appropriate accommodations. Housing costs are
therefore about twice those of equivalent accommodations in the
Washington, D.C. area, and are increasing at a faster rate.
ADB staff salaries are established, on the assumption that they
will be exempt from national income taxes. U.S. citizens are the
only expatriates on the staff of the Bank whose salaries are subjec
to taxes. The 1978 revision of U.S. tax laws regarding foreign
earned income has placed these Americans at a severe disadvantage;
they now receive, on the average, 20 percent less than other nation
at the ADB. The difference in disposable incomes after taxes and
housing expenses, compared with U.S. Government officials in Manila
at the same basic rate of pay, are even greater.
These problems have made employment with the ADB a serious
/.rnifmenf
hardship for
of Qualified
the U.S. nationals
U.S. citizens
already
almost
there,
impossible.
and has made re-

During 1979, eleven Americans out of 31 resigned from the ADB,
and other resignations are expected in the near future. There
are now only five Americans, out of a total of 54, at a level
equivalent to GS-16 or above in the Bank, compared to seven from
Japan, and 15 from South Asia. Other member countries exert
maximum efforts to place their nationals at these levels in all
international organizations. If the U.S. presence were to erode
permanently, the philosophical make-up of the ADB staff could change.
Continued employment of U.S. citizens on the staff of the ADB is of
considerable policy importance to the United States, as it helps
contribute to more effective implementation of ADB policy and projects.
The United States currently has cumulative subscriptions in
the Bank of over $1.3 billion, and these contributions to the
Bank are growing by several hundred million dollars each year.
Congress has long urged employment of U.S. nationals on the staffs
of international organizations, and provides similar salary adjustments for U.S. citizens employed at all U.N. agencies through
appropriation to the Department of State.
I should also mention one other technical provision of the proposed
authorization bill. The first section of the bill corrects an
oversight in Treasury's existing legislation to further assure
that we can pay, for our overseas employees performing international
affairs functions, allowances and benefits comparable to those
provided to employees of the Department of State. Currently,
Treasury is authorized to pay allowances and benefits comparable
to those provided to State Department employees by title IX of
the Foreign Service Act of 1946. However, additional allowances
for educational travel for dependents of State Department employees
are authorized by another statutory provision (5 U.S.C. 5924 (4) (B)).
Under this provision, State Department employees receive travel allowances for two round trips for each dependent each year for under- - •
graduate education and one round trip for each dependent each year flor
secondary education in the United States. Treasury Department
employees, however, receive travel allowances for only one round trip
for secondary school and one round trip for undergraduate education
in the United States for each dependent during the employee's
entire overseas tour of duty. The proposed amendment would correct
this present inequity and align Treasury travel allowances for
such dependents with those of the State Department.
****

In conclusion, Mr. Chairman, I urge the Committee to act
promptly and favorably on the proposed legislation to increase
the U.S. quota in the IMF and to authorize appropriations for
Treasury's international affairs functions.

Department theTREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
EXPECTED AT 2:00 p.m.
March 31, 1980

A?fi ^ 8 0
ritASURY DtrARfMENT

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE STATE, JUSTICE, COMMERCE, THE JUDICIARY AND
RELATED AGENCIES SUBCOMMITTEE
OF THE SENATE APPROPRIATIONS COMMITTEE

Mr. Chairman and Members of the Committee:
My testimony will discuss the Administration's request for
two appropriations relating to the Chrysler Loan Guarantee Program:
first, a full one-time appropriation enabling the Chrysler Corporation Loan Guarantee Board to make payments of principal and interest
on any guaranteed loan in default; and, second, an appropriation
to cover the Fiscal Year 1981 administrative expenses of implementing the Guarantee Act.
A One-Time Full Appropriation
Mr. Chairman, the Administration requests a one-time appropriation through December 31, 1991, of such sums as are necessary
to make payments of principal and interest, if there is a default,
on the $1.5 billion principal amount of loans which are authorized
to be guaranteed. As you know, all guaranteed loans must mature

M-405

- 2 by December 31, 1990. However, the appropriated sums should
remain available until December 31, 1991, to provide extra
time for resolution of any dispute or litigation over a
payment due in 1990.
Mr. Chairman, when I appeared before this Committee last
December, the Administration sought an appropriation with
two elements:
° A one-time authorization permitting the Guarantee
Board to issue guarantees of the principal and interest
on the loans for the benefit of Chrysler for the full
$1.5 billion principal amount authorized by the Guarantee
Act, plus such additional amounts as may be necessary
to pay interest which may be in default; and
° A one-time appropriation of such sums as are necessary
to make payments of principal and interest, if there
is a default, on all of the loans which could be
guaranteed.
The Congress provided the first element, but not the second.
The Appropriation Act (PL 96-183) passed by Congress on January 2,
1980, authorized the issuance of guarantees, but only committed to
make the necessary appropriations to make payment under the
guarantees.
Cost and Marketing Factors
In December, I testified that providing the latter appropriations would be necessary to assure that the financing plan
could be assembled. Chrysler's financial advisors, Salomon

- 3 -

Brothers

and its special counsel, Debevoise, Plimpton, Lyons

& Gates have further investigated the marketing issues and
confirmed the concerns that I voiced in December: without the
appropriation, both the unguaranteed and guaranteed financing
will be troublesome or significantly more costly to Chrysler.
Guaranteed Assistance
A guarantee which is not backed by a one-time full appropriation may result in unnecessary added financing costs for
Chrysler. Specifically, lenders will seek an additional interest
premium on guaranteed loans, since payment on a default could
be delayed due to the need for congressional action to appropriate
sums for payment. Such increased interest charges would increase
the financial liability of the Federal Government on its guarantees. Furthermore, to the extent that a guarantee fee is
negotiated which involves a share of profits, the increased
interest cost will reduce the fees to the Federal Government.
Chrysler's financial advisors believe that this interest
premium attributable to the lack of appropriation could approximate two full percentage points (200 basis points) over a
comparable three-year issue of Treasury securities. A copy of
their letter is appended to this testimony, together with
Chrysler's. This means that Chrysler could incur $90 million of
additional interest expense over three years on the full $1.5
billion of guarantees.

Treasury generally agrees that Chrysler would incur much higher
interest costs, although we have made no specific estimate.
Chrysler's advisors also indicate that the guaranteed loans may
be difficult to sell without the appropriation under the market
conditions that it projects for this summer. Indeed, initially
Salomon Brothers hoped to sell guaranteed securities with
maturities approximating 6 months. Because of the lack of
appropriations to pay the guaranteed securities, they are now
recommending maturities of one to two years.
Furthermore, it also would be difficult to obtain the necessary
long-term unguaranteedd financing commitments unless clear-cut
Federal guarantees were available. This was our experience in
other guarantee programs of this nature, such as New York City.
To the extent questions are raised concerning the ability to
sell guaranteed securities, the success of these negotiations
may be impaired.
The Need for a Full $1.5 Billion Appropriation
Mr. Chairman, I request that the^.Congress appropriate
sums to make payment on the full $1.5 billion of principal and
relevant amounts of intrest, to be made available beginning
immediately through 1991, because Chrysler may ultimately draw
down the full amount of authorized guarantees. The company's
latest projections indicate less than full usage, but those
projections are being revised substantially*

- 5 Timing
Mr. Chairman, an Appropriation Act is necessary immediately
to help assure that the Congressional aims of the Guarantee Act
are satisfied.
Specifically, Chrysler's cash flow outlook indicates that
overall guaranteed and unguaranteed financing plan must be
implemented within the short-term. Also, most guaranteed loans
will be needed during this fiscal year and the early part of
1981, although no payments will be made under the guarantees
during this fiscal year because the guaranteed loans are not
expected to mature until later.
Mr. Chairman, Chrysler and those with an economic stake in
its future have made progress in meeting the requirements of
the Guarantee Act. Chyrsler has revised its operating plan and
has developed a related financing plan. Significant progress
has been made toward assembling the long-term unguaranteed
financing which is a condition required for Federal guarantees:
0

0

Chrysler and its unions have entered into a revised
labor contract to provide $462.5 million in required
wage concessions. Chrysler also has adopted a plan
to obtain $125 million in wage concessions from its
non-union employees.
State and local governments have been moving forward
with legislation and other programs to provide the
$250 million of financing which the statute requires
of them.

0

Chrysler is now soliciting its dealers and suppliers
to purchase at least $230 million in subordinated
debentures. Commitments are expected in early April.

0

Chrysler is in negotiations with its domestic and
foreign lenders to provide the $650 million in contributions and concessions required from them in adition
to extensions of amounts commited as of October 17, 1979.

- 6 0

Chrysler has identified assets to be sold to meet the
$300 million target for proceeds from asset dispositions and has entered into related negotations. -

Furthermore, Chrysler is negotiating with the Canadian Government
and others for financing that might bring the total package to
more than the $1.43 billion.
Mr. Chairman, it would be indeed unfortunate if after all
this effort and progress, this rescue effort were to fail or
be significantly frustrated by a relatively technical issue
such as this appropriation question.
Administrative Expenses
Mr. Chairman, the Administration also requests a supplemental appropriation for Fiscal Year 1981 of approximately
$1.3 million, including funding for 20 permanent positions to
enable the Board to administer the loan guarantee program
established by the Guarantee Act. As you know, our approach
to this program is to seek appropriations for administrative
expenses only on an annual basis.
These funds and positions are necessary to maintain the
Office of Chrysler Finance and related "support activities in
the Treasury Department. The Loan Guarantee Board requires
staf~f assistance and other services to satisfy its responsibilities under the Act. Those responsibilities include negotiations over the guaranteed and unguaranteed portions of
Chrysler's four-year financing plan; the continuing analysis
of Chrysler's four-year operating plan, its financing plan, and
other plans necessary for the Board to make the determinations

- 7 required by the Act in order to issue guarantees? and preparation of annual reports to Congress concerning its activities.
These responsibilities will continue throughout the entire
period that guarantee commitments and guaranteed loans are
outstanding. The expertise necessary will continue to require
contractual services from experts in the private sector.
Specifically, we have employed the public accounting and management consulting firm of Ernst & Whinney to help us analyze
and evaluate Chrysler's current status and its operating and
financial plans. We have also hired the law firm of Cahill
Gordon & Rheindel to help us prepare the legal documents and
review legal issues incident to the financing transaction,
including security arrangements.
Our appropriation for these administrative purposes for
Fiscal Year 1980 was approximately $1.5 million and 20 permanent
positions. To date, we have filled approximately one-half of
these positions. In the meantime, we have relied significantly
on outside experts, with approximatley $1 million of the $1.5
million budgeted for their fees. Our reliance on outside
experts should diminish after we make our initial determinations
and complete any financing agreements.
That diminution, however, will produce additional staff
responsibilities. Thus, for 1981, approximately $600 thousand
is budgeted for consultants, and $500 thousand for internal
staffing with the remainder for incidental expenditures.

- 8 -

Of the internal positions, 14 are professionals-

11

financial analysts, and three attorneys. Of the analysts, one
slot is held by the Office Director, and the remaining ten are
divided equally among individuals responsible for Chrysler's
operating plan and among those responsible for its financing
plans and ongoing finances. The remaining slots are for
clerical personnel.
I would be pleased to answer any questions.

oOo

VfSfa

0' V* rat* VO* SlOCh E«C«««P« •«

0-n *e* Vo* *'«•
Mt* Vofh N V 100W (212) T47-TOO0

Salomon Brothers

February 15, 19 80

Chrysler Corporation
Loan Guarantee Board
Room 300 0
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Gentlemen:
On behalf of Chrysler Corporation, for whom we
are acting as financial advisor, we hereby recommend
that the Chrysler Corporation Loan Guarantee Board
(the "Board") take the necessary steps to obtain the
specific appropriation of such funds as may be required for the payment of principal and interest on
up to $1,500,000,000 aggregate principal amount of
loans guaranteed under the Chrysler Corporation Loan
Guarantee Act of 1979 (the "Act"). Such funds
should rer-.ain available at least until some reasonable period after December 31, 1990, the final
authorized date for maturity of a guaranteed loan.
It is our judgment that the absence of specific
appropriation of such funds would have an extremely
adverse impact on the marketing of debt to be guaranteed by the Board, and also with respect to the pricing
of such debt.
Accordingly, we strongly recommend that the
specific appropriation be made prior to any issuance
of debt to be guaranteed by the Board.
Very truly yours,

eSg^fr/^^i
SALOMON BROTHERS

•no / Daiias / Hong Kong / London (Subsidiary) / Los Aniens / Pfcifeotlphia / S*n Frmctseo

CHRYSLER
CORPORATION

March 3, 1980

Chrysler Corporation Loan
Guarantee Board
c/o Treasury Department
15th and Pennsylvania Avenue, N.W.
Washington, D.C. 20020
Attention: Mr. Brian M. Freeman
Executive Director
and Secretary
Specific Appropriation under
Chrysler Corporation Loan
Guarantee Act of 1979
Dear Sirs:
By letter dated February 15, 1980, Salamon
Brothers, our financial advisor, recommended that the
Chrysler Corporation Loan Guarantee Board take the necessary steps now to obtain the specific appropriation
of such funds as may be required for the payment of
principal and interest on up to $1,500,000,000 aggregate
principal amount of loans guaranteed under the Chrysler
Corporation Loan Guarantee Act of 1979.
At a meeting held today at the office of the
General Counsel of the Department of the Treasury further
discussions concerning the necessity for specific appropriation of funds were held. In addition to the General
Counsel and one of his staff, representatives of Salomon
Brothers, Debevoise, Plimpton, Lyons 6c Gates, Patton
Boggs 6c Blow and Brown, Wood, Ivey, Mitchell 6c Petty
participated in the discussions.

Chrysler Corporation
Loan Guarantee Board

-2-

March J, 1980

Based on today's discussion, and on advice from
its legal and financial consultants, Chrysler hereby requests the Board to proceed as swiftly as possible to obtain specific appropriation of funds. The supplemental
appropriation language pending before Congress (a copy of
which is attached hereto) is satisfactory to us.
Please let us know if any further information
is required or if Chrysler or any of its advisors can be*
of further help in the legislative process by which the
specific appropriation we have requested will be obtained.
Sincerely yours,

Robert S. Miller, Jr.
Assistant Controller

Department of the Treasury
BUREAU OF GOVERNMENT FINANCIAL
OPERATIONS
CHRYSLER CORPORATION LOAN GUARANTOR PROGRAM

(Supplemental appropriation language request pending)
There are appropriated such sums as m a y be necessary for payment of principal and interest on loans
guaranteed pursuant to the Chrysler Corporation Loan
Guarantee Act of 1979 and in default, to be available
immediately and to remain available until December
81,1991.

This supplemental appropriation language is pending
before the Congress. This language is needed for the
implementation and administration of the Chrysler Corporation loan guarantee program.

kpartmentoftheTREASURY
TELEPHONE 566-2041

'ASHINGTON, D.C. 20220

• ,••

OFFICE OF PUBLIC AFFAIRS
r

C o n t a c W C a r o l y n Johnston
""
(202) 634-5377

FOR IMMEDIATE RELEASE

April 1, 1980

TREASURY SECRETARY MILLER APPOINTS JOSEPH A. MCELWAIN
AS NEW SAVINGS BONDS CHAIRMAN FOR MONTANA
Secretary of the Treasury G. William Miller
has appointed Joseph A. McElwain, Chairman of the
Board, Chief Executive Officer and Director of the
Montana Power Company, as Volunteer State Chairman
for the Savings Bonds Program in Montana. The
appointment is effective immediately.
He succeeds William B. Andrews, President,
Northwest Bank of Helena.
Mr. McElwain will head a committee of business,
banking, labor, government and media leaders who,
in cooperation with the U.S. Savings Bonds Division,
will assist in promoting bond sales throughout the
state.
Mr. McElwain, a native of Deer Lodge, Montana,
has received B.A., LL.B and JD degrees from the
University of Montana. He joined the Montana Power
Company in 1954 as Washington Legislative Counsel,
( over )

M-406

serving in that capacity until 1963, when he became
Counsel for the company. Mr. McElwain subsequently
became Vice President, Executive Vice President,
and President.
He was elected to his present positions in 1979.
Mr. McElwain has been a director of the National
Association of Electric Companies; First Metals Eank
& Trust Company; Pacific Northwest Power Company,
and the Butte Cultural Arts Board. He has also served
on the Advisory and Policy Committees of the Edison
Electric Institute and the Business Administration
Advisory Council of the University of Montana..

OFFICE OF PUBLIC AFFAIRS

Contact:

Carolyn Johnston
(202) 634-5377

FOR IMMEDIATE RELEASE March 29, 1980
TREASURY SECRETARY MILLER NAMES HORATIO MASON
SAVINGS BONDS CHAIRMAN FOR KENTUCKY
Horatio P. Mason, Vice Chairman of the Board
and Treasurer, Mason & Hanger-Silas Mason Company,
Inc., has been appointed Kentucky Volunteer State
Chairman for the Savings Bonds Program by Secretary
of the Treasury G. William Miller. The appointment
is effective immediately.
He succeeds Charles I. McCarty, Chairman of
the Board and Chief Executive Officer, Brown &
Williamson Tobacco Corporation.
Mr. Mason will head a committee of business,
banking, labor, government and media leaders who,
in cooperation with the U.S. Savings Bonds Division,
will assist in promoting bond sales throughout the
state.
Mr. Mason joined Mason & Hanger after graduation
from Virginia Military Institute. He worked in New
York City and Philadelphia before moving to Kentucky
to manage the company's Hartland Farm.
( over )
M-407

- 2 -

In 1962 Mr. Mason was elected Vice President
of Mason & Hanger-Silas Mason Co., Inc.

He became

Vice President and Treasurer in 1966 and Vice Chairman
and Treasurer in 1976.
Mr. Mason is the great grandson of Claiborne
Rice Mason, who founded the company in 1827.