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LIUHAtf'f
L) t~'r

DEC

1 5 1983

Treas.
HJ

. A1P34

v. 208

Dept. of the Treasury.

PRESS RELEASES

partment of ihe Treasury

Washington. D.C.

STATEMENT
DONALD

Telephone 566-204'

REGAN

SECRETARY OF THE TREASURY
ON

PRODUCER

PRICES

FRI DAY I OCTOBER 15 I 19 82
The 0. 1 percent drop in producer prices in September
an encouraging
Prices for cars,
sign for the consumer.
and
The
food
gasoline were all down.
message is clear that
inflation is staying down and interest rates should come

down

even

further.

interest rate at 12 percent, several banks
are now lowering their consumer loan rates for houses, cars
and other goods.
These are good omens for economic recovery
which will encourage the kind of business expansion that
will create new jobs.
With the prime

R-990

spartlnent of the Treasury ~ Washington, D.C. ~ Telephone 566-204'I

REMARKS BY R. T. MCNAMAR
DEPUTY SECRETARY OF THE TREASURY

BEFORE THE
ELECTRONIC INDUSTRIES ASSOCIATION
LOS ANGELES, CALIFORNIA

October 12, 1982
The greates single need in economic policy in the United
States is for consistency.
I want to suggest a unique
demonstration of the consistency in economic policy that the

Reagan

Administration

will provide.

As you know, I was on the
ready to leave to address you
National Airport in Washington
plane in front of us crashed.

next Air Florida plane getting
in Boca Raton last January, when
was closed after the Air Florida
So

was

forced to cancel.

As a demonstration
of consistency, I am going to give you
the exact speech that I had prepared to deliver then, and except
for updating the numbers, and a shift at the end, it is still
Listen to these remarks in that context of
applicable'

consistency
"Now,

two

in economic

policy.

I realize that in your industry, it often seems that
of products can come and go over the
But many of you also understand
that the experience

or three generations

weekend.

curve phenomenon -- with its emphasis on continuous product
and anticipatory
capacity expansion -- really means
development,
that a very long-range outlook is the key to success in
electronics. And that success also demands willingness to ride
out short, -term problems in order to invest for future growth.

—

That's the theme I'd like to strike today
the long term.
the frame of reference in
And in doing so I'd like to reconstruct
program for economic recovery was
which the Administration's
fashioned.
In addition, I' ll touch on the President's program, the
current status of the eocnomy, and the outlook for the future.
Let me begin by saying that the President's program is not
one of quick fixes, short-term solutions, or impulsive reactions
goalso
R-991

These goals

are:

To minimize

To reduce

the rate of growth

spending;

and

of government

restore stable, real economic growth.

did not attain

fully attain

inflation;

them

these goals in our
in our second.

first

year

nor will

But I would suggest that since the President's inauguration
beginning
changes in direction
we have begun some fundamental
for
forty years.
a reversal of trends that have been developing
And I believe historians
will record that we have just passed an
inflection point in our economic history.

Let's quickly review

some

of our recent history.

The Problem

Specifically, let's examine the legacy of rapid and
inconsistent monetary growth, stop-and-go fiscal policies and the.
constant growth in federal revenue caused by inflation and a
counterproductive
corporate and personal tax system -- a system
that generated revenues for the federal government through
In fact, the government's
inflated tax
continued inflation.
revenues got to the point where the government talked about
declaring a dividend.
Remember the so-called "Fiscal Dividend" that was supposed
to materialize when the Vietnam War ended? Without the war to
fund, we were supposed to be able to balance the budget and
reallocate federal dollars from defense and expand social
1974 was the year all that was supposed to start.
programs.
Let's see what has happened since then.
Well, since 1974 we' ve certainly neglected our defense
establishment -- that part of the bargain was kept. But 1974 was
also the last year in which the federal government comprised less
than twenty percent of our gross national product -- 19.5 percent
to be exact.
The "Fiscal Dividend" turned out to be fiscal excess.
Since
1974, federal spending rose from $270 billion to $660 billion in
1981. That's 23 percent of GNP
almost one dollar in every
And our national
four generated by our economy.
debt swelled to
over a trillion dollars today.

—

during this period not all the trends were
Productivity, for example, has long been in a major
de~line
The rate of productivity
growth decreased from an
annual average of 3. 1 percent in the 20-year period after World
War II to 0. 7 percent in the 1973-80 period.
And American
jobs

Unfortunately,

rising

and

investment

went

overseas as a result.

the personal savings rate -- which
averaged 7. 7 percent in the ten years ending in 1975 fell almost
to the 4. 5 percent rate early in 1981 and, in the mid-quarter of
1981 was a low 5. 2 percent.
At the same time,

for the economic situation that this
is trying to rectify is due to bipartisan errors.

Granted,
Administration

blame

basic weaknesses in our economy have been developing over a
period of three or four decades -- a period during which both
Republicans and Democrats have occupied the White House, while a
Democratic dominated Congress piled federal spending commitment
on top of commitment.

The

is this:

message

Administration
inherited
described as dismal.

taking

office,

an economic

the Reagan
that could be

situation

Frankly, this is a mess that was so long in the making that
will be more than days, or weeks, or months, in the mending.
But what we are trying to do is to redefine the relationship
between the public and the private sectors and -- for a change
redefiine it in favor of private initiative and private
In short, we want to establish a long-term framework
enterprise.
for the future of our economy.

The

Let

give
the future.

President's

briefly

you some

Pro ram for Economic Recover

summarize

idea of

at this point, then
of the outlook for

the program

its current status

and

integrated parts which, if consistently implemented by
Congress will ameliorate inflation, reduce the size of the
federal government and restore the kind of real economic growth
that will benefit everyone -- investor and industrialist,
consumer and corporation, hard hat and housewife.

carefully

The

monetary

first

element

polic'y.

Second, there's

of the program
the tax program.

is
We

non-inflationary
have

effectively

eliminated

the tax on income from

new

equipment.
The

third element of the program

investment

in plant

—regulatory

and

reform

has

already eliminated over fifty major federal regulations.
Federal Register was 25 percent smaller in 1981 than in 1980.
The result is an initial saving to the economy of $16 billion,
Again,
plus a recurring, annual saving estimated at $6 billion.
to
market
that's cash that corporate borrowers won't be coming to
The

seek.

Finally,

want

to slow the growth of the federal

spending

In this way we can free real resources
Gross National Product.
for the private sector -- capital that can be used to modernize
elements of our society.
and expand the productive

What's more, curbing the growth of federal spending now and
in the future reduces competition for credit and alleviates
pressure on the Federal Reserve to monetize the deficit and

therefore

contribute

to inflation. "

the changes I mentioned, is the speech I
It's still
would have delivered to you almost a year ago.
the fundamental
It's
describes
still accurate. And it
current.
That is, the
America
today.
in
nature in the economic problem
need to shift the momentum of an enormous economy away from the
direction that it has been moving for almost twenty years in the
twenty months we' ve been in office.
That

text,

with

Results of the Pro

ram

degrees, elements of the program are in effect
today. However, the current downturn is worse than
envisioned in our earlier scenarios, in no small part because
interest rates stayed high much longer than expected. I submit
that the interest rate decline that started this summer and is
continuing is in large part attributable to the Congressional
Together they
budget and tax compromise reached last spring.
reduced anticipated federal deficits by 8400 billion.
That
started the decline that is still going on today.
and

In varying

working

If interest rates are improving, let me address
which isn't improving.
All of us in the
unemployment,
Administration,
first and foremost the President, are saddened
the hardship of people out of work. The current unemployment
rate strengthens our resolve for permanent long-term solutions
the need for more jobs.

proposed an economic program to create
sector jobs and get the economy moving again. Month by
month the nation watched as one piece after another of this
program fell into place.
Inflation dropped from 12. 4 percent to
5. 1 percent today. The prime interest rate dropped from 21. 5

This Administration

private

percent

rate,

to 13.0 percent today. The three-month Treasury bill
reached nearly 17 percent in the spring of 1981, is
7. 5 percent and declining. Mortgage interest rates

which
now around

are declining.

Yet today

still

struggle with the intensely personal
people out of work. Our economic program
was designed to strengthen
the fiber of our private enterprise
system, the economic engine that creates permanent jobs in this
The gradual increase in unemployment
levels in the
country.
post-war period reflects the depth of the deterioration that had
rate is
taken place in our economic base. The high unemployment
exacerbated by the fact that the recession of 1980 began with the
highest unemployment
rate of any post-World War II recession.
problem

Our

of far too

many

tax cuts, budget

cuts, regulatory

reform,

and monetary

policy are designed to rebuild that industrial base. The first
sign of success is lower inflation; next is the decline in
interest rates; the decrease in the unemployment rate will
follow.
History shows that when inflation is brought under control,
interest rates decline, expansion ensues and the unemployment
rate responds by coming down. In 1971-72, inflation was cut by
third. The next year, in 1973, unemployment dropped to under 5
percent. In 1974-76, inflation was cut in half. In the
fell by a third. And in
following two years, unemployment
1981-82, the inflation rate again has been cut in half. I
believe the stage is set for an economic recovery which will
rate and create real jobs.
reduce the unemployment

the quick fixes of the past that brought inflation
down for short periods, only to have
The short-term proposals to create
them skyrocket back up.
make-work jobs through more government
spending programs will
re-ignite
and result in even
inflation,
choke off the recovery,
don't
believe that a return to
We simply
greater unemployment.
the policies of high taxes and big spending programs will create
jobs. $50, 000 per person CETA jobs haven't been
meaningful
successful, they only helped to widen deficits, increase
We

down

and

reject

unemployment

inflationary

expectations,

and

raise interest

rates.

third element of the program -- regulatory reform -- has
The
already eliminated over fifty major federal regulations.
Federal Register was 25 percent smaller in 1981 than in 1980.
The

result is an initial saving to the economy of $16 billion,
Again
plus a recurring, annual saving estimated at $6 billion.
to
market
won't
to
coming
be
borrowers
that's cash that corporate
seek.
in initiating a period of budgetary
And we have succeeded
in the fiscal 1982
discipline. Last year Congress agreed to cuts
budget
recent
Our most
budget amounting to 835 billion.
from
billion
resolution calls for cumulative cuts of 8280
needed.
1983-85. Additional cuts of major proportions are
It's an indication that the
That's sound progress.
and the Congress are moving in the right
Administration
direction. But there can be no question that more cuts are

The

needed.

should anyone question our resolve to go back to the
Hill again and again for more cuts in federal spending, for more
cuts in entitlement programs.
Nor

and shifted the
two years, we' ve redefined
The
road to fiscal
deliberation.
debate
and
terms of
policy
objective is
the
but
arduous,
and
will
be
long
responsibility
we'
but
battles,
We'
some
lose
ll
our
times,
ll pick
clear.
won.
will
be
war
eventually the economic

less than

State of the Econom
have some rather dramatic evidence that

Current
In

major

fact,

now

battles in the
While inflation

economic

war

are being won.

interest

rates have been declining,
there can be no doubt that the economy is performing poorly, and
Two flat or mildly negative
quarters
worse than we had expected.
this year were anticipated in our original estimates.
Now

let

return

and

point. about consistency,

and

talk

deficits by returning again to last winter's speech,
which is even more applicable today as more and more Democratic
candidates call for make-work public jobs programs.
about budget

"I want to reassure the American people that we are on a
consistent, correct track, and that we will not go back to the
policies of the past, and that this Administration has a program
to get lasting and meaningful jobs.
What's needed -- as I suggested earlier -- is time.
Admittedly, this will try the American political will during a
recession this winter and during an election year. As Henry

Kissinger said of the American lack of patience: "Americans seem
to have a proclivity to pull up the trees every few weeks to see
if the roots are really growing. "

Deficits
Probably the greatest single stimulus for pulling
trees to check the roots is a concern in some quarters

up the
about the

projected deficits. There's no question in anyone's mind that
the outlook for the anticipated federal deficits has deteriorated
I know
sharply from the projections that we made in late spring.
that some analysts take serious issue with any suggestion that we
shall see single digit interest rates, because of the possibility
of larger deficits.
higher
made

Ironically,

reason the deficits will be termporarily
is because of the progress that has been

a major

than expected
in fighting inflation.

it.

to the way in which most entitlement
federal spending or outlays are linked to
the previous year's inflation rate, but revenues based on taxable
income are basically linked to the current year's inflation rate.

Think about
programs are indexed,

Due

All other things being equal, the faster inflation comes
down, the more difficult it becomes to quickly balance the
No administration
has faced this phenomenon of a
budget.
sustained decline in inflation since our major entitlements
Deficits are a part of the transformation
prorams were indexed.
process. That perverse set of incentives deserves a hard look.

is fairly simple. Inflation indexed
-- the Treasury borrows to meet
federal
increase
outlays
programs
the entitlement obligation -- the Fed buys the Treasury's debt-the money supply increases too rapidly causing inflation -- the
inflation causes indexed programs to increase federal outlays and
so on. This vicious circle must be broken -- because inflation
is the largest, most regressive tax of all.
The

circular equation

problem is not the federal deficit.
The fundamental
the overall level and rate of growth in government spending

sixteen percent
The

public

rate of growth

is well

aware

It --is

in recent years.

of this fiscal reality:

all

alternatives:
Payment can be made in the form of explicit taxes that
officially transfer resources to the public sector.
federal

bills

must

paid.

Examine

the

inflation that raises everyone' s
tax brackets and shifts the greatest burden -- through negative
real interest rates -- to those who save, and to those whose
Or payment

incomes

can be made by

are not indexed.

Or payment

can take the form of

least temporarily higher as the
sector for funds.
and

rates that are at
outbids the private

interest

government,

This reality manifests itself in volatile financial
higher real interest rates. These, in turn, are an

expression of fear that imposes
exacerbates investment risk.

inflation

premiums

markets

and

Those fears will only be relieved by a resolute Congress
determined to cut the budget, and by a Federal Reserve that
persists in a slow, steady growth " in the money supply parallel
with real growth in the economy.
On October 1
Just let me illustrate:
That was last winter.
based
increase
cost
of
living
the food stamp program just had a
on last year's inflation of 8%. Yet this year food costs have
increased year-to-date only 3. 6%. The cost to you was 81
billion. If today's inflation rates were used, the cost savings
This illustrates why Tip
would have been over 9S50 million.
O' Neill likes higher and higher inflation each year so he doesn' t
have to face this problem.
We are not going
to engage in more futile rounds of tryng to
That route
raise taxes faster than Congress can raise spending.
has been tried and has failed.
If we stay on course -- and we shall -- we shall restore
long-term health to the economy.
The roots of the economic tree
are indeed growing, because they' re being cultivated by a
responsible economic policy.

increased the tax incentives to save and invest, and
to restore responsibility to the budget process. The
United States can move back toward a savings rate that, will
support temporary deficits without crowding out, without higher
We' ve

begun

rates,

interest

and

without

inflation. .
inflation, reducing

Our goals of reducing
the rate of growth
in government spending and restoring real growth are not only
mutually consistent, they are mutually necessary and mutually

reinforcing.
Many

growth

of those

and derived

special interests that both fostered the
ever-greater benefit from the federal

government, and that lost the last election, have been declaring
the President's economic program a failure since before it was
unveiled.
And though they suffered defeat in every major battle
last year, they will undoubtedly try to unravel that program this
year. Hence, much of the policy agenda will be aimed toward

preserving

last year's gains.

Most important, we must be prepared to meet attacks on the
program's key incentive-oriented
tax provisions.
Those attacks
will not be aimed directly at the core provisions that take
effect this year or perhaps next. Rather the attacks will be
aimed at what some critics perceive to be the weak periphery.

will seek to delay, reduce or eliminate the third
personal tax reduction -- a ten percent reduction that becomes
effective July 1, 1983. Others may seek to eliminate the
indexing provision.
Still others will seek to repeal the
safe-harbor leasing provisions of last year's tax act. All these
attempts will be shrouded in specious arguments of "sound fiscal
policy" and reduced corporate welfare.
Some

fact that these

arguments will be advanced by the same
for years fostered big deficits by fostering
ever-bigger federal spending programs should be a clue to their
real motivation.
Rolling back the tax cuts is their way to
restore rapid growth in federal revenues -- the goose that lays
the rotten egg of an ever-larger federal role.
The

interests

who

And contrary
to the claims that will be made, these
In fact, they are central to our
provisions are not peripheral.
efforts to restore long-term incentives to save, invest, and
work.
If the third year, or the indexing provisions of the
personal tax cut were repealed, for example, the remaining two
year tax cut would be seen for exactly what it would be -- a

brief,

temporary respite
an ever bigger

taxes and
otherwise.

on the long march toward ever higher
No one could possibly
think
government.

So, while there undoubtedly will be some increases in taxes
do not destroy the incentive effects of our program, the
We will continue
to
program itself is here for the long term.
that

focus on reducing government spending, on reducing government
intervention in the economy by eliminating unwarranted
regulations, and on continuing to reduce inflation by maintaining
a slow, steady growth of the money supply.
The Mana ement
Our

policy agenda,

enda

for 1982

hope, will also shape

in part your

personal
agendas

agenda

in 1982

in 1982. In fact, I think
—
a political agenda and

the nation's

Politically,

agenda

you really have two
agenda.
a management

is already written;

you

on those parts of the economic program
that I believe are important to you and to the success of your
true of the key tax provisions
This is particularly
businesses.
personal tax cuts, accelerated cost recovery and safe harbor
leasing. If you do not respond to the challenges that will be
mounted, you, and the country, will be the losers.

must

make

your views

known

—

the key to our economic recovery is not what
do; it's what you in business do in response
we in the government
incentives that were enacted last year.
economic
restored
the
to

Nanagerially,

well management and labor respond to this changed
will determine whether we lock in lower
economic environment
the long term. In recent years, wage
for
rates of inflation
settlements have been ever larger as workers attempted to catch
rising inflation rate.
up with a constantly
How

Nevertheless, we are living
psychology that is difficult to
with a deeply rooted inflationary
Half the working
Think about our current legacy.
change.
population today has never known price stability or low inflation
attitudes born of such
in their adult lives. Fundamental
experience will die slowly, yet they must, yield to changed

Inflation

longer

rising.

realities.

Inflation now is coming
decline. If wage settlements

rapidly and will continue to
do not follow suit, company profits
will be further squeezed. With those vanishing profits will go
the cash flow necessary for renewed investment in plant and
equipment that would restore real growth and create more jobs
the kind that allow both American
more highly productive
jobs
business and American labor to succeed in a much more competitive
down

world

economy.

Lover nominal wage settlements are thus a necessary adjunct
to lower expected rates of inflation.
And lower nominal
wage
settlements need not mean even temporarily lower real wages.
Consumer prices in August indicate that inflation
remains
low and the prospects for economic recovery remain high.
A
seasonally adjusted
3 percent rise in consumer prices in August
is a significant drop from June and July levels. Consumers
should notice this achievement in at least two ways.
First, in
their shopping carts, at the gas pump and in their pocketbooks.
Second, in interest rates and economic recovery.

So far this year, the CPI is 5. 1 percent at an annual
This is a far cry from the double-digit inflation of 1980.

rate.

If you took a family making $15, 000 a year in 1980 on a
fixed income basis, then compared how many dollars extra they
have today, after our inflation rates and tax cuts, compared with
how they would have done under two years more of runaway
inflation and tax bracket creep, you find that this lower income
family has $1, 286 more to spend for food under the Reagan
Administration.
If they spend $100 per week on food, that's more
than three months' groceries and a pretty darned good meal.
We are shedding
that sense of uncontrolled and accelerating
inflation that haunted us in the late 1970's. Turning that
situation around was an essential precondition to achieving
long-term economic growth and prosperity.
I believe these new
figures show we' re on the road to recovery.

real or after-inflation GNP in the second
2. 1 percent. The third quarter GNP should also be
slightly positive. The "flash" report indicated a real increase
of 1. 5 percent. The leading indicators have been up four of the
last five months. And, clearly the financial markets, usually
the most accurate harbinger of an upturn, believe it is coming.
This is not a short-term task involving quick fixes. It is
a problem that requires long-term commitment -- a commitment to
stay the course. We are determined to reverse the policies of
In addition,

quarter

was

this problem, and help develop
that will put people back to work.

the past which created

growing

economy

steadily

The
has weathered a severe recession.
and high interest rates have left
But
indelible imprints on the nature of this nation's business.
whether it be in banking, or housing, or autos, or hundreds of
other industries, American leadership of the private sector is
restless to get on with the Renaissance of free enterprise.
The American

effects of

And

high

economy

inflation

I believe

our economic
The
what

the government policies in place to
don't waiver now. If we stay the
a Congress that wil support the continuity of

support that effort.
course. If we have

have

resurgence.

choice is the American

people's on

November

failed or continue with what's succeeding.
to
people will vote to stay the course to prosperity.
Thank

you.

Return

I submit that

apartment of the Treasury ~ Washington,
FOR IMMEDIATE

O.C. ~ Telephone 566-2041
October 18, 1982

RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $5, 605 million of 13-week bills and for $5, 605 million of
26-week bills, both to be issued on October 21, 1982, were accepted today.
OF ACCEPTED
COMPETITIVE BIDS:

RANGE

98. 142
98. 115
98. 120

High
Low

Average

Tenders
Tenders

at the
at the

26-week bills
April 21, 1983
maturing
Investment
Discount
Rate 1/
Rate
Price

13-week bills
January 20, 1983
maturing
Investment
Discount
Rate 1/
Price
Rate

low
low

7. 350%
7. 457%
7. 437%

96. 085 7. 744%
96. 072 7. 770%
96. 076 7. 762%2/

7. 59%

7. 71%
7. 69%

8. 17%
8. 20%
8. 19%

price for the 13-week bills were allotted 74%.
price for the 26-week bills were allotted 77%.
TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Received

Location
Boston
New York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago
St. Lou'is
Minneapolis
Kansas City

Dallas

10, 683, 745
28, 820

51, 845

36, 265
48, 095
847%570

52, 570

11,780

44, 790
26, 000
759, 490

Accepted

$~&,

0
4, 462, 745
28, 820
41, 845
36, 265
47, 495
289, 070
41, 570
11,780
44, 790
26, 000

281 285

251, 490
281, 285

$12, 915, 695

$5, 604, 595

$10, 968, 365
969, 600
Subtotal, Public $11,937, 965
887, 930
Federal Reserve
Official
Foreign
89, 800
Institutions
$12, 915, 695
TOTALS

$3, 657, 265
969, 600
$4, 626, 865
887, 930

San

Francisco

Treasury
TOTALS

Competitive
Noncompetitive

89, 800
$5, 604, 595

1/ Equivalent coupon-issue yield.
calculating the
2/ The four-week average for
is 8. 480%.
certificates
market
on money

Received
52, 700

11,959, 765
17, 660
29, 955

91, 795
28, 865
913,515
43, 385
18, 315
24, 270
9, 795
1, 047, 135
335, 110

$14 572 265

Accepted
27, 700
4, 974, 235
17, 500
18, 955
28, 295
24, 465
47, 815
31, 165
7, 815
24, 240
9, 795
58, 135

335, 110
$5 605 225

$12, 649, 475 $3, 682, 435
732, 990
732, 990
465
$13, 382,
$4, 415, 425
825, 000
825, 000
364, 800
$14, 572, 265
maximum

364, 800
$5, 605, 225

interest rate payable

.partment

ot the Treasury

|sashlisptqg5ko.
ou

Telephone 566-2045

li'III

BY THE HONORABLE BERYL W. SPRINKEL
SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE AMERICAN STOCK EXCHANGE CONFERENCE,
U ~ S ~ PE RS PE CT IVE S
REMARKS

UNDER

WASHINGTON,

. .

D C

October 20, 1982

International

Monetar
The U. S. A roach

Issues:

I would like to begin by telling you that I am honored to
have been asked to speak to you this afternoon.
It is a pleasure
to address such a distinguished group, and to be part of such an
interesting and timely program.
These are

issues.

arisen

ones

difficult times for the world economy,
number of difficult international

faces a

and

this

monetary
But while the exact forms in which these issues have
are often new, the underlying problems are familiar
ones the United States has coped with in the past.

government

in
To the degree that past U. S. policies were unsuccessful
resolving such issues, we hope we have learned a few lessons.
in
To the degree we succeeded in weathering similar situations
the past, we can draw comfort. Thus, while recognizing the
seriousness of the current strains on the banking system associated with the large debt burdens of sovereign borrowers, it
is reassuring to remember that the international monetary system

has proven

participants,

enough to cope with very difficult situations
With a responsible approach on the part of all
we should be able to cope with this one as well.

flexible

in the past.

market-oriented
approach to
monetary issues has entailed some notable departures
from previous U. S. policies, and has occasionally differed from
the current policies of some of our allies. Making such a major
change is difficult in many ways -- it requires determination
work, and a receptive
into effect, credibility to make
to put
our
allies
of
to avoid
on
the
attitude
part
cooperative
and
methods
and
goals.
over
our
misunderstandings
The Reagan Administration's

international

R-994

We have been working
for
of this can occur overnight.
to put across our point of view -- our belief in limiting
government interference with market decisions, and in stable and
predictable economic policies. While differences remain, our
approach is now better understood and more favorably received
abroad. And we are 0onfident that momentum will continue to

None
some time

move

in our direction.

approach to economic issues already
During the first two decades
after World War II, the United States was a leader in the liberalization of the international trade and payments system which
Our strong domestic
underlay a dramatic world economic recovery.
economic performance and open capital markets made the United
States a reliable world financial center, and the U. ST dollar
the key international currency.
By the mid-l970s, however, the
United States had become a source of instability -- particularly
The market-oriented

has a successful

track record.

its deteriorating growth and inflation performance. Of
some of this deterioration
in U. S. performance came in
response to the oil shocks, which we experienced in common with

due to
course,

every other. oil-importing

nation. But the main cause of our
record was the weakness of our domestic economic
policy relative to that of other major countries.
disappointing

U. S. Economic Performance

Macroeconomic policy in the United States had. turned
increasingly to fine-tuning with a short. -term policy horizon.
In that environment,
economic efficiency was
far down the
list of priorities, and the ultimate results put
were a substantial
worsening in U. S. productivity performance, and an inflationary
bias in wage and price formation.
The U. S. inflation rate developed
a distinct. upward trend, and as a result interest rates kept
ratcheting upward to new historical highs.
Our current domestic economic program was designed to
reverse this process' And in fact, while much remains to be
done, we have had major success in our effort to put the country
back on a sustainable non-inflationary
growth path.

critics used to be most skeptical
ability to get inflation and interest rates down
from
the stratospheric levels they had reached by the time this
Administration
took office. I think it would be accurate
ra e too say
sa
t h at most financial market participants
shared this skepticism
to some extent, and for perfectly good reasons. Too many lenders
have gotten "burned" in the past by believing government promises
that inflation would be brought under control, only to see inflation and interest rates shoot up again to new highs soon afterwards
This left them skeptical that inflation would ever be brought
under
lasting control, and unwilling to risk much on the good intentions
of this, or any other, Administration.
Our

about our

domestic and foreign

Fortunately, our good intentions have now been matched by
perseverence and demonstrated performance.
Consumer price
inflation has been running at only a 5. 1 percent annual rate so
far this year, and we fully expect that we can sustain this type
of performance next year as well. Short-term interest rates have
come dramatically
off their peaks, and long-term rates are now
following them down as the longer-run inflation expectations of
borrowers and lenders adjust to the reality of our commitment
and our achievement.

I have no intention of ignoring the cost that has been paid
for this reduction in inflation and interest rates. An unemployment
rate of over 10 percent is a high price to pay no matter how you
look at it -- in terms of lost jobs, lost output, and hardship to
families and businesses all over the country.
In order to get
inflation down, we had to slow the growth of the money supply.
Lower money growth automatically
led to weaker real economic
activity during the transition from an environment of high inflation
expectations and inflationary economic behavior, to one of price
stability. Some temporary restriction of economic growth was
inevitable, given the pervasiveness of inflation and the strength
of expectations.
We believe,
however, that the resulting economic
slowdown has been made both longer and more severe than necessary,
as a result of the abruptness of the initial monetary slowdown,
the volatility of money growth, and the difficulties we have had
in getting a sound budget through the Congress.
Now, as we begin to count up the cost of getting inflation
under control, we would do well to bear in mind why we did this'

must remember the overwhelming
urgency which the American
people, as well as our foreign allies, attached to getting the
U. S. inflation rate down only two years ago. We had all seen the
stagflationary consequences of the previous economic policies.
investment was lagging, productivity
The savings rate was dropping,
rate was trending upward.
growth was slowing, and the unemployment
a
recognition
of the danger chronic
widespread
There came to be
American
and
to
the
economy,
widespread consensus
inflation poses
worth
inflation
would
be
the
cost and should be
that controlling
The cost has been high -- higher than
our number one priority.
necessary -- but the benefits have also been significant and will
Having already paid the price, it would be a
grow over time.
retreat, and be forced to retake the already
us
to
for
disgrace
captured ground again in the future.
We

However, some observers now advocate just that -- a policy
of faster money growth in order to spur the economic recovery.
In reply, I can only point again to the high price that has been
paid to get the degree of price stability we have today. Were
to inflation, the credibility of
we to reopen the floodgates
anti-inflation policy would be irreparably damaged and the cost
of ever getting inflation under control again would make our
recent experience seem pale in comparison.

learned by experience, any short-term boost to
real economic activity from overexpansion of the money supply
would be based on speculative borrowing and lending, inflationary
spending patterns, and declining investment and savings ratios.
rather, it would
Such a stimulus could hardly be sustainable;
from which the
trap
stagflation
the
into
back
soon lead us right
make the same
them.
Why
extricate
to
us
elected
American people
mistake all over again?
As we have

success in bringing inflation and interest. rates down
is yielding significant benefits in the international arena.
The direct benefits are clear -- lower dollar borrowing costs
for all borrowers in international financial markets, including
hard-pressed LDC borrowers, and removal of one source of upward
Both
pressure on domestic interest. rates in other countries.
are helping to strengthen world economic prospects.
Our

Falling U. S. interest rates are yielding an important. indirect
benefit, as wells As our interest rates have dropped in recent
months, foreign interest rates have not come down nearly as much.
At the same time, the U. S. dollar has remained very strong on
exchange markets despite the movement of interest rate differentials
against dollar assets. These events reinforce a message we have
been trying to put across for some time. While high U .S . interest
rates have had some negative impacts on other countries and have
world situation, the problems
contributed to an already-difficult
of each of our economies are primarily a result of our respective
domestic structural problems, economic policies, and economic
We regret the additional
performance.
problems the transition
process in the United States has caused our allies, and have been
doing all we can to make our way quickly through this period of
economic adjustment.
But we have felt all along that each of our
governments would be better served by looking for answers within,

rather than outside,

International

its

own

Economic Coo

economy.

eration

This having been said, I would like to underscore the
tremendous importance we attach to effective international
economic cooperation.
While sound domestic policies are crucial,
none of our economies can go
alone' We are very aware of the
opinions and aspirations of our allies, and try to take every
available opportunity to consult with them and arrive at common
understandings.
This obviously does not mean that we go into
discussions intending to sell U. S. interests short
but that we
are willing to work with our allies to find mutually acceptable
solutions to our economic problems.

carry out this commitment every day in a number of ways:
candid exchange of new ideas and points of view, through
timely notifications of policy changes or upcoming economic events
which impact on one another's policies, and through a thorough
quiet and reasoned airing of any misunderstandings
or differences.
We are fully aware that the demands
of international cooperation
sometimes require a country to forego its immediate self-interest
in pursuit of fundamental common goals. We are receptive to
approaches which focus on lasting solutions to fundamental problems.
Effective international economic cooperation should not be limited
to short-run crisis management and muddling through day-to-day in
We

through

a haphazard

manner.

At the Versailles Summit, the leaders of the Summit nations
took what I hope will be a historic step in this direction, when
they agreed to our proposal for an enhanced process of international
economic cooperation.
This agreement represents a reaffirmation
of the consensus achieved in 1975 at the first economic summit at
Rambouillet -- a consensus which led directly to the Second Amendment
of the IMF Articles of Agreement, the legal basis for the present
international monetary system.
The spirit of Rambouillet was that exchange market stability
can stem only from stability in fundamental underlying economic
policies and performance. Countries which have relatively weak
economic policies and poor inflation performance simply cannot
avoid persistent depreciation of their currencies, relative to
countries with stronger economies. And as long as market participants are uncertain about the future direction of policies and
performance in key countries, exchange rate volatility is likely
to be a fact of life. Only when all are moving toward more stable,
economic policies can we expect more stability in
non-inflationary
exchange markets'

built on the Rambouillet consensus to develop a broad
of "surveillance" over its members' exchange rate policies
To carry out this
and the economic policies which underly them.
and
confidential
annual
frank
surveillance, the IMF conducts
Executive
Board
and staff.
its
evaluations of national policies by
which
in
the
forces
members
inherent
process
While there is nothing
felt
it
is
that
in
generally
response,
to change their policies
surveillance has had some impact.
The Versailles Summit cooperation agreement centers on
periodic meetings of the Finance Ministers and Central Bank
Governors of the five countries whose currencies make up the
greater convergence
SDR -- meetings which are aimed at achieving
term.
first meeting
The
the
medium
over
in economic policies
was held
this
agreement
implementing
to
begin
among Ministers
believe
was
and
we
it
a success
Toronto,
weekend
in
over Labor Day
it
seriously.
approached
I
all
participants
that
in the sense
don't want to oversell the process -- it is essentially still a
consultative mechanism with a medium-term focus, and not intended
to produce dramatic or immediate action. But I do expect that. it
The IMF

system

will contribute to sounder and
the participating countries.
Exchan e Rate

more informed

economic

policies in

Polic

name is associated with any issue in the interS. exchange market policy. At the time this
U.
national area, it. is
the U. S. government was engaged in a
office,
took
Administration
intervention in exchange markets.
large-scale
policy of frequent
the United
the
previous Administration
of
months
six
Over the last
currencies,
in
foreign
equivalent
billion
nearly
States purchased
$8
weeks
of the
in
the
early
purchased
million
was
and another $600
Administration.
Reagan

suppose

At that point, we called "time out" to review our intervention
policy. As a result of that review, we instituted our current
policy of minimal intervention -- intervening only if necessary
to counter serious disorder in exchange markets. The underlying
rationale for U. S. intervention operations remains the same as
had been over the entire floating exchange rate period -- we
stand ready to intervene in fulfillment of our commitment under
Article IV of the INF Articles of Agreement, to counter disorderly
of that policy has
But our implementation
market conditions.
changed significantly.
This change generated controversy abroad, especially in the
early stages. With their currencies weakening against the dollar,
some of our economic partners asked us to reconsider and join them
in large-scale intervention to support their currencies.
An even
more widespread argument was based on concerns about exchange rate
volatility. It was suggested that a more activist U. S. approach to
intervention would reduce the size and rapidity of short. -term
exchange rate movements.
Our response has been that we cannot ignore the lessons we
drew from past intervention
experience.
Intervention can have an
occasional role in dealing with serious episodes of market disorders
But our reading of recent history suggests that a more active
intervention policy -- one aimed at fixing or managing exchange
rate levels -- is unlikely to succeed.

there are still some differences of opinion as
We recognize
to the effectiveness of intervention.
For that reason, we proposed
at the Summit that there be a thorough international study of the
impacts of exchange market intervention in the past. This study
is now underway, under the auspices of a group of experts from
national governments.
They are tasked with reviewing the evidence
and collective experience on the negative and positive impacts of
intervention, and producing a report for the Ninisters.
Their
report is not intended to dictate or to prescribe what the future
intervention policies of participating countries should be
rather, it is meant as an input. to continuing discussion of
topic at policy level.

The Current

In the

Financial Challen e

last

two months,

have been full of gloom
the international banking system.

newspapers

prospects for
great deal has been written and said about the possibility of
widespread loan defaults triggering a collapse of the banking
system. There have clearly been significant strains, and there
is room for concern, but I think many commentaries vastly overstate the danger. We are not in a crisis, nor do we believe a
crisis is imminent. The banking system is resilient, and able
to cope with such challenges.
and doom about

While the Mexican situation is not yet resolved, the rapid
effective response of both private and official lenders
demonstrates the capability of the financial system to deal with
very difficult situations.
More generally,
borrowing countries
are showing a greater willingness to take adjustment measures.
Assuming, as I do, that we will pass successfully through all our
present difficulties, there is a valuable lesson to be learned.
In order to maintain their creditworthiness,
borrowers are going
to have to make sure they pay greater attention to balance of
and

adjustment in the future, and run more disciplined
economic policies.
Lenders, by exercising greater caution and
prudence in their lending decisions, will help make sure they
payments
do

So.

I believe it is a positive thing that lenders
of the dangers of succumbing to the "herd
to cause overoptimistic lending in good times,
retrenchment when times are rough.
and overly-rapid
Responsible
self-interest suggests that lenders would do well to exercise normal
prudence in their lending decisions at all times, and make sure
that their rewards are an accurate reflection of the risks they
take.

At the same time,
have become more aware
instinct" which tends

The

International

Monetary

Fund

there came to be a
early in this Administration,
of"
the
International
"disapproved
Monetary
public belief that we
It is true that.
Fund.
Nothing could be further from the truth.
time and effort investigating ways in which
we spent considerable
But our reason for doing so
the IMF could be more effective.
stemmed from our basic conviction that it is an essential and
successful component of the international monetary system.
Somehow,

consultative mechanisms and surveillance activities
on the evolution and functioning
of the
influence
have a major
members'
economic
formation
of
policies.
And
the
and
on
system,
immediate
in
the
international
more
part
the Fund also takes a
adjustment process, by providing temporary balance of payments
financing assistance conditioned on the borrowers' implementation
of policies to correct thei" domestic and external imbalances.
The Fund's

In view of the large balance of payments financing needs
faced by many countries, and of the many strains on the financial
However, an overly
system, IMF resources will have to be expanded.
to weaken
pressure
under
Fund
the
would
increase
put
large quota
its conditionality, and threaten to turn the IMF from a monetary

institution into a development bank -- and potentially into an
The United States is supporting an
engine of world inflation.
in current round of negotiations:
increase
IMF
quota
adequate
an increase that would enable the Fund to meet the temporary
balance of payments financing needs of its members under normal
circumstances.
We agreed in Toronto that these negotiations
should be accelerated, and that we should try to reach decisions
of this quota increase by next
on the size and distribution
spring's

Interim Committee

meeting.

In addition, as a complement to the quota increase, we have
raised the idea of a new permanent borrowing arrangement in the
IMF, designed to provide the Fund with a standby line of credit to
deal with extraordinary circumstances which might seriously threaten
the international monetary system. There has been some suspicion
that we might be using this proposal as a diversionary tactic to
Because of this,
delay or reduce the prospective quota increase.
I want to make very clear that this idea is for a facility which,
if adopted, would be additional to and not a substitute for an
Administered by the IMF, the borrowing
adequate quota increase.
arrangement would be available on a contingency basis and could
be drawn upon by the IMF to finance access by members to Fund
resources under extraordinary circumstances.
The idea is being
discussed further and will be considered by IMF members in the
coming months, in conjunction with the quota discussions.
The

Multilateral
We

also see

development

Development
an important

Banks

continuing

role for the multilateral

such as the World Bank group.
With some modifiprocedures, the banks can expand their role as

banks,

cations in their
catalysts for the mobilization of the private sector resources which
are essential to growth and development.
In late February, we
released a thorough report on U. S. participation in the MDBs
which stressed the directions in which we think their activities
should be guided.
Our suggestions
are aimed at enhancing both
the catalytic role of the MDBs and their ability to provide
sound

economic policy advice'

of our proposals are straightforward.
We
to place greater emphasis on market forces
on
the importance of appropriate pricing structures and incentives.
We are asking the banks to make greater
resort to co-financing
and other ways of stimulating
increased private foreign investment
in developing countries.
And we will be working to ensure that
scarce concessional loan funds are reserved for the poorest of
the developing countries, while more creditworthy borrowers are
graduated to "harder" lending'
want

The key elements

the

MDBs

—

In the meanwhile, as the MDBs are considering these and other
of making more effective use of their resources, we will continue our own priority efforts to fulfill the previously-negotiated
international understandings
on funding for the MDBs.

ways

of sound economic policies to economic growth
the rationale for this Administration's
policies toward the MDBs, are amply demonstrated in a recentlypublished review of foreign aid and development, written by Professor
Raymond Mikesell under a contract from the Treasury and State Departments and the Agency for International
Mikesell's
Development.
review investigates major issues relating to official foreign aid
policy and the effectiveness of foreign aid, and arrives at a
number of specific conclusions
about how best to target and use
concessional aid resources.
The importance
and development,
and

The full text makes interesting
reading, but for this purpose
the recommendations
could be summarized in a few sentences.
First,
donors should reserve and target scarce aid resources for those
countries which need it the most and can use it most effectively.
Second, recipients should use aid in ways that contribute to broadbased economic growth, and which complement private sector activity
rather than replacing
The aim on both sides should be to
establish the preconditions for self-sustainable growth.

it.

the review indicates that the major lesson to be
existing studies of countries in the process of development is that the government policies which are most closely associated with successful development are those which allow the
incentives of the free market to work, and which are conducive to
the expansion of exports and to inflows of private capital. Within
foreign aid can make a major contribution
a sound policy environment,
There are undoubtedly cases in which aid
to economic development.
has been of little value in promoting growth, and even cases in which
it was counterproductive. But more generally there is ample
evidence that aid, provided under proper conditions and used effectively, can be a powerful stimulant to development and to the
growth.
establishment of the preconditions for self-sustainable
More

derived

broadly,

from

Conclusion

Just as the current international monetary problems have a
familiar ring to them, so does our policy response. Our emphasis
market-oriented
economic policy is
on a coherent, predictable,
not
the
first
to recognize how
we
are
not a new idea. Certainly
economic
and developments
to
growth
is
crucial private enterprise

10
What distinguishes
Reagan Administration
policies is not
their novel content, but rather the consistency and determination
with which we are applying our basic economic philosophy.
The
resulting policies have sometimes differed considerable from those
of previous Administrations,
and on occasion those departures have

been viewed with skepticism

and alarm.

This Administration has worked hard since entering office,
not only to put its policies in place but also to convince others
of their validity. We considered it. important to make clear that
we expect no overnight
miracles, but instead have designed our
policies for consistently good economic performance over the long
haul. Opinions and philosophies differ, but I hope that both our
consistent and logical underlying approach, and the strengthening
economic performance of the U. S. economy, are going a long way to
convince the skeptical.

epariment of ihe Treasury

Washington,

O.C. ~ Telephone 566-204%

4:00 P. M.

FOR RELEASE AT

October

19, 1982

TREASURY'S WEEKLY BILL OFFERING

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $11,200 million, to be issued October 28, 1982.
This offering will provide $925
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $10.275 million, including $1, 080 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1 589 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 $5, 600
million, representing an additional amount of bills dated
January 28, 1982I
and to mature January 27, 1983
(CUSIP
No. 912794 BY 9), currently outstanding
in the amount of $10, 825
million, the additional and original bills to be freely
~

interchangeable.
182-day

bills for

October 28, 1982,
No. 912794 CS

1).

approximately

and

to mature

$5 600 million, to
F

April 28' 1983

be dated
(CUSIP

Both series of bills will be issued for cash and in exchange
Tenders from
for Treasury bills maturing October 28, 1982 '
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will be accepted at the
Addiweighted average prices of accepted competitive tenders.
tional 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. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $1p, ppp
and in any higher $5, 000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Tr easur y.

Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D . C .
20226, up to 1:30 p .m . , Eastern Daylight. Saving time, Monday,
October 25, 1982.
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 .

Tenders over
Each tender must be for a minimum of $10, 000
$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 three decimals, e g , 97 920 Fractions may not be used

. .

institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve Bank
Qf New York their positions in and borrowings Qn such securities
if the names of the
may submit tenders for account of customers,
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 as of 12:30 p .m . Eastern
time on the day of the auction.
Such posit, ions 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
Banking

in the

bill

being offered exceeds 9200 million

par amount, of the bills applied for
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 .
Payment, for the full
must. accompany all tenders

deposit need accompany

tenders from incorporated banks
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 .
No

and

trust

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 O«obe»8i 1982&
in cash or other immediately-available
funds
or in Treasur y bills maturing October 28, 1982.
Cash ad ustments
will be made for di f ferences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.

Section 454(b) of the Internal Revenue Code, the
which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill.
If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
Under

amount

of discount at

of the Treasury Circulars, Public Debt Series
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
Department
Nos. 26-76 and

any

Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
%ashington, D.C. 20220

October 18, 19 82

PRESS RELEASE

Money Market

Deposit Account

In the attached Federal Register notice the Depository
Deregulation Committee (DIDC) announces a 15 day
public comment period on the new money market deposit account.

Institutions

Depository Institutions Act of 1982
directs the DIDC to authorize a new Federally insured account to
be offered by commercial banks, savings and loan associations
and mutual savings banks that is directly competitive with money
market mutual funds.
The Garn-St Germain

The Garn-St Germain Act requires that this account: (1) have
on the maximum rate of interest payable; (2) be
in effect no later than 60 days from enactment of the GarnSt Germain Act; (3) not be subject to transaction account reserve
requirements
(as defined by the Board of Governors of the Federal
Reserve System, as of August 1, 1982) even though no minimum
maturity is required, and even though up to three preauthorized

limitation

transfers plus three third-party transfers are
per month; and (4) be "directly equivalent to and competitive with. money market mutual funds registered with the
Securities and Exchange Commission under the Investment Company
Act of 1940. "
or automatic
permitted

The Committee

requesting

comments

features not

specifically set forth in the Garn-St Germain Act; ~e. , minimum
initial denomination, maintenance balance, denomination of withdrawals, whether institutions should be required to reserve the
right to require seven days' notice of withdrawal, and whether
loans should be permitted to meet the minimum denomination

requirement.

Attachment

:OMPTROLLER OF THE CURRENCY
'EDERAL RESERVE BOARD

FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION

FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY

DEPOSITORY

INSTITUTIONS

DEREGULATION

COMMITTEE

12 CFR Part 1204

(Docket No. D-0026]
Money
AGENCY:

Depository

ACTION:

Proposed

("Committee"
Institutions
new

Institutions

insured

Deregulation

Institutions

is required

)

Deposit Account

by the

Deregulation

Garn-St Germain

Act of 1982 ("Garn-St Germain

mutual

Depository

Act") to authorize

limitation

The Garn-St Germain

funds.

that this account: (1) have

Committee

to all depositors,

deposit account, available

compete with money market

requires

Committee.

rulemaking.

The Depository

SUMMARY:

Market

Act

on the maximum

rate of interest payable; (2) be in effect no later than 60
days from enactment of the Garn-St Germain Act; (3) not be
subject to transaction account reserve requirements {as defined
by the Board of Governors of the Federal Reserve System, as of
August

1, 1982)

even though

no minimum

to three preauthorized

maturity

is required,

or automatic

and

transfers

transfers are permitted per month; and
(4) be "directly equivalent to and competitive with money market
mutual funds registered with the Securities and Exchange Commission
under the Investment Company Act of 1940. No minimum denomination
plus three third-party

was

set forth in the Garn-St

Report suggested

requesting

comments

Germain

be no more than
on

Act, although
$5000 '

the Conference

The Committee

features not specifically

set forth in

the Garn-St Germain Act;

should be required

seven days'

notice of withdrawal,

DATE:

meet the minimum
must be

Comments

denomination,

of withdrawals,

whether

to reserve the right to require

institutions
permitted

initial

minimum

denomination

balance,

maintenance

~e.

and whether

denomination

loans should be

requirement.

received by (15 days from the date of

publication).
Interested parties are invited to submit written data,
ADDRESS:
views, or arguments concerning the proposed rules to Gordon
Eastburn, Acting Executive Secretary, Depository Institutions
Deregulation

Committee,

Room

15th Street and Pennsylvania
All material

submitted

should

1058, Department
Avenue,

of the Treasury,
D. C. 20220.

N. W. , Washington,

include

the Docket

D-0026

Number

and

for inspection and copying upon request, except
as provided-in -$ 1202. 5 of the Committee's Rules Regarding Availability of Information (12 CFR $ 1202. 5).
will be available

FOR FURTHER

INFORMATION

CONTACT:

Alan

Priest, Attorney,

Office ~i

of the Currency (202/447-1880); Joseph DiNuzzog
Federal Deposit Insurance Corporation (202/389-4147);

the Comptroller
Attorney,

Senior Associate General Counsel,

Rebecca Laird,

Federal

Home

(202/377-6446); Paul S. Pilecki, Senior Attorney
Board of Governors of the Federal Reserve System (202/452-3281);
or Elaine Boutilier, Attorney-Adviser,
Treasury Department

Loan Bank Board

(202/566-8737).
LIST

OF SUBJECTS IN

SUPPLEMENTARY

12 CFR Part 1204:

INFORMATION:

tion Act of 1980 (Title
~se

("DIDA") was

Banks, banking.

The Depository

II of P. LE

Institutions

96-221; 12 U S Cenacted to provide for the orderly
~

Deregula-

3501 et

pl as,

~ut

and

ultimate

of interest

of the limitations

elimination

that

and dividends

by depository

may

rates

be paid on deposit accounts
I

institutions

as rapidly

Under DIDA, the Committee

warrant

on the maximum

as economic conditions

is authorized to

phase out

interest rate ceilings by any one of a number of methods including the creation of new account categories not subject to interest
rate limitations or with interest rate ceilings set at market
rates of interest.
Section 327 of the Garn-St Germain Act specifically requires
the Committee to authorize a new insured deposit account, which
"shall be directly equivalent to and competitive with money
funds. " The Garn-St Germain Act prohibits

limitation
on the maximum rate of interest payable on the new account.
The
Garn-St Germain Act also states that the account shall not be
subject to reserve requirements on transaction accounts even though
no minimum maturity is required and even though up to. three
preauthorized or automatic transfers and three transfers to

market

any

third parties are permitted.
The Committee

requested

a new deposit

comment

on short-term

After the June 25, 1981 meeting,

deposits previously.
Committee

solicited public

has

desirability of authorizing
with characteristics similar to money

comments

instrument

the

on the

the Committee did not put forth a
specific proposal at that time. 46 Fed. Reg. 36712 (July 15,

market mutual

1981).
requested

although

funds,

Aft. er the September
comments

time deposits.

22, l981 meeting,

the Committee

three specific proposals

46 Fed. Reg. 50804 (October

for short-term

15, 1981).

of the short-term

One

1981 notice

is similar

denomination

was a $5000-minimum

in concept to the account

Act.

Germain

Consequently,

on an instrument

in the October 15&

accounts proposed

account, which

set forth in the Garn-St
has received

the Committee

comments

all of the features

that possesses essentially

Certain features

account.

of the congressionally-mandated

NOW

are

the Garn-St Germain Act and cannot be changed.

mandated

Ho~ever,

some

features were

left

to the Committee's
is requested only on features

by Congress

discretion. Accordingly, comment
not specified in the Act. Public comment is being requested in
view of the interest expressed by competitors of depository
institutions for an opportunity to comment on the features the
Committee

may

designate.

The new account

proposed

by the Committee

would

have the

features as required -by the- Garn-St Germain Act and its
legislative history: (1) no minimum maturity; (2) no interest rate
ceiling; (3) an initial minimum denomination no greater than $5000;
following

(4) allow

to three preauthorized or automatic transfers and three
other third-party payments (including drafts) per month without beup

subject to transaction account reserve requirements;
(5) available to all depositors; and (6) insured by the FDIC or FSLIC. The
Committee is considering whether or not to impose a minimum iniing

tial
and

denomination

requests

minimum

and/or

comments

minimum

NOW-account

maintenance

balance of less than $5000

this feature.

balance. the Committee

tation (such as the
the

maintenance

balance,

ma~

In connection

impose

rate)
and

with the

interest rate limi-

accounts which

prohibit

fall

below

loans to meet the

initial

minimum

to be

withdrawals

sidered

(1)

made,

and

by the Committee

depositor

will permit limited
certain requirements are being conThe account

drafts;

mail, telephone,

except that telephone

transfers

e. cC-

to these withdrawals,

in regard

denomination

a minimum

by the

denomination.

(2) unlimited

withdrawals

or in person,

messenger

to third parties or another de-

posit account of the depositor would be regarded as preauthorized
transfers; (3) require an institution to monitor on an ex ~ost
basis to determine compliance with the withdrawal limitations;
and (4) require an institution
to reserve the right to require
seven days' notice prior to withdrawal.
Although the maximum
rate of interest paid on the account may not be limited, the

Committee

quirements

terest for

considering

that institutions

concerned

other time deposits

time period,

a limitahion

on the time

interest rate.
restrict overdraft credit arrangements
with this new account.
tion

may

guarantee

The Committee

posed above,

issues:
(a)

and

requests

What should

requests

be the minimum

comments

initial

Report suggests

than $5000, and

interest has

denomination.

Should

the maintenance

initial

denomination?

as pro-

on the new account

(The Conference

$2500 minimum

(b)

comments

particularly

rate of intherefore the Committee is
period for which an instituThe Comm-'ttee also may
offered in connection

by guaranteeing

substantial

the re-

will circumvent

on the following

denomination?

that

be no more

been expressed

in a

)

balance differ from the

If so,

what

should

be?

What would

be the possible

consequences

balance?

no maintenance

Would

easier to have the maintenance
the

(c)

initial

minimum

be operationally

balance the

same

denomination?

institution be required to pay a lower
rate of interest, such as the NOW-account rate, for
Should an

fall

accounts which
(d)

of having

so, should

denomination

Should a minimum

below the maintenance

balance2

set for drafts?.

be $100, $500, or some other

amount?

(e) Should depository institutions be required to
reserve the right to require seven days' (or some
other time span) notice prior to withdrawal?
(f) Should loans be permitted to meet the minimum

initial
(g)

Should

denomination'?
any

deposits2

restrictions
Should

be placed on additional

sweeps

from other

accounts be

permitted?
(h)

Should the time period

tion can guarantee
If so, what should
have a maximum

(i)

How

should

drawals

maturity2
on the number

per month be enforced?
&~.

reguir~d

of with-

For example,

should

to monitor. accounts

on an

to determine compliance? How should
be defined for purposes of this limitation)
the date of payment by the institution or

ex ~ost basis

Should

the limitation

the institution
"month"

for which an instituinterest rate be limited?
be? Or should the account

(j)

draft control for purposes of compliance with the three drafts per month limitation?
Should any restrictions be placed on overdraft
credit arrangements offered in connection with
this account?

(k)

Should unlimited

date written

on the

withdrawals

by mail,

telephone,

mes-

to the depositor?
(The staff believes that telephone transfers should
be regarded as preauthorized transfers if the transfer
is to a third person or to another deposit account of
the same depositor. )
(1) Is thirty days (or some shorter or longer period)
adequate lead time for depository institutions to
implement operational changes for this account?
The issues set forth above are not intended to limit the
area of comment. The Committee requests comments on those
questions and on any other aspect of the account which the public
wishes to address, particularly with respect to characteristics
that would make this account "directly equivalent to and competitive with" money market funds.
The Committee has considered the potential effect on small
entities of the proposal to establish a new deposit instrument,
as required by the Regulatory Flexibility Act (5 U .S.C. $ 603 et
action, in and of itself,
~se . ). In this regard, the Committee's
senger,

would

or in person be permitted

not impose any

Consistent

new

reporting

with the Committee's

deposit interest rate ceilings,

or recordkeeping

statutopr

mandate

this proposal

requirements.

to eliminate

would- enable

all

depository

institutions

place for short-term

effectively in the marketDepositors generally should benefit

to compete

funds.

since the new instrument would
provide them with another investment alternative that pays a
If low-yielding deposits shift into
market rate of return.
from the Committee's

proposal,

institutions might experience increaseQ
costs as a result of this action. However, their competitive
position vis-a-vis nondepository competitors would be enhanced
by their ability to offer a competitive short-term instrument
at market rates. The new funds attracted by the new instrument
(or the retention of deposits that might otherwise have left the
institution) could be invested at a positive spread and would
therefore at least partially offset the higher costs associated
with the shifting of low-yielding accounts.
The Committee is asking for comments for a 15-day period.
This short comment period is made necessary by the fact that the
Garn-St Germain Act requires the new account to be available within 60 days of enactment.
Because the Committee desires to give
the depository institutions adequate time to prepare and market
the account, time for comment must be limited to allow time for
compilation and consideration of the comments, a Committee vote
on the features and publication of the final rule.
Therefore,
comments on this account should be submitted promptly. .
the

new

By Order

account, depository

of the

Committee,

October 15, 1982.

Gordon Eastburn
Acting Executive Secretary

THE SECRETARY OF THE TREASURY
WASH I NQTON

October 20, l982
NEMORANDUM

FOR THE VICE PRESIDENT

FRCN:

DONALD

SUBJECT:

Proposed Administration

REGAN

Task Force on Consolidation

of Financial Regulatory Agencies
Proposals for the comprehensive study and review of financial institutions' deregulation have been advanced this year by
members of Congress and others.
Most notably, Representative
Timothy Wirth (and approximateLy sixty co-sponsors) recently
introduced legislation calling for the establishmhnt of a

Commission on Capital Markets.
The proposed Commission would
have a combined Congressional/Industry/Administration
membership

its task would be to "evaluate the regulation of financial
intermediaries.
.and the functioning of such intermediaries in
the accumulation and allocation of capital within the United
States economy. "
and

Our view has been that the creation of any such
omnibus"
study body is unnecessary and would delay consideration of
financial institutions reform legislation.
Proposals for
further deregulation would be put on hold pending the outcome
of any commission/task force report, and policy positions
in certain major areas of
already taken by the Administration
deregulation would undoubtedly be opened up to needLess and

potentially

counterproductive

new

debate.

We believe that, instead of duplicating
the voluminous work
that has already been done on financial institution deregulation,
a task force could more usefully address the equally important
question of consolidating the Federal agencies which regulate
has yet to define a
The Administration
financial institutions.
specific policy position in this area and the contribution of a
In our opinion, any such task
task force could be significant.
force ought to be established in conjunction with the Administration's regulatory reform task force which you chair. A clear
task force is that it could
advantage of such an Administration
take a "targeted" approach to a specific regulatory problem, and
at the same time it would provide a constructive means of getting
each Federal regulatory agency involved in the Administration'a
financial reform program. For example, SEC Chairman John Shad,
who has expressed a great deal of interest in financial reform
issues, now agrees with us that the proposed Administration task
force on regulatory consolidation is the right way to go at this

time, and he intends

to be a highly

involved

participant.

The Need

for

enc

Consolidation

existing allocation of responsibilities among Pederal
financial institutions is highly complex'
evoking characterizations
such as crazy quilt" and labyrinth
by critics. For example, three separate agencies have responsibility for the regulation of the commercial banking industry
alone: The Comptroller of the Currency regulates nationallychartered banks. The Pederal Reserve Board regulates statechartered banks that are members of the Pederal Reserve System,
The Federal Deposit Insurance
and also bank holding companies.
Corporation has responsibility for state banks that are not Fed
members.
Other Pederal agencies regulating depository institutions are the Federal Hane Loan Bank Board and the National
Credit Union Administration.
At least eight Federal agencies are
involved in the regulation of aspects of the securities markets. ~
deal with the regulatory agenOf course, financial institutions
cies of the various states as well.
agencies regulating

Since the late 1930s, numerous proposals for banking agency
consolidation have been put forward by Congressmen, regulators,
observers. The present movement toward deregulaand independent
tion of financial institutions raises new issues regarding regulatory agency structure, lending additional force and timeliness
to many of the arguments for consolidation.
Proponents

single agency

of consolidation have long argued thats (1) a
clearly fix responsibility for regulation

would

Congressional
and provide a focal point for Administration,
and public concerns regarding regulatory policyg (2) agency consolidation would facilitate the handling of problem institution
cases; (3) consolidation would improve the regulation of holding
(under
companies and their subsidiary depository institutions

it is sometimes difficult for a single
to get a complete picture of the relationship between
companies and subsidiaries): and (4) the existing division
of responsibilities among agencies permits differential treatment
of different institutions, giving rise to inequities (the several
agencies notably have differed among themselves in their policies
toward mergers, holding company acquisitions and activities, and
in their supervisory and assistance practices and requirements).
the existing system,

agency
holding

e The SEC; Commodity Futures Trading Commission; Federal Home Loan
Bank Board; Comptroller of the Currency; Federal Savings and
Loan Insurance

Corporation;

Federal Deposit Insurance Corporation;
and the Federal Reserve

Securities Investor Protection Corporation;

Board.

The Administration

Task Force on Consolidation

process of financial institution deregulation now
will bring about significant changes in the structure
of the nation' ~ financial system and, of necessity. in the
structure and functions of the regulatory agencies. Accordingly,
«recommend that our proposal for the establishment of an
Administration
task force to study questions regarding the
scope and nature of regulatory consolidation and reorganiration
be implemented as early as possible.
The
underway

it,

the task force would be chaired by the Vice
of the Treasury serving as Vice
Chairman and furnishing
Other members of
you staff support.
the task force would include the heads of the independent depository institution regulatory agencies (the Federal Reserve Board,
the Federal Deposit Insurance Corporation, the Federal Savings
and Loan Insurance Corporation,
the Federal Home Loan Bank Board,
and the National Credit Union Administration),
the Comptroller
of the Currency, the Chairman of the Securities and Exchange
Commission, and senior officials of the Department of Justice,
the Office of Policy Development, and the Office of Management
and Budget.
As we view

President,

with the Secretary

restatements of fixed public positions and to
dialogue free of the pressures of well-known industry
positions, the task force would not include members of Congress
or representatives of the private sector. However, the viewpoints
of all such external parties will be brought to the attention of
the task force as advisory resources by means of private meetings,
conferences, and solicitation of public comments.
To avoid mere

promote

task force would be expected to submit its report and
executive branch action and legislation as soon as
possible. (A factor in the timing of the task force's report is
Garn-St Germain Depository Institutions
that the newly-enacted
l982"
Federal deposit insurance agencies each
the
Act of
directs
to undertake a study of the deposit insurance system and to
Ideally,
report their findings in not later than six months.
those insurance agencies' reports ought to be reviewed by the
task force and incorporated into its information base. )
The

recommend

I would like to have your approval and support of this idea
as soon as possible. so that we might give it appropriate publicity.
In the absence of our initiative, other poorly conceived proposals
(e.g. , Representative Wirth' ~ ) will gain momentum and diffuse
financial deregulation efforts.
Administration

of the Treasury

department

washington,

D.C. ~ Telephone 566-2041

For Immediate Release
October 21, 1982

ADDRESS FY
BERYL W. SPRINKEL
UNDFR SECRETARY FOR YONFTARY AFFAIRS
BFFORF TFF
GRFATER KANSAS CITY AREA AS. OCIATION OF
LIFE UNDERWRITERS
KANSAS CITY, ÃTSSOURI

October 21, 1982

Good

afternoon.
I was born and raised in missouri and it is
for me to be able to come back to my home state
today.

a special treat
and be with you

Before I turn to economics, I would like to take Rust a
to salute and to pay tribute to a areat lady of missouri
Bess Truman.
She exemplified the finest aualities of
Missouri, of the midwest and of America.
moment

Let's take

look at the true picture of the economy: what it
and where' it is aoina.
I am convinced that we
are on the horizon of a much brighter future for this country.

was, what

took

What

it is

shape was the economy

office?

really in

when

this Administration

left. office the rate of
When the previous Administration
inflation had ballooned up to almost 13 percent. The prime rate
had hit an incredible peak of 21 and a half. percent.
Productivity arowth, which was around 3 percent in the 1960s, had
And i. t
slowed by nearly one-half in the 70s to 1.5 percent.
dropped two-tenths of a percent a year from 1977 to 1981. As a
result of the double whammy of inflation and interest rates our
national rate of personal savings had dropped to an abysma 4. 6
percent during the first auarter of 1981.
all of this is discouraaing on two counts. First, it
inherited
that the economic situation this Administration
it charitably.
was truly a mess --- and I think that is puttina
Secondly, there are some who really believe that those who
the nation with sky hiah interest rates and inflation, declining
productivity, investment and savings did a aood ~ob. Fortunately
the American people know better. And the American people also
know, as the president said on television last week, that the
economic troubles this country has been experiencina are not
entirely the fault of one political party or one Administration.
They are the result of a couple of decades of economic
Now

meant

mismanagement.
R-996

of the post-war period, many economists thouaht that
a little inflation was a qood thing, that it could bring
down and add to tax revenue too. The idea was that
unemployment
inflation could reduce the value of wages, make labor cheaper,
and promote hiring.
for
Apparently, working people could be tricked into working
bracket
through
taxes
a lower real waqe, and into paying higher
who
creep, while politicians and businessmen were the only ones
rewards.
the
would
reap
and
would know what was really happening
For

much

Working
This arrogant and elitist theory was sheer nonsense.
takes
government
much
how
are,
what
prices
full
well
know
people
out of their paychecks, and what their wages will buy after taxes
and

after-tax waae.
Inflation does not reduce
of

aware

it,

and

unemployment

people catch on awfully

once people become

fast.

fact, inflation increases unemployment by increasing taxes
raising interest rates. Over the last. 15 years, this has become
In

blatantly

obvious.

inflation. And
We have had a decade and a half of rising
after each business cycle, the lowest level that inflation
reached was worse than it had been at the previous low. The same
The best that could be done kept
was true for unemployment.
getting worse. At the same time, interest rates kept reaching
new

peaks.

Inflation acts through the progressive income tax code to
increase taxes on labor thus reducing the reward to work effort.

also raises the cost of hiring American

labor in a highly
U. H. employment falls. The
cost-of-living increases as well as modest real wage qains pushed
middle income families from the 17 percent federal income tax
bracket in 1965 to the 24 percent bracket in 1981.
competitive

world

economy.

Those higher up on the income scale, earning twice median
incomes, were pushed from the 22 percent bracket in 1965 all the
way to 43 percent in 1981.

Incredibly, businesses and workers now face combined tax
rates of 40-to-55 percent on added wages. It costs a firm
between $1.67 and $2. 22 to give to a worker a S1 after-tax raise.
on labor has risen, firms have faced
wage; workers faced lower wages after
and inflation.
fell. As both sides struggled
Employment
afloat, only the government gained.
As

the tax burden

rising real pre-tax
Rising personal

income

tax rates have also retarded

taxes
to stay

savings

rate of return on personal saving was actually neaative
Savers
during the late 1970s after taxes and inflation.
responded in the only sensible way.

The

resulting collapse of the saving rate deprived the credit
potential home buyers and expanding businesses of about

The

markets,

billion a year in badly needed investment funds.
Inflation hit business taxes hard, too; causing a sharp
decline in the after-tax return on productive investment due to
taxation of phantom inventory profits and inadeauate allowances
for the replacement of capital.
The tax code does not permit depreciation allowances to be
adjusted for inflation.
Before the Fronomic Recovery Tax Act of
1981, plant and eguipment were wearing out faster than firms were
allowed to report to the IR&. Conseouently,
real profits were
overstated and overtaxed. The after-tax cost of plant and
eauipment rose, the rate of return fell, and investment plans
were cancelled.
Productivity stagnated, real hourly wages fell for three
These
years, and employment growth was held below its potential.
impacts were substantial.
Inflation also works through interest rates to reduce growth.
Inflation rates raise interest rates because lenders know they
will be repaid in cheaper dollars. They have to charge an
interest rate at least as high as the inflaton rate to make up
for loss in the value of money. In fact they must charge still
more to cover the taxes on interest, and then a bit more to have
a real return left after taxes and inflation.
These high interest charges put homebuyers and buyers of
plant and eauipment in a cash saueeze. Yany home purchases or
Productivity, wages, and
investment plans are cancelled.
$40

fall.

employment

That

is the

kind of trend

Administration

Twenty-one

it is

have been seeing

precisely this trend
set out to reverse.

for far too long.

And

months

ago,

when

five critical problems: high taxes,
inflation, high interest rates and

in this country
which this

came into office, we faced
runaway Government
spending,

unemployment.

to the roots of unemployment meant fighting inflation
interest rates caused by runaway Government spending and
taxing and excessive money creation. There is reallv no other
solution because we know that, when inflation shoots up, it
is
Now inflation
triggers a delayed-action rise in unemployment.
Getting

and

high

being driven
So

back down,

started

and

by winning

lower unemployment

the

first real

will follow.

tax cut for the

Our program brinqs down
American people in nearly two decades.
time, we' ve been
same
the
At
income tax rates 25 percent.
and the rate of
regulations
Government
wasteful
cutting costly,
We'
rate of
the
reduced
ve
increase in Government spending.
Government spending growth by nearly two-thirds.

registered 12 4 percent in 1980, is down to
just 5. 1 percent so far this year.
that one of the important
Let me say, parenthetically,
effects of this change from an inflationary economy as it qoes
is the impact on relative
through the process of disinflation,
In periods of increasing
assets.
prices of real and financial
inflation, real assets -- houses, land, gold, antiaues -- provide
In
investors with the greatest expected real rate of return.
periods of declining inflation, financial assets -- stocks,
bonds, bank accounts, money market funds -- provide the qreatest
expected real rate of return.
During much of the last decade, as inflation rose rapidly,
investors realized that they received their best expected rate of
return on real assets, and they transferred their money
The prices of those real assets -- houses, land,
accordingly.
gold -- went up. And the prices went down on on the assets they
sold to make those purchases -- stocks and bonds.

Inflation,

which

We are
in a period of decelerating inflation.
i. nvestors
have begun
the reverse of this process:
to sell their real assets and put their money into financial
assets. It is not an accident that, in recent months, the prices
of houses and gold have come down, while bond prices and, more
recently, the Dow Jones Index, have risen. The next step in this
adjustment process is renewed economic expansion and job
We are
experiencinq

now

creation.

I'm not saying that everyone is selling houses and rugs to
stocks and bonds. Rut there is some of that qoinq on. And
in a 4 trillion dollar economy, which we are on the verge of
having, a shift of 1 or 2 or 3 percentage points puts ters of
billions of dollars into the economy in the form of expanded

buy

credit. Thanks to declining inflation, that phenomenon
and additional
happening,
credit needed for economic
expansion is forminq rapidly.
This results in downward pressure on interest rates; and we
are quite confident that this downward pressure will overwhelm
the budget deficit in its upward pressure on the level of
interest rates.
Interest rates, which had climbed as high as 21-1/2 percent
before we took office, have in fact fallen. The prime is now
The averate rate for three-month
12 percent.
Treasury bills
auctioned this August was 660 basis points lower than last
potential

is already

August.

Those

rates are not

low enouah,

but certainly

headinq

the right dircetion.
Unemployment,

always

lagging

recession, has not yet stopped its

indicator
upward

in times

drift.

But in 21 months, we' ve already brought tax rates down by a
ouarter, with the third installment coming next July, and brought
down the rate of increase in government
spending by nearly
That's helped us to bring down the rate of inflation
two-thirds.
by more than half, and that's helped us to bring down interest
rates by 40 percent.
So, on four out of five problems that we faced at the
beginning of 1981, we' ve made important progress.
We haven' t
solved them all, but we' re making real headway.
The Federal
Reserve recently decided to lower its discount rate to 9.5
percent, the first time this key interest rate has gone below two
digits since 1979, and the fifth reduction in just four months.
This demonstrates the Fed's confidence that inflation and market
rates will continue coming down, and its confidence that we can
work together for a healthy, noninflationary
recovery. All of
this lays the ground work for a recovery that will mean more jobs
and more opportunity
for all our people. But it's a delayed
reaction.

President

Reagan

announced

earlier this

that

month

are

going to stay the course. The four part program of this
-- reducing tax rates, reducing government
Administration
spending, reducing regulation and having slow moderate growth in
the money supply -- is based on economic principles that are
sound.
Their validity has been well documented time and time
again. They have worked in the past and they are starting to
And I might add, that
We will stick with our policy.
work now.
contrary to much of what you read from the political pundits, I
that the Federal Reserve Roard will stick to its
am confident
announced policy of obtaining steadv, moderate growth in the
money

supply.

believe that the Federal Reserve's announced monetary
targets are appropriate and we are confident that the Fed will
We

persist in its efforts toward long-term monetary control.
of money growth which persists for. several
A reacceleration
months would have disastrous effects on our long-run goal of
price stability and permanently lower interest rates. It would
greatly reduce the potential for future output
growth and would be an engraved invitation to
in as many years.

and

employment

third recession

before the Rusiness Council in Rot
to two near-term events which
pointed
Springs, Chairman Volcker
numbers for the next few
Y1
the
are probably going to distort
movemer
t of billions of dollars
the
is
factor
first
weeks. The
out of All-Savers accounts and into other forms of financial
In his speech recently

The second factor is the initiation of the newly
instruments.
legalized bank certificates. What this means is that it might be
in the N1 aggregate over
more difficult to interpret movements
mean is that the
not
What it does
the next several weeks'
Administration
or the Federal Reserve Tiave in any way chanqed the
importance it places on achieving our lonq-stated goal of
moderate, stable qrowth in the money supply.

In the past two months
by over 200 points

seen the stock
--we a have
increase
phenomenal

market

explode

of 25% in 60
that the
believe
would
have
who
Now
there
are
those
you
days'
only reason the value of stocks has gone up is that the economy
is so weak. The argument is that the demand for credit is so
slack that interest rates are therefore going down and therefore
the stock market has moved up on the news of lowering interest
rates. If the logic were not so contorted that argument might be
plausible.
The truth, however, is that interest rates have declined
because the market is now perceiving that inflation is not only
is totally committed to
down, but that this Administration
keeping it. down.
The stock market soared because investors are sensing that
the American economic machine is stirring aqain and that a
genuine recovery is on the horizon.
It is worth noting here that
in every recession since World War II -- and there have been
eight of them -- an upward movement in the stock market has
advanced the recovery by three to six months.
I am confident
that this pattern will hold true this time as well.
upward

are seeing signs of that recovery already.
In
to the stock market, we have seen the index of leading
indicators move up four of the last five months. We have seen
GNP up in the second auarter
and up again in the third auarter.
It was just announced that housing starts for the month of
September are up 14. 4 and new business start ups for this year
are at a near record pace.
And

addition

final statistic. In 1977, venture capital investment. in
was around $50 million.
Last
it was $1.4
billion and this year it will probably be even year
hiqher. That says
two things.
First, a lot more jobs -- real jobs -- are going to
be created.
And secondly,
there are a lot of people out there
who have faith in a brighter
economic future.
One

small businesses

businessmen have been telling me that a 12 percent prime is
about the level at which people will buy again; the level at
which home builders can borrow and still make money; the level at
which people feel they can afford a new car.
The result of all this is a consumer led recovery.
And those
recent historic highs in the stock market indicate to me that
confidence in the recovery is qrowinq.
I believe we are

It will
beginning the long climb to sustained economic growth.
not be fast and it will not be easy. But we now have the program
in place to make it happen.
And -- for a change --- we have a
President in the White House with the wisdom and courage to stick
with that program -- not for the sake of short term political
I am confident
gain but for the long term sake of the country.
he will be successful in restoring economic growth and prosperity
in the weeks and months ahead.
Thank

you very much.

department

of the Treasury

D.C. ~ Telephone 566-204$

Washington,

REMARKS OF PETER
WALLISON
GENERAL COUNSEL
TREASURY DEPARTMENT
U.
BEFORE THE
BAR ASSOCIATION NATIONAL INSTITUTE

LUNCHEON

AMERICAN
ON THE NEW FINANCIAL
SERVICES INDUSTRY
MARRIOTT KEY BRIDGES HOTEL
WASHINGTON'
D. C.

OCTOBER

21' 1982

DEREGULATION OF BANK HOLDING COMPANIES AND INSURANCE COMPANIES:
A COMPARISON OF TWO RESPONSES TO THE GROWTH OF A FINANCIAL
SERVICES INDUSTRY

R-99'7

in the financial services
particularly the advent of the diversified
financial services firm, have led to proposals for
. changes in government regulation. This paper considers

Recent developments

industry,

two proposals for such reform
Bank Holding Company Deregulation

the Administration's
Act and the Heimann

AND

proposal for reform of the New York
Insurance Law -- contrasting their differing approaches
to deregulation. *

Commission's

DEVELOPMENTS

IN THE INDUSTRY

PROPOSALS

FOR

CHANGE

changes have occurred in the financial
in recent years and the prospects for
changes are by now well known.
The causes of the

Dramatic

services industry
future

are also familiar:
(i) increasing public
sophistication about and demand for convenient financial
services; (ii) changes in technology that have
revolutionized the character and ways of delivering
financial services; (iii) the aggressive strategies of
firms that have restructured themselves as diversified
financial services organizations; and (iv) the increasing
competitive pressures on banks (and other traditional
financial intermediaries), challenging both their role as
deposit takers and their role as lenders.
upheaval

the effects of these
Many who have considered
developments on insurance companies and banks have
observed that these firms must be able to combine into
diversified financial services firms in order to compete
Movement in this
in a radically restructured market.
direction has already begun. In the insurance field it
started a number of years ago with a trend toward the
combination of life insurance and property/casualty
insurance companies such as
More recently,
companies.
Prudential and Kemper, and conglomerates with strong
The author wishes to acknowledge the assistance of
Donald
Tourney, Esquire, Special Assistant to the
General Counsel of the Treasury, in the preparation of

this paper.

term "closely related
a firm which owns or

to banking" quite narrowly, so that
controls a bank cannot in general
own or control subsidiaries
engaged in offering other
kinds of financial services. *
The purposes of these restrictions are to
preserve the safety and soundness of the banking
- subsidiaries
of a holding company, to prevent a bank from

holding company affiliates with unfair
advantages, to eliminate potential conflicts of
interests between the bank's roles as a lender to and as
an affiliate of non-banking
companies, and to prevent the
concentration of resources in a few giant corporations
(see 12 U. S.C. 5 1843(a)(2)). Their effect, however, has
been to prevent bank holding companies from combining
firms offering other financial
With or establishing
services and thus to handicap bank holding companies and
their subsidiary banks in their competition with

providing
competive

financial

conglomerates.

The Administration's

proposal,

which

was

in June 1982 as S. 2490, (97 Cong. , 2d Sess.
bank holding companies, through
allows
(1982)),
subsidiaries, to engage in any activities the Federal
Reserve Board determines by regulation to be "of a
financial nature. " Id. 55 8 a 9. The bill provides that
this term the Board shall give primary
in interpreting
consideration to the public benefits of increased
competition between bank holding companies and other
financial concerns. Id. 5 9 Moreover, the bill
specifies certain activities in which a bank holding
company subsidiary may engage, whether or not
characterized
by the Board as "services of a financial
"
nature.
In the securities field, subsidiaries may deal
in and underwrite U. S. and most state and municipal
securities, including revenue bonds; sponsor, control,
the
company; underwrite
and advise an investment
deal
and
in and
securities of an investment company;
commercial
and
of
deposit
distribute bank certificates
paper of its parent holding company or any of the holding
Id. 5 10. Other activities in
company's subsidiaries.
which the bill specificalTy authorizes bank holding
to engage ~re insurance underwriting
company subsidiaries
development,
and brokerage, and real estate investment,

introduced

and

brokerage.

Id.

12.

* The Board has issuea regulations implementing
the Bank Holding Company Act's limitation on the
See
activities of bank holding company subsidiaries.

activities, would give these non-banking subsidiaries or
divisions an unfair advantage over companies that must
raise capital at the ordinary market rates for uninsured
credit. Second, tax and regulatory laws applying to
banks are different from those applying to non-bank
enterprises.
If the non-banking activities of banks were
regulated by a bank supervisory agency, banks might be
able to obtain more favorable regulatory treatment for
their conduct in a given sector than their competitors
obtain from the usual regulator of the particular
industry.
In addition, the operation of the tax laws as
applied to banks may give them an advantage over
non-banks, a problem that is particularly troublesome in
the securities field. *
Entry by banks into non-banking activities could
also jeopardize bank soundness, whether the bank enters
the field directly or through a subsidiary in which it
invests its capital. In either case, banks themselves
would be taking commercial risks, risks that are
particularly inappropriate for organizations whose
liabilities are insured by the Federal government. Quite
apart from the issue of government insurance, banks are
supervised entities of limited authority because there
are good public policy reasons for creating financial
institutions whose credit is unquestioned.
It is because
bank credit is unquestioned
that bank liabilities are
part of our money supply, and it is not an exaggeration
to say that modern commerce could not exist if
transacting parties did not have confidence in the
capacity of financial intermediaries such as banks to
meet their obligations.

the other hand, allowing bank holding
to
companies
expand their financial service activities
provides banks with the competitive benefits-principally improved contact with customers attracted by
the holding company's broad range of services -- but does
not require or permit the bank to assume the increased
risks associated with non-banking activities. Holding
companies are of course legally separate from the banks
they own and control, and the capital invested in a
On

under 5 265 of the Internal
are not subject to the rule that
denies a tax deduction to securzties dealers and others
for interest paid on funds used to carry an inventory of
See Mehle, Bank Underwritin
tax-exempt securities.
of
Free
and
Preservin
Fair
Bonds:
Revenue
Munici al

For example,

Revenue

Code banks

banks

While the holding company approach can insulate
activfrom the risks associated with non-banking
cannot prevent holding companies from misusing

ities, it

their controlling positions in banks. To deal with these
concerns, the Administration's
proposal includes a series
of provisions that regulate banks' transactions with
. their non-bank holding company affiliates, modifying and
strengthening
the restrictions already imposed by section
23a of the Federal Reserve Act. 12 U. S.C. $ 37lc. The
principle underlying these provisions is that transactions between a bank and its affiliates must be made on
substantially the same terms and under substantially the
same circumstances,
including credit standards, as those
prevailing at the time of the transaction for comparable
transactions by the bank with non-affiliated companies.
Specifically, under the proposal transactions
between a member bank and its
one of three categories.
The
transactions, " which include:

affiliates

would

fall into

first category is "covered
(i) the purchase of
securities or other assets, except those subject to a
repurchase agreement from an affiliate; (ii) the sale of
securities or other assets, including assets subject to a
repurchase agreement, to an affiliate; (iii) the payment
of money or furnishing of services to an affiliate under
a contract, a lease, or otherwise;
(iv) any transaction
in which an affiliate acts as an agent or broker or
receives a fee for its services to the member bank or to
any other person; and (v) any transaction or series of
transactions with a third party if the affiliate has a
financial interest in the third party or if the affiliate
is

participant in the transaction or series of
transactions.
S. 2490 S 14(b)(5)
is the
The only rule for covered transactions
are
such
transactions
stated
earlier:
rule
general
the same as
permitted only if made on terms substantially
(footnote con't. from page 6-8)
a

t':= holding company
structure and that adequate
separation will exist between a

within

bank's involvement in export
trading activities and its
deposi' t=' ing function.
H. R. Rep. No. 97-924, 97th
Cong. , 2d

Sess. 19 (1982).

Neither

a bank

affiliates

may

nor any of

purchase

its
securities
affiliate

any

or other assets from any
unless the instrument creating the
fiduciary relationship, a court order,
or the law of the relevant jurisdiction
permits such purchases.
Id.

14(a)(4).

Neither

nor any of
knowingly

its

a bank nor any of

its

a bank

subsidiaries

may

otherwise

purchase

acquire any security, a
principal underwriter of which is an
affiliate or subsidiary of the bank,
for so long as the underwriting or
selling syndicate exists. Id. 5

14(a)(6).

Neither

affiliates

may

advertisement
be in any way

obligations

14(a)(5).

suggest in any
that the member bank will
responsible for the

its affiliates.

Id.

These regulatory limitations are an integral
part of the Administration's
proposal. They ensure that
not only will banks be separated legally from the risks
associated with the non-banking activities of their
holding company affiliates, they will avoid relationship
with affiliates that would threaten their soundness or
provide their affiliates with unfair competitive
advantages through favorable financing terms or other
devices.

Administration's
program also deals with
supervision of the activities of
non-banking
subsidiaries of bank holding companies, while
attempting to avoid the danger of excessive supervision.
Under the Bank Holding Company Act the Federal Reserve
authority to require
Board has broaa discretionary
reports of and to conduct examinations of bank holding
company subsidiaries.
5 5(c), 12 U. S.C. 5 1844(c). The
Administration
proposal limits the Board's authority to
require reports. Under the proposal the Board may only
require that the subsidiaries submit, not more than
quarterly, the same information that securities firms are
The

the need for regulatory

New

York insurance

law

limits the activities

life insurance companies may engage
directly to life insurance, certain closely related
of
which

domestic

in
kinds

insurance, and, with the permission of the Superintendent of Insurance oz to the extent necessary or
incidental to engaging in the above, certain
statutorily-described
closely related financial
activities. N. Y. Insurance Law $5 46, 46-a(9), 60 and

Through subsidiaries,
life insurance companies may
in any kind of insurance activities, a slightly
broader range of related financial activities, and "any
other business activity reasonably ancillary to an

193.

engage

business. " Id. 5 46-a.
Non-life insurance companies may engage
directly in a broad range of insurance activities and,
with the permission of the superintendent
or to the
extent necessary or incidental to engaging in these
insurance activities, certain statutorily-described
related financial activities.
Id. 5 85-a. Through
subsidiaries non-life companies may engage in a broader
range of statutorily-described
related financial
activities and businesses ancillary to insurance. Id.
The Superintendent
has the power to disapprove the
purchase of subsidiaries by both life and non-life
companies.
Id. g5 46a(2)(b) a 85a(2)(b).
Other provisions of New York law (i) limit the
types of assets in which insurance companies may invest,
(ii) allow regulators to conduct examinations of
insurance companies and insurance holding companies and
their subsidiaries, and (iii) regulate the transactions
between insurance companies and their holding company
affiliates. N. Y. Insurance Law $5 79, 80 and 81
(regulation of investments); $$ 28, 69-d (examinations);
transactions).
The purpose of these
5 69-e (regulating
provisions, like that of federal regulations applying to
banks, is to preserve the financial soundness of
insurance
\

insurance

companies.

The Heimann

from

concluded

Commission

extensi;-e set of reguLations
New York insurance
companies
financial environment marked

out-of-state diversified

that this

hampering the efforts
compete in a changing

increased

services firms,
development of new and

financial

greater consumer awareness, and
sophisticated financial products.

competition

-11-

mortgages, N. Y. Insurance Law $79, and the remainder in
various other assets considered safe. Id. $81. Banks
may not loan more than 10 percent of their paid in
capital and surplus to a single borrower, 12 U. S.C. S 24
(seventh); a parallel rule limits the amount New York
insurance companies may invest in the securities of one
private institution to 10 percent of its admitted assets.
N. Y. Insurance Law 5 87.

Similar parallels

can be drawn

with

respect to the

activities in which their respective regulations allow
banks and insurance companies to engage.
The permitted
activities of each have already been discussed; the most
important point of comparison is that both sets of
regulations attempt to limit the entities regulated to
activities related -- conceptually or otherwise -- to
their principal activity. In both banking and insurance,
it is regulation of activities that has received the most
attention of deregulators.
This is not surprising, since
both banks and insurance companies are faced with
increased competition from firms that are engaged in a
broad range of financial activities.

The central point of comparison between the
Administration
and the Heimann Commission proposals is
the method each uses to broaden the activities with which
banks and insurance companies may become associated, and
the crucial difference between the two proposals is found
in the types of corporate structure the proposals utilize
in opening new fields of activity to banks and insurance
companies.
The Heimann Commission proposes that
insurance companies be deregulated by removing or
ameliorating many of the regulations that restrict
insurance company entry into businesses other than
insurance.
Implicit in this approach, however, is a
tension between two conflicting goals -- ensuring the
solidity of insurance companies through regulation of
their investments and non-insurance activities, and
allowing insurance companies to compete effectively in an
increasingly competitive financial environment by
~roadening the range of financial services their

subsidiaries may offer.
In this context, while the Heimann Commission's
proposals for deregulation go some distance toward
freeing insurance companies of restraints on the range of
their financial service activities, they do not seem to
be comprehensive enough in concept to effect a complete
cure. Although problems of safety and soundness are
aleviated by requiring that risky non-insurance
activities be carried on by subsidiaries of an insurance

interest in the activities of holding companies,
less in the activities of holding company
subsidiaries whose operations do not affect the regulated

minimal
and even
company.

New York already allows insurance
holding companies
to engage in an unrestricted range of activities. As has
- already
been noted, it also regulates transactions
between insurance companies and their holding company
affiliates. Such regulations are appropriate in this
context, just as they are in relation to banks' dealings
with their own holding company affiliates.
However, they
should be thoroughly reviewed and revised to ensure that
insurance regulators have the authority to prevent
transactions that may jeopardize the financial condition
of' an insurance company functioning as part of a
diversified financial services holding company.

If the focus of efforts to achieve insurance company
deregulation was on expansion of activities through the
use of the holding company framework, rather than on
reduction of regulatory controls on insurance company
activities, the goal of enabling insurance companies to
form or combine with diversified financial services firms
could be significantly advanced. *
*

important

barrier to the use of the

by insurance companies is that
in mutual form. The same problem
exists in banking
many savings banks and savings and
loan associations are mutual organizations.
There are
to the stock form of organization,
many advantages
particularly the ease and simplicity with which capital
can be attracted for expansion and the greater degree of
management
responsiveness to stockholders as distinFor these
guished from account or policy holders.
reasons, among others, insurance companies and banks
should be encouraged to adopt the stock form of
In this connection, the Heimann Commission
organization.
that conversion to the stock form should be
recommended
encouraged and that legal barriers to conversion be
removed.

holding

many

company

structure

are organized

—

-15-

Oepartmeni of ihe Treasury
FOR IMMEDIATE

Washington,

D.C. ~ Telephone 566-204'
October 20, 1982

RELEASE

RESULTS OF AUCTION

The Department

OF 2-YEAR NOTES

of the Treasury has

$6&751 million of
13.887 million of tenders received fromaccepted
the public for the 2-year
notes, Series X-1984, auctioned today. The notes will be issued
November 1, 1982, and mature October 31, 1984.
$

interest rate on the notes will be 9-3/4%. The
of accepted competitive bids, and the corresponding prices at
9-3/4% interest rate are as follows:
Bids
Prices
Lowest yield
9. 72%
100. 053
9. 85%
Highest yield
99. 823

The

range

the

Average

Tenders

9. 79%

yield

at the high yield

were

New

York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury

allotted

TENDERS RECEIVED AND ACCEPTED

Location
Boston

99 929

Received
75, 105
11,438, 295
74, 700
107, 250
89, 830
86, 940
810, 520
164, 205
52, 175
65, 850
28, 795
886, 550
6, 820

(In Thousands)
$

Accepted
68, 805
5, 463, 645
74, 700
98, 980
84, 825

84, 110
307, 925

112, 085

48, 900
65, 650
28, 785
305, 790

6, 820
Totals
$13, 887, 035
$6, 751, 020
The $ 6i751 million of accepted tenders includes $ li326 million
of noncompetitive tenders and $ 5i425 million of competitive tenders
from the public.
In addition to the $6, 751 million of tenders accepted in the
auction process, $575 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
An additional
$478 million of tenders was also
monetary authorities.
at
the
from
Government
average
price
accounts and Federal
accepted
Banks
for
their
own
account
in
for maturing securities.
exchange
Reserve

R-998

yartseent of the Treasury e Washington, O.C.
FOR RELEASE AT

12:00

Telephone $11-204~

October 22, 1982

NOON

TREASURY'S

52-WEEK BILL OFFERING

of the Treasury, by this public notice,
for approximately $7, 000 million of 364 -day
bills to be dated November 4, 1982, and to mature
3, 1983
(CUSIP No. 912794 DE 1 ). This issue will
about $2, 000 million new cash for the Treasury, as the
52-week bill was originally issued in the amount of
million.

The Department

invites tenders
Treasury
November

provide
maturing
$5, 016

bills will be issued for cash and in exchange for
bills maturing November 4I 1982In addition to the
maturing 52-week bills, there are $10, 264 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition
of this latter amount will be announced next week.
The

Treasury

Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold 5 li647 million, and Federal
Reserve Banks for their own account hold $2i673 million of the
maturing bills.
These amounts represent the combined holdings of
such accounts for the three issues of maturing bills.
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. For purposes of
determining such additional amounts, foreign and international
monetary authorities
are considered to hold $405
million
of the original 52-week issue.

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
on the records either of the
and in any higher $5, 000 multiple,
Federal Reserve Banks and Branches, or of the Department of the
I'reasury.

Tenders will be received at Federal Reserve Banks and
D. C.
branches and at the Bureau of the Public Debt, Washington,
!0226, up to 1:30 p. m. , Eastern Daylight Saving time, Thursday,
october 28, 1982.
Form PD 4632-1 should be used to submit
. enders
for bills to be maintained on the book-entry records of
of the Treasury.
he Department

-999

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 three decimals, e g . , 97 .920 . 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
if the names of the
may submit tenders for account of customers,
Others
customers and the amount for each customer are furnished
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 as of 12:30 p .m . Eastern
time on the day of 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

must

Payment for the full par amount
accompany all tenders submitted

tenders from incorporated banks
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
bank or trust company accompanies the
payment by an incorporated
No

and

deposit need accompany

trust

tenders.

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
4, 1982,
Qn November
in cash or other immediately-available
funds
or in Treasury bills maturing November 4, 1982.
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.

amount

the bill. If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
Department of the Treasury Circulars, Public Debt Series
Nos. 26-76 and 27-76, and this notice, prescribe the terms of
of their issue.
these Treasury bills - and govern
' e dethe conditions
- —,s , ~-; &~;.b~ a ned
Comtian of the ~ j ocul -" c an
Federal Reserve Bank or Branch, or from the Bureau of the Public
'-

Debt.

—,

FOR IMMEDIATE

The Treasury

announced

today that the 2-1/2 year

yield curve rate for the five business

Treasury
ending

25, 1982

RELEASE OCTOBER

October 25, 1982, averaged

JD. g, O

days

rounded

five basis points. Ceiling rates based
on this rate will be in effect from Tuesday, October 26,
1982 through Monday, November 8, 1982.
Detailed rules as to the use of this rate in estabthe nearest

lisning the ceiling rates for small saver certificates
were published

Small saver

in tne Federal Register on July 17, 1981.

ceiling rates

related information

and

available

from the DIDC on a recorded

The phone

number

telephone

message.

is (202)566-3734.

Approve

Francis X. avanaugh
Director
Office of Government

Market Analv. -is

Fin

Department of ihe Treasury
FOR IMMEDIATE

Washington,

D.C. ~ Telephone 566-204%
October 25, 1982

RELF~E

RESULTS OP TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $ 5, 604 million of 13~eek bills and for $5.610 million of
26~eek bills, both to be issued on October 28, 1982, were accepted today.
OF ACCEPTED

RANGE

COMPETITIVE

BIDS: maturi

High
Low

Average

a/ Excepting
Tenders
Tenders

13-week bills
Janua
27 1983
Discount Investment

1/:

Location
Boston
York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St. Louis
Minneapolis
Kansas City
Dallas
San Prancisco
Treasury

Competitive
Noncompetitive

Subtotal, Public
Pederal Reserve
Foreign Official
TOTALS

AND

ril

28 1983
Investment
'
Rate 1/

ACCEPTED

ted: $47%
Received
Received
tec
310:
780
780
$38.
$32,
$3,
10,247, 210
: 11,730, 000 4, 984, 890
4, 0939660
Thousands)
Acce

~acce

3313

49, 860.
68, 075
34, 855
33, 390

1, 068, 770
39, 985

16, 630
43, 345
27, 480

499860

47, 075
34, 855
33, 390
574, 770
38, 985
16, 630
43, 345
22, 480

256 080

3540390
256' 080

$12, 701, 830

$10, 764, 905

777%840

:
:
:
:
:
:
:
:
:.

65, 920
90, 915
24, 390
36, 365
843, 995
60, 265
13, 140
29, 605
18, 415
902, 530

15, 420

19,515
21, 890
21, 520
46, 295
30, 265
6, 140
29, 605
13,415
79, 530

308 815

308 815'

$5, 603, 830

: $14, 172, 135

$5, 610, 080

958 390
$11,723, 295

$3, 666, 905
958 390
$4, 625, 295

$11%914%155
726 780
$12 ' 640, 935

817, 935

800, 000

$4, 078, 880
800, 000

160 600

731 200

$12, 701, 830

$5, 603, 830

$14, 172, 135

$5, 610, 080

1/ Equivalent coupon-issue yield.
2/ The four-w ek average for calculating the maximum
on money market certificates is 8. 299X.

R-1000

Discount
Rate

37X:::

(In

Institutions

26~eek bills
maturi

Rate
Rate
Price
Price
97.995 7. 932X
8.21X
95. 723a/ 8.460X
8. 96X
97. 956 8 086X
8.
95. 714
8.478X
8. 98X
97. 970 8.031X
8.31X
95. 717
8.472X2/ 8. 97X
2 tenders totaling $1,860, 000
at the low price for the 13~ek bills were allotted 31X.
at the low price for the 26~eek bills were allotted 76XRECEIVED

New

$3, 352, 100
726 780

interest rate payable

oepart~ent of the Treasury

Washington,

O. C. ~ Telephone 566-204$

REMARKS BY
THE HONORABLE JOHN M. WALKER,
ASSISTANT SECRETARY
(ENFORCEMENT AND OPERATIONS)
DEPARTMENT OF THE TREASURY
BEFORE THE
NATIONAL BEER WHOLESALERS' ASSOCIATION

JR.

BALTIMORE, MARYLAND
OCTOBER 18 i 1982

Thank you Neil.
It is a real pleasure to speak to you
today. I am afraid that some of you think we at Treasury may
not care as much about the alcohol industry as we do about
the Administration's
fight against organized crime and drugs'
Let me stress that I am every bit as concerned about the
health of your industry.

The Malt Beverage Industry has an interesting
history.
Clay tablets dating back to Babylonia in 6000 B.C. picture
and consumption
the brewing of beer. And beer manufacturing
are deeply 'enmeshed in the culture of our country.
It is not
surprising that tomorrow in the sixth game of the World Series,
a team called the Brewers of Milwaukee will play in Busch
Stadium in St. Louis. The first commercial brewery in the
new world was built before 1625 in the Dutch Colony of New
on what is now Manhattan Island.
George Washington
Amsterdam,
In fact,
had a brew house on his estate at Mount Vernon.
his personal recipe for beer in his own handwriting may be
Through the years, the
seen at the New York Public Library.
Industry has survived many challenges and difficulties, not
the least of which was the ill-fated and, judged in hindsight,
ill-conceived experiment of prohibition.
The Malt Beverage Industry is a dynamic one. Through
sound, innovative, and ethical business practices, the beer
wholesalers have not only kept pace with the industry, but

have been

instrumental

its great vitality.

greatly to this
As you well know, every year
country's financial
since 1862, there have been significant excise taxes levied
on alcoholic beverages including malt beverages. In fact,
from 1868 through 1913, almost 90 percent of the U. S. 's
The Malt Beverage

Industry

well-being.

R-1001

has contributed

revenue collections came from taxes on
malt beverages, and tobacco. Beginning

distilled spirits'
with the War

excise taxes on alcoholic beverages, or increases thereon'
helped to finance America's war efforts right up to
Vietnam War. In 1981, the Federal Government received over
$5. 7 billion in revenue from the alcohol industry, with over
$1 ' 6 billion coming from malt beverages alone. Clearly, your
government has a vested interest in ensuring that your industry
is strong and viable. At the same time, with the recent
passage of the Tax Bill and a brightening of the economy, I
increases in the excise tax
do not now anticipate additional
on alcoholic beverages.
in general,
and the alcohol industry
Your industry,
No other
produces and markets a socially sensitive product.
amendments,
Constitutional
commodity has been the subject of two
with
values
social
and there have always been conflicting
respect to alcoholic beverages. As a consequence, alcoholic
beverages have long been regulated -- from the Federal level
I believe, though, that you, the
down to the local level.
alcohol beverage industry, and we, the government, have both
matured to the point where some of the stringent government
controls over alcoholic beverages are no longer needed. As
a result, we at Treasury have been working to modernize the
laws applicable to your industry, with the goal of regulating
only where regulation is warranted, and then only to the
In such areas where regulation is still
degree necessary.
necessary, we are increasingly convinced that the alcohol
beverage industry can and should play a greater role in
those responsibilities.

the economy in general, we are now witnessing the
an economic recovery from many years of runaway,
double-digit inflation, high interest rates, excessive
On

start of

Under this Administration,
taxation, and over-regulation.
inflation is at its lowest point in years and interest rates
are steadily coming down. Hundreds of unnecessary regulations that were strangling productivity have been eliminated.
always the lagging indicator in a recovery, is
Unemployment,
still unacceptably high; however, we should see these rates
The Administration'
s
falling as the recovery progresses.
successes, achieved after years of fiscal irresponsibility,
have not come easily.
Indeed, the President had to make
politically difficult decisions and use true leadership to
win the support of Congress.
Today, we are now on the road
to recovery, because he made those hard decisions and demonstrated that leadership.

the Administration
is also facing
will require both industry and government,
together, to forego the easy out and to concentrate our
energies on the search for viable, long-term solutions.
In your industry,

challenges

which

Last year, an example of a difficult decision the
Administration
chose to make was the plan to transfer the
functions of BATF. The purpose of the plan was to achieve
financial savings based on economies of scale and to manage
existing resources better -- in short, to do what the President
was

elected to do.

Accordingly, we sought to transfer the firearms and
explosives functions to the Secret Service and the alcohol
and tobacco functions to the U. S. Customs Service.
This
transfer to Customs would have occurred without disrupting
the existing organizational
structure. You would have dealt
with the same people and no continuity would have been lost.
Later, in negotiations, Treasury agreed to a plan which
would have effected the firearms and explosives transfer to
the Secret Service, but left alcohol and tobacco functions in
an independent

Treasury agency. However,
reached with Congress on either plan.

no agreement

was

I assure you that if the Administration and the appropriate
Congressional committees ultimately decide to proceed with the
reorganization of BATF, the alcohol function will remain a

distinct entity wherever it is located. In addition, we will
maintain a strong enforcement posture.
Lastly, I will consult
with you and seek your support before we proceed with another
reoganization

effort.

the President has signed additional
for Fiscal Year 1983 for the BATF to
at full staffing, and the budget proposal continues
We believe
to recognize the Bureau as a separate entity'
the Fiscal Year 1983 budget ensures effective field enforceWe have
ment against major violations of the alcohol laws.
also received great cooperation from most of the 50 states
in pursuing violations of those laws.

In the meantime,

budget
remain

appropriations

reorganization
there is some administrative
the Bureau, which will have no impact on your
Two regional offices are being closed, the Midindustry.
Atlantic Regional Office in Philadelphia and the Central
You will still deal with the
Regional Office in Cincinnati.
but the North Atlantic
matters,
technical
on
offices
same field
and
respectively,
York
Chicago,
New
in
regions,
and Midwest
At

present,

going on within

will assume management

Enforcement
where workload

Regulatory

offices

for their operations.
several area
longer justified their existence.

responsibility

has also eliminated
no

activities are ongoing and
regulations are being
Currently,
proceeding smoothly.
alcohol'™
beverages.
This is
of
proposed for the advertising
Meanwhile,

BATF's regulatory

area where the current

new

regulations

are

still

in the rulemaking

process. ATF is evaluating the results of the comments and
public hearings and plans to complete these regulations bY
late this year or early l983.
issue of Newsweek brought to national attention
A recent
once again the menace of the drunk driver -- responsible
in excess of 25, QQQ fatalities per year on the nation's
Concerned
highways.
This is a major problem in our societY
citizens are demanding measures to reduce the shocking number
of fatalities related to drunk driving.
~

However, I am pleased to see that, as is usually the
case, your industry is playing a leadership role in responding
to this problem without prodding from the Federal Government.
Alcohol industry representatives
are serving on the President' s
Commission on Drunk Driving, which is holding hearings around
to the President
the country and is due to make recommendations
in the spring of next year. Further, Rex Davis, Chairman of

the Licensed Beverage Information Council, tells me that the
Licensed Beverage Information Center (LBIC) and the Outdoor
Advertising Association will work in concert on a billboard
areas to educate drivers on
campaign in major metropolitan
the hazards and penalties of drunk driving.

I also applaud the work of the LBIC in drawing
attention to the problems of fetal alcohol syndrome
women and the problem of alcohol abuse generally.
On

another

and modernize

subject,

the

FAA

public

in pregnant

project is underway to revise
Specifically, the purpose of the

a major

Act.

is to make the Act more responsive to the current
interests of consumers, the Federal Government, and
industry by: (l) deregulating those aspects of the industry
which no longer require federal control; and (2) making the
law more understandable
and with adequate enforcement
powers
to ensure compliance where federal regulation is necessary.
This project has not been carried on in the dark recesses
of the government bureaucracy -- industry associations,
individuals, state agencies, and others have been actively
involved in the process'
Your association, in particular,
has provided us with constructive, meaningful comments.
I
greatly appreciate your cooperation in this regard.
During the process of developing the legislative package,
revision

needs and

are now, and will continue to be open to
suggestions as to how we can improve upon a
draft bill. We at Treasury and ATF are currently
evaluating
comments received relative to our latest ver; '
I'.— n- t sure I can predict ~&e final
we "=' 1 draft g8 .
have been,
comments and

product

because we are in the middle of the evaluation process.
I can say that we are making accommodating changes where we can.
Where we can't make changes, we are fully documenting
our
rationale. I anticipate the evaluation process will be
completed in the near future.
Once it is completed, a final
version will be drafted and submitted to Congress. We hope
to have a final package ready for Congress early next year.
Now,

you' ve asked

legislation.

Admittedly,

comment

upon

the proposed

there are probably

some aspects of
legislation with which you do not totally agree.
As you know, drafting this legislation
has been a give-and-take
process. I am confident the final product will be reflective
of your concerns as well as ours. NBWA has been supportive
in this effort. We predict that, after passage of the Federal
Alcohol Control Modernization Act, your industry will be much
less burdened by government intervention.
We will regulate
where necessary, to the extent necessary, and with the power
necessary to ensure a competitive environment in an open market
place. Working together, the industry and the government have
put together a legislative package that will, for the first
time in nearly fifty years, provide equitable, clear and workable
guidelines within which you can all operate legitimately and
profitably.

the proposed

In another area of Treasury activity, which may be of
interest to some of you, we want to see increased exporting of
alcoholic beverages. For the past few years, we have been
working closely with the European Economic Community to improve
access of U. S. wines to the EEC by reducing nontariff trade
barriers. We recently concluded wine consultations with the EEC,
and, although our agreement needs to be ratified by interested
parties in the EEC and the U. S. , I am confident we will have
reduced most of the non-tariff barriers that confront our wine
exporters to the EEC. We will not rest after this success,
however.
I plan to expand our consultations to other countries
and to include malt beverages in our discussions.
In closing, this Administration
is above all committed to

preserving

the

vitality of the alcohol

will also maintain

a strong

enforcement

beverage

posture.

industry.

You must

remember, however, that the President is committed to eliminating
unnecessary regulations and reducing Government spending.
With
these realities in mind, we will continue, in the months ahead,
to look for appropriate ways to deregulate and to achieve
We would
savings to the taxpayer.
like your support in this

ef fort.

I appreciate

the opportunity

to address

you

today.

epartment of the Treasury
FOR IMMEDIATE

WasKin~Q.

C. ~ Telephone 666-2141
Marlin ritzwater
qgg'p+jl

RELEASE

October 26, 1982

Tuesday,

„;

(202) 566-5252

fNT

BY DONALD T. REGAN
SECRETARY OF THE TREASURY
ON THE CPI
TUESDAY, OCTOBER 26, 1982

STATEMENT

WASHINGTON,

D. C.

The Consumer Price Index (CPI) rose only . 2 percent in
September indicating that this nation is on a steady course of
lower inflation.
The signs of economic recovery continue to
While the economy is still
appear in building block fashion.

there is steady improvement
in the near future.

weak,

and we

performance

expect stronger

first

9 months of this year, inflation has increased
rate of only 4. 8 percent, compared with 12-4
percent for the year 1980 and 8. 9 percent last year.
Along with the fall in inflation, we have seen a steady
decline
in interest and mortgage rates. This positive trend
.
should give added confidence to the private sector and foster
increased individual and commercial activity in the marketplace.
Houses, autos and other consumer goods are becoming more easily
affordable.
Business and industry can begin to borrow money at

For the

an annualized

reasonable

fiscal

rates.

are sensible

and have a

continuation

of responsible

policies, we can keep inflation down,
of interest and spur the economic recovery
necessary to get this nation back to work.
and monetary
generate low rates

R-1002

of the Treasury

Department

FOR RELEASE AT

Washington,

4:00 P. M.

D.C. ~ Telephone 566-2041
October 26, 1982

TREASURY'S WEEKLY BILL OFFERING

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $11, 200 million, to be issued November 4, 1982.
This offering will provide $925
million of new cash for the
Treasury, as the maturing bills were originally issued in the
amount of $10, 264 million.
The two series offered are as follows:

91-day bills (to maturity date) for approximately $5, 600
million, representing an additional amount of bills dated
August 5, 1982,
and to mature February 3, 1983
(CUSIP
No. 912794 CH 5), currently outstanding
in the amount of $5, 542
million, the additional and original bills to be freely
interchangeable.
182-day

dated

bills for

November

4, 1982,

(CUSIP No. 912794 CT

approximately

9).

and

$5, 6pp million, to

to mature

May

5, 1983

Both series of bills will be issued for cash and in
In
exchange for Treasury bills maturing November 4, 1982.
addition to the maturing 13-week and 26-week bills, there are
$5, 016 million of maturing 52-week bills. The disposition of
this latter amount was announced last week. Federal Reserve
monetary
Banks, as agents for foreign and international
and
Federal Reserve
hold
million,
currently
authorities,
$1, 556
Banks for their own account hold $2, 744 million of the maturing
bills. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills.

Tenders from Federal Reserve Banks for themselves and as
monetary authorities will be
agents for foreign and international
accepted at the weighted average prices of accepted competitive
tenders. Additional amounts of the bills may be issued to Federal
monetary
Reserve Banks, as agents for foreign and international
authorities, to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing bills
held by them.
For purposes of determining such additional
amounts,

considered
26-week

foreign and international monetary authorities are
to hold $1, 151 million of the original 13-week and

issues.

The bills will be
and noncompetitive

issued on a discount basis under competibidding, and at maturity their par amount
tive
interest. Both series of bills will be
without
payable
will be
book-entry
form in a minimum amount of $10,0QQ
in
entirely
issued
on the records either of the
multiple,
higher
000
$5,
and in any
or of the Department of the
Banks
and
Branches,
Reserve
Federal
Treasur y.
R-1003

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,
November 1, 1982.
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

Tenders over
Each tender must be for a minimum of $10, 000
of competicase
the
In
000.
000
of
must be in multiples
$10,
$5,
tive tenders the price offered must be expressed on the basis of
100, with three decimals, e g . , 97 920 . 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
if the names of the
may submit tenders for account of customers,
Others
customers and the amount for each customer are furnished
Each
are only permitted to submit tenders for their own account
tender must state the amount of any net long position in the bills

This
being offered if such position is in excess of $200 million
information should reflect positions held as of 12:30 p m Eastern
time on the day of the auctions
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
will be made on all accepted tenders for the
A cash adjustment
difference between the par payment submitted and the actual

issue price as determined
No

in the auction

deposit need accompany

tenders

from incorporated

banks

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
and

accompanies

the tenders

Public announcement will be made by the Department of the
Treas«y of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement for accepted tenders for bills to be maintained
the
book-entry records of Federal Reserve Banks and Branches
on
be
must
made or completed at the Federal Reserve Bank or Branch
on November 4, 1982,
in cash or other immediately-available
funds
or in Treasury bills maturing November 4, 1982.
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.

Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
The ratable share of this discount
basis (cost) for the bill
Under

amount

such discount by a fraction, the
by multiplying
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's

is determined

ratable portion of the acquisition discount,
treated as short-term capital gain.

the excess gain

of the Treasury Circulars, Public Debt Series
and this notice, prescribe the terms of
27-76,
26-76
and
Nos.
and
govern the conditions of their issue.
bills
these Treasury
tender forms may be obtained from any
and
circulars
Copies of the
or from the Bureau of the Public
Branch,
Bank
or
Federal Reserve
Debt.
Department

depart nent of the Treasury
Contact:

Robert
Edwin

POR IMMEDIATE

October

26,

Don I evine

Washington,

n. c. ~ Telephone %66-2041

(566-2041)

Dale (395-3080)

REI EASE

1982

DONAI D

JOINT STATEMENT OF
REGAN,

SECRETARY OF THE TREASURY
AND

DAVI D A. S TOCKMAN,
DIRECTOR OF THE OFFICE OF MANAGEMENT

AND

BUDGET

BUDGET RESUITS POR FISCAI

YEAR

1982

SUMMARY

today releasing the September Monthly
States
of the United
Outlays
which shows the actual budget totals for the fiscal
Government,
year that ended on September 30, 1982. The statement shows:
receipts of $617.8 billion in 1982;
The Treasury

Statement

Department

outlays
a

Receipts

and

of $728. 4 billion in 1982; and

deficit of $110.7 billion.

Table

1.--BUDGET

(in billions

1981 Actual. . . . . . . . . . . . . . .
1982 Estimates and Actual

1/. . . . . . . . . .

February

July 2/
Actual.
/
2/

. .. . . . . . . . .. . .

~ ~ ~ ~

e ~

~ ~ ~

TOTAIS

of dollars)

599. 3

657. 2

-57. 9

626. 8
622. 1

725. 3

-98. 6
-108.9
-110.7

617.8

731.0
728. 4

July 1982 from the Mid-Session Review of the 1983

Bud

et.

ts. --Receipts were estimated in the February budget at
In the July Mid-Session Review, this estimate
$626. 8 billion.
was revised downward to $622. 1 billion.
The revision was the net
effect of revised economic assumptions -- primarily lower nominal
incomes -- policy changes,
and technical
reestimates. Actual
receipts were $617.8 billion, $4. 3 billion below the July
estimate.
Substitution
of the Tax Equity
and
Fiscal
Responsibility Act of 1982 for the legislation- assumed in the
Mid-Session, accounts for $0. 9 billion of this reduction.
The
remaining
difference
is in large part due to lower than
of
anticipated
collections
social
insurance
taxes
and
contributions,
and excise taxes, which reduce receipts by $1.5

R~ecei

billion and. $1.4 bi11ion, respectively.

s. --ln

the February Budget, 1982 outlays were estimated at
This estimate was increased by $5. 7 billion, to
$731.0 billion, in the Mid-Session Review, reflecting the net
impact of technical reestimates,
policy changes, and a revised
economic forecast.
The final total for 1982 outlays was $728. 4
billion, $2. 6 billion below the July estimate.
the
Although
total decrease since July was relatively small, there were a
within
the total, which are
number
of offsetting
changes
described in the next section.

~Outla

$725. 3 billion.

OUTI. AY CHANGES

BY AGENCY AND PROGRAM

changes since the July Mid-Session Review are
described below.
Table 2, which follows this discussion, shows
the estimates for E'ebruary and July and the actual levels by
agency and major program.
'I'he

major

outlay

Funds

ro riated to the President

securit assistance were $0. 4
for international
because a
below the July estimate,
primarily
the
containing
supplemental
appropriation
request
President s Caribbean Basin Initiative was enacted later
in the year than expected and because the actual spending
rate for the commodity import program in Egypt was slower

Outlays

billion

than anticipated.

outlay

Fund

of $0. 3 billion

to the International Monetar
to the appreciation of the
dollar with respect to foreign currencies.
Because the
U. S. quota in the IMP is denominated
in special drawing
rights (SDR s), the dollar value of quota assets declines
when the dollar appreciates'
Most of the change from the Mid-Session
for ~militar
sales ro rams occurred in the foreign military sales
trust fund.
Net outlays
in that account were $0. 4
billion below the July estimate, mostly due to higher
from
sales of military
than
anticipated
receipts
equipment to foreign governments.
artment of A riculture
Parmers Home Administration
outlays were $1.0 billion
above the Mid-Session Review estimate
largely because
reduced cash needs permitted $0e7 billion in asset sales
to be deferred until 1983, and because repayments of farm
and housing loans were lower than expected.
-- Decreases in the July estimate of offsettin recei ts
from sales of timber and other Government-owned
resources
increased net outlays by $0. 4 billion.
artment of Education
Education Department outlays were $1.1 billion below the
in part because of late enactment
July estimate
by
Congress of procedures for allocating funds for certain
financial assistance programs.
student
In addition,
about their share of the 1982 and 1983
uncertainty
for these and other education
grant
appropriations
programs caused a number of grantees to slow the rate of
expenditure of current funds.
An

(IMF)

was

recorded

due

of Ener
Outlays for the Department of Energy were $1. 2 billion
below the July estimate.
This reduction reflects the
combined impact of slower than anticipated
spending for
defense-related
construction,
ener
su 1 ,
and
alternative
fuels programs;
enactment
of a
delayed
supplemental
appropriation
for the ~wea ons
request
~ro ram;
increased
revenues
from
uranium
enrichment
projects because of improved debt collection practices;
and reduced outlays for State ener
conservation grant

artment

programs.

of Health and Human Services
Social securit outlays were $0. 5 billion lower for 1982
than estimated in July.
Outlays for medicare were $0. 5 billion above the MidSession estimate largely because hospital costs have
continued to increase at a rate faster than anticipated.

artment

securit

medicaid,

income
and

discretionary
estimate.

Housin

and Urban

ro rams, the
a
variety

programs,

were

human

$1.2

services block rant,
research
and
other
billion below the July

Develo ment

operating subsidy budgets for the
approving
ro'ects and slower than
low-income
of
housin
for
communit
anticipated spending
develo ment
ro rams
were the main reasons for the $0. 5 billion decline in
Delays in
o eration

outlays from the July
Development programs.
De

estimate

for Housing

and

Urban

of Labor
Outlays for the unem lo ment trust fund were $0. 5 billion
above the July estimate because the actual unemployment
rate exceeded the level assumed in the Mid-Session

artment

Review.
De

artment

of Trans ortation

Outlays for Federal-aid-hi hwa s were $0. 3 billion below
the July estimate primarily
because of an unexpected
from States
for Federally-aided
decline in billings
highway work.

artment

of the Treasur

Interest on the public debt was $0. 8 billion lower than
the July estimate due to the recent sharp decline in
interest rates. Of this total, $0. 6 billion was offset
by a reduction in interest received by trust funds.
recei ts were $0. 9 billion below
Treasury s offsettin
the July estimate mainly due to the net effect of lower
than expected interest receipts from the Commodity Credit
Corporation offset by higher than estimated receipts for
other receipt accounts.
This reduction
in receipts
resulted in a $0. 9 billion increase in outlays'
Environmental

Protection

enc

for the Environmental

Protection Agency were $0. 3
below the July estimate
due to slower
than
anticipated spending for contruction of municipal waste

Outlays

billion

treatment

plants.

ort-Im ort Bank

decline
in loan disbursements,
for
particularly
purchases of aircraft, reduced outlays by $0. 3 billion
from the July estimate.
I oan disbursements
were down
because
the global
recession has slowed
generally,
investment expenditures in many developing countries that
purchase capital goods from the United States.
A

Allowances

allowance of -$1.0 billion was included in the July
estimate for outlays savings expected from the reduction
of waste fraud and abuse. Savings achieved during the
year are now reported as part of agency outlays or
An

receipts.

Offsettin recei ts
Receipts for Federal em lo er contributions to retirement
funds were 00. 5 billion below the July estimate, mainly
because of a postal service decision not to consider
cost-of-living adjustments as basic pay for retirement
This increased outlays by $0. 5 billion frc".„
purposes.
Mid-Session
estimate.
the
which
is an
trust
received
b
funds,
Interest
billion
lower
offsetting receipt, was $0. 6
undistributed
in
However,
since
interest
on
~he
July.
than estimated

Undistributed

public debt was $0. 8 billion lower, the net ef feet of
these interest-related
changes reduced outlays by $0. 2

billion.

Receipts
from
rents
and
ro alties
on
the
Outer
Continental Shelf were $0. 9 billion lower than estimated
in July, primarily because of a delay in two sales from
late fiscal year 1982 to fiscal year 1983.

Table 2. --1982

BUDGET RECEIPTS BY SOURCE AND OUTLAYS

(fiscal years; in millions

of dollars)
1981

Actual

Recei ts

. ..

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Subtotal, Social insurance
and contributions. .

Estate

Customs'

taxes.
and

tax es

... . .......

Ac tua1

.......
Total, Receipts.

285, 551
61, 137

298, 578
46, 752

298, 510
49, 869

298, 111
49, 207

162, 973
16, 129

185, 527 181,410
16, 461 16, 680

180, 686
16, 234

3 984

. . .. . . ... . .. . ...
~

493

212

183, 086

206, 481

202, 583

201, 131

40, 839

42, 993

37, 755
8, 057

9, 212
16 115

36, 311
7, 991
8, 854
16 161

6229 101

617, 766

13 790

7, 162
8, 870
15 917

5998 272

6264 753

6, 787
8, 083

gift taxes

Miscellaneous.

1982
Estimate
~Jul
~Febeuaa

Source

Individual income taxes. . . . . . . . . . . . . . . . . . . .
Corporation income taxes. . . . . . . . . . . . . . . . . . .
Social insurance taxes and contributions:
taxes and contributions. . . .
Employment
insurance. . . . . . . . . . . . . . .
Unemployment
Contributions for other insurance and
retirement

Excurse

BY AGENCY

Tab. Le

2. --1982

BUDGET RECEIPTS BY SOURCE AND OUTLAYS

(fiscal years;

in millions

1981

Actual

a b

O~utla

Legislative

Judiciary.
...
Funds Appropr iated to the President:
Disaster relief. . . . . . . . ~. . . . . . . . .
International security assistance
International development assista nce. . . . . .
International monetary programs. .
Military sales programs. . . . . . . . . .
0 ther. . . . . . . . . . . . . . . . . . . . . .
Subtotal, Funds appropr iated to
the Pr es ident. . . . . . . . . . . . . .
Executive Of f ice of the President.

~ ~ ~ ~ ~ ~ ~ ~ ~

Agriculture:
Commodity

Credit Corporation, for eign
and special expo rt. .

assistance,

.
..
.. ...

Farmers Home Administration.
Food and Nutrition Service.
Of fs~:tting ri ceipts. . . . .

0 ther.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Subtotal,

1/. . . . . . . . .
1/.
Defense-Civil. . . . . .
Education 1/. .
Energy 1/. . . . . . . . . .
Commerce

Defense-Military

Agr

(Continued)

1982

Estimate
F~ebruar

Actual

~Jul

enc

and the

branch

BY AGENCY

of dollars)

icultur e

1, 846

2F232
92

2, 171

401
3, 090

406
3, 423
2, 352

238
3, 488
2, 365

-166

398
345

-17

354

7, 010

6, 370

6, 835

6, 073

5, 290

7, 484
2, 600
15, 146

12, 651

12, 582
3, 568
15, 196

2, 268

365
456
429

518

15, 915

-1, 134
5 441

26, 030

2, 226
156, 035
3, 148
15, 089

11,797

-1, 585
5

798

2, 576

15, 237

-1, 220
5

919

2, 068

115

3, 052
2, 229
323
370

-811

679

359163

36, 213

2, 149
2, 164
182, 731 182, 731
2, 991
3, 012
138
15,
15, 153
834
8,
8, 885

2, 045
182, 850
2, 971
14, 081
7, 705

294442

Table 2. —-1982

BUDGET RECEIPTS BY SOURCE AND OUTLAYS BY AGENCY

(f iscal years; in millions

of dollars)
1981

Actual

Health

Services 1/:

and Human

Social security

Medicare.
Medicaid.
Other

(OASDI,

net). . .

137, 970

42, 489
16, 833

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

29 697

Subtotal, Health and Human
Services. . . . . . . . . . . . . . . . . . . . . . . .
Housing and Urban Development:
.. .
Housing payments. . . . . . . .
Payments for operation of low income
housrng projects. . . . .
grants. . . . .
Community development

0 ther.

.. ... . . ..
. ..
. ..

......

Sub'otal,

Housing

Development.

and Urban

.. . . .. . .. . . .. . . . . . . .

Interior 1/
Justice 1/
Labor:

Employment and
tr
Unemployment

Other

training assistance. . . . . . .
ust fund. . . . . . . . . . . . . . . . . . .
~

Subtotal, Labor.

State

Transpor

tation:

Federal Highway Administration.
Federal Aviation Administration.
0 ther. . . . . . . . . . . . . . . . . . . .

.. . . . . . ....
. . .. .. . ...

Subtotal, Transportation.

... . . ...

1982
Estimate
~Jul
~Februar

Actual

154, 643 154, 600
49, 919
49, 556
17, 823 17, 612
50 272
30 011

154, 144
50, 423
17, 391
29 310

226, 989

252, 033

252, 403

251, 268

5, 747

6, 726

6, 771

6, 880

929
4, 042
3 316

1, 278

1, 283

1, 008
3, 792

605

4, 005
2 928

14, 033

14, 614

14, 987

14, 491

4, 262
2, 682

3, 827
2, 598

4, 042

3, 793

6, 848
18, 739

4, 210
25, 400

4, 146
23, 800

4, 110
24, 282

497

30, 084

~ ~ ~ ~

(Continued)

4, 005

465

28664

349

811

2, 584
2

343

324075308296

30, 736

1, 897

2, 183

2, 153

2, 185

9, 119
3, 158

10 276

8, 313
3, 073
9 181

8, 280
3, 094

7, 988
2, 891

22, 554

20, 567

20, 553

19, 929

179

9 049

Tabie

z. --xsud

BUU( P"J.'

KE('Big'J.'S BY SOUR('E

AND

OU'J. 'LAYS

BY A('EN(

(f iscal years; in millions of dollars)

Treasury:

Interest

Offsetting
Other

on the

.. . . . .. . . .. . . .
. . .... ...... . ... . ... ..

public debt.

receipts.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

.. ... . .. . . . ...
. . . ..
Aeronautics and Space Adminis tration.
Administration. . . . . . . . . . . . .
nf Columbia. . . . . . . . . . . . . . . . . .

Subtotal, Treasury.
Environmental
Protection Agency.

National
Veterans

District

Export-Import Bank.
Federal Deposit Insurance

Corporation,
Federal Emergency Management Agency. .
Federal Home Loan Bank Board. . . . . . . . . .
... ..
General Services Administration.
Office of Personnel Management. . . . . . .
Postal Service payment. . . . . . . .
Railroad Retirement Board. . . . . . . . . . . .
Small Business Administration
Authority
Tennessee Valley funds'
Other (net) 1/. . . . . . . . . . . . .

Allowances

~ ~

~ ~ ~ ~

~ ~ ~ ~ ~ ~ ~ ~

95, 589

~Fe

br uar

OIltlnuea)

1982

~Jul

115,700 118, 200

-14, 282

-18, 301 -19, 385

929633

1099349 1109548

11 325
5, 232
5, 421
22, 904

492
066
2,
-1,726
372
370

186

18, 089

1, 343
5, 308
1,913
1,928
5, 202

~ ~ ~ ~ ~ ~

Undistributed offsetting receipts:
Federal employer contributions to
. . . . . . . . ... . .. . .
retirement
Interest received by trust funds. .

((

Estimate

1981

Actual

-6, 371
-13,797

11 950

5, 434
5, 827
24, 134

479
1,855
-1,800
417
38
257
19, 907

619

5, 727

525

2, 180
4, 632
-624

11 733

Actual

117,404
11 579
110,521

-18, 463

5, 307
5, 850

5, 004
6, 026
23, 937

1, 478

1, 173

24, 190
519

439

-1,500

-1, 440

-599

-588

20, 010
661
5, 733
701

19, 973

4, 649

4, 459

350

339

1, 760

-1, 000

-7, 560 -7, 561
-16, 080 -16, 593

280
229

707

5, 721

631

1, 527

-7, 020
-15, 991

rarlxe

~. ——isug

BUU4ET

~('5JpTS

BY SOURl'5

AND

OUTLAYS

1981

Actual
Rents and royalties

on the Outer

Shelf. . . . . . . . . . . . . . . . . . . . . . . .
Total, outlayse

Continental

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Deficit

(-). . . . . . . . . . . . . . . . . . . . . .
~

-10 138
657F204

578932

De tail ma r n )t add to totals because of rounding.
These agency totals reflect the non-enactment of proposals
Departments of En. rgy and Education.

NOTE:

BY ACiYNOY

(f iscal years; in millions of dollars)

(Oon&1nuea)

Estimate
~Februar

1982
Actual

~Jul

-7 164

-6 250

725F331 7308985

728, 424

1088884

1108658

-7 861
986. 578

to dismantle

the

)epariment of the treasury ~ Washington, D.C.

Telephone S66-2041

Oc tober
FOR RELEASE 7/HEN

AUTHORIZED

27, 1982

AT PRESS CONFERENCE

TREASURY NOVEMBER QUARTERLY

FINANCING

will raise about $8, 400 million of new cash and
$4, 620 million of securities maturing November 15, 1982, by
issuing $6, 000 million of 3-year notes, $4, 000 million of 10-year
notes, and $3, 000 million of 30-year bonds. The $4, 620 million of
maturing securities are those held by the public, including $284
million held, as of today, by Federal Reserve Banks as agents for
foreign and international monetary authorities.
refund

The Treasury

$13, 000 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
(including the $284 million of maturing securities) will be
added to that amount.
The

three issues totaling

to the public holdings, Government
Federal Reserve Banks, for their own accounts, hold
of the maturing securities that may be refunded by
tionai amounts of the new securities at the average
accepted competitive tenders.
In addition

accounts and
$1, 019 million
issuing add i-

prices

Details about each of the new securities are given in the
attached "highlights" of the offering and in the official offering

circulars.

oOo

Attachment

R-1005

HIGHLIGH'1
OF TREASURY
OFFERINGS TO THE PUBLIC
NOVEMBER

1982

FINANCING

'IO BE ISSUED NOVEllBER

Offered:
public.
Description of Security:

Anount

$6, 000 million

To the

Term and type of
Series and CUSIP

llaturity date.
Call date.

. . . . . . 3-year
designation. . . . Series
security.

. . . . . . . . . . . . . .. .. .

based on

To be determined

Interest rate

October 27, 1982

$4, 000 million

$3 000 million

10-year notes
Series C-1992
(CUSIP No. 912827
November 15, 1992
No provision

30-year bonds
Bonds of 2007-2012
(CUSIP No. 912810 DB

November
November

based on

To be determined

15, 2012
15, 2007

based on

To be determined

or discount. . . . . . . . . . . . .
est
payment elates. . . . . . . . . .
Inter.
available . . $5,
Minimu&n dencInination
Premium

Sale:
of sale.
Accrued interest payable
by investor.

Terms of
Net)iod

allobnent.

Preferred
Payment

investors.

Bates:

Deadline

Yield Auction

None

. . . . . . . . . . . . Noncompetitiveor
$1, 000, 000

non-institutional

Deposit guarantee by
designated institutions.
&ey

Full payment
with tender

bid for

less

to be submitted

. . . . . . . . Acceptable

for receipt of tenders.

date (final payment
institutions)
a) cash or Federal funds. . . .
b) readily collectible check.
Delivery date for

Yield Auction
None

Noncompetitive
$1,000, 000 or

Full payment
with tender

bid for

less

to be submitted

3, 1982,

November

Thursday,
by

1 30 p

Full payment
with tender

less

to be submitted

Acceptable

Wednesday, November
by 1:30 p. m. , EST

bid for

Noncompetitive
$1&000,000 or

4, 1982,

EST

Tuesday,
by

November
EST

9, 1902,

1:30 p.m. ,

Settlement

due from

coupon

securities.

the average of accepted bids
the average of accepted bids
the average of accepted bids
To be determined at auctipn'-. To be determined at auction
To be determined at auction
be determined after auction
To be determined after auction To be determined after auction To
May 15 and November 15
May 15 and November 15
May 15 and November 15
$1,000
$1,000
000

yield.

Investment

notes
P-1985
(CUSIP No. 912827
November 15, 1985
No provision

15, 1982

. Monday,
. Friday,
Tuesday,

November
November

November

15, 1982
12, 1982
23, 1902

15, 1982
12, 1982

Monday,

Friday,

November
November

Friday,

November

26, 1982

(Not applicable)

Monday,

Friday,

November
November

15, 1982
12, 1982

ARE

of the Treasury

~ Washington, D.C. ~ Tel8QINaaa 566-204$
R. T. McNamar
Hog p'gg
Deputy Secretary of the Treasury
.
TNEAS «~ Before a
r. rMEgT
Conference of the

Department

Institute

Bank Administration

Chicago, Illinois
October 28, 1982

OR BANK RELATED:

BANKING

A PROPOSAL

OF FINANCIAL

FOR EXPANS ION

SERVICES

This is a dull speech.
It. is a dull speech by design.
It
is dull not because the subject matter is dull. Indeed, I think
the subject matter is tremendously exciting.
However, the speech
itself is dull because it is detailed. It is detailed because
detailed analysis, discussion, and exposition is required to
explain adequately the Administration's
position on the deregulation of bank holding companies.
Thus I urge you in your afterlunch stupor to steel yourself for, as they say in the shaggy
dog stories, the dullest of the dull dull speeches you have

ever heard.

in the financial services industry
to a number of proposals for changes in government
regulation of financial services. From the Administration's
point of view, the "Rosetta Stone" for expanding bank participaBank Holding
tion in financial services is the Administration's
Act. This provides the appropriate legal
Company Deregulation
framework for continuing the protection of the unique and
beneficial features of depository institutions while permitting
them to expand into less regulated segments of the financial
the
services industry.
And, it does so without disadvantaging
organizations that must compete with them in the marketplace.
Recent developments

have led

What

is a further
is needed.
causes of the dramatic
follows

this legislation
The

the financial

1.
2.
3.

services industry

Expanding

zations;

changes

financial

computer

of the reasons

why

that have occurred in

are well known:

public sophistication

Increasing

convenient
Changing

examination

services;

about and demand

for

technology;

diversified

financial

services organi-

and

4. Accelerating

competitive pressures on banks
other traditional financial intermediaries.

and

it is clear that banks and
In light of these developments,
other financial service entities must be able, if they choose,
to combine into diversified financial services organizations
Subin order to compete in a radically restructured market.

direction has already begun. Indeand those sponsored by other financial services firms have developed products that compete directly
with depository institutions.
New ways to combine the best
features of deposit and investment funds are being merchandised
aggressively by'the securities industry.

stantial

pendent

movement in this
money market funds

and
More recently, insurance companies„ such as Prudential
with strong insurance divisions,
and conglomerates
such as Sears and American Express, have combined with firms

Kemper,

in other sectors of the financial services industry to create
diversified financial services firms. These firms appear to
believe that by combining many financial services they can
create a whole that is greater than the sum of its individual
parts. Whether it is spreading overhead, joint marketing programs, multiple services to individual customers, or simply
a blind faith in what was once called synergy, we are seeing
more and more of these multiproduct
financial firms. And today, both life and property casualty insurance holding companies
are engaged in real estate development and ownership, securities
activities of virtually all types, savings and loan activities,
travel services and a wide variety of other services.

But, because regulatory restrictions on banking are tighter
than those on insurance company diversification,
banks face a
much more significant
barrier to expansion beyond a narrowly
defined field. Nevertheless, some of the larger banks and bank
holding companies have expanded their non-banking services overseas -- including insurance activities and investment banking
and are now probing at the edges of permissible
activities
in the United States.

But, if government regulation flies in the face of long
term market forces, it can be harmful to the securities, insurance, banking and other industries.
Therefore, we have proposed
changes in laws that will accommodate both the legitimate purposes of regulation in these fields and the needs or desires of
the firms to establish

firms.

or join in diversified

financial

The Administration's
proposal (introduced in
and in the House as H. R. 6720) would amend

services

the Senate as
the Bank Holding Company Act (and several other banking acts) to permit, but
not require, bank holding companies to become diversified financial service firms. Under the recently passed Garn-St Germain
Depository Institutions Act of 1982, thrift institutions were
authorized to expand their bank-like services. The Administration would propose that at some point -- and perhaps now is the
time -- thrift institution holding companies should be authorized
to provide the same financial services as bank holding companies.
Should there be a difference between thrift and bank holding

S. 2490

I suggest the burden of proof is on those that say
that there should be a difference.
I would ask why.

companies?

owns

company is a firm that
The current law limits
to banking
company subsidiaries

Broadly defined, a bank holding
or controls one or more banks.

the activities of bank holding
and such other activities that "the [Federal Reserve] Board. . . .

has determined

or controlling

to be so closely related to banking or managing
as to be a proper incident thereto. " As

banks

this language implies, the Federal Reserve Board has very broad
discretion to decide whether a bank holding company may own
subsidiaries that engage in non-banking activities. Historically,
the Board has construed the term "closely related to banking"
quite narrowly, so that a firm which owns or controls a bank
cannot in general own or control subsidiaries engaged in
offering other kinds of financial services.

The historical purposes for these restrictions have been
to preserve the safety and soundness of the banking subsidiaries
of a holding company, to prevent a bank from providing holding
to
company affiliates with unfair competitive advantages,
eliminate potential conflicts of interest, and to foster a
large number of firms so as to minimize concentration of resources and promote diversity and competition.
Originally,
this may have been sound and adequate public policy. Today it
is in doubt. However, the practical effect of the policy has
been to prevent bank holding companies from combining with or
establishing firms offering other financial services. This
has handicapped bank holding companies and their subsidiary
banks from competing for customers, markets, or enjoying ecoIndirectly, this may increase bank operating
nomies of scale.
expense and reduce additions to capital needed to promote

sound

banking

policies.

in June, would allow
Our proposal, which was introduced
to engage in
bank holding companies, through subsidiaries,
any activities the Federal Reserve Board " determines by

The bill provides
regulation to be "of a financial nature.
that, in interpreting this phrase, the Board should give primary
consideration to the public benefits that would result from
Moreover, the bill specifies certain
increased competition.
activities in which a bank holding company subsidiary may
the Board decides the activity is "of
engage, whether or not
"
The bill would specifically authorize
a financial nature.
bank holding company subsidiaries to engage in insurance underwriting and brokerage, and real estate investment, development,
In the securities field, bank holding company
and brokerage.
subsidiaries could deal in and underwrite U. S. and most state
securities, including revenue bonds. They could
and municipal
sponsor, control, and advise an investment company and they
can deal in and distribute bank certificates of deposit and
commercial paper of its parent holding company or any of the

holding

company's

subsidiaries.

Under

the present

law,

a bank holding

company

wishes

to purchase shares of a corporation whose activities it believes
it must obtain
meet the "closely related to banking" requirement,
The review
the approval of the Federal Reserve Board in advance.
of these applications can take considerable time and is itself a
substantial barrier to bank holding company entry even into those
fields the Board has determined are closely related to banking.
Some have suggested the Fed has built a Japanese style non-tariff
barrier to prevent entry into financial activities just as the
Japanese non-tariff barriers prevent the free reasonable entry
of goods into Japan.
proposal requires that
By contrast, the Administration's
within 180 days of the bill's enactment, the Board develop regulations defining which activities are of a financial nature.
Under this plan, a bank holding company that wishes to purchase
shares of a corporation whose activities it believes fall within
the terms of this Board regulation may proceed with more confidence. The Board may disapprove only if the activities do not
meet the definition, if it has received insufficient information
to decide, or if it concludes that material information in the
application is inaccurate.
Thus, the proposal not only broadens
the activities in which bank holding companies may engage, but
also makes entry into these new fields easier and less time conThe Fed would have the power to veto based on specific
suming.
pre-established criteria, rather than the present vague and time
consuming ab initio approval.
By allowing bank holding companies, rather than banks
themselves, to offer a broader range of services, the
Administration's
holding company proposal accomplishes certain
legitimate policy objectives of bank regulation while allowing
banks to associate themselves with firms that can compete for
customers with other diversified financial services.

In the Administration's
view, permitting direct entry
banks
into
non-banking
activities
would be unsound policy
by
for two principal reasons. First, allowing banks to offer
non-banking services would create opportunities
for unequal
competition.
Second, by subjecting banks to new risks,
might jeopardize their safety and soundness.

Those who have consistently opposed bank entry into nonbanking fields have argued persuasively that banks have unique
characteristics and advantages that set them apart from other
businesses.
First, banks have the lowest cost of funds of any

private institution because the marketplace perceives their
public role as a financial intermediary as an exceptionally
stabilizing influence. Banks have an assured access to the
Federal Reserve discount window to help them avoid liquidity
crises, and their deposits under $100, 000 are Federally insured.
To protect these deposits in very large banks that are financially troubled, it is often necessary to merge the troubled

bank

ers

into another healthy institution
coming

with

out whole.

all depositors

and

lend-

Because lenders or depositors count on these arrangements,
banks are able to acquire even their uninsured funds at a very
favorable market rate far below the cost of nominal debt funds.
Banks can utilize these funds in internal activities to their advantage in competing with independent organizations that perform
the same types of business.
This is exactly the case where independent securities firms compete with banks conducting government
securities business within the bank.
Second, tax and regulatory laws applying to banks are different from those applying to non-bank enterprises.
If the nonbanking activities of banks were regulated by a bank supervisory
agency, banks might be able to obtain more favorable regulatory
treatment for their conduct in a given sector than their competitors obtain from the usual regulator of the particular industry.
In addition, the operation of the tax laws as applied to banks
over non-banks, again a problem that
may give them an advantage
is particularly troublesome in the securities field.
Entry by banks into non-banking activities could also
jeopardize bank soundness, whether the bank enters the

field directly or through a subsidiary of the bank in which it
its bank capital. In either case, banks themselves
Clearly,
would be taking commercial risks, not banking risks.
it is inappropriate for organizations whose liabilities are
insured by the Federal government to be taking commercial
risks in competition with enterprises which are less heavily
leveraged than an insured bank, and which must raise capital at
the commercial paper rate, a spread over LIBOR, or in the long
invests

term corporate
The

bond market.

Federal deposit insurance

vision of bank

agencies'

risks are protected

collect but also by their superactivities restricted by law to those that are

not only by the premiums

they

within the agencies' resources and the need to
In short, the price
maintain public confidence in the system.
of the Federal insurance is a restriction on activities.

manageable

Quite apart from the issue of government insurance,
entities of limited authority because
public policy reasons for creating finanIt is because
cial institutions whose credit is unquestioned.
that bank liabilities are part
bank credit is unquestioned
of our money supply, and it. is not an exaggeration to say
that modern commerce simply could not exist if transacting
parties did not have confidence in the capacity of financial
intermediaries such as banks to meet their obligations.
between bank CD
Should we have a system that distinguishes
credit
is
a
bank
part of M-l, M-2,
the
whether
to
as
spreads
not.
course
Of
?
M
or n
M
banks are supervised
there are compelling

the other hand,

allowing

bank holding

companies

service activities provides banking
organizations competitive benefits, but does not require or
permit the bank itself to assume the increased risks associated
expand

their financial

with non-banking

activities.

Holding companies are of course legally separate from the
banks they own and control, and the capital invested in a holding company's non-banking subsidiaries is not the subsidiary
banks' capital.
is the capital raised by a holding
Rather,
company in competition with other borrowers in the credit
markets,
e. , at a competitive, market determined rate.

This in itself helps insulate banks against threats to
their safety and soundness.
Permitting holding companies to
offer a broader range of services can also contribute in a
positive way to the financial soundness of its subsidiary
banks. Holding companies were originally viewed as sources
of strength for their subsidiary banks, and this would
certainly be the case if they were engaged in profitable
non-banking activities. (Obviously, poor management would
make the opposite true. )
During times of strain on subsidiary bank's resources, a
soundly financed and profitable holding company could furnish
additional equity capital to the bank. But holding companies
can hardly be expected to contribute significantly to bank
soundness if their range of activities does not extend beyond
what is permitted to banks themselves.
And, holding companies
may acquire substantial
tangible assets, e. g. real estate, that
can provide holding company management with tax and management
opportunities to borrow monies at the holding company level
using the assets as security for repayment of the borrowed funds.
Holding company debt can be converted into an equity investment
that is infused in the down-stream bank, S&L, insurance company,
or other financial services activity. Thus, the opportunities
to raise new capital to support traditional financial services
can be enhanced'

The question of adequate equity or investment
capital
sources to support future streams of cash flows and reported
earnings warrants comment.
In financial services, an evil to
be avoided is unwarranted
pyramiding of capital.
Because financial intermediaries appropriately are highly-leveraged, there
should be independent,
allocated pools of equity or risk capital
that support each earning stream. If activities are carried
out. by a bank subsidiary,
and the only capital infused is the
bank's capital, an immediate pyramiding and comingling of
diverse risks takes place. Consider for example, a bank that is
leveraged at 20-1, and the bank's subsidiary engages in an
activity, that because of its higher risk, normally has a 2 to
debt to equity ratio. Obviously the bank capital has been

in cash flow and earnings that could
of the bank subsidiary's equity. To
the extent that the stock of the downstream subsidiary is
counted as an investment asset on the books of the parent
bank, this can be a double counting of the enterprise's equity.
At the risk of stretching an analogy, just as kiting checks is
a practice that overstates one's checking account, permitting
bank or S&L equity capital to be used to finance downstream
non-S6L activities overstates the availability of
non-banking,
the equity investment capital to support either those activities
exposed to fluctuations
result in an impairment

or the parent bank.

This blunt assessment was recently confirmed by one knowledgeable banker who publicly stated that he opposed our
holding company approach, because the cheapest way to engage
in non-banking activities was to use the bank's own capital to
generate an additional stream of income. That view confirms
either restrict the activities
the public policy dilemma:
or segregate the capital and expand the permitted activities
that match each allocated equity capital investment.
During

the most recent session of Congress,

the principle

should be allowed to expand into activiforbidden
to banks was finally accepted. In
otherwise
ties
the
Trading
Export
Company Act, Congress authorized
passing
bank holding companies to own export trading companies -- firms
that would purchase goods and services in the United States
But the Act specifically excluded banks
and sell them abroad.
from such ownership.
This commercial dealing activity, far too
risky for banks themselves, was authorized for bank holding
companies because these entities are legally separate from
their subsidiary banks and because their commercial activities

that holding companies

would

not create risks for their subsidiary

While the holding

from the

company

approach

banks.

can insulate

risks associated with non-banking

activities,

banks

holding companies from misusing their controlling positions in banks. To deal with these concerns,
the Administration's
proposal includes a series of provisions
that regulate banks' transactions with their non-bank holding
the restriccompany affiliates, modifying and strengthening
tions already imposed.

cannot prevent

The

principle

actions between

substantially

underlying

these provisions

is that trans-

a bank and its affiliates must be made on
the same terms and under substantially the same

circumstances, including credit standards, as those prevailing
at the time of the transaction for comparable transactions by
The objective is to
the bank with non-affiliated companies.
activities capitalcompetitive
have functionally equivalent
portfolio
sources.
theory, this
market
(In
equivalent
ized by
of
stock
volatility
of
the
beta
theory
would be a variant
reflecting the variability of earnings. )

Specifically, under the proposal, transactions between a
bank and its affiliates would fall into one of three
categories. The first is "covered transactions, " which include:
(i) the purchase of securities or other assets, except those
subject to a repurchase agreement, from an affiliate; (ii) the
sale of securities or other assets, including assets subject
to a repurchase agreement, to an affiliate; (iii) the payment
of money or furnishing of services to an affiliate under a
contract, a lease, or otherwise; (iv) any transaction in which
an affiliate acts as an agent or broker or receives a fee for
its services to the member bank or to any other person; and
(v) any transaction or series of transactions with a third
party if the affiliate has a financial interest in the third
party or if the affiliate is a participant in the transaction
or series of transactions.
The only rule for covered transactions
is the general

member

rule stated earlier: such transactions are permitted only
if made on terms substantially the same as those found in
comparable transactions with non-affiliates.
So long as they
comply with this rule, banks and their affiliates may engage
in covered transactions without any limitation as to amount.

category is "financial assistance transactions, "
which include:
(i) loans or extensions of credit to affiliates;
(ii) purchases of or investments in securities of affiliates;
(iii) purchases of assets that are subject to repurchase agreements from affiliates; and (iv) the issuance of acceptances,
guarantees, or letters of credit, including endorsements or
standby letters of credit to or on behalf of affiliates.
The second

Our

bill subjects financial assistance transactions

rule of arm's length dealing as well as to percentage
limitations on their amount. The aggregate amount of financial
assistance to any one affiliate may not be greater than 10
percent of the bank's capital and surplus; the aggregate amount
of financial assistance to all affiliates may not be greater
than 20 percent of the bank's capital and surplus.
In addition,
financial assistance transactions are also subject to strict
collateral requirements.
the general

The third and final category includes
are prohibited outright.
For example:

transactions

that

Neither a bank nor any of its subsidiaries may
purchase a "low quality asset" from an affiliate
except under limited circumstances.
A low
quality asset is defined as: (i) any asset of an
obligor that has an obligation classified as "sub"standard, " "doubtful, " or "loss" in a current
federal or state bank examination report;

(iii)

(ii)

any asset in a non-accrual status;
any asset on which principal or interest payments are more than 30 days past due; or (iv)
any asset whose terms have been renegotiated
or compromised due to the obligor's financial

condition.

Neither a bank nor any of its affiliates may
purchase any securities or other assets from
any affiliate unless the instrument
creating
the fiduciary relationship, a court order,
or the law of the relevant jurisdiction
permits such purchases.
a bank nor any of its subsidiaries
knowingly purchase or otherwise acquire
of
any security, a principal underwriter
which is an affiliate or subsidiary of the
bank, for so long as the underwriting
or

Neither
may

selling syndicate exists.

Neither

a bank nor any

may suggest
member bank

of its affiliates

in any advertisement that the
will be in any way responsible

of its affiliates.
These regulatory limitations are an integral part of the
Administration's
proposal.
They ensure that not only will
banks be separated legally from the risks associated with the
non-banking activities of their holding company affiliates,
they will avoid relationships with affiliates that would
threaten banks soundness or provide their affiliates with unfair competitive advantages through favorable financing terms
or other devices.
The Administration's
program also deals with the need
for regulatory supervision of the activities of non-banking
subsidiaries of bank holding companies, while attempting to
avoid the danger of excessive supervision.
Under the Bank
Holding Company Act the Federal Reserve Board has broad
discretionary authority to require reports of and to conduct
examinations of bank holding company subsidiaries.
The Administration proposal limits the Board's authority to require
reports. Under the proposal the Board may only require that
the subsidiaries submit, not more than quarterly, the same
information that securities firms are required to submit to
the SEC under section 17 of the Securities Exchange Act of
1934 and that all companies are required to submit to the SEC
under section 13 of the 1934 Act. Again, the objective is to
ensure equivalent treatment of functionally equivalent activifor the obligations

ties.

proposal also limits the Federal Reserve Board's
to conduct examinations of non-bank subsidiaries.
of operations that
The Board may only conduct examinations
The Board does
affect the affairs of any bank subsidiary.
have the power to conduct a complete examination of a non-bank
subsidiary, but only if it makes a finding that the financial
condition of the subsidiary is likely to have a materially
adverse effect on the safety and soundness of an affiliated
bank or banks.
Thus, state insurance commissioners would regulate a bank holding company's insurance activities, the SEC
its securities activities, and so on.
The

authority

proposal,
purpose of the Administration
permit banks--if they choose--to become part of
diversified financial services firms so that they will be able
By
to adapt to and compete in a rapidly evolving markets
utilizing the bank holding company framework, the proposal
seeks to expand the range of services that banking organizations
are associated with, without exposing banks themselves to the

then,

The underlying

is to

risks of non-banking activities. By imposing further restrictions on transactions between banks and their holding company
affiliates, the proposal seeks to protect banks against. harmful
relationships with their affiliates and to prevent them from
furnishing financial support to their affiliates that might
give these

affiliates unfair competitive advantages.

The Administration's
proposal enhances competitive
because any organization performing only activities in
a bank holding company may engage, may itself organize
holding company and acquire a subsidiary bank or banks,
other service firm. As a result, deregulation of bank

companies

a two-way

other financial
into banking.

street

businesses

equality

which

holding

with banks able to expand into
firms able to expand

and competing

view the proposed new activities
Too many organizations
for banks as an intrusion into their business rather than an
invitation for them to expand into banking. And, I fear those
who object are either ignoring change or giving credence to
the old adage that "businessmen love competition, but hate to
"

compete.

The Administration's
objective is to maximize the competitive benefits of the financial services industry for all partiWhat we seek to do is to
cipants and primarily for consumers.
provide a legal framework for the consolidation of financial
service entities that seems inevitable in some markets, but
will leave others basically unaffected.
We seek a framework
for a government neutral, pro-competitive, functionally regulated financial services industry -- the proverbial level

field: a legal framework that doesn't prohibit profits,
that offers options for management to decide their own
strategy for long-term profitability, survival, or whatever
they and the marketplace decide.

playing
and

This

the appropriate

bank holding

company

role of

activities.

government

in the deregulation

Oepartment

of the Treasury

Washington,

O.C. ~ Telephone S66-2040
October 28, 1982

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION

for

4
million of 52-week bills to be issued Novemb
are
The
details
1983,
were
today3,
accepted

and

$ 7, 000
November

RANt

E OF ACCEPTED COMPETITIVE BIDS:

Tenders

to mature
as follows:

Investment

Price
High
Low

Average—
Tenders

91.407
91.263
91.338

at the

low

Discount Rate

(E uivalent

Cou

Rate
on-issue Yield) I/

8.499X
8. 641X
8.567X

9 .21X

9.38X
9.29X

price were allotted

12X.

TENDERS RECEIVED AND ACCEPTED

(In

Thousands)

Received

Location
Boston
New

54, 585

5, 8l3, 120

52 590

$11,318, 325

$7, 000, 325

9, 814, 200

$5, 496, 200

27, 900
37, 600
40, 855
98, 660
664, 660
55, 300
10, 705
25, 540
7, 380
876, 430

Philadelphia
Cleveland
Richmond

Atlanta
Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury

~e
Competitive
Noncompetitive

Subtotal, Public
Federal Reserve
Foreign Official

Institutions
TOTALS

37, &8S

9, 366, 120

York

TOTALS

~kcce Ced

27, 900
34, 600
38, 855
98, 660
194, 660
39, 300
10, 705
23, 540
7, 380
621, 430

234 125

$10, 048, 325
1, 000, 000

$5, 730, 325
1, 000, 000

270, 000

270 000

$11,318,325

$7, 000, 325

This requires an
1/ The average annual investment yield is 9 51X
All-Savers
Certificates
of 6. 66X.
on
investment
annual
yield

R-1007

ipart'Inent

o~ the Treasury

FOR IMMEDIATE

O.C. ~ Telephone $66-2041

Washlnion,

RELEASE

1, 1982

November

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $ 5, 618 million
26-week bills, both to be issued
OF ACCEPTED
COMPETITIVE BIDS:

RANGE

Low

Average

Tenders
Tenders

13-week bills
February 3, 1983
Discount
Investment
Price
Rate
Rate 1/

at the
at the

low
low

7. 730%
7.833%
7.813%

bills

26-week

maturin

98. 046
98. 020
98. 025

High

of 13-week bills and for $5, 602 million of
on November 4, 1982, were accepted today.
maturin

Price

7. 99%

95 ' 865
95. 829
95. 839

8. 10%
8.08%

May

5, 1983

Discount
Rate

Investment
Rate 1/

8. 179%
8. 250%
8. 231% 2/

price for the 13-week bills were allotted
price for the 26-week bills were allotted

8. 65%
8. 73%
8. 71%

56%.
46%.

TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Location
Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St. Louis
Minneapolis
Kansas City
Dallas
San

Francisco

Treasury
TOTALS

Competitive
Noncompetitive

Subtotal, Public
Federal Reserve
Foreign Official

Institutions
TOTALS

Received

105
$55,
11,264, 535

35, 885
80, 115
43, 455
64, 840
1, 174, 410
36, 610
16, 105
58, 570
30, 080
889, 570
249, 910
$13, 999, 190

ted:
$55, 105:
~dcce

4, 419, 515
35, 885
59, 115
43, 455
64, 840
384, 040
25, 610
14, 105
58, 570
25, 080
182, 560
249, 910

$5, 617, 790

:
:
:
:
:
:

Received
900
10, 394, 460
66, 920
68, 695
36, 185
45, 850
1, 043, 555
37, 000
18, 345

$67,

:
:
:
:

:
:

43, 445
21, 975
896, 180
323, 110
$13, 063, 620

ted

47, 900
4, 515, 860
16, 420
40, 695
36, 160
37, 080
199, 555
22, 000
14, 265
39, 445
16, 975
292, 040
323, 110

$5, 601, 505

$10, 935, 300
840, 520
$11, 775, 820
870, 000

$3, 473, 185

$12, 947, 130
874, 260

$3, 495, 100
1,070, 630
$4, 565, 730
874, 260

177, 800
$13, 999, 190

177, 800
$5, 617, 790

417, 800
$13, 063, 620

417, 800
$5, 601, 505

$11,876, 500
1, 070, 630

1/ Equivalent coupon-issue yield.
the maximum
2/ The four-week average for calculating
8.
049%.
on money market certificates is

R-1008

~dcce

840, 520
$4, 313, 705
870, 000

interest rate payable

epartment of the Treasury ~ washington,
For Immediate
November

Release
1982

D'ARCY-MACMANUS

I.C. ~ Telephone
Robert E. Nipp

Contact:

566-2133

SELECTED TO DEVELOP MARKETING
FOR OLYMPIC COINS

PLAN

M. (Bay) Buchanan,
Treasurer of the United States, and
Pope, Director of the Mint, today announced the selection of
D'Arcy-MacManus
& Masius,
Inc. , an advertising agency in New York
City, to develop a comprehensive marketing strategy for the
domestic sale of 1983 and 1984 Olympic Commemorative Coins.

Angela

Donna

The Olympic Coin Marketing Program will be developed by
D'Arcy in conjunction with its subsidiary,
Poppe-Tyson, Inc.
D'Arcy 6 MacManus a Masius, Inc. , the eleventh largest advertising
agency in the world, has 55 offices in 26 countries and is
privately held. The agency registered 1981 worldwide billings in
excess of one billion dollars.
The Olympic

Coin Marketing

Advertising considered
keting of the coins.
Means

by which

maximum

Plan will address:
most

effective for successful

public awareness

the coins can best be achieved.

and

mar-

acceptance

Assessment of the types of distribution
networks that will
be cost effective in selling the coins to the public.

of packaging
acceptance, be durable

The types

that will maximize public
easy to use, at the minimum

and

possible cost.
Under the terms of the Treasury contract, D'Arcy is required
to present a plan within 90 days for domestic sale of Olympic
Minting of up to 50 million silver
Coins, according to Buchanan.
and 2 million gold coins (the first gold coins to be minted in
under the Olympic Commemorative Coin
some 50 years), is authorized
Act (P L. 97-220), signed into law on July 22, 1982.
R-1009

%66-2041

Sale of the coins is designed to provide needed revenue for
the United States Olympic Committee (USOC) and the Los Angeles
Olympic Organizing Committee (LAOOC). The USOC is responsible for
training Olympic athletes and Los Angeles is the site of the 1984
summer games.
The Olympic Commemorative
Coin Bill provides that a
surcharge of not less than $10 per silver coin and $50 per gold
coin be divided evenly between the USOC and the LAOOC.
Orders for the coins are being accepted.
The 1983 silver
coin will be struck early next year, and the 1984 silver and gold
coins will be minted in early 1984. Buyers have the option of
purchasing all three coins, the two silver coins, or the 1983
silver coin only. Prices are 9352 for the three coin set, $48 for
the two silver coins, and $24. 95 for the 1983 silver coin.
The Mint expects to accept orders at these prices until
December 15, 1982. However, in the event that a significant
increase in bullion prices should occur, the Mint reserves the
right to discontinue order acceptance after December 15. Once
orders are accepted, however, they will not be cancelled due to

changes

in bullion

Order

offices.
be sent

forms

Orders,

to:

prices.

from all Bureau of the Mint
accompanying
check or money order, should

are available
with

San

Bureau of the Mint
55 Mint Street

Francisco, California

94175

of ihe Treasury

Department

For Immediate
November

washington,

Release

Contact:

1982
TREASURY INFORMS
ON TRANSITIONAL

D.C. ~ Telephone S66-2041

TAXPAYERS

SECTION

Charles Powers
566-2041

OF POSITION

338 ELECTIONS

The Treasury Department
today announced that it anticipates
that the election allowed under section 224(d) (2) of the Tax
Equity and Fiscal R'esponsibility Act of 1982 ("TEFRA"), to apply
section 338 of the Internal Revenue Code of 1954 (the "Code" ) to
certain acquisitions occurring before September 1, 1982, will be
governed by section 306(a)(4) of the Technical Corrections Act of
1982 (H. R. 6056), as passed by the Senate on September 30, 1982
(or similar rules) . The Treasury alerted taxpayers that it would
therefore be advisable to make such elections on the assumption
that section 306(a)(4) (or similar rules) will apply.

Section 224(d)(2) of TEFRA allows a corporation which
a controlling
interest in the stock of a second
corporation after August 31, 1980 and before September 1, 1982 to
elect to apply the provisions of new section 3 38 of the Code
(added by section 224(a) of TEFRA), provided the purchased
corporation was not liquidated before September 1, 1982 and the
purchasing corporation makes the election not later than November
15, 1982. However, section 306(a)(4) of H. RE 6056, the Technical
Corrections Act of 1982, passed by the Senate on September 30,
1982, would clarify the rules applicable to those elections.
Under section 306( a)(4), the purchased
corporation is treated as
having sold all of its assets in a single transaction to which
section 337 applies at the close of the date the election is
made, and is treated as a new corporation which purchased those
assets as of the beginning of the following day. As a result,
the taxable year of the purchased corporation closes and its tax
attributes terminate as of the close of the election date, and
from the deemed asset sale is
any tax liability resulting
reported on the final return of the purchased corporation for the
year ending on that date. Further, any tax resulting from the
election will not be included in any consolidated tax return
filed by the seller of the purchased corporation, and could be
included in a consolidated tax return filed by the purchasing
To account for distributions
corporation.
by, and operations of,
the purchased corporation between the actual purchase date and
the date of the election, section 306(a)(4) requires adjustments
analogous to those under section 334( b)(2) of the Code, as in
effect prior to TEFRA, to be made. Additionally, section
306(a)(4) provides that the rules of section 338 of the Code
requiring consistency of treatment where several acquisitions are
made from the same affiliated group will not apply to elections
purchased

made

under

section 224(d)(2) of

TEFRA.

The Treasury Department believes that it is the intention of
the Congress that section 306(a)(4) (or similar rules), as
described above, apply to elections made under section 224(d)(2)
of TEFRA. The Treasury Department anticipates that a technical
amendment

clarifying

that intention

will soon be enacted.

The Treasury Department
also pointed out that a News Release
issued today by the Internal Revenue Service providing
guidance to taxpayers regarding the manner of making the
transitional rule election allowed by section 224(d)(2) of TEFRA
was

Oepartment

of the Treasury

FOR RELEASE AT

Washlnton,

4:00 P. M.

D.C. ~ Telephone %66-2041
November

2, 1982

TREASURY'S WEEKLY BILL OFFERING

of the Treasury, by this public notice,
two series of Treasury bills totaling
approximately $11, 200 million, to be issued November 12, 1982.
This offering will provide $925
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $10, 264 million, including $1, 049 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2. 142 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
The Department

invites tenders for

90 -day bills (to maturity date) for approximately
$5, 600
million, representing an additional amount of bills dated
August 12, 1982,
and to mature February 10, 1983
(CUSIP
No. 912794 CJ 1 ), currently outstanding
in the amount of $5, 528
million, the additional and original bills to be freely
interchangeable.

181-day bills for approximately
12, 1982,
and to mature
9l2794 CU 6)-

November

No.

$5, 600 million, to
May

12, 1983

be dated
(CUSIP

Both series of bills will be issued for cash and in exchange
Tenders from
for Treasury bills maturing November 12, 1982
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will be accepted at the
Addiweighted average prices of accepted competitive tenders.
tional 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.

bills will

be issued on a discount basis under competinoncompetitive bidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
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
Treasur y.

tive

The
and

Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C
20 226, up to 1:30 p .m . , Eas tern Standard time, Monday,
November 8, 1982.
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 .

being offered if such position is in excess of $200 million . This
information should reflect positions held as of 12:30 p .m . Eastern
time on the day of 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 millions

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
No

in the auction

deposit need accompany

tenders

from incorporated

banks

accompanies

the tenders

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
funds
on November 12, j982, in cash or other immediately-available
Cash adjustments
or in Treasury bills maturing November 12, j 982.
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.

amount

If the gain on the sale of a bill exceeds the taxpayer 's
the bill.
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
of the Treasury Circulars, Public Debt Series
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

Department
Nos. 26-76 and

any

Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

lepartment of ihe 'treasury

Washington,

D.C. ~ Telephone S66-2041

For Release Upon Delivery
Expecte at 12:00 Noon
November 4, 1982

REMARKS BY BERYL W. SPRINKEL
SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE
TRINITY UNIVERSITY CONFERENCE ON FINANCIAL MARKETS
TEXAS
SAN ANTONIO,

UNDER

Thursday,

It is

pleasure

views and concerns

feelings

November

4, 1982

to be with you here today to hear others'
issue of deregulation and to express

on the

subject.

some

from
As you know, a major goal of the Reagan Administration,
outset, has been to deregulate the financial services industry.
effort has certainly not proceeded at the
While the deregulation
our briefcases in
had
when
we first unpacked
rate that we
hoped
the Nation's capital, we have achieved some important changes and

the

have every

Congress.

reason to believe

that

will be enacted

the next

While the slow pace at which the political process grinds out
it is, on balance, probably
change is frequently frustrating,
appropriate. An issue such as financial deregulation is, after all,
a highly complex one in which many diverse groups have an interest.
potentially, deregulation has fundamental implications for virtually
every aspect of the financial services industry, from the pricing
of services to the geographical distribution of firms. In addition,
financial deregulation has far-reaching implications for the consumer

services, particularly the small saver.
With the interests of so many groups and the future path of
several industries at stake, it is only prudent and reasonable that
all the various viewpoints and concerns get their "day in court. "
Certainly nothing would be worse than a wholesale slashing of
regulations without a proper airing of the effects now, and into
the future, on the markets for financial services.
We at least got our feet wet with The Depository
Institutions
Act of 1982 which was, of course, designed primarily to address the
of financial

The Act allows thrifts
pressing problems in the thrift industry.
to engage in commercial, consumer, and agricultural loans, and
authorizes the provision of government-backed
promissory notes to
In addition, it
help maintain the net worth position of thrifts.
repeals the quarter-point interest rate differential on savings
accounts for thrifts.

R-1012

Probably the most important provision of the new law -- from
the standpoint of the consumer and the financial services industry
as a whole -- is the authorization
for banks and thrifts to issue a
new money-market-fund-type
account. The detailed specifications of
the account are to be determined by the DIDC so that the account
can be made available to the public by December 15. Since the DIDC
is aware that depository institutions need some lead time to "gearup" for the new deposit, it is likely that their decisions will be
forthcoming even sooner.

has become commonplace to declare that we are experiencing
There is no
in the financial services industry.
question that we have seen major changes in the U. S. financial
system in the past decade and most analysts foresee that trend
continuing in some form into the future.

a revolution

To what

can

attribute the pace of financial innovation in
point to the obvious advances in computer
allowed the provision of services -- such as

recent years? Many
technology that have
point-of-sale terminals, automatic machines, and sweep accounts
that were unimaginable a decade ago. Technological developments
have -- and will no doubt continue to -- facilitate much financial
innovation.

In addition, government regulation itself has created the
incentive for much financial innovation.
Money market mutual funds
are probably the best example of financial innovation in response
to government regulation.

Setting government

the moment,

however,

and computer chips aside for
fundamental
level, it is economic

bureaucrats

on a more

conditions that have created the greatest incentives to financial
innovation. Financial innovation has occurred where the demand for
a new product has existed and it has become cost-effective for the
industry to provide it. Technological advances have provided the
nuts and bolts. Regulation, has in some cases, forced the industry
to be particularly clever in circumventing the regulation and, in
other cases, created situations of inequity and competitive
for some types of institutions.
disadvantages
But the real incentives
for firms to market new financial services and for the public to
buy them have been caused by the prevailing
economic conditions
over the past decade and a half.
The

five-year average of the inflation rate (measured by the
1.2% for the 1960-64 Period, to 3. 4% (1965-69),
(1970-74), to 8. 1% for the five years ending in 1979.

CPI) has risen from

to 6. 1%

interest rates, while going through their characteristic
have gradually been ratcheted-upwards
over
the past two decades.
Every time interest rates were driven upward,
they rose to new highs; with every cyclical downturn, they failed
to fall as far as during the previous decline. Thus after longterm rates hovered between 4% to 6% through most of the 1960's,
subsequent downturns in interest rates allowed the Corporate Aaa
rate to "fall" to 7%, 7. 9%, 8. 6% and 9. 2% in the 1970's, and 10-1/2%
Meanwhile

cyclical

ups and downs,

12.9%. On the upside, interest rates
less resistance to change. The Corporate Aaa rate
rose successively to peaks of little more than 6% in the late 1960's
to 8-1/2%, then 9.3% and 13% in the 1970's, and finally to 15-1/2%
in 1981.
With such dramatic changes in inflation and interest rates,
did we really expect the public's demand for financial services and
investment opportunities
to remain the same? The experience of
accelerating inflation and rising interest rates has had a profound
effect on the saving and investment behavior of the public; it has
also altered the profit-making opportunities of financial institutions.
in 1980 and most recently

have

shown

Again,

much

money-market

funds

provides

us with

the most dramatic

Interest rate ceilings for banks and thrift institutions
existed many years before that regulatory barrier took on new
meaning as inflation eroded the purchasing
power of the public's
savings while regulation prohibited the small saver from earning
a market rate.
The economic conditions of the time -- inflation
and rising market interest rates -- simultaneously
created the
demand for such an account and made it cost-effective for the

illustration.

brokerage

firms to provide

it.

interest rates are also, of course, at the
industry's problems.
While the provisions of
the law just enacted will aid thrifts in coping with their current,
acute problems, the best solution to their difficulties is -- and
always has been -- to get inflation under control and reduce interest
Inflation

and

root of the thrift

high

rates.

economic goal of the Reagan Administration
is to
In our view, inflation is the
reduce the rate of inflation.
fundamental,
underlying cause of the increasingly poor economic
performance of the past decade and a half.
Inflation erodes
incentives to save and invest and, in combination with a progressive
tax system, discourages work and production; it impedes productivity
and reduces our ability to compete in international
markets.
The primary

We are therefore
committed to policies that will restore price
stability because we believe that price stability is a prerequisite
to restoring sustainable economic growth. The short-term economic
fixes -- such as various spending and subsidy programs -- that have
been used in the past to patch up our economic problems provide (at
best) short-term, cosmetic relief to the unemployed or to a targeted
ailing industry or sector. While well-intentioned,
short-term
fixes do not address our permanent, long-run problems of accelerating
inflation and a stagnating economy. In fact by increasing government
spending and adding to the deficit, short-term fixes actually

contribute to the problem and, in the long run, help impede
sustainable economic growth.
president Reagan first took office, we
consistently supported thereafter, a gradual

When

have

recommended,

deceleration

and

money

this is absolutely essential to bringing inflation
under control and providing for lower interest rates in the long
run. That view is completely consistent with the Federal Reserve's
stated policy and money growth target ranges.
Nothing that has happened in the last year and a half has
altered our faith in that basic policy. The slowing of money growth

growth.

In our view,

has been more abrupt than we had desired or planned on, and money
The economy has paid (and continues
growth remains too volatile.
to pay) a price for those aspects of monetary policy. The sharp
slowdown in money growth has exacerbated the length and severity of
of money growth has added to skepticism
The volatility
the recession.
that noninflationary monetary policy will be adhered to over the
long run; that uncertainty has slowed the downward adjustment of

interest rates to declining inflation rates.
Those problems aside, however, the Federal Reserve has achieved
an important deceleration of money growth in the past year and a
half, and the resulting decline in inflation and the recent drop in
interest rates is evidence of the appropriateness of our basic
Obviously other factors can affect inflation and
monetary policy.
Important among
in the short run.
particularly
interest rates,
deficits,
deficit.
budget
Large
the
size
of
budget
these is the
and concern that they will continue into the future, add to
uncertainty in the financial markets and reduce the credibility of
Budget deficits
our commitment to long-run control of inflation.
transfer resources to the government sector and absorb credit that
otherwise would be available for private investment and expansion.
Deficits are an unmitigated evil, and the Administration and the
Congress must persevere in their efforts to bring government spending
under

control

and

reduce the

This Administration

deficit.

has also placed

a high

priority

on reducing

believe that excessive regulation
anti-competitive.
As such, efforts
to weed out unnecessary and inefficient regulation cannot only help
reduce the size of the Government; but also reduce business costs
competition.
and enhance domestic and international

government regulation because
and
can be counter-productive

Prudent, noninflationary
monetary policy, tax changes aimed at
restoring incentives to save and invest, reducing the rate of growth
of government spending, and regulatory reform are all parts of a
total package designed to return us to price stability, which we
view as a precondition
for healthy, sustained economic growth. An
environment of price stability and lower interest rates -- rather
than accelerating inflation and secularly rising interest rates-will have important implications for the financial services industry.
As Chairman Volcker likes to point out, we now have a whole generation
of people in this country who have never known anything but inflation
during their working lives.
Reversing the inflationary trend will
have as profound effect on working, saving and investment behavior
as did the accelerating inflation and interest rates of the 1970's.

Just as financial innovation has responded in the past to
current economic conditions, it will do so in the future. Rising
inflation and interest rates breed innovation and efforts to
circumvent regulation, but I am not so sure that disinflation and
secularly falling interest rates will. I submit that a changing
financial environment may -- as it has been in the past -- prove to
be a more important determinant
of the direction of change in the
financial services industry than the latest computer gadgetry.
Rising inflation and interest rates provide a powerful incentive
for hybrid accounts such as money market funds and sweep accounts.
If the Federal Reserve succeeds in achieving noninflationary monetary
policy, the driving force of that incentive will be considerably
weaker.

is that as important as technology and regulations
My point
are, prevailing economic conditions have powerful and pervasive
effects on the demand for, and incentives to provide, new financial
services. In addition, economic conditions can transform the effect
as well as the removal or
and importance of an existing regulation,
relaxation of regulation.
Certainly many times in our financial
history we have seen the role and impact of a given regulation
changed dramatically
Similarly,
by changing economic conditions.
the effect of deregulation can be altered by changing economic
events.

account for banks and thrifts
The new money-market-fund-type
The decline in interest rates that
again provides a good example.
has occurred in the past few months has already changed the situation
considerably, compared to when the new account was first proposed.
If the gap between market interest rates and rates on more conventional
accounts is, say, 9%, a market-rate account is extremely attractive;
but when that rate narrows to, say, 4%, the incentive to shift
In addition, interest rates, as well as loan
funds is much weaker.
profit-incentive
of depository institutions to
demand, affect the
new
accounts
and
services.
market
develop and
remains committed to a broad deregulation
This Administration
In our view, many of the existing
of the financial industry.
prohibitions and regulations impede competition and cause numerous
inefficiencies and inequities between types of institutions.
Our
ultimate goal is to remove the government restrictions on products
and pricing that now exist, so that financial institutions
can
markets as
adapt and compete in changing domestic and international
they deem appropriate and profitable.

Since the Government does, with public funds, insure deposits,
course, necessary to impose prudent standards of risk,
or, alternatively, procedures that isolate risky operations from
portion of an institution's operations.
the government-insured
we seek a government-neutral,
Between types of institutions
"level playing field" in which no type of institution
noncompetitive,
is disadvantaged by -- or protected from competition by -- government

it is, of

regulation.

and will continue to
focus on four goals: (1) assisting and restructuring
the thrift.
industry, (2) reforming the archaic and artificial separation of
commercial banking and investment banking, (3) liberalizing
the
and (4) affecting
geographic restrictions on banking organizations,
a consolidation of the Federal financial institution
regulatory
Our

financial

deregulation

program

has

agencies.

the law that has recently been enacted is
Administration
proposed and supported
legislation that would also authorize bank holding company subsidiaries
to underwrite revenue bonds, to sponsor and deal in mutual funds,
and provide for much broader real estate and insurance activities.
We supported
the view that these activities should be housed in a
holding company subsidiary to insulate them from the government-insured
deposit activities of the bank and to provide greater equity between
banks and competing, nonbank firms.
We, of course, did not obtain
legislative approval for these other powers, but the Administration
will continue to support their enactment when Congress reconsiders
them in its next session.
In this context,
only one small step.

The

The hodge-podge of regulations
imposed on financial institutions
did not develop overnight; it has been a gradual evolution in
response to economic and institutional
changes.
I suspect that the
deregulation process will also proceed gradually, more of an
evolution than a revolutions
But an important objective of this
Administration
is to move the financial industry along the path of

deregulation.

that can be accomplished is, of course, a complicated
question.
Deregulation, like all other
government policies, cannot occur in a vacuum.
The transition
from
a highly-regulated
industry must be made with care and with proper
awareness of the impact of prevailing economic conditions.
The
major goal of this Administration
is to return economic and price
stability to the U. S. economy and a. more stable and predictable
economic environment will enhance and facilitate the deregulation
process.
How

political

rapidly
and

economic

o0o

eparimeni of the Treasury ~ Washington,
FOR IMMEDIATE

RELEASE

D.C. ~ Telephone 566-2041
November

RESULTS OF AUCTION

3, l982

OF 3-YEAR NOTES

The Department of the Treasury has accepted $6, 001 million of
$12, 821 million of tenders received from the public for the 3-year
notes, Series P-1985, auctioned today. The notes will be issued
November 15, 1982, and mature November 15, 1985 '
The interest coupon rate on the notes will be 9-3/4%.
The
range of accepted competitive bids, and the corresponding prices at
the 9-3/4% coupon rate are as follows:
Bids
Pr ices
Lowest yield
9.70% 1/
100. 128
Highest yield
99. 619
9.90%
Average yield
9.86%
99.720
Tenders at the high yield were allotted 61%.
TENDERS RECEIVED AND ACCEPTED

Received

Boston
New

York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas

San Francisco

Treasury

Totals
The
$6, 001 million
million of noncompetitive
tenders from the public.

90, 678
10, 330, 550
66, 700
159, 475
135, 700
67, 290
1, 014, 125

142, 328
38, 815
77, 930
20, 540
673, 035
3 455

$12, 820, 621

(In Thousands)
ted

~Acce

655
$60,
4, 750, 000

49, 750

113,195
86, 115
61, 890
363, 870
92, 325
38, 815
77, 235

19, 540

284, 015

455
$6, 000, 860
3

of accepted tenders includes $1, 294
tenders and $4, 707 million of competitive

In addition to the $6, 001 million of tenders accepted in the
auction process, $330 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
An additional
$600 million of tenders was also
monetary authorities.
at
the
average
price from Government accounts and Federal
accepted
Reserve Banks for their own account in exchange for maturing securities'
1/ Excepting 1 tender of $70, 000.

of ihe Treasury

Department

Washington,
Contact:

FOR I59CEDIATE RELEASE

Wednesday,

3, 1982

November

SOCIAL SECURITY INTERFUND
TO TOTAL ABOUT

O.C. ~ Telephone 566-204$
Marlin Pitzwater

(202) 566-5252

BORROWING
NOVEMBER

$1 BILLION IN

Donald T. Regan, Secretary of the Tz'easury and Managing
Trustee of the Social Security Trust Funds, today announced that
the Old Age and Survivors Insurance Trust Fund (OASI) will borrow
approximately $1 billion from the Disability Insurance Trust Fund
(DI) on Friday, November 5, 1982 in order to meet November Social
Security payments.

Social Security

payments are made on the third of each
Trust Funds are sufficient to cover payments made by
electronic funds transfer on November 3. The borrowing will take
place on November 5 to cover checks mailed to recipients.
The
precise amount of the borrowing will be determined by close of
business on Friday, November 5 after receipt figures for the day
are calculated.

month.

The

" Secretary Regan said, "we are
borrowing to insure that all of our citizens get their November
and the Congress consider
While the Administration
payments.
solutions to insuring the solvency of the Social Security trust
funds, I want to assure everyone that our Social Security
obligations will be met. "
"As authorized

Trust Fund as of November 2 was
The payments dated November 3 are
There will be additional receipts
which will reduce- the amount to be borrowed to

The balance

approximately
approximately
through Friday
approximately

by Congress,

in the

OASI

$10.3 billion.
$12.2 billion.
$1

billion.

interest rate of 10 5/8 percent will be paid on the funds
The Social Security Act prescribes the
borrowed in November.
formula for determining ihterest rates on all Social Security
investments.
The December 1981 amendments
authorizing interfund
borrowing dictate the borrowing rates to be the same as the
An

current

investment

rate.

Approximately 31 million
each month from OASI.

R-1014

Social Security

payments

are

made

will be able to borrow from the Disability and Hospital
cover OASI needs through June 30, 1983, as authorized by
to
law, " Secretary Regan said, "without. endangering the solvency of
these funds. However, this is "a serious situation that must be
addressed as soon as possible.
"We

Funds

The Board of Trustees of the Social Security System, in
their annual report of April, 1982 estimated that $7 to Oil
billion would have to be borrowed through June 30, 1983.
Secretary Regan said the QASI would have to borrow again in
December to cover payments for that month, and for the ensuing
six months. Congress recognized the probability of underfunding
in the Social Security Trust funds in Public Law. 97-123, signed
December 29, 1981, which authorized interfund borrowing to cover
needs through June 30, 1983. The borrowing must be carried out
by December 31, 1982.

lpart~ent

of the Treasury

FOR INNEDIATE

Washington,

Il.c. ~ Telephone %66-2041

RELEASE

November

RESULTS OF AUCTION

4, 1982

OF 10-YEAR NOTES

The Department of the Treasury has accepted $4, 005
million of
$7, 998 million of tenders received from the public for the 10-year
notes, Series C-1992, auctioned today. The notes will be issued
November 15, 1982, and mature November 15, 1992.

interest rate on the notes will be 10-1/2%. The range
bids, and the corresponding prices at the
10-1/2% interest rate are as follows:
The

of accepted competitive

Bids
Lowest yield

yield
Average yield
Highest

Tenders

at the

high

10.46% 1/
10.53%
10.50%
yield were allotted

TENDERS RECEIVED AND ACCEPTED

Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta

Chicago
St. Louis
Ninneapolis
Kansas City

Dallas
Francisco
Treasury
San

Totals
The

million
tenders

Received
623
6, 584, 593

$19,

12, 235
38, 449

47, 093
36, 481
714, 350
81, 113
29, 349
22, 820
14, 333
396, 898

706
$7, 998, 043

Prices
100.244

99. 817
100. 000
43%.

(In Thousands)
Accepted
14, 623
$
3, 515, 138

12, 235
30, 949
31/313
31, 911

191,770
61, 543

29, 349
21, 820

9, 333

54, 778

706
$4, 005, 468

$4, 005 million of accepted tenders includes $920
of noncompetitive tenders and $3, 085 million of competitive
from the public.

In addition to the $4, 005 million of tenders accepted in the
auction process, $65 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
An additional
monetary authorities.
$250 million of tenders was also
accepted at the average price from Government accounts and Federal
Reserve Banks for their own account in exchange for maturing securities.
1/ Excepting 1 tender of $1, 000, 000.
R-1015

apartment

the Treasury

FOR IiQCEDIATE

Friday,

RELEASE

November

5, 1982

D.C. 0 Telephone 566-2C

Washington,
CONTACT:

SOCIAL SECURITY INTERFUND

Marlin Fitzwater
202/566-5252

BORROWING

5, 1982 Federal Old-Age and Survivors
Trust
Fund
borrowed 8581, 252, 899. 48 from
Insurance
Federal Disability Insurance Trust Fund. This is the
first of three anticipated borrowings among the Social
Security Trust Funds authorized by Public Law 97-123 of
December 29, 1981.
On November

R-1016

DEPOSITORY'INSTITUTIONS
COMPTROLLER OF THE CURRENCY
FEDERAL RESERVE BOARD

FOR II"It"IEDIAZE

DEREGULATION COMMITTEE PRESS RELEASE

FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMIX". STRATION

RE~~E

Nov.

SPECIAL DIDC MEETING

The Depository

market deposit account.
Cash Room
Avenue

NW.

of the

~ttee

will hold a special

a.m. to dete~e the features of
The meeting

main Treasury

will be

building

5, 1982

DEPOSIT ACCOUNT

CN NEW

Insti. tutions Deregulation

meeting on Nov. 15th

FEDERAL HOME LOAN BANK BOARD
TREASURY DEPARTMENT

o~.

at 15th Street

t'ne new mon y

will be in the
and Pennsylvania

feder

CI.1

fina. nCinCI bank

WASHINGTON,

FOR IMMEDIATE

D.C.

20220

RELEASE

November

FEDERAL FINANCING

Bank
month

BANK

5, 1982

ACTIVITY

Francis X. Cavanaugh, Secretary, Federal Financing
(FFB), announced the following activity for the
of August 1982.

of obligations issued, sold, or guarother Federal agencies on August 31, 1982
totaled $122. 6 billion, an increase of $1.4 billion
over the July 30 level. FFB increased holdings of
agency debt issues by $0. 02 billion, holdings of agency
guaranteed debt by $0. 7 billion and holdings of agency
assets purchased by $0 ' 6 billions A total of 205 disFFB holdings

anteed

bursements

Attached

to this release are tables presenting
FFB commitments
to lend

activity and new
during August and a table
of August 31, 1982.
FFB loan

the month.

were made during

summarizing

R-1017

FFB holdings

PEDERAL FINANCING

Page 2

BANK

AIIXST 1982 ACTIVITy
AKX3NT

OF ADVANCE

(sanannual)

Note 4257

8/13

Central Li

idi

8/6
8/17
8/20
8/23
8/25

'Note %104
Note 4105

HOME

4, 700, 000.00
2, 550, 000.00
3,000, 000.00
7,000, 000.00
10,000, 000.00

9/7/82
11/15/82
11/18/82
11/22/82
11/22/82

10.279%

8/24/97
8/24/92
8/24/02

12.555%
12.595%
12.515%

9/1/09
7/15/11

13.469%
13.540%
13.520%

9.055%
7.864%
7.397%
7.962%

405, 000, 000.00
200, 000, 000.00
95,000, 000.00

—GUARANI%ED URNS

DEPARIMENT OF DEFENSE

Israel 8
Egypt 2

Israel 13
Philippines
Sanalia 1
Spain 5

Israel 8
Israel 13

Sudan 4

Jamaica 2
Malaysia 5
Morocco 9
Israel 8
Daninican Republic 5
Ecuador 5

Camerocn

Israel 8
Israel 13

Cameroon

Jordan 6
Korea 15
Panana

10.167%

Ownershi

8/24
8/24
8/24

Turkey

9/24/82

ADMINISTRATION

Certificates of Beneficial

GOVERNMEWZ

15,000, 000.00

Facili

Note 4101
Note %102
Note 4103

FARMER'S

Israel 13
Egypt 2
Turkey 11

Israel 13

Egypt 2

Israel 13

Jordan 6

Liberia 6
Saralia 1
Peru 5
Morocco 9
Honduras

Philippines
Jordan 6
Jordan 7
Morocco 9
Israel 8

Israel 13

(other than
semimnnua1)

— FOREIGN MILITARy SALES

8/3
8/4
8/4
8/4
8/4
8/4
8/4
8/5
8/5
8/5

8/6
8/6
8/9
8/9
8/10
8/10

8/ll

8/12
8/12
8/13
8/13
8/13
8/13
8/16
8/16
8/16
8/17
8/19
8/19
8/19
8/19
8/19
8/20
8/20
8/20
8/20
8/25
8/25
8/25
8/25
8/25

3,000, 000.00
2, 039,834.56
7, 760, 943.18
208, 419.46
3, 091,558.00
2, 528, 310.00
67, 816.68

1,292, 344.92

10,179,326.97
180,301.78
145,080.92
1,960, 599.28
1,854, 310.00
40, 000, 000.00
16,767.27

62, 500 00

51,433.76

2, 000, 000 00
6, 795,282. 20
4, 250, 150.00
1,266, 391.98
878, 238.60
937,926.60
39,716,000.00
149,912,449.57

285, 224 36
20, 910,558.12
562, 014.19
6, 230, 071.98

3,051,708.00
9, 954'. 04

254, 338.32
56, 207.90
1 ~ 206i029 00
21, 692.37

194,772.39
208, 192.86
1,375, 607.14
1,939,071.00
1,187,939.74
5, 428, 861.17

2/16/12
9/10/87
9/1/92
6/15/91
12/22/10
9/1/09
2/16/12
2/10/12
12/20/93
2/20/86
3/31/94
9/1/09
4/30/89
5/25/88
9/22/86
9/1/09
2/16/12
3/14/87
9/21/92
12/31/93
5/25/89
2/16/82

7/15/ll
12/22/10
2/16/12

7/15/ll

2/16/12
9/21/92
3/21/86
9/1/92
3/15/86
3/31/94
4/25/90
9/10/87
9/21/92
3/16/90
3/31/94
9/1/09
2/16/12

13 324%
13 ' 632%

13.546%
13.534%
13.613%
13.568%
13.568%
13.834%
13.193%
13.969%
13.775%
13.669%
13.607%
13' 365%
13.618%
13.565%
13.185%
13.593'%
13.640%
13.531%
13.207%
13.214%
13.221%
13.049%
12.528%
13.521%
12.575%
11.857%
12.659%
11.691%
12.574%
12.392%
12.040%
12.385%
12.259%
12.458%
12.402%
12.372%

12.949% ann.
12.992% ann.
12.907% ann.

EEDERAL FINANCING

NSUST 1982

Page 3

BANK

of 7

ACTIVITIES

AMXNT

OF AIKANCE

BORROW)ER

Seal
— FOREIGN MILr)mtY

OE DEFENSE

DEPmaWENT

8/27
8/27
8/27
8/27
8/27
8/27
8/27
8/27
8/27
8/30
8/30
8/30

Egypt 2

Indonesia
Jordan 7
Kenya 9

Liberia 9
Philippines

Spain 5
Sudan 4
Turkey 9
Turkey 11
Honduras 8
Egypt 3
Turkey ll
Colanbia 5

annual)

Sum (Cont'd)
610,966.09

7/15/ll

4, 065, 690.00
346, 915.00
5, 000, 000.00
93,786.33

5/5/91
3/16/90
3/15/93
7/21/94
9/lo/87
6/15/91

7,521,268.00

335,034.40
129,826.02
22, 177,274. 75

444, 261.00
814,326.71
1,400, 000.00
425, 705.00

8/31
8/31

19,668.00

2/1O/12
6/22/92

12/22/10
4/25/94
6/15/12
12/22/10
12/1S/88

semi-annual)

12.540%
12.499%
12.355%
12.544%
12.671%
12.035%
12.451%
12.528%
12.583%
12.771%
12.898%
12.754%
12.785%
12.623%

DEPJQEIWEÃZ OF ENERGY

thetic Fuels Guarantees

—Non-Nuclear

Great Plains

Gasification Assoc.

8/2
8/9

423
424
425
426a
426b
427a
427b

8/23
8/23
8/30
8/30

23, 000, 000.00
19,000, 000.00
58,000, 000.00
14,000, 000.00

10/1/82
4/1/83
1/3/83
1/1/02
7/1/02
1/1/02
7/1/02

11.808%
11.625%
13.340%
13.338%
13.376%
12.765%

13 ' 372%

nt Block Grant Guarantees

Ccxaamit

Devel

Tucson,
Paterson
Hialeah,
Boston,

Arizona
Muncipal

Util.

Auth.

Florida
Massachusetts

County, Pennsylvania
Louisville, Kentucky
Sacranento, California 43
Gary, Indiana

8/26
8/26
8/26
8/26
8/30

lawrence,
Hialeah, Florich
Washington

2OO, O0O. OO

1,500, 000.00

45, 000.00

8/1/87
8/1/88
12/1/83
9/1/82
8/15/87
9/15/82
1/1/83
12/1/83
9/15/82
11/30/82
2/15/84
9/1/82

13.728%
13.738%
13.025%
10.557%
13.141%

9.689%
9.025%
11.055%
7.751%
7.751%

13.573%

ann.

11.361'8

ann.

11.3258
8.198%

11.646% am.

various

13.453%

13.905%

14.199% ann.
14.210% ann.
13.449% ann.

Notes

Sale 424
NATI(XRL AEKNAVZICS

Space Ccamunications

8/13

15,390,982.81

ann.

AND SPACE ADMINISTRATION

Ccaapany

United Power 467
United Power 46
«Arkansas Electric 497
«Arkansas Electric 4142
«Alabana Electric 426
*San Miguel Electric 4110

Central Electric 4131
Saluda River Electric 4186

Tennessee Telephone 480
South Mississippi Electric
United Power 467
United Power f129

extension

48, 270.00
500, 000.00
504, 000.00
140,099.27
70, 000.00
59, 460.30
74, 276.13

8/1O

8/16
8/16
8/20

Public Hous'

6, 869, 848.00
2, 000,000.00

8/2
8/2
8/9

York
County, Pennsylvania
)%ass. 42

New

)aashington

«maturity

8, 500, 000.00
16,000, 000.00
5, 000, 000.00

OF HCUSBK' S URBAN DEVEXQPMENZ

DEPARZMEÃZ

Utica,

8/16

Act

8/20

10,800, 000 00

10/1/92

12.549%

12.943% ann.

8/1
8/1
8/1
8/1
8/1
8/1

8, 200, 000.00

8/14/84
8/1/84

13.305%
13.305%
13.305%
13.305%
13.305%
13.6558
13.30S%
13.305%
13.30S%

13.091% qtr.
13.0918 qtr

8/2
8/2
8/2
4171 8/2
8/3
8/3

3, 200, 000.00

1,106,000.00
3,782, 000.00
1,000, 000.00

128, 309,000.00
275, 000.00
2, 350,000.00
2, 699,000.00
1,900,000.00
600, 000.00
lg200~000 F 00

an4

8/1/84
8/1/84
8/1/85
8/2/84
8/2/84
8/2/84
8/3/84
8/3/84
8/3/84

13+305%

12.945%
12.945%

13 ' 091% qtr,

13.091% qtr.
13.091% qtr,
13.430% qtr.
13.091% qtr.
13.091% qtr.
13.091% qtr.
13.091% qtr.
12.742% qtr.
12.742% qtr.

FEDERAL FINANCING

MI«UST

Page 4

BANK

of 7

1982 ACTIVITY
ANX&l'
OF ADVANCE
(

annual)
RURAL ELECHGFICATION

M¹(INISTRATION

«East Ascension Telephane ¹39
Sunflcwer Electric ¹174
Big Rivers Electric ¹91

Northern Michigan Electric ¹101
«Alabaxa Electric ¹26
«South Mississippi Electric ¹3
*South Mississippi Electric ¹90
Seminole Electric ¹141
Northern Michigan Electric ¹101
Northern Michigan Electric ¹101

Valley Power ¹104
Valley Pcser ¹206
Western Farsers Electric ¹220
Western Farners Electric ¹133
Wabash
Wabash

Northern Michigan Electric ¹101
Allegheny Electric ¹175
«Brookville Telephone ¹53
Kansas Electric ¹216
Kansas Electric ¹216
«Brazos Electric ¹144
Arkansas Electric ¹221
Cajun Electric ¹147
«Basin Electric ¹87
"Western Illinois Power ¹162
East Kentucky Power ¹140
East Kentucky Power ¹180

Electric ¹192
Electric ¹141
Electric ¹141
Central Louisiana Tele. ¹34
Western Illinois Pawer ¹225
South Texas Electric ¹200
Glacier State Telephone ¹29
Seminole Electric ¹141
«Associated Electric ¹132
Brazos Electric ¹108
Brazos Electric ¹230
Big Rivers Electric ¹58
Big Rivers Electric ¹91
Big Rivers Electric ¹136
*Big Rivers Electric ¹143
*South Mississippi Electric ¹3
New

Hampshire

Seminole
*Seminole

Oglethorpe Power ¹150
Oglethorpe Power ¹74
«Plains Electric GaT ¹158
«Big Rivers Electric ¹58
Big Rivers Electric ¹91

'San Miguel Electric
Big Rivers Electric
Big Rivers Electric
Big Rivers Electric
*East Kentucky Power
Basin Electric ¹87

¹110
¹136
¹143
¹179
¹73

*South Texas Electric ¹109
'Western Farmers Electric ¹133
Arkansas Electric ¹221
Wabash Valley Power ¹206
«South Mississippi Electric ¹3
*South Mississippi Electric ¹90

«East Kentucky Pawer ¹140
Cant. Tele. of the South ¹134
Cont. Tele. of the South ¹106
Cont. Tele. of the South ¹135
Basin Electric ¹87
Basin Electric ¹137
*Eastern Iae LaT ¹61
«maturity

extension

other than
semi-annual)

(Cont'd)
8/4
8/5
8/6
8/6
8/6
8/6
8/6
8/8
8/10
8/10
8/10
8/10
8/10
8/10
8/10
8/10

8/ll

8/12

. 8/12

8/13
8/13
8/13
8/15
8/15
8/16
8/16
8/16
8/17
8/18
8/18
8/18
8/18
8/18
8/19
8/19
8/19
8/19
8/20
8/20
8/20
8/20
8/20
8/20
8/20

8/21
8/21
8/21
8/22
8/23
8/23
8/23
8/24
8/24
8/25
8/25
8/25
8/25
8/25
8/25
8/27
8/27
8/27
8/27
8/29
8/29
8/29

$384, 064.00

2, 500, 000.00

1,850, 000.00
164,000.00

3,155,000.00

221, 000.00
279, 000.00
1,438, 000.00
20, 000 F 00
2, 878, 000.00
5, 591,000.00
386,000.00
10,800, 000.00
200, 000.00
131,000.00
4, 940, 000.00
1,034, 000.00
1,050, 000.00
1,050, 000.00
1,270, 000.00
6, 421, 000.00
40, 000, 000.00
4, 057, 000.00
2, 640, 000.00
430, 000.00
4, 069, 000.00
1,065, 000.00
2, 678, 000.00
2, 580, 000.00
3, 191,000.00
2, 203, 000.00
1,005, 000.00
2, 381,000.00
14, 536, 000.00
12, 500, 000.00
903,000.00
8, 409, 000.00
40, 000.00
910,000.00
182, 000.00
30, 000.00
3, 325, 000.00
5, 153,000.00
15,526, 000.00
6, 459, 000 F 00
3,426, 000.00
1,948, 000.00
7, 759,000.00
84, 000.00
157,000.00
26, 163,000.00
5, 782, 000.00
9,853, 000.00
1,400, 000.00
15,300, 000.00
5, 209, 000.00
477, 000.00
125,000.00
822, 000.00
640, 000.00
2, 300, 000.00
2, 700, 000.00
2, 353,000.00
1,071,000.00
25, 000, 000.00
265, 000.00

13.471%
13.055%
13.205%
13.205%
13.205%
13.205%
13.205%
13.365%
13.345%
13.205%
13.205%
13.205%
13.205%
13.205%
13.205%
13.225%
12/31/14 13' 467%
8/12/84
13.275%
en2/e5
13.515%
13.055%
8/13/84
8/13/84
13.055%
8/13/84
13.055%
12.875%
8/15/84
12.875%
8/15/84
8/16/84
12.875%
8/16/84
12.875%
8/16/84
12.875%
8/17/84
12.485%
12/31/12

8/5/84
8/6/84
8/6/84
8/6/84
8/6/84
8/6/84
8/8/84
2/10/85
8/10/84
8/10/84
8/10/84
8/10/84
8/10/84
8/10/84
8/31/84

8/18/84
8/18/84
8/18/84
8/18/84

12/31/13
8/19/84
8/19/84
8/19/84
8/19/84
8/20/84
8/20/84
8/20/84
8/20/84
12/31/09
8/20/84
8/20/84
8/21/84
8/21/85
8/21/85
8/22/84
8/23/84
8/23/84
8/23/84
8/24/84
8/24/84
8/25/84
8/25/84
8/25/84
8/25/84
8/23/85
8/23/85
8/27/84
12/31/10
12/31/10
12/31/10
8/29/84
8/29/84
12/31/14

11.955%
11.955%
11.9558
11.955%
12.594%
11.885%
11.885%
11.885%
11.885%
11.735%
11.735%
11.735%
11.735%
12.489%
11.735%
11.735%
11.325%
11.735%
11.735%
11.325%
11.325%
11.325%
11.325%
11.695%
11.695%
11.625%
11.625%
11.625%
11.625%
11.935%
11.935%
11.795%
12.471%
12.471%
12.471%
12.055%
12.055%
12.709%

13.251% qtr.
12.849% qtr.
12.994% qtr.
12.994% qtr.
12.994% qtr.
12.994% qtr.
12.994% qtr.
13.149% qtr.
13.130% qtr.
12.994% qtr.
12.994% qtr.
12.994% qtr.
12.994% qtr.
12.994% qtr.
12.9948 qtr.
13.013% qtr.
13.248% qtr.
13.062% qtr.
13.294% qtr.
12.849% qtr.
12.849% qtr.
12.849% qtr.
12.674% qtr.
12.674% qtr.
12.674% qtr.
12.6748 qtr.
12.674% qtr.
12.296% qtr.
11.781% qtr.
11.781% qtr.
11.781% qtr.
11.781% qtr.
12.402% qtr.
11.713% qtr.
11.713% qtr.
11.713% qtr.
11.713% qtr.
11.568% qtr.
11.568% qtr.
11.568% qtr.
11.568% qtr.
12.300% qtr.
11.568% qtr.
11.568% qtr.
11.169% qtr.
11 .568% qtr.
11.568% qtr.
11.169% qtr.
11.169% qtr.
11.169% qtr.
11.169% qtr.
11.529% qtr.
11.529% qtr.
11.461% qtr.
11.461% qtr.
11.461% qtr.
11.461% qtr.
11.762% qtr.
11.762% qtr.
11.626% qtr.
12.282% qtr.
12.282% qtr.
12.282% qtr.
11.879% qtr.
11.879% qtr,
12.513% qtr.

PKERAL FINANCING

BANK

Page 5

of 7

~MXST 1982 ACTIVIT)(
A)KENT
OF ADIEU

RURAL ELECTRIFICATION

A(KBGSTRATION

~Southern Illinois Power 438
North Carolira Electric 9185

'Tri-State

~Southern
*Southern

GaT 4177

Illinois
Illinois

8 725, 000.00

13,097,000.00

380,000.00
25, 000,000.00

10,000e00
2, 805,000.00

8/31
8/31
8/31
8/31
8/31
8/31

Electric 493

~Allegheny

%38

438
Eastern Icnsr LaT 461

Small Business Investment

196,000.00

2, 225, 000.00

870, 000.00

163,000.00

8/18
8/18
8/18
8/18
8/18
8/18
8/18

State

Debentures

4 Local Devel

Wilmington Ind. Dev. , Inc.
Albany Local Dev. Corp.

Nil~ukee Econ. Dev. Corp.
Ind. Dev. Corp.
Brockton Reg. Econ. Dev. Corp.
Bay Area Bus. Dev. Corp.
Central Avenue Bettenrent
Wilmington Ind. Dev. , Inc.
Plymouth

As'.

Urban Ioarl Dev. Corp.
Bay Colony Dev. Corp.

Springfield
'Ihe
The

Sm.

St. Louis
St. Louis

Bus. Assistance

Dev. Carrpany
Dev. Canpany
Evergreen Can. Dev. Assoc.
Netropolitan Growth & Dev. Corp.
Akron Sm. Bus. Dev. Corp.
Bay Area Employment Dev. Co.
Wisconsin Bus. Dev. Fin. Corp.
Long Beach Incal Dev. Corp.
Long Beach Local Dev. Corp.
Columbus Citywide Dev. Corp.

Seven

States

National

8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4
8/4

1,500, 000.00
1,050, 000.00
1,000, 000.00

8/1/87
8/1/92
8/1/92
8/1/92
8/1/92
8/1/92
8/1/92

13.125%
13.215%
13.215%
13.215%
13.215%
13.215%
13.215%

55, 000.00

8/1/97
8/1/97
8/1/97
8/1/97
8/1/97
8/1/97
8/1/02
8/1/02
8/1/02
8/1/02
8/1/02
8/1/02
8/1/02
8/1/02
8/1/02
8/1/07
8/1/07
8/1/07
8/1/07
8/1/07
8/1/07

13.530%
13.530%
13.530%
13.530%
13.530%
13.530%
13.576%
13.576%
13.576%
13.576%
13.576%
13.576%
13.576%
13.576%
13.576%
13.446%
13.446%
13.446%
13.446%
13.446%
13.446%

11/30/82

9.043%

250, 000.00
500, 000.00
500, 000.00
600, 000.00

93,000.00

168,000.00
171,000.00
187,000.00
375,000.00
26, 000.00
32, 000.00
54, 000.00
88, 000.00
105,000.00
108,000.00
109,000.00
315,000.00
500, 000.00
55, 000.00
127,000.00
189,000.00
249, 000.00
384, 000.00
500, 000.00

tion

Ene

Note A-82-11
DEPARTNENT

12.709%
12.055%
12.055%
12.055%
12.135%
12.565%
13.085%
12/31/11 12.731%
12/31/12 12.724%
12/31/16 12.702%
12/31/14
8/30/84
8/30/84
8/30/$4
8/31/84
8/31/85
8/15/89

Debentures

Capital Corporation
Clintan Capital Corpoxaticn
Fleet Venture Resources, Inc.
Gold Coast Capital Corp.
Nichigan Onpital 4 Srv. , Inc.
NIS Onpital Corporatice
Reedy River Ventures, Inc.
Amev

(other than
semi~nnua

8/31

469, 715,283.01

OF 'JRANSPO)CATION

Railzcad Passe

Note 430

tice

(Amtrak)

8/20

11,603, 713.00

10/1/82

7.864%

8/31

12,557, 538.00

6/30/06

12.790%

Section 511
The Nilmukee

)

(Ocet'd)
8/29
8/30
8/30
8/30

Central Electric 4131
Basin Electric 4137
Basin Electric %87

(aanannual)

12.513% qtr.
11.879% qtr.
11.879% qtr.
11.879% qtr.
11.956% qtr.
12.374% qtr.
12.878% qtr.
12.535% qtr.
12.528% qtr.
12.506% qtr.

Page 6

EXCERAL FINANCIER

August

Buf falo Urban Bengal Agency
Sacrsnento County, CA
Planned Ind. Exp. Authority
(St. Louis)
Botswana

Ecuador

Haiti
Kenya

of 7

BANK

1982 Camitments

2, 295, 500.00

1,500,000.00
1,500, 000.00

500, 000.00
4, 500, 000.00
300,000.00
22, 000, 000.00

8/1/84
2/15/84

8/1/03
2/15/89

1/15/84
7/14/84
6/20/84
7/25/$4

1/15/04
1/15/88
6/20/89
7/25/94
5/5/94

5/4/84

PHJERAL FINANCIIK2

Page 7

BANK HOLDIN2S

of 7

(in millions)

Prrrtmn

Of fW

31, 1982

~Jul

8 1 82-8

31 82

10 1/81-8 31/82

Debt

Tennessee Valley Authority
Export-Import Bank

Facility

Liquidity

NCUA-Central

uut

12,050.0
13,828.9
109.3

$12,035.0

1,221.0

53, 311.0
129.6
145.7

52 ' 711 0
129.6
145.7
21.5

$15.0

13,828.9
101.6

1,176.0
1,419.5

8.0

7.7

Debt

U. S. Postal Service
U. S ~ Railway Associaticn

-47.0

-7.5

207.4

AcCenc~Assets
Farmers

Adninistration
intenanoe Org.

Home

EHHS-Health

Facilities

IHHS-Nedical

Overseas Private Investment Corp.
Rural Electrification Ainin. -CIK)
Snail Business Ahninistration

Governnmnt~ranteed
DOD-Pbreign

Nil itary Sales

Assn.

Loans

DOE-Hybrid Vehicles
DOE-Non-Nuclear Act

(Great Plains)

MJD-Ccasumity Dev. Block Grant
IMJD-New Ccsummities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
IX)I-Virgin Islands

Co.
Ccuanuniontions
Rural Electrification Admin.

SBA~ll

Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
Ra

IXJT-Title V,

RRRR

2, 883.7
58.8

2, 883.7
59.5

-7

11,308.8
5,000.0
36 ' 6

10,955.6
5,000.0
36.6

353.2

282. 5

228. 5

il Svcs.

112.5
33.5
1,551.0

Act

DVI NNATA

may

-8.6

not total dm to

roundxmJ

15.4

622.5
7.9

10.8

111.8
3,573.6
83.0

50.4

70.2
130.4
177.0

70.2
117' 8
177.0

282.5

420 ' 5
36.0
29.6
738.8

38.2

O-

—,4

39.2

229.4
3.9
3.9

843.8

11.6

304 ~ 1
75.5

12.5

6.8

1,167.8

855.4

54.0

-3.1

15,686.7
683.0

2, 161.2
700.0

19.6

115.5
33.5

36.0
29.5
749.6
15,916.1
686.9
43.1
1,218.2

122, 624. 6

figures

-5.1
288.4

-2.0

1,535.6

420. 5

NASA-Spaoe

IX1P-Amtrak
DOJ3-Emergency

M. 7

Loans

IKd. -Student Lean Nnrketing

IX)E~thernal

21.5

4, 490.0
13.1

600.0

121,260.7

37.9

-0-

-D

1,364.0

15,324.4

»oartmeni of the Treasury
FOR IMMEDIATE

D.C. ~ Telephone $66-2041

Washlneton,

RELEASE

8, 1982

November

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $ 5, 608 million of 13-week bills and for $5, 603 million of
26~eek bills, both to be issued on November 12, 1982, were accepted today.
OF ACCEPTED
COMPETITIVE BIDS:

RANGE

13-week bills
Februar
10, 1983
Discount
Investment
Price
Rate
Rate 1/

98.031
98.001
98.009

High
Low

Average
a/ Excepting

low
low

maturin

bills
12

Discount
Rate

Price
95. 800 a/ 8. 354%
95. 768 8. 417%
95. 778 8. 397% 2/

8. 15%
8. 27%
8. 24%

7. 876%
7. 996%
7. 964%

totaling

tenders

at the
at the

Tenders
Tenders

26-week

maturin

$8, 000, 000.

price for the 13-week bills were allotted
price for the 26-week bills were allotted

1983
Investment
Rate 1/

8. 84%
8. 91%'
8. 89%

49%.
24%-

TENDERS RECEIVED AND ACCEPTED

(In
Location
Boston
New

Received
39, 465
$
12, 109, 065
32, 110

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St Louis
Minneapolis
~

Kansas City

Dallas
San

Francisco
TOTALS

Competitive
Noncompetitive

Public

Federal Reserve
Foreign Official

Institutions
TOTALS

465
$39,
246, 315

32, 110

51, 020

45, 480
47, 000
535, 775

41, 650

'
'
'
'

:
:
:
:
:
:
:
:
:
:

Received
875
12, 064, 030
70, 795
97, 920
46, 215
52, 485

$79,

928, 725
58e905
19, 605
37, 640

ted

39, 520
4, 513, 270
20, 595
64, 920
36, 990

41, 485

330, 925
39, 715
12, 605
27, 640
10, 740
157, 070
307, 385

$14, 607, 600

$12, 377, 445
930, 830
$13, 308, 275
1,092, 325

$3, 377, 885
930, 830
$4, 308, 715
1,092, 325

$12, 361, 285
805, 935
$13, 167, 220
1, 050, 000

$3, 236, 525
805, 935
$4, 042, 460
1, 050, 000

207, 000
$14, 607, 600

207, 000

510, 400

$5, 608, 040

$14, 727, 620

$5, 602, 860

15, 740
948, 300
307i385
$14, 727, 620

$5, 602, 860

1/ Equivalent coupon-issue yield.
the maximum
2/ The four-. week average for calculating
on money market certificates is 8. 215%.

R-1018

~dcce

14, 905
49, 890
22, 380
261, 160
220, 890
$5, 608, 040

220, 890

Treasury

Subtotal,

67, 020
45, 480
47, 000
1, 188, 585
43, 650
17, 905
49, 890
32, 380
714, 160

ted:

Thousands)

~Acce

interest rate payable

FOR I&L'MEDIATE

The Treasury

RELEASE NOVEMBER

announced

8, 1982

today that the 2-1/2 year

yield curve rate for the five business

Treasury

days

~g5:

rounoen to
8, 1982, averageci
tne nearest. five basis points.
Ceiling rates based

enciing

November

this rate will be in effect

1982 through

Nonday,

November

from Tuesday,

)uovember

22, 1982.

Detailed rules as to the use of this rate 'n estab-

lishing the ceiling rates for small saver certificates
were published

Small saver

in the Federal Register on July 17, 1981.

ceiling rates

related information

and

available

from the DIDC on a recorded

The phone

number

telephone

message.

is (202)566 —3734.

Approved

Francis X. Cavanaugh
Director
Office of Government
&

biarket Analysis

Finance

leyartment

of the Treasury

Washington,

D.C. ~ Telephone 566-204$

ADDRESS BY

R. T.

MCNAMAR

DEPUTY SECRETARY OF THE TREASURY

BEFORE THE
OF THE ASSOCIATION
AMERICAN MEDICAL COLI EGES
WASH INGTON i D ~ C ~
MEETING

ANNUAL

Monday,

November

8, 1982

Good morning.

delighted to be with you today. In reviewing your
for today and tomorrow, I noticed that you are scheduled
to hear three talks on the subject of change and three on the
subject of preservation of values. The juxtaposition of the two
am

agenda

is both timely and critical. In modern society, change is
inevitable.
Perhaps the only immutable law of the universe is
that nothing is immutable and the great challenge we all face is
to somehow clearly identify and preserve those values we cherish

themes

amidst

the increasingly

rapid

onslaught

of change.

At the Treasury Department,
where we find ourselves immersed
in the world of economics and finance, new developments
occur
almost daily.
In the next few minutes I want to discuss two
important aspects of a changing financial world which are already
effecting each of our personal lives and our respective
professions
these are interdependency
of financial markets and

disinflation

—
--

two key

concepts.

Before we jump into those subjects let me take just a
to touch on the philosophical -- or perhaps better -- the
physiological basis -- of our view of economics.

moment

Those of you in the medical
Yes, I did say physiological.
and those of us in the financial world have much more
in common than often meets the eye.

profession

policies, it is
fully comprehend this Administration's
to understand the framework which underlies this
Administration's
economic policies.
To

important

First, it is essential

to understand

that

view the

just as the human body, or any biological
And
organism is a system and modern machines are systems.
systems -- whether they are biological, mechanical or economic
have three very crucial characteristics
in common.
First, there
can be no event in one part of the system which does not effect
the rest of it. The parts are all interconnected and
interrelated.
economy

R-1019

as a system;

features built
Second]y, a true system has self-correctingrises
above 98. 6,
human
body
a
of
temperature
the
into it. If
within
automatically
and
naturally
things start to happen
back to normal.
body to bring its temperature
Similarly, in a properly functioning economic system, if
prices get too high or too low, if supplies become too plentiful
or too scarce, self correcting forces within the marketplace
itself become active to counter the imbalances.
Thirdly, a true system is capable of creating something new.
classic example, has the-- innate
An acorn, to use Aristotle's
-a
or being created into
characteristic of creating
of
the
capability
has
plant,
A
generating
magnificent oak tree.
different:
very
something
creating
taking coal and fire and

electricity.

that I am taking your time
Now it may seem odd or frivolous
to talk about acorns and running a fever. But the analogies go
In the
right to the heart of the nature of economic activity.
world economy, and in our domestic economies, we have precisely
the same key

characteristics.

interrelated and synergistic
features. This is not
self-correcting
systems'
to say, of course, that if we leave everything alone it will all
take care of itself. But it is to say that the self-corrective
are by their
They have strong

Economies

nature

forces at work in the market place are powerful and that they
need to be allowed to function.
And, finally, as in biological and other systems, economic
systems have the wonderful capacity to create new real wealth
where it did not exist before.
In short, to increase standards
of living.
in Financial

Interdependenc

Markets

There is a very important way in which the very nature
economic system in this country is changing.
Through the
explosion of technology, regulatory reform and market
integration, the financial services industry is undergoing
fundamental
metamorphosis.
Today operations

and

events

interwoven with financial markets
they will be woven more tightly.

recognize
that now

for

that financial

have

a spectrum

in a

in the U. S. financial
in other countries.

of the
a

markets

are

Tomorrow

To be realistic, we have to
transactions have become so interrelated
de facto sense -- one worldwide market

of borrowing,

lending,

and

investment

activities.

Last month at the IMF meeting in Toronto, Canadian Prime
Minister Trudeau aptly described this evolution of the financial
markets.
His theme was the accelerating interdependence
of our

economies

concerned.

financial. markets,

and

the resulting

impact

all

can point to a plethora of evidence showing that neither
York, nor Chicago, nor Tokyo, nor Riyadh operates in

New

isolation.

available technological capability is
instantaneously
to all parts of the
of dollars electronically in minutes, and do

Take technology.
The
We communicate

staggering.

world, move billions
computations in nanseconds which might have taken days and weeks
a few years ago.
And tomorrow will see the electronic global

village.

We can also point
to ways to which national and international
economies are becoming ever more interwoven and interdependent.
Internationalization
of funding is a fact of life. With time
differences, a real estate loan made by a bank in Texas in the
morning may have been funded by a CD issued that afternoon by its
branch in London or Fed funds from Alaska that afternoon.

the shares of some major U. S. companies can be
around the world and around the clock; by a recent count,
149 U. S. companies are listed in London, the same number in
Amsterdam,
91 in Zurich, 42 in Paris, and 12 in Tokyo. A dozen
or so trade 24 hours a day.
At

traded

present,

and commerce, the rise of the
multinational
corporation has changed the world
marketplace into a tightly woven system of import and export
operations.
Interdependence
of economic and financial market is
becoming functionally
more like manufacturing
operations where
parts are brought together from many parts of the world. Witness
the Ford World car, or the new computer that will use software
from the U. S. , semi-conductor
chips from Britain, a UHF modulator
from the Philippines,
an electronic regulator
from El Salvador, a
and central processing from Japan.
It is a
memory from Malaysia,
world where companies, governments,
institutions to
and financial
support them are ever more closely interwined.

In the area of trade

multi-' product

the economic, financial and technological
is the role played by the government, because
government
political decisions set the framework within which
trade and investment flows operate.
In the U. S. , that means
largely the regulatory role. It means setting the policy and
legal framework in which both domestic and non-U. S. institutions
can transact business within our borders.
Overlaying
interdependence

legislation,

but computer technology and the
ingenuity of the markeplace, continue to change the
financial services industry -- indeed to redefine
Kroger is
now selling money market and mutual
funds right along with bread
Electronic banking in the home is being pilot tested
and butter.
in New York as well as Ohio. And will other companies follow the
Not

only

old-fashioned

it.

Sears and American Can route into financial services? I can
assure that before the next Congress reconvenes there will be
more change, foment, and competition.
We

are in a revolution

of technological

advances.

Electronic

operations and
automation of international
information systems have not only increased speed and added new
but have also
types of accounts and marketing opportunities,
redefined the very nature of a service by changing the
funds

transfers

capabilities

and

of a product.

argue for a so-called level
All financial institutions
playing field. Yet, when any one group sees legislated
opportunities to compete in markets related to their own, they
cry foul. Commecial banks want to be able to deal in securities,
but they don't want securities firms' money market funds to draw
off their core deposits; investment banking and brokerage firms
want to attract customers'
free credit balances, but they don' t
want to see banks dealing in commercial paper.
Insurance
companies continue to be captive of their agency forces and
pretend banks, American Express, alumni clubs, etc. don' t. sell
insurance and service through other institutions
In
as wells
Washington, these are the epitome of narrow, special interest

politics.

The problem is that neither politics nor legislation
can ever
take us back to the comfortable post-World War II days of high
checking account balances, large commercial compensating
balances, passbook savings, fixed rates, and whole life

insurance.

I' ve discussed are putting great.
All of these developments
strains on the balkanized, nonfunctional approach to financial
institutions regulation followed in this country. And it
presents a great challenge to Congress and regulators alike to
bestir ourselves from the complacency of past decades.
Washington can either play the same role of protecting special
industry segments, or we can remove the non-economic legislative
barriers and permit more efficient lower-cost delivery of
financial

services, foster functional regulation, and still
basic fairness in the marketplace.
If we choose the
former course, we will be overwhelmed
by the changes that occur
and tomorrow will mock today's artificial distinctions.
But if
we pursue
the activist course of reform and competition
"change" -- then the delivery of financial services can be
rationalized in a policy framework that maintains
the proper
balance of decision-making
authority
to
private
and public
sector -- preservation of those values that we have in America:
diversity; competition; pluralism.
Now that is the major
in which the nature of the
financial services system way
itself
is
change.
But their
is a fundamental change also underway undergoing
in the economic environment
in which the economy functions.
preserve

Let

It is

now

last

column.

newspaper

column because it is datelined
1985 (Someone obviously works on a very

extraordinary

"Washington, January,
long lead time!)

It's

brief

read a very

called "Looking back"

and

reads as follows:

"As Ronald Reagan completes his first term in office, we can
begin to look back at the extraordinary
of the
developments
four years with a bit of perspective.

"When he took office four years ago he promised that he would
do four things:
cut taxes, cut spending, reduce regulation and
slow money growth.
He has done those four things
and the

promised

"It

revitalization

economic

took

months

many

has in

for the American

fact finally occurred.
economy

to go through

is now being called the "major transition" from a high
inflation — high interest rates-low savings economy to one of low
inflation — low interest rates and high savings'
That process
was painful but the mood in the nation now -- and especially on
Wall Street -- is that it was well worth the transitional

what

difficulties. And it was the President's conviction, among other
things, that allowed us to hold to a steady course during the
rough political periods of the early '80s.

"In 1981, all everyone talked about was inflation.
By 1982,
inflation had basically been whipped and people only talked about
interest rates and employment.
"By 1983, almost no one was complaining
about inflation or
how
interest rates. They were wondering
long and how strong
would be this period of growth and would it provide enough jobs.
Well, it's now 1985, and happily that is still the question on
people's minds. " (End of column. )
Doesn't say if he ran for reelection in 1984.
I think we are, in fact, in the midst of what history will
record as a major transition to an economy based on low inflation
and low interest rates.
Now, if this is true -- and I am
-of such a
what are the implications
convinced that it is
"
change?

Your theme

"Disinflation. "
To begin
What

with,
have

less attractive

"change.

second

topic:

less inflationary economy:
regarded as inflation hedges will
in a

investments.

are already
of tangible

be markedly

seeing the inflation

assets. Prices have
squeezed out of a number
fallen for gold, diamonds, commodities, and even the old standby:
California houses. And, in fact, the reported decline in housing
prices masks the real decline in terms of cash and quality of
premium

today versus five years ago. Just ask the individua]
house for $300, 000 in Los Angeles, but took back
his
who sold
interest paper for $250, 000.
mortgage

low

In contrast to real or tangible assets, financial or
The
intangible assets are becoming relatively more attractive.
real return to investors is rising, and the recent year' s
"inflation discount" in the prices of intangible assets should be
Stock price-earnings ratios should go up as the normal
reduced.
return demanded by investors falls. In this context, I think the
stock market's explosive upward movement is no fluke. Rather it
is, at least in part, a manefestation of these changes.

effect of disinflation is that savings becomes
Think about the
attractive than consumption.
relatively
societal implications of a younger generation that all their
lives have known prices to only go up faster and faster. They
Savings rates
are accustomed to buying now to beat inflation.
in recent years.
have fallen significantly
Another

as a percent of disposable
1976-1981 and fell to 4. 8% in the first
It is now,
quarter of 1981, when inflation was at double digits.
environment,
savings will
happily over 7%. In a disinflationary
again be worthwhile, particularly now that we have a tax system
that no longer penalizes saving so heavily.
For example,
averaged

income

savings

personal

5. 7%

from

In a disinflationary
less attractive because

period, borrowing

obviously

becomes

much

positive or real after inflation
cost. And with lower
it has a much higher true cost;
that is, the "after tax, after inflation cost" increases. As a
result, in the short term, capital goods spending may be reduced
as companies no longer rush to borrow and invest in marginal
projects. That's happened. However, the long-term impact should
be beneficial as the borrowing that does take place is used more
for productive investment, and less for protection of current
has a
taxes today

wealth.

As inflation
uncertainty is reduced, we should also see a
restoration of the long-term capital markets -- for investors,
for the government, for the corporate borrower.
Thus, as
borrowing becomes less attractive overall, there should also be
an extension in maturities
from short-term to long-term issues'
That is happening now -- bond market.

contracts continue to be reopened, and labor prices
begin to increase more in line with productivity
increases. In the short run, the price of labor may rise
relative to other inputs if wage rates are less responsvie to
price changes. This may mean that industries with high labor
intensity will do relatively less well over the intermediat~
future; at least, less well than companies that rely more
capital investments but have not saddled themselves with high
Wage

should

interest

rate loans.

Disinflation has temporarily squeezed profit margins,
particularly those of companies with a high ratio of fixed to
variable costs or when there is little value added by the firm
and thus little opportunity
Next
for productivity improvements.
year, estimates on aggregate corporate profits are +30%.
I recognize that in the short-term, the slowing in the rate
of growth of prices, together with the recession, reduced sales
and cash flows, temporarily
In
keeping corporate borrowing high.
part, this phenomenon kept commercial and industrial loan levels
high during the recession, and utilized much corporate debt
capacity even as the assumed rate of future price increases

declines.

However, corporate borrowing requirements
will be to some
extent offset by cash flow savings from the President's corporate
tax cuts. The business tax changes for ACRS alone provides $10. 5
billion of cash flow that corporations won't have to borrow in
1982. That's about one-third of last year's increase in
short-term borrowing, or one-fourth of all corporate bond
offerings last year.

Farmers who over-expanded
in recent years are also finding
In recent years, farmers often leveraged
themselves squeezed.
Food prices
themselves at high interest rates to buy more land.
and land values were expected to rise fast enough to cover the
interest payments.
Instead, land and food prices may rise more
slowly, creating cash flow problems.
While sectors involving tangible asset plays are adversely
affected, other sectors may benefit. For example, it may be rash
to predict that whole life insurance policies will again become
popular, but, at a minimum, life insurance companies may find
that they can once again offer new, attractive products that
combine savings and protection.
liabilities, and the
While expanded asset powers, deregulated
ability to lend at variable rates are the keys to long-term
success of the S&L industry, thrifts will also benefit from a
decline in interest rates. Pension funds and other institutional
investors will see an increase in the liquidity of their
portfolios, as the differences between book and market values are
may find their spreads
Other financial intermediaries
reduced.
squeezed, at least in the short-term, as the rate they earn on
new loans falls more quickly than their cost of funds.

Finally, federal deficits will temporarily be higher. To an
extent, we in the Administration are victims of our own success.
A rapidly
falling inflation rate temporarily means higher federal

deficits.
than

one-third

more
than 40 government programs representing
CPI
the
indexed
are
federal
budget
by
of the

year's CPI. This means that benefit increases for
social security and other retirement programs were approximately
inflation rates
$5 billion higher in 1983 than if contemporaneous
the previous

had

been used.

federal expenditures are tied to last year' s
inflation rate, tax receipts are tied to this year's inflation
rates. The effect of this difference in timing is a larger
were two percentage
deficit. Thus, for example, if inflation
points lower for calendar years 1982-85 than under the
Administration's
original budget forecast, outlays will fall
billion. This
$45-50 billion, while receipts may fall $65-70
alone -- holding all other factors constant -- will result in an
Inflation, as
increase in the deficit of some $20 billion.
fallen
from roughly a 9
will
have
measured by the GNP deflator,
6
percent
range this year
least
a
at
to
rate
last
year
percent
and that will cost us about 85-6 billion in increased budget
deficit this year.
is higher federal
The result of higher deficits naturally
borrowing, since neither we nor the Fed are prepared to monetize
Monetizing the deficit would only give up
much of the deficit.
While

the gains

many

have made

far.

Notwithstanding
any short-term costs, the long-term benefits
of lower inflation are great. The Reagan Administration has
proposed a program and a framework for long-term productive
is a
The advent of disinflation
growth in the U. S. economy.
strong first sign that that program is working.
Those of you in the medical profession know, far better than
most, that the process of healing often means going through a
period of pain and discomfort.
And in economics,
as in medicine,
to delay or deny needed corrective measures only makes the
process that much more painful and serious when they are finally

taken.

I said at the outset, we are experiencing two generic
of changes today. One is brought on by policy shifts that
were required to bring our economy back to health.
These changes
involve some short term costs but much more beneficial long term
gains. Secondly, there are a series of changes being ushered in
with new technology, new communications
and new financial market
As

kinds

integration.

sets of changes are going to redound to the benefit of
But it is essential that we constantly stay abreast of
developments
and be ready to adapt both our professional
and
personal lives to the changing circumstances.
Both

society.

Thank

you.

Ioyartmeni of the Treasury
FOR RELEASE AT

4:00

PE M.

Washlnoton,

D.C. ~ Telephone S66-2041
November 9, 1982

TREASURY'S WEEKLY BILL OFFERING

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $11,200 million, to be issued November 18, 1982.
This offering will provide $725
million of new cash for the

Treasury, as the maturing bills are outstanding in the amount
of $1oi471 million, including $993
million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2, 029 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 $5, 600
million, representing an additional amount of bills dated
August 19, 1982,
(CUSIP
and to mature February 17, 1983
in the amount of $5 541
No. 912794 CK 8 ), currently outstanding
million, the additional and original bills to be freely
interchangeable.

182-day bills (to maturity date) for approximately $5, 600
million, representing an additional amount of bills dated
May 20, 1982,
and to mature May 19, 1983
(CUSIP
in the amount of $5, 581
No. 912794 CC 6), currently outstanding
million, the additional and original bills to be freely
interchangeable.
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing November 18, 1982. Tenders from
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will be accepted at the
Add iweighted average pr ices o f accepted competitive tenders.
tional amounts of the bills may be issued to Federal Reserve Banks,
monetary authorities, to
as agents for foreign and international
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
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $10,000
on the records either of the
and in any higher $5, 000 multiple,
Federal Reserve Banks and Branches, or of the Department of the
Treasur y.
R-1020

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,
November 15, 1982.
Form PD 4632-2 (for 26-week series) or Form
13-week
series) should be used to submit tenders
4632-3
(for
PD
maintained
on the book-entry records of the
for bills to be
.
Department of the Treasury
Each tender must be for a minimum of $10, 000 . Tenders over
ql0, 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 three decimals, e .g . , 97 920 . Fractions may not be used

and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
if the names of the
may submit tenders for account of customers,

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 as of 12:30 p m . Eastern
time on the day of 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
tenders for customers, must
on such securities, when submitting
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
No

in the auction

deposit need accompany

tenders

from incorporated

banks

accompanies

the tenders

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 November 18 1982
funds
in cash or other immediately-available
or in Treasury bills maturing November 18, 1982. 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.

Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
If the gain on the sale of a bill exceeds the taxpayer 's
the bill.
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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
Under

amount

Debt.

Oepartment

of t.he Treasury

washineion, O.C.

Telephone S66-2041

FOR IMMEDIATE RELEASE

November

9, 1982

RESULTS OF AUCTION OF 30-YEAR TREASURY BCNDS
AND SUMMA' RESULTS OF NOVEMBER FINANCING

The Department of the Treasury has accepted $3, 002 million of $7, 428
million of tenders received fran the public for the 30-year Bonds of 2007-2012,
auctioned today. The bonds will be issued November 15, 1982, and mature
November

15, 2012
interest rate
~

The

on the bonds will be 10-3/8% ~ The range of accepted
and the corresponding prices at the 10-3/8% interest rate

canpetitive bids,
are as follows:

Tenders

at the

Prices

Bids

laxest yield
Highest yield
Average yield

99.407
99.045
99. 226

10.44X
10.48X
10.46X
allotted

high yield were

70%.

TENDERS RECEIVED AND ACCEPTED ( In

Iocation

Received
9, 858
$
6, 502, 630
2, 675
14, 499
39, 463
27, 501
492, 972
68, 563
27, 852
10, 106
11, 138
220, 191

Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury
Totals
'Ihe $3, 002 million
canpetitive tenders and
In addition to the
process, $159million of
Government

14, 863
15, 701
155, 272
47, 983
24, 252

9, 106

7, 938
60, 491

$7, 427, 526

$3, 001, 606

of accepted tenders includes $701 million of non$2, 301 million of competitive tenders from the public.
$3, 002 million of tenders accepted in the auction
tenders were accepted at the average price fran

accounts and Federal Reserve Banks for their

for maturing

exchange

Thousands)
Accepted
4, 558
2, 653, 190
2, 675
5, 499

securities.

SUMMARY

account in

RESULTS OF NOVEMBER FINANCING

Through the sale of the three issues offered in the November financing,
the Treasury raised approximately $8. 8 billion of new money and refunded
$5. 6 billion of securities maturing November 15, 1982. 'Ihe following table
summarizes the results:
New

9-3/4%
Notes

Publica

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Issues

10-1/2%
Notes

10-3/8%

0.2
0.1

0.2

(*)

1.0

$3 ' 2

(*)

$14.4

$5. 6

Net

Nonmar-

ketable
Maturing
New
Securities Money
11/15/85 11/15/92 11/15/07- Special
Held
2012 Issues Total
Raised
$— $13 ' 0 $4. 6 $8.4
0
$4. 0
$3.0
$6 ' 0
Bonds

Government

Accounts and Federal Reserve Banks.
Foreign Accounts.

.
.. .

'ICTALe

~ ~ ~ ~ ~ ~

~ ~ ~ ~ ~ o

0. 6
0. 3
$6 ' 9

$4 ' 3

" $50 million or less.
Details may not add to total due to rounding.

0.4

0. 4

$8.8

jepartment of the Treasury ~ Washington,
FOR RELEASE AT

12:00

NOON

TREASURY OFFERS

$4, 000

MILLION

CASH MANAGEMENT

D.C. ~ Telephone 566-2041
November 9, 1982
OF 73-DAY

BILLS

The Department of the Treasury, by this public notice, invites
tenders for approximately $4, 000 million of 73-day Treasury bills
to be issued November 15, 1982, representing an additional amount
of bills dated January 28, 1982, maturing January 27, 1983 (CUSIP
No. 912794 BY 9).

tenders will be received at all Federal Reserve
"30 p. m. , Eastern Standard time, Friday,
up to 1.
November 12, 1982. 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 three
decimals, e. g. , 97. 920. Fractions may not be used.
Competitive

Banks and Branches

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 competiand at maturity
their par amount will be payable
interest. The bills will be issued entirely in book-entry

tive bidding,

without
form in a minimum

denomination of $10, 000 and in any higher $5, 000
on the records of the Federal Reserve Banks and Branches.
Additional amounts of the bills may be issued to Federal Reserve
Banks as agents for foreign and international
monetary authorities

multiple,

at the average price of accepted competitive

tenders.

institutions and dealers who make primary markets
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
Banking
in Government

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 as of 12:30 p. m. ,
Eastern time, on the day of the auction.
Such positions would
include bills acquired through "when issued" trading, and futures
R-1022

bills
forward transactions as well as holdings of outstanding
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.

and

with

deposit need accompany

tenders

from incorporated

banks

recognized dealers
in investment securities.
of 2 percent of the par
A deposit
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'
and

trust companies

and

from responsible

and

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, November 15, 1982.
Under Section 454(b) of the Internal Revenue Code, the amount
of discount at which these bills are sold is considered to accrue
when the bills are sold, redeemed,
or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption
of these bills that does not exceed the ratable share of the acquisition discount must be included in the Federal income tax return of
the owner as ordinary income
The acquisition discount is the excess
of the stated redemption price over the taxpayer's basis (cost) for
the bill. The ratable share of this discount is determined by multiplying such discount by a fraction, the numerator of which is the
number of days the taxpayer held the bill and the denominator
of
which is the number of days from the day following the taxpayer's
date of purchase to the maturity of the bill. If the gain on the
sale of a bill exceeds the taxpayer's ratable portion of the acquisition discount, the excess gain is treated as short —term capital gain.

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 may be obtained from any Federal Reserve Bank or Branch.

pepartment

of the Treasury

FOR RELEASE UPON

Washington,

O.C. ~ TelePhone 566-2041

DELIVERY

Expected at 8:00 p. m.
November 10, 1982

UNDER

REMARKS BY BERYL W. SP RINK EL
SECRETARY OF THE TREASURY FOR MONETARY
BEFORE THE
CONFERENCE ON BUSINESS ECONOMICS
INDIANA UNVERSITY
BLOOMINGTON,
INDIANA

Wednesday,

November

AFFAIRS

10, 1982

actions of the Federal Reserve and the money supply are
in the news these days'
As many of you know, it wasn't always
that way. Twenty-five years ago the world, the public, the financial
markets all paid little heed to what the Fed was doing or how and
A small
why they were doing
group of us were trying to get
greater attention focused on the importance of monetary policy.
Generally we were either ignored entirely or tolerated and politely
dismissed'
The

much

it.

ten or fifteen years ago most economists had grudgingly
that maybe "money mattered" and the level of professional
"money matters a lot"
rhetoric fell to new lows with debates on
versus "money matters, but very little. " To the extent that analysts
paid any systematic attention to what the Fed was doing, in most
cases their attention was focused almost entirely on the level of
interest rates in order to characterize monetary policy as " tight" or
"easy. " Many of us were still emphasizing the importance of money
growth, but few paid serious attention.
By

admitted

of
Now we have come full circle, from when only a handful
economists saw the point of watching money growth, to now when
economists, businessmen and the financial markets here and worldwide
do little else on Friday afternoon but await the results of the
week's money supply lottery.
Those of. us who have long advocated the economic importance of
growth should, it is claimed, be heartened by the fact that so
that I find the
many have "seen the light. " I must say, however,
current obsession with the weekly money numbers to be as pointless
and ill-advised
as was the public's complete ignorance of monetary
policy twenty-five years ago. Maybe we were overzealous in our
attempts to convince people that money growth was a critical factor
to economic performance; the point has certainly been taken to its
logical, but absurd, extreme with people inferring that every blip
This
in the money numbers has important meaning and implications'
money

R-1023

extreme viewpoint
has ever espoused.

is not, to

knowledge,

one that any monetarist

the Federal Reserve cannot be expected to
supply on a week-to-week or even month-to-month
basis. There are too many factors over which the Federal Reserve has
in the money supply.
no control that cause temporary aberrations
aggregates
we observe in the monetary
Much of the weekly variation
To the

control the

contrary,

money

to technical factors and to statistical noise.
Efforts to achieve precise weekly or monthly monetary control would
therefore likely prove to be extremely destabilizing.
While I do not believe that money growth can be controlled
precisely on a weekly or monthly basis, I do believe that the Federal
Reserve has the ability to maintain the average, quarterly rate of
money growth within its announced
target range. By the Federal
Reserve's own estimates, Ml can be controlled, on a quarterly basis,
within a range of +1%. That result would be a great improvement
over what has actually occurred.
rates of growth in Ml over the
The list of quarter-to-quarter
past two years sounds more like a list of random numbers than the
result of an explicit control procedure with a margin of error of
Act of 1978 mandated annual targeting
+1%. Since the Humphrey-Hawkins
can be attributed

of money growth, the quarterly
target range only four times.

average

has been within

its

critize the volatility of money growth out of some
or dogmatic concern for the sanctity of money growth
targets. I do so because I believe -- and always have -- that erratic
and unpredictable
adverse
money growth has very real and important
effects on the economy.
I

do not

academic

In the short run, money growth is closely and positively
correlated with aggregate nominal income growths
A slowdown
in money
growth that is sustained over a six-month period or longer depresses
economic activity.
Historically, a rapid decline in short-run money
growth, below its long-term growth path, has preceded each downturn
in economic activity.
In most cases, such as in 1957, 1959, 1966,
1969 and 1980, abrupt monetary restriction was the primary cause of
the decline in the economy.
Aware of this relationship,
the Administration,
in recommending
strongly supporting the principle that money growth be reduced
to a noninflationary
pace, urged that that deceleration be accomplishe~
gradually.
It would, of course, have been technically possible for
the Federal Reserve to reduce money growth abruptly to a noninflatio»r)
rate. But it was felt that such a sudden move would cause severe
short-term economic disruption and hardship.
The gradual approach
would provide the public more time to adjust its inflationary
expectations downward, thereby minimizing the transitional costs, in
terms of reduced output and higher unemployment.
is
The transition
drawn out by this approach, but the immediate negative impact on
real economic activity is reduced.

and

Specifically, we recommended that the rate of money growth be
cut in half by 1986 -- with a steady deceleration each year.
reduced and in fact more
Unfortunately,
money growth was abruptly
than half of the deceleration that we recommended occur by 1986
happened in 1981. There is no question that this abrupt slowing of
money growth has added to the length and severity of the recession.
After more than a decade of accelerating inflation and rising
interest rates, monetary policy (as well as all other government
economic policies) has a credibility problem, particularly
with
respect to the goal of controlling inflation'
Despite repeated
announcements
officials that we
by Federal Reserve and Administration
intend to persevere on controlling inflation, the public's skepticism
remains.
This is not irrational: this is not the first Administration
or the

first

Federal Reserve Board to

make

that promise.

several occasions since 1965, money growth was slowed abruptly
to concerns about inflation.
But, in each case, the

in response

effort

was soon abandoned
and the rate of monetary expansion
subsequently was accelerated further.
In each case, the economy
suffered the immediate costs of monetary restraint -- recession and
rising unemployment -- but was denied the lasting benefit of reduced
inflation. The result was a steadily rising long-term rate of money
growth, punctuated by several short periods of monetary restraint.
The rising trend resulted
in an ever-worsening
inflation and an
upward-ratcheting
of interest rates, while the brief bouts of monetary
restraint generated or intensified economic recessions. These
episodes eroded confidence in the willingness or ability of the
Government to fulfill its promises to control inflation.

This effect on the credibility of anti-inflationary
monetary
policy is seen clearly in the pattern of long-term interest rates since
With each stop-go episode, long-term rates became
the mid-1960's.
increasingly resistant to the Government's assurances that antiThe lows in long-term
inflationary policies would be maintained.
interest rates which were recorded near each cyclical trough have
risen sequentially with each successive cycle. The reason is obvious
accelerated money growth, renewed inflationary pressures and
rising interest rates have followed each recession.
Because episodes of reducing
history alone gives the financial

have occurred before,
assurance that we are
now witnessing
shift to noninflationary policy. If a
a permanent
period of slow money growth is followed by a long period of rapid
money growth -- as it was in late 1981 and early 1982 -- that
uncertainty is reinforced.
It signals to the financial markets that
their worst fears and doubts may be coming true -- that the government
cannot be relied upon to adhere to noninflationary
monetary policy
over the long run; that anyone who bets on inflation coming down and
staying down (that is, anyone who lends money at a lower interest
rate) can count on losing it to the tax of inflation.
money

markets

growth
no

In the current environment of uncertainty and concern about the
budget deficit, the effects of volatile money growth are magnified.
important
Hence, the stability of money growth is a particularly
With the
aspect of monetary policy in the currrent situation.
experiences of the past decade fresh in the public memory, erratic
monetary
that noninflationary
money growth adds to the uncertainty
policy will, once again, not be maintained over the long run. That
skepticism helps keep interest rates high, even as actual inflation

falls.

Research completed recently at the Treasury Department shows
that the volatility of money growth has, conservatively estimated,
raised the entire term structure of interest rates by 2-3 percentage
points over the last two years. This is the result that some have
labelled "inherently implausible. " It might have seemed implausible
to me too a decade ago, but years of inflationary monetary policy,
despite rhetoric to the contrary, has had a profound effect on the
behavior of the investing public.
have repeatedly urged the Federal Reserve to provide for
stable and predictable money growth. While it is naive to
believe that an economy can move from a situation of secularly rising
inflation and interest rates without some hardship, the cost of the
transition would be minimized by stable and predictable money growth
which could enhance, rather than detract from, the credibility of
anti-inflationary
policy, and speed the downward adjustment of
interest rates to actual inflation.
We

truth's
Rack in the days of the "money matters/no

it doesn' t" discussions,
characterized as believing that "only
typically
money matters. " That is, the central bank's policy alone is important
and all other economic policies are irrelevant.
Nothing could be
further from the
monetarists

were

Far from believing that the central bank is omnipotent, I
believe that the only thing a central bank can do -- effectively,
over the long run -- is to assure the purchasing power of the monetary
standard; that is, control inflation.
The other goals that are
frequently claimed to be appropriate for monetary policy -- stabilizing

interest rates, stabilizing exchange rates, promoting real economic
-- cannot be effectively pursued by
reducing unemployment
a central bank over the long run.
When the attention
and the powers
of the central bank are pointed toward such goals the best that can
be expected is that they will succeed for a short period of time
only. In the long run, their efforts are likely to be self-defeating
and may actually worsen the problem they seek to correct.
growth,

monetary policy is neither the source of all our economic
problems nor their cure-all.
Prudent, noninflationary
monetary
policy is a necessary condition to achieve real economic growth

prosperity, but it is not the panacea for lagging
productivity, secularly declining industries and
compete internationally.

investment

inability

and

This leaves an extremely important role for the rest of economic
factor
Policymaking.
Tax and regulatory policies are an important
in providing the proper incentives for the public to save and for
business to invest, and has clear implications for productivity and
tax and
Government
competition, both domestic and international.
spending policies determine the allocation of resources between the
private and public sectors.
the problem of the predictability
In the current environment,
of future monetary policy is compounded by concern about the Federal
budget.
The perception of unbounded
growth of government spending
into the future raises fears that higher inflation and/or higher tax
rates lie ahead. The f inancial markets fear that the Federal Reserve
will be pressured into "monetizing" the implied def icit: that is,
f inancing spending by creating new money. Any signals that the Fed
is coming under political pressure to revert to inflationary money
growth only adds to that concern.
The markets

are also concerned

"crowd out" private

that large future deficits will

borrowing in the credit markets and thereby
we need to provide
sustained economic
impede the real investment
Government borrowing absorbs savings that would otherwise
growth.
be available for private borrowing,
spending and investment and,
other things equal, raises the real cost of credit for all borrowers.

Both the Congress and the Administration,
by their actions,
demonstrate to the public that the Federal government has the
collective will to discipline itself now and in the future against
the fiscal excesses which have otherwise come to be expected of
We must
face the fact that any government spending -- no matter how
its goals or beneficial its impact -- imposes costs
well intentioned
In the short term, government spending can be
on the economy.
financed three ways -- through taxation, by creating new money or by
Ultimately, however, only two sources of revenues are
borrowing.
available -- direct taxation and/or inflation.
Therefore, the
situation is simply this: if we are to allow government spending to
grow unchecked as it has over the past several decades, we will face
accelerating inflation (and the escalating interest rates that go with
There are no other choices.
high and rising tax rates or both.
must

it.

it),

I would see the clay that I would be trying to
to downplay the importance of monetary policy.
If that's what it sounds like I am doing, my point is simply this:
monetary policy is of critical importance to the economy's performance;
but so are tax and spending policies, the size of the budget, and
regulatory policies.
government
never thought
convince an audience

Before I wander too far astray of my topic, however, I think
I should comment on what has occurred in the past month or so with
respect to monetary policy -- the so-called change in monetary
pol

icy.

You may recall the popular parlor game in years past called
"pass the story, " where people sat around in a circle and one person
would whisper something to the person next to him, and one by one the
It was always fascinating
message was secretly passed around the room.
-- to see at the end that the final story
and sometimes hilarious
bore virtually no resemblance to the original one. Well, today
ourselves at home by chasing
Now we entertain
things have changed.
green and yellow dots across our television screens and play
pass-the-story at the national level.

fact that the national game is much more serious,
The Federal Reserve's
just as hilarious.
last month about monetary policy is a classic case in

Except for the
the outcome is often

announcement

point.

The Federal Reserve Board stated that there were two changes
about to take place that could affect the form in which people hold
their f inancial assets. Both changes were the result of legislation:
the maturing in early October of $30-40 billion worth of All-Savers
accounts and, secondly, the pending authorization of a new money-marketfund-type account for banking and thrifts.
Chairman Volcker stated
that the Fed foresaw no way of predicting with any precision the
immediate impact of these two developments
on the monetary aggregates,
on
Nl.
Therefore,
said
especially
Volcker, it will be more difficult
to interpret the significance of the Ml figure and that the Fed will
pay relatively less attention to Ml in the weeks ahead.
'

It is clear that both the potential distortion from the two
legislation-based phenomena, and the Fed's response to them, are of
limited duration.
In fact, temporary shifts in emphasis by the Fed
in response to such financial innovation have been fairly common in
recent years. A temporary change in emphasis in response to temporary
distortions in the financial marketplace.
And Nr. Volcker stated
clearly that no change in the basic monetary policy or in their
approach to policy was being made by the Fed.
Then, some bankers, investors and, of course, a goodly portion
of the press began playing "pass the story game" on a massive scale.
By the time the story had made it around the national
circle -- the
original idea had been twisted almost beyond recognition.
Before
you could say tight money, it became "common knowledge" that the
Federal Reserve had become so nervous about the continuing weakness
of the economy that it had decided to change its policy to one of
"easy money. "
The fact that Mr. Volcker and other officials said just the
opposite seemed to be of no concern to those who had become convinced
that the Fed was abandoning its commitment to steady, moderate growth
in the money supply.
Proponents of various economic and political
philosophies began to shout that this meant everything from abandonment
of monetary control to a return to targeting interest rates.

who are so conf ident that the Fed has moved to a policy
money" might ponder for a moment what this would mean
were true.
The Federal Reserve usually acts in one of two ways:
increases and decreases bank reserves in the banking system and
raises and lowers the discount rate. If the Fed's actions with
regard to bank reserves results in the M' s, and Ml in particular,

Those

if it
it
it

of "easy

at or near the target ranges, that can hardly be called easy

being

money

But what about the discount rate? There are many who believe
that recent reductions in the discount rate are somehow a manifestation
of an easing of monetary restrictions.
Most recently, failure to
drop the discount rate again is seen as raising doubts about the
policy of "easing. " The problem with this view is that a Federal
Reserve move to cut the discount rate almost always comes in response
to a decline in market rates. Movements in the discount rate are
typically the result, not the cause, of movements in market rates.

It is

little

disturbing how quickly a viewpoint can take hold
that "everybody knows. " It is more than a little
As
disturbing how often such common assumptions are flat-out wrong.
Craig Roberts pointed out recently, "everyone knew" last year that
the Reagan tax cuts and resulting deficits were going to drive
inflation and interest rates right through the roof. Where are
those people now who were forecasting that outcome with such certainty?
They have simply moved on to another "story. "
as something

This past spring there were those, especially in Europe, who
that the dollar was strong only because American interest
high. And they were certain that a decline in U. S.
interest rates would weaken the dollar. We in the Administration
repeatedly said that the dollar was high for much more fundamental
reasons and that it would remain strong even as our interest rates
That, of course, is precisely what has happened.
began to move down.
were sure
rates were

policy, achieving stable, moderate growth in
supply remains one of the four strong cornerstones of the
President's economic program.
Throughout history sustained rapid
And just as surely,
growth in the money supply has led to inflation.
inflation has led to high interest rates and declining economic
activity. This Administration remains committed to stable, moderate
for both low inflation and
money growth as a necessary precondition
interest rates. Both, in turn, are necessary preconditions for
economic recovery.
As

for monetary

the money

assumed office with the firm conviction
This Administration
that the process of inflation is a major obstacle to vigorous economic
As a result, a
performance and expansion of individual opportunity.
major part of the president's economic recovery program was the call
for a gradual deceleration of monetary growth to a noninflationary
pace. The basis of this monetary program was and still is the
recognition that sustained inflation -- no matter what may be the
initiating force -- requires the accommodation of excessive money

creation.

And in spite of the steady whirl of rumor
That is our view.
reporting to the contrary, I am convinced that it is also the
I am also convinced that the Fed will
view of the Federal Reserve.
continue to base its actions on that view.

and

ooo

|cpa&ment of the Treasury ~ Washington, D.C.
FOR RELEASE AT

4500

Telephone $66-2041

November

P~M~

TREASURY TO AUCTION

$6, 750

MILLION

10, 1982

OF 2-YEAR NOTES

The Department of the Treasury will auction $6, 750 million
of 2-year notes to refund $4, 544 million of 2-year notes maturing
November 30, 1982, and to raise $2, 206 million new cash.
The
$4, 544 million of maturing 2-year notes are those held by the
public, including $557 million currently held by Federal Reserve
Banks as agents for foreign and international
monetary authorities'

million is being offered to the public, and any
by Federal Reserve Banks as agents for foreign
monetary authorities
(including the $557 million
securities) will be added to that amount.

The $6&750
amounts tendered
and international

of maturing

In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $422 million
of the maturing securities that may be refunded by issuing additional amounts of the new notes at the average price of accepted
competitive tenders i

Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo

Attachment

R-1024

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED NOVEMBER 30,

1982

10, 1982

November
Amount

Offered:

To the public.

................... ....

of Security:
and
Term
type of security. . . . . .
Series and CUSIP designation. . .

2-yea'i notes
Se'ries Y-1984
(CUSI'P No. 912827
November 30, 1984

... .. .... ... ...
Call dateo
Interest coupon rate. . . . . . . . . .
Investment yield. . . . . . . . . . . . . . .
Premium or discount. . . . . . . . . . .
Interest payment dates. . . . . . . . .
~

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

~ ~ ~ ~ ~ ~ ~ ~

available.

Payment

None

Noncompe'titive
$1, 000, 000' or

non-institutional

investors. . . . . . . . . . . . . . . . . . . . . . . . . . . . Full
with

Deposit guarantee by
..........
designated institutions.funds'
Key

Dates:

Deadline

Settlement

based on

Yield auction

$5, 000

Sale:
of sale ~ . . . . . . . . . . . . . . .
Accrued interest payable
by investor. . . . . . . . . . . . . . . . . . . .
Preferred allotment. . . . . . . . . . . .

Terms of
Method

the average'of:accepted bids
To be determined' at auction
after auction
To be'deterrriined
30
May 31 and November

denomination

provision

To be' determined

Minimum

Description

Maturity date.

$6, 750 million

~ ~

tender

Acceptable

institutions)
....
b) readily collectible check.
Delivery date for coupon securities.

due from

a) cash or Federal

November
, EST

1:30 p. m.

Tuesday,

Friday,

to be submitted

payment

for receipt of tenders. . . . . . Wednesday,
date (final payment

bid for

less

Thursday,

November
November

17, 1982,

30, 1982
26, 1982

December

9, 1982

DEPOSITORY INSTITUTIONS DEREGULATION COMMITTEE
Washington,

D.C. 20220

PRESS RELEASE

Secretary Regan's Opening Statement

at the

November

15, 1982

DIDC

Meeting

this special meeting, the Committee will establish
new money market deposit account that may
be offered by Federally insured commercial banks, savings
and loan associations and mutual savings banks.
The GarnSt Germain Depository Institutions Act of 1982 in addition
to expanding the asset powers of thrift institutions and
increasing the emergency assistance powers of the Federal
insurance agencies, directed this Committee to authorize a
deposit instrument that is directly equivalent to and
At

the long awaited

competitive

with money market

mutual

funds.

The Committee's
action at this meeting will be limited
to authorizing an account that meets the specifications of
the Garn-St Germain Act. At the scheduled December meeting,
the Committee will consider seeking public comments on options
for accelerating our long term deregulation schedule, rationalizing the current regulations on time deposits and authorizing
an account much like the account we discuss at today's meeting
but with unlimited transaction features.

DIIIPTROLLER OF THE CURRENCY
FEDERAL

RESERVE BOARD

FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION

FEDERAL HOME LOAN BANK BOARD
DEPARTMENT OF THE TREASURY

epartment of the 'treasury
FOR IMMEDIATE

Washlnston,

D.C. ~ Telephone S66-2041
November

RELEASE

RESULTS OF TREASURY'S AUCTION

OF 73-DAY CASH MANAGEMENT

12, 1982
BILLS

Tenders for $4, 002 million of 73-day Treasury bills to be
issued on November 15, 1982, and to mature January 27, 1983, were
accepted at the Federal Reserve Banks today. The details are as

follows:

BIDS:
Investment Rate
(Equivalent Coupon-Issue
8 64-

OF ACCEPTED COMPETITIVE

RANGE

Price Discount Rate
8. 379~o
98. 301
98. 289
8. 4389.

High
Low

Tenders

at the

8. 70-o
8. 67%

8. 408~o

98. 295

Average

low

price

were

allotted

87%.

TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:

(In Thousands)

Location
Boston

Accepted

York

$12, 293, 000

$3, 901, 000

Cleveland

41, 000
90, 000

5, 000

1, 326, 000

72, 000

3, 000

2, 000

687, 000
$14, 440, 000

22, 000
$4, 002, 000

New

Philadelphia
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
TOTALS

R-1025

Received

Yield)

Oepartment

of the Treasury

FOR IMMEDIATE

D.C. ~ Telephone 566-2048

Washington,

15, 1982

November

RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $5, 600 million
26-week bills, both to be issued
OF ACCEPTED
COMPETITIVE BIDS:

RANGE

High
Low

Average

at the
at the

Tenders
Tenders

of 13-week bills and for $5, 601 million of
on November 18, 1982, were accepted today.

13-week bills
maturing February 17, 1983
Discount
Investment
Price
Rate
Rate 1/
97. 877 8. 399%
8. 70%
97. 858 8. 474%
8. 78%
97. 865 8. 446%
8. 75%
low
low

26-week bills
maturing May 19, 1983
Investment
Discount
Rate 1/
Rate
Price

95. 706
95. 672
95. 683

8.494%
8. 561%
8. 539/2/

9. 00%
9. 07%

9.05/

price for the 13-week bills were allotted 01%price for the 26-week bills were allotted 45%.
TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Boston
New

10, 196, 420
31, 600
54, 235
40, 405
50, 805
858, 345
43, 810
11,565
47, 810

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St.

Louis
Minneapolis
Kansas

City

Dallas
San

Francisco

Treasury
TOTALS

Tzpe

Competitive
Noncompetitive

Subtotal,

Public

Federal Reserve
Foreign Official

Institutions
TOTALS

=4~0
Received

Location

Received

Accepted
020
~6,

81, 235

9, 768, 625

4, 627, 920
31, 600

120, 760
82, 940

34, 235
35, 405
49, 305
288, 345
41, 810

51, 430
37, 150
652, 600
44, 655

13, 220
57, 620

9, 565

32, 935
762, 950
238, 075
$12, 414, 975

47, 810
27, 935
122, 250
238, 075
$5, 600, 275

$10, 233, 480
930, 280
$11, 163, 760
1, 066, 515

$3, 418, 780
930, 280
$4, 349, 060
1, 066, 515

184, 700
$12, 414, 975

184, 700
$5, 600, 275

22, 840

~Acce Ced

735
$50, 625

4. 703,

45, 760
49, 940
39, 005
34, 125

116, 600
34, 155

9, 220
51, 845
17, 840
173, 735

586, 735
274, 230

274, 230

: $11, 794, 040

$5, 600, 815

9, 556, 860
799, 580
: $10, 356, 440
1, 050, 000

$3, 363, 635
799, 580
$4, 163, 215
1, 050, 000

387, 600

$11,794, 040

$5, 600, 815

1/ Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum
on money market certificates is 8. 409%.

interest rate payable

-'~! .
yeycnl'trent

the Trsesua'y

o Washington,

O. C. o Telephon4. 588-2045

INALLY LECTURE
OF MICHICAN BUSINESS

UNIVERSITY

SCHOOL

THE HONORABLE R. T. MC NAMAR
DEPUTY SECRETARY OF THE TREASURY
ANN ARBOR, MICHIGAN

November

The

Inexorable

Linkage:

The United States
Geneva in what has been

15, 1982

International

Trade and Finance

about to join 87 other nations in
billed as the meeting of the decace to
determine tne framework, direction, and momentum for
international
trade relations for the indefinite future.
The
GATT Ministerial
24-26 may, indeed, give both
on November
observers and government policymakers a clearer indica ion of
whether nations will go-it-alone in internat ona' trace or make
'he difficult individual
political decisions necessary to work
together to deal with the serious trade and financial problems
that now threaten the international
economic, f'nancial, and
politica' systems that have served tne Free thecal
World for th
last
three and a hal f decades.
The ve ry real danger i s that ind ividua 1 governm er. s w~ 1
choo se the course of econom ic ~solat onism on - the ba s'-s th
the i r own
comest'c" econom ic si tua t on mak es it pol itica
''

impossib' e to make any majo

sys

even

to uphold

new

commitment s to the

present

ones fu 1 1 y.
the to

&'nis eria decision may we '1 se
economics, and therefore in ternational
po''
cene. a' ly f or the res- of t he 20th Century.

7-102

open

t ra='ing

Th e Gy ~m
.ona

at'

ohs

Today the world watches the United States, Japan, and the
European Community to see whether they will assume or abdicate
their role as world economic leaders. Each is vulnerable to
to lead. The U. S. faces
abdication.
Each has opportunities

intense

economic

domestic

realities

political pressures
and

to avoid adjustment

loss of comparative

advantage

new

in some

established industries.
This has led to calls for other nations
to further subsidize their industries.
Japan is threatened with
exclusion from its U. S. and EC markets unless it assumes the full
measure of international
economic responsibility
and liberalizes
its policies on imports. And, with record unemployment rates in
the EC, coupled with recent political polarization,
there is a
distinct possibility that the EC will continue its
pro-protectionist trends, turn its back on the developing nations
of the world in its futile search for domestically politically
policies. Indeed, it is fair
popular, economically short-sighted
to ask whether Western liberal democracies can maintain both an
open market and free trade consumer welfare policies in the face
of today's challenges.

international economic environment
national leaders have experienced in
some time -- certainly
the most politically difficult trade
situation since the 1930s, when strong protectionist pressures
is

sure, the current
of the most difficult

To be

one

were

coupled

with

poor economic

In a recent op-ed
noted that world

article

growth

and

in the Washin

high

unemployment.

ton Post,

Sir

Roy

percent during the
trade debacle of the 1930s. Are we doomed to repeat those
mistakes?
Have the American people just elected a Congress that
will revisit the beggar-thy-neighbor
trade measures of that era?
Or can we resist pressures
for these kinds of trade actions and
financial system?
avoid the collapse of the international
Denman

trade declined

I think we can -- which may make me the only optimist about
free trade in the room. But I recognize that the United States
Our economy is too closely linked with those
cannot do it alone.
of other nations to turn away from the problems of other nations,
or to deny the effect of our economic policies on others.
The
period ahead is not going to be easy. It will require strong
world leadership
to maintain an even keel and a pragmatic
are
We
approach.
going to have to judge very carefully what
policies are in the best interest of the U. S. economy as a whole
before jettisoning our traditional open market .approach and
joining the foreign trend toward active government intervention
or domestic markets.
to further restrict international

That's a mouthful.
But it reflects my own deep conviction
that our trade, financial, and domestic economic policies are
today so integrally related that we have no other choice. We
cannot look at each of them in isolation, attempting to deal with
trade issues apart from their implications for the international
economic situation or for the future strength of the U. S.
More than ever before, each nation, in its
economy.
policy deliberations, must recognize and take into account the
close inexorable linkages that are ever tighter between these
can we
policy areas. Only by recognizing the interrelationships
synthesize an overall policy approach, and avoid inherent policy

domestic

contradictions.
That's the conclusion of all the remarks I will make today.
And while
I know the University of Michigan Business School
doesn't use the case method for teaching; case studies, however,
of
were an acceptable method of learning within the University

School, which I attended, and they continue to be
perhaps less progressive business schools further
East. So, with due apologies to the Business School, what I'd
like to do today is offer an analysis of the current
international
economic situation as the backdrop for a case study
economic sphere.
of government policymaking
in the international
I' ll attempt to provide an overview of recent economic facts,
describe a mythical foreign industrial country, and let ~ou
choose the policies which this country should now pursue.

Michigan
used

Law

some

I'd like to structure the
But I'm getting ahead of myself.
case analysis -- and betray a few of my own convictions as I do
so -- by focussing on four major themes:

International integration now makes isolationism in
trade -- or other economic policies -- virtually
infeasible, and totally unacceptable as a policy
Indeed, for the industrial democracies
prescription.
the distinction between domestic and international
economic policy is now largely obsolete.
countries'
The collective response to the developing
debt problems will be crucial to the future of the
financial system, and the actions we take
international
in the trade area shou~1 in no way jeopardize this
situation. The less developed nations -must be able to
import the equipment and energy needed goods to
This will
continue their domestic economic growth.
require net new financing, and preserving their export
countries. All are
markets in the industrialized
the
economic
preserve
gains necessary to
necessary to
underpin

the Free World's

political stability.

Most nations

consequences
they adopted
now they also
In an attempt

inflation

still have not fully adjusted to the
of the overly expansive economic policies
to ease the "oil shocks" of the 1970s; yet
shock".
have to face a new "disinflation
to wring out the old problem of high

from

the economy,

governments

have been

forced for the near-term to accept low real economic
Reducing world trade will only compound the
growth.
economic problems for nations dependent upon export-led
recovery.

because of the transient
of the moment only defer the
Protectionist measures
inevitable economic adjustment.
-- import
deal
with
the
of
problems
only
symptoms
weak
loss
of
comparative
penetration,
exports,
causes. More to the
advantage -- not their underlying
and
developing nations cannot
point, all industrial
restrict imports and increase exports.
simultaneously
Each nation's export is some other nation's import.
Trade measures

political

conclusions

the i r val id i ty.

International

adopted

imperative

stated, let

Inte ration:

The Im

attempt

to pers'uade

you

ortance of Trade

Stimulated by the substantial
reduction of tariffs among
industrial countries during the Kennedy Round of trade
negotiations in the 1&tiOs, as well as by strong and continuing
domestic economic growth, international
trade became the most
In the decade of the 1970s,
dynamic part of the global economy.
the strong growth in international
trade and an extraordinary
increase in the use of private international
financing provided
to developing countries fostered their economic growth.

trade increased

eleven percent annually during the
although it grew at a slower pace after the
it still averaged six percent annual growth for
the decade as a whole -- cor siderably faster than the growth i ~
World

1970-73,
first oil shock,

period

and

world gross national product.
Relatively low levels of
unemployment
and the boom in global demand for- both capi
consumer goods encouraged
nations to provide increasingly

markets for international
until the
goods
1973 and the subsequent
pressures for trade
developed during the recession of 1974-75.

first oil
restrictions

tal

a.".
open
shock in

that

In the aftermath of that recession, trade again picked up,
nations
although at a slower pace, as the major industrial
adopted expansionary
fiscal and monetary policies. While
contributing to the subsequent increases in inflation, these
inflationary policies did give a boost to trade, as did the
continuing strong economic growth of most LDCs, and newly
industrializing
countries like Korea and Mexico.

For the United States, exports in the latter part of the
last decade actually grew twice as fast as the growth of world
trade. U. S. exports as a share of GNP doubled between 1970 and
1979. By the end of the decade, exports accounted for one out of
three acres of U. S. agricultural
production, one out of eight
U. S. manufacturing
jobs, and nearly 20 percent of U. S. production
of all goods. As world trade expanded, other countries also
became more dependent
on both imports and exports to earn the
foreign exchange to pay for their increasing imports.
and the oil shocks of the 1970s also
capital flows and
expansion of international
institutions and
greater interdependence
among financial
financial markets.
International banks in the United States and
abroad have provided the bulk of financing required to support
economic growth and burgeoning
trade flows between developed and
developing countries.

Rising

spurred

inflation

an enormous

Financial transactions have now become so interrelated that
have, in effect, one worldwide market for a wide spectrum of
Offshore banking
borrowing, lending, and investment activities.
centers and teleccmmunications
link New York, London, Frankfurt,
Bahrain and Singapore so that the sun never sets on the world' s
Banks serve customers throughout
continuous banking activity.
the world and have the capacity to attract or borrow deposit
funds in one center and to place them with borrowers anywhere in
the world.
Although the sources of funding may change, the role
of the private financial intermediary remains the same
Thus,
the dropoff in OPEC surplus and net withdrawal
of OPEC funds from
banks in the international
banking market has been compensated by
increases in the share of funding from other principal sources,
e. , the developed country centers, particularly the United

States.

of this heightened interdependence are
to all parts of
instantaneously
profound.
We can now communicate
in minutes
the world and move billions of dollars electronically
Total
in response to a variety of complex market factors.
tran~, actions in the U. S. foreign exchange market are often in
excess of $100 billion per day.
The

Interde

implications

endence

for all Nations

Against this web of financial ties, consider individual
economic policies.
Substantial divergences in economic
performance among the major nation's can have a significant impact
of the system as a whole. Economic stagnation
on the stability
world is soon transmitted
in the industrial
through declining
demanD for imports
to reduced exports for the developing nations,
which are dependent
on exports to maintain and help finance the
. economic
of their domestic economies. The
growth and development
interrelationship
is simple: i f the developing nations cannot
export; they cannot import capital goods to transform the
developing countries from being an exporter of commodities to
being an exporter of finished products where they enjoy a
If they can' t export, they can' t pay
comparative advantage.
their debts to the commercial banks of the developed countries
that want to export to them. Again, there is a clear linkage.

naticns'

And f inally,
par ticular ly wi th f ixed exchange rates, the
efficacy of policy measures adopted by any individual nation is
of the
more limited than ever and more subject to the influence
Today's flexible exchange rate system reduces
globa' economy.
the atility of governments
to influence capital investment and
savings through domestic actions, because of the ultimate
exchange rate effects.

illustrate the tie between domestic and
To further
international
policies, the sizeable foreign exposur e in
developing countries of U. S. and other nations' commercial banks
and their interbank
borrowing must be considered along with their
objectives by central bank monetary
prim iry anti-inflationary
authorities when they establish domestic monetary targets. Thus,
in its
even the r~deral Reserve cannot be truly "independent"
It operates in an international not isolated
policymaking.
domestic market.

As Canadian
Prime Minister Trudeau stated in September at
annual
Monetary Fund and the
the
meeting of the International
"our
compels us
World Bank in Toronto,
economic interdependence
to understand that since many of our problems transcend
international borders, we must solve them together if they are to
be solved at all. " His words contain a warning against
individual actions by nations.
His insight is that not only is
"no man an island", but no nation any longer can be insular.
Let's examine further how this came about.

of the Oil Shocks

relatively bright trade picture of the early 1970s has
now changed
substantially.
In major part this is due to the
failure of the world economy as a whole to adjust adequately
to the dual oil shocks of 1974-75 and 1979-80. The cost of oil
The

rose over 1, 000 percent between 1973 and 1981 -- from
approximately
$3 per barrel to over $34 per barrel.
However,

these data only

tell

the story for the United

States. Since oil trade is almost exclusively priced in U. S.
dollars, to look at the oil shocks in terms of other countries,
we should
look at these oil price increases in local cur'rencies.
That is, how many DM or yen did it take to buy the dollars
prices? I 'll examine
necessary to buy the oil at ever-increasing
1972-1982
two periods:
and (2) the most
(1) the full decade,
recent period of strength'in the U. S. dollar, 1979-1982.
For the full decade, the cost of oil in three major
currencies -- dollars, yen, and deutschmarks -- increased by
the same percentages:
1, 034 percent, 1, 046
approximately
-- all about 10-fold
respectively
998
percent,
percent, and
increases. However, for Belgians using Belgian francs, the
increase in the price of oil for the decade was further
aggravated by the relative appreciation of the dollar (and
decline of the Belgian franc against the dollar, yen, and DM)
countries,
during this period . Thus, for two key industrial
increase
in
the
cost
of
oil
imports was
Japan and Germany, the
relatively the same as for the Unite' States for the decade, but
for others, including many LDCs, the co t of the oil shocks was

fa:

more.

to the more recent period, 1979-1980, differences in
cost of oil imports due to the value of the dollar for
The
individual nations are more distinc. ~~d more drastic.
increase in dollar terms was 174 percent, 219 percent in yen, 246
and 299 percent in Belgian francs.
This
percent in deutschmarks,
shorter timeframe has been used by some as evidence that the
appreciation of the dollar since 1980 has had an effect on
certain economies similar in nature -- if not in extent .-- to the
second "oil shock" itself, but has only affected countries
outside of the United States.
the

Turning

leaders who look exclusively at this more recent
"the
want to argue that this third shock
-dollar oil ."hock"
boosting
has hit them as a double-whammy:
the cost of oil imports and exacerbating overall tr ade/current
account imbalances.
The only ameliorating
effect is that it has
also boosted the U. S. demand for their goods, by decreasing the
relative co'~t of their exports in dollar terms. This boost to
other natio is' exports has been felt in the United States in
terms of in=reased import competition, as in steel in the last
two years.
National

time period

—

may

balanced, I should also point out that the decline in
currenc ies relative to the dollar 'has reflected in large
part a market. reaction to the domestic economic policies in these
countries.
Continuing high inflation and rising budget deficits
relative to other countries, for example, has contributed to the
To be

some

of some European currencies.
Many commentators
the current weakness of the yen is also attributable
deteriorating budgetary and export prospects for Japan.

depreciatior.
suggest

Without
make

two

off on too much of a tangent, I would
observations from these basic facts:

going

general

like to

politicans always look at a shorter time
Unfortunately,
There's little political
horizon than economists.
future in good economic policies. Indeed, in a free
society, too often good economic policies and good
pclitics are anathetical.
2.

Exchange rates do affect trade flows, but they affect
them in both directions.
If the changes aren't overly
speculative and destabilizing to the system as a whole,
over time they should always balance out through trade
and exchange rate ad j ustment.

additional factor should also be mentioned with regard
oil shocks. The percentage increase figures don' t reflect
the efforts of a number of nations to reduce the volume of oil
imports over this period -- or the relative increase in oil
Nor does it say anything
about the
import volumes for others.
ability of nations to pay the higher import bills. I suggest
a more analytically
comprehensive
figure is the percentage of
exports needed to pay for oil imports over a time period:
this
figure helps to demonstrate the cost of oil imports in terms of a
One

to the

nation's

trade account as

whole.

For the period 1972-1981, the share of exports needed to pay
imports increased substantially
for all nations -- but
more for some than for others
For Japan the share more tha~
doubled.
In 1972, 14 percent of Japanese exports were neede3 to
In 1981, 35 percent of Japanese exports
pay for oil imports.
went for this purpose.
Had Japanese exports stayed at their 1972

for oil

would have gone to pay for oil
would not have met Japan's full oil import
there would have been no foreign exchange to
imports, such as coal, grain, or lumber from

level, all of these exports
imports

and

still

needs. Obviously,
buy other essential

the U. S. These facts help to demonstrate Japan's heightened need
to export more manufactured
goods -- such as cars and TVs where
Japan has a comparative advantage in order to pay for its oil
imports needed to keep its people warm and employed.
Japanese
Diet members, like their peers in the other industrial
democracies, follow the same logic as do U. S- Senators and
Chamber of Deputies members.

Similarly

for Belgium

to pay for

needed

oil

and

imports

Brazil, the share of exports
this per iod. In

~tri led during

14 percent of its export earnings to pay for
Today, half of Brazil's exports now go simply to pay for
its oil imports. For the United State s, the compa r able inc r isa se
was from 5 to 28 percent.
The sharp increase in U. S.
agricultural exports, where we enjoy a comparative advantage, has
helped the U. S. pay for our ever more costly oil imports.

1972, Brazil needed

oil.

In sum, the dramatic oil price increase and dollar oil price
produced two major economic consequences worldwide:

increases

to the 1960s, the rate of inflation nearly
for both developed and developing countries.
The average inflation rate for OECD nations in the
1970s was 8. 4 percent; for LDCs, 26. 5 percent. Much of
this increase was due to the oil price shock, but

As compared

tripled

expansionary

monetary

and

fiscal policies

in a number

of countries were also a major contributing facto~, In
addition, in European countries the use of wage
indexation schemes further ratcheted up inflation
rates. Indeed, indexed domestic social programs costs
countries increased as a result of
in industrialized
inflationary shocks: oil
external or internat'anal
Again,
price increases and foreign exchange movements.
I suggest the intervoven fabric of in~ernational and
domestic policies interacts in often unforeseen ways.

the decade, non-OPEC trade and current account
OECD surpluses
were transformr d
balances plummeted.
into an average deficit of S14 billion in 1974-80,
while the small LDC deficit jumped to an average of $40
billion. Lacking economic adjustment, these deficits
Indeed, they were by the
had to somehow be financed.
international commerc ial banks.

During

-10-

There has been a great deal of analysis and discussion about
the need for structural adjustment to the new oil price
situation. Unfortunately, too little adjustment has actually
taken place. Usually, as in the United States, the political
process has impeded the necessary economic changes.

ecoromic adjustment is especially critical for the
external debt has ballooned in recent years. Let me
explain. With few exceptions, developing countries have
increased their international
debt rather than adopt the domestic
measures needed to ad just structurally
to the higher cost of oil
and inflation
of the 1970s. That is, they failed to bring about
a sustained
reduction in their merchandise and current account
deficits in order to reduce the need to borrow. LDCs have
too often preferred to rapidly increase imports for consumption
to maintain or increase current living standards and at the same
time increased imports capital goods for industrial
development
Increasingly these imports were financed in larger and larger
Thus,
proportion with borrowed funds for the commercial banks.
from
increased
earnings
rather than utilizing
foreign exchange
economic
exports with sustainable external debt increases from
to: (1) build
too many LDCs attempt simultaneously
development,
increase
an industrial
consumption; and, (3) count
economy; (2)
on higher and higher inflation
to cover their current policy
excesses. As a result, LDC debt has grown at a rapid but
unsustainable
pace. The recent scale of LDC borrowing to finance
imports in order to achieve rapid economic development was
unprecedented.
However,

LDCs whose

non-OPEC LDCs from banks in the
jumped from $10. 5 billion in 1977
to $22 billion a year later in 1978 and almost doubled again to
$41. 6 billion in 1981. The outstanding balance of debt owed to
private Western banks by these countries, primarily in Latin
America, reached !230 billion by the end of 1981, and exceeds a

Net new borrowing

major industrialized

quarter

by the

countries

trillion dollars today.

at the same time, a concurrent trend was developing
that would ultimat ely undermine this continued growth in LDC
Inflat on expectations and performance had begun to
borrowing.
Industrial countries generally had shifted away from
change.
domestic policies toward policies of
more expansionary
disinflation.
For the developing countries in particular, this
shock" or transition to lower
has introduced
a new "disinflation
nominal increases in economic growth.
However,

lenders and finance ministries of
loan portfolios =hat were
borrowing nations are re-evaluating
about future
expectations
established under quite different
inflation. Levels of debt which seemed sustainable under
inflation and therefore
assumptions of continuing ever-increasing
growing export receipts, suddenly are very high in real terms
after accounting for inflation. And new borrowing is necessarily
more costly in real terms, since borrowers can no longer expect
to repay loans with ever cheaper dollars as happened in the
latter part of the 1970s. Today, real interest rates are higher
As a

and

result,

the dollar

export earnings

commercial

rate has become
standpoint.

exchange

costly

from

a result, fundamental
economic adjustment measures are
to deal with this situation.
Overall LDC cashflow
requirements
for financing must be reduced. In the very short
run, this can only be accomplished by a reduction in LDC imports,
either by reducing aggregate demand (and hence GNP growth) or by
direct restrictions on imports. Over the longer term, export
expansion and import substitution
must become part of the more
New domestic
fundamental
structural adjustment by non-oil LDCs
investments and expanded export production capacity, however,
will only occur after a considerable time lag. At the same time,
rescheduling and restructuring
of external debt maturities is
essential to better match export earning and cashf low potential.
As

needed

For their

part, bankers in industrial nations wi 11 tend to
be increasingly
selective in additional new lending. But it is
crucial that new lending not be imprudently curtailed by all
lenders.
Banks will also look to international
financial
the
International
institutions, particularly
Monetary Fund, for
funds, and the
support operations, additional medium-term
imposition of programs requiring greater economic poli=y
discipline in those LDCs whose debt positions are least
sustainable

the plight of the LDCs, we must comprehend the
To understand
A general
decline in k~y commodity
magnitude of their problems.
prices has exacerbated the problem for LDCs and reduced their
total export earnings. World sugar prices have dropped 65
percent since 1981, causing the United States to impose import
quotas to protect dome~tie price supports for sugar and further
reducing export earnings for the major sugar exporting countries.
and domestic policy
(Again note the linkage of international

considerations.

)

prices have iallen 14 percent over this same period,
effect on Argentina's exports. Copper prices have
fallen 34 percent since 1980, affecting Peru's exports, among
others. For nations that rely mainly on commodity exports for
foreign exchange earnings, the combination of a worl ]wide
recession and the transition to disinflation has beer brutal in
terms of deter. iorating current account balance.
Wheat

with

major

-12The Futur e

for
prospects in
the developed countries'?
in essence, that
industrial nations face a reversal of the export-led growth
phenomenon
of the 1970s. LDC reductions in imports -- and the
future expansion of LDC exports -- are crucial t'o the stability
of the international financial system. In a slow-growth world&
however, this means that developed countries will have to accept
the reverse swing in LDC trade to enable adjustment to occur.
Industrial nations' exports to LDCs may decline in real
terms, yet industrial nations must continue to keep their markets
open both to other developed countr ies and to LDCs to keep the
international trade and financial systems from dissolving
Protectionist moves among the industrial countries will merely
compound
the problem -- already of sufficient magnitude -- by
. reducing
the developing countries' ability to repay their debts,
diminishing
trade as an engine for economic growth, and possibly
precipitating a global financial crisis. An implosion of trade
and new financial
credits would be shortsighted, self-defeating,
and politically
hazardous to the stability of the Free World.
What

do the

international

current

trade,

and

debt problems

for

employment
They require,

LDCs mean

and

growth

For OECD nations which are now endur ing a major recession
near-record unemployment levels, this prospect is not
After-inflation OECD economic growth has averaged
encouraging.
less than one percent during the last three years, while the
volume of world trade has actually declined for the first time
since the 1940s. Serious overcapacity in major industries such
as steel, autos, and shipbuilding
has created strong
protectionist pressures -- and further increases in imports from
LDCs will be met with a jaundiced
in
eye within these industries
and

particular.

How harshly
will the necessary LDC adjustment affect the
industrial countries?
Eor analytical purposes let's assume an
extreme hypothesis:
that commercial banks extend no net new
loans to LDCs. This would suggest a reduction of 845 billion in
-- roughly 15 percent of LDC imports. Such a
new financing
cutback would reduce OECD growth rates up to 1 percent.
About
$10 billion of this decline would come in U. S. exports, with a
lesser effect on U. S. GNP since trade is still less important to
the U. S. economy than to other OECD nations.
In Europe, there
would be no trade led recovery from the current recession and
would sharply increase and cause further political
unemployment
instability.
In Japan, the OPEC oil bill simply could not be
paid without dramatic and politically unpalatable
changes.

economic system meet this challenge?
Can the international
Indeed, can the current international
system as we know it
These are the cuestions I ask you to answer.
survive?

-13-

Before I pass this policy dilemma to you for your
consideration, I would like to make a few gene al comments
regarding the policy considerations that I per. -onally find of
critical impo r tance to the future:
1. The importance of the developing nations to the U. S.

and to the global economy is usually overlooked
Non-OPEC LDCs now account for nearly
or misunderstood.
That is more than the
30 percent of U. S. exports.
Non-OPEC LDCs
European Community and Japan combined.
LDC exports
supply 25 percent of U. S. imports.
represent 17 percent of world trade, and their imports
are nearly one-fourth of global imports.
Their
economic health is critical to the world economy.
And,
I submit, the United States' own for ign policy and
economic future increasingly depends on their economic

economy

progress.
The crucial issue for industrial
creating a climate conducive to

nations
LDC

will be
adaptation
LDC export

economic

This means not impeding
adjustment.
accepting cutbacks in LDC imports where
necessitated by a stringent balance of payments and
debt situation, and working within the international
financial institutions to encourage better discipline
on future LDC economic behavior.
and

growth,

All the multilateral
financial institutions must play a
key role in the adjustment
process. The International
Monetary Fund must play a pivotal role in fostering
timely and smooth adjustment by the LDCs. Current INF
policy recommendations aim at reducing government
interference in domestic economies, reducing subsidies
and budget deficits, eliminating
price controls and
inefficient industrial support, and establishing
realistic exchange rates and relative prices. These
policies should be continued, and the INF should
maintain strong conditionality
of its loan prog rams to
insure that such changes do in fact occur. Indeed, to
provide added incentives for adhererce to IMF backed
policies, disbursement of net new ccmmercial loans
might t= more closely tied to meeting IMF program

standards.

Each individual

LDC

must

take the

politically

unpopular

decisions to eliminate subsidies they have used to
shield their people from the ravages of the world's oil
~~h" her it is artificially
shocks
low interest rates,
export subsidies, controlled gasoline or bread prices,
they must be adjusted to better reflect world market
prices. The international governmental, commercial and

-14-

systems can simply no longer sustain or
these subsidies through increases in
ever-larger external debt too often supplied by the
industrial nations' commercial banks. This reality
nations with the internal
must provide developing
political justification for these admittedly
domestically unpopula r actions. The alternative is to
and face the political consequences
become a non-player
of that action.

financial
finance

Let me touch on one last issue for your consideration as you
decide the best policies for th future of your case study
The need to adjust to new domestic and international
country.

difficulties

economic

rests

with

both LDCs ad industrial

nations.

are insisting the LDCs adjust, then we must do so as well.
If
This means adjustment not only to higher oil prices, but also to
increasing competition from the advanced developing countries in
our markets, even aside from the present debt situation,
and to
current problems of industrial overcapacity in our basic
industries.
Bluntly put, can any nation fail to adjust when it
is losing comparative advantage to another section of the world
industry'?
in a particular
we

Community has done well at conserving
energy,
also done perhaps the least of the OECD nations in terms
of adjustment to the indirect effects of the oil price shocks and
The EC has barely begun to
over-expansionary
monetary policies.
reduce overcapacity and to accep~: the loss of comparative
The result is
advantage to the Japanese and LDCs of the world.
reflected in part in their weaker exchange rates vis-a-vis the
U. S. dol 1 ar .

The European

but has

have made
Very weak economic growth and soaring unemployment
anc'
icult.
economically
di
f
f
adjustment both politically
Although
some steps have been taken to «ncourage
the retraining of workers
ar ~ the reduction
of overcapaci ty, progress toward ".his objective
has been very slow.
In the interim, the EC's system nf

i."."ustrial subsidies,

import restraints,
and vari-ble levies and
export subsidies in the agricultural
area have increased the
for other (. ountries such as the United
burden of adjustment
States, Brazil, and Japan. I am sure you are familiar with the
steel and agricultural disputes which have recently plar. ued
U. S. -EC bilateral
relations, and I won't reiterate them here.

some observers here are now arguing
that we should
industrial policy model -- both to bring the EC, and
others, to the negotiating tabl , and to protect our own national
interests for the future. In s»ort, we should cartelize the
level, The so-called industrial policy
world at the governmental
debate will be an active issue en next year's political agenda, I

However,

mimic

the

sure

-15-

policy per se is subject to various

Industrial

definitions.

purpose is to help facil . tate economic change,
either through broad economic policies affecting all industries
or through specific measures aimed at particular industries that
are either:
(1) in decline, (2) injured by foreign competition,
or (3) growth industries of the future which need a boost to get
While these are noble sounding
ahead.
&bj ectives, in most forms
industrial policy in fact offers a theoretical cover for
protectionism, whether based on infant industry arguments or on
the need to match what foreign countries are doing.

Its ostensible

are:

questions

Key

(a)

Who

(b)

How

be helped?

should

ones?

policy proponents
Nascent

industries

to answer

or declining

should they be helped?
Through general tax
measures, targeted subsidies, or trade measures?
formula'?

for industrial

How

conceivable

do you cut

off help?

that under our system of government,

economists and industry advisers can answer all of
these questions properly, decide who, how, and when to intervene,
and also get government
out again when 't's the right time'? I
know of no example of government
policy that gives me optimism.

government

Has government
assistance
Have quotas,

in the past helped industries
to
or voluntary restraint agreements
And have they used
given industries
the needed time to adjust?
this time effectively -- or ended up by lobbying for more of the
same?
(Should we discuss the U S. textiles, shoe, auto, or
mushroom
industries?
Or perhaps specia ty steel -- a modern
well-managed
segment of our steel inudstry that is still hurting
today. Has government protection helped any of these'?)

tariffs,

adjust?

What

effective
subsidies

Ar e they
do expo r t subsid i es do to the budget'?
in increasing U. S. exports, or in matching foreign
to avoid a decline in potential U. S. exports?

The most

difficult issue is clearl}

when

foreign

governments'
intervention adversely affects the U. S. ability to
compete.
What should our policy be? Do we counter foreign
unfair practices, match them if our law= don't offer sufficient
leverage to force a change in their practices, try to negotiate
new international
rules to define what 'cinds of intervention are
fair? What are the effects of alternat ve approaches on the U S.
economy, world trade, and our own effor'. s to adjust?

These are not easy questions and I submit there are no
But I would caution
simple or even theoretically pure answers.
mimicking
before
the
United States
European practices,
that
first
at
succesthe relative
of those practices
should gook
within the EC in fostering the needed long-term adjustment -- and
o
then dpHrk~ W s i s r ea 1 1 y the route we wa.".

-16-

Polic

tions:

0
At

academic

Case Study

last, I

come to the real policy options
but
community may act as policymakers,

where

you

in the

will need to
in lignt of the current

consider the best alternatives
international
economic situation.
even

You have
given you

you should

disregard

the basic
some

general

keep in mind

any or

"facts" of

all of

-my

I' ve

the case before you.

policy considerations which I believe
you are of course free to
suggestions.
although

For purposes of constructing
our case model, let's imagine
that you are the Prime Minister of a rzythical foreign industrial
country in the current world situation.
In your nation imports
are increasing rapidly; unemployment
.:, s at a record level; your
currency has appreciated relatively to your principle export
markets currencies; protectionist
pressures are growing on all
fronts; exports are declining; the outlook for the trade deficit
is staggering; LDCs are clamoring for better market access to pay
off their ballooning debts; other countries are subsidizing
exports, aggravating your export losses. You live in the world I
have

described.

Assuming a docile, obedient Pari'ament,
no strong
constituencies, and no need
no single-interest
compromise, what policies should you choose to espouse?

groups,

interest
to

Assume you have to give a major TV address, focussing on the
current economic situation.
To prepare for the address -- and
set the path for your future policies -- you have called a
The Cabinet
meeting of the Cabinet to ask for their advice.
Trade, Finance,
conveneS.
Your Ministers of Labor, Agriculture,
So is your
Economics, and Foreign Affairs are all present.
personal economic counselor -- a trus';ed former economics
You have
professor from the University of Michigan, now retired.
asked the counselor to join you to give his objective opinion on
He has
the economic effects of the advice of your Ministers.
already won his Nobel Laureate and has no political aspirations
in either the United States or your country.
He sits at your
side during the Cabinet debate.

Before you can even formally call the Cabinet meeting to
order, your Labor Minister asks to speak. "Mister Prime
Minister, " he says excitedly, "we must, we absolutely must
protect our own industries.
These are our people who are
These people vote!"
not foreigners.
unemployed,

-17-

to increase domestic employment and production.
re losing jobs daily to the Japanese.
Our unemployment
rate
is at an unacceptable level. The unions are threatening a
general strike. " Now waving his arms, he says, "our nation can
help our people in several ways: through unilateral quotas,
adjusted monthly according to consumption forecasts, or
'voluntary foreign export restraints' which our country would
enfo rce. "
"We have

We'

"Also, existing restraints cn imports from developing
countries should be tightened anc sensitive imports monitored for
surges, especially that cheap specialty steel from Sweden and
Advanced industrial
countries should be graduated
from
Germany.
And finally, " says the
special duty-free import preferences.
Labor Minister, "bilateral aid should be tied exclusively to
purchases of our exports.
Oh yes, we do need new government
subsidies to import-competing
industries to help them to adjust
into new products, introduce new =apital equipment and retrain
workers. "
Your soft-spoken University
of Michigan counselor calmly
you that the costs of these measures would be increased
consumer prices and substantial
Unless
increase in inflation.
the domestic economy picks up, there will be few if any new jobs.
"Economic adjustment of protected industries will be delayed" he
says, "And with new import restraints on LDC goods, overall LDC
balance of payments and debt situations will worsen, possibly
financial crisis and seriously affecting
causing a major global
our banking system. "

advises

cautions

finally that

your

key

political

opponent

suggesting precisely this protectionist policy line to win labor
It will be very
support for the next election in two years.
tough to get blue collar support if you insist on maintaining
open markets, because the next opposition candidate for Prime
Minister is expected to promise more domestic jobs by increasing
"Frankly, Mr. Prime Minister, unless you make a
protectionism.
major effort to convince the public of the extreme dangers of
such shortsighted
measures, he may get the votes and all your
polic ies will be rever sed . "

this point,

ricult

'. e

Minister breaks in and
exports and
export subsidies to increase agricultural
"Net f~rm income, " he says "is now at
win back foreign markets.
its lowest point since the 1930s. We have huge government
stocks, which cost the budget billions in outlays to maintain.
And the outlook
Larg- quantities are spoiling in stvrage.
is for
"
next
dramatic production increases
year.
At

proposes

your

absolutely critical, " he argues, "that our country
dispose of heavy stocks which ove rhang the market in our
are producing our crops and
And the Latin Americans
products.
selling them in our overseas mark, ts. I also think" says the
Agriculture Minister, "that we shi~uld introduce a new system of
variable import duties which will protect domestic prices from
foreign competition. "

"It is

-18-

"Sir,
You turn' again to your special counselor.
He says,
these agricultural measures will only increase exports if foreign
countries don't match your export subsidies, an unlikely
assumption given their situation.
Or they may decide to use
subsidies to take away your markets in other third country
markets.
But because agricultural
goods are commodities that are
totally fungible, it's questionable whether any substantial net
new sales will take place at all.
You may a. so find that your
exports of non-agricultural
goods to competing agricultural
exporting countries, which your country depends on for
substantial export earnings, may be cut off in retaliation.
In
addition, " he says, "you may have to spend a lot of money,
causing a major increase in your budget deficit and contributing
to reinflation, higher interest rates, and fc reign exchange
movements.
New variable
import duties would isolate your market
"
,

and

raise

consumer

prices.

Your Trade Minister then leans forward, takes his pipe out
of his mouth and says what more and more trade ministers are
"Mr. Prime Minister, we must try to negotiate new
saying to him.
international
rules to deal with the current problems.
New rules
could legitimize selective import restraints where there are
rapid surges in imports due to currency appreciation.
Because
-you have little negotiating
leverage
with our own market being
pretty open -- you should bring others to the negotiating table
foreign export subsidies and countering unfair trade
by matching
practices at the border. '

The Trade Minister continues on with a plea for measures
identical to foreign import barriers affecting your major
exports, but de"igned to hit foreign countries on goods where it
will hurt.
It is his usual "get tough" reciprocity approach.
"Domestically, " he argues, "you should embark on a new path of
industrial policies to boost the growth of key industries and
maintain employment.
And you really should
ea e monetary policy
to reduce interest rates, which in turn will reduce the value of
our currency.
in the
This would be supplemented
by intervening
I'm sure the Japaneese do it
markets to drive the currency down.
to the yen. Ne need a weak currency so we can export. "

this point, the Trade Minister,
political con=ensus wi th the Parliament
At

who

;always

wants

interjects,

"Mr

to reach

Pr ime

reach a consensus agreement to divide the
It's the only modern
world's market- into quotas for everyone.
way.
Otherwise, the more efficient producers will be the only
ones to survive, and our most costly companies will either have
to be nationalized
Frankly, I think it' s
or further subsidized.
time we recognized that these economic decisions are far too
important to be decided on the basis of the supply, quality, and
price of goods. Only politicians can make international. economic
decisions. These decisions are far too important to be left to
what's best for
the citizens, political officials understand

Minister,

must

them

-19-

this point, you turn to the counselor. Throughout the
icy stares are being directed at him. But you call on him
"These approaches" he says, "could dramatically cut
again.
imports, but will increase domestic prices to everyone, delay
adjustment, and cause a substantial budget deficit increase.
Not
to mention the probability that foreign nations would likely
retaliate in kind, setting off a protectionist spiral, rather
than serious negotiations.
Trade wars triggered the great
depression worldwide.
Your Administration
would become
increasingly involved in business decisions, and tempers will
rise as industries line up for assistance, claiming they all can
be competitive with government
help. Exports may temporarily
increase once the value of the currency declines (with a 1-1/2
year time lag), but essential imports such as oil will become
more costly, aggravating
the trade deficit in the short term.
Nore importantly,
LDCs will suffer severely from loss of
markets, and probably be forced to default on debts owed to the
English banks ' where our own banks are so closely tied in the
London market.
It could pr ecipi tate a domestic financial crisis
here i f people lose conf idence in our banks because of the U. K.
situation. We would then lose deposit funds from our banks as
people sought safety in gold or United States Treasury Bills or
U. S. bank CDs or real estate.
This would drive down our currency
against the U. S. dollar, increase our cost of oil more than our
exports, and dry out the liquidity in our banks that need funds
to level out now.
If our people and multinational corporations
did withdraw these funds, we would face a capital flight crisis
and some of our ba .ks could collapse setting off a real
depression here -- at a minimum, there would be no increase in
domestic lending to 'our companies. "
At

room

Now it is the Finance Minister's
turn. He argues a free
trade approach; maintaining
as open a market as possible, and
demanding
compensation
(in the form of better market access for
other goods) from countries that impose import restraints.
He
turns to you directly and says, "Mr. Prime Minister, it is time
that we ask for a strong p. edge by all major countries to avoid
protectionism.
I am strongly opposed to any "quick-f ixes" in
either trade or sh= "t-term monetary policies. They don' t work.
We must
emphasize the need for long-term domestic and
international
adjustment to market forces. Ninimally
inflationary economic policies should be maintained. "

To help exports, the Finance Minister
proposes credit
g~»rantees rather than "ash subsidies, but urges that there

should
IMF

less conditionality

to assist

LDC

growth.

in international

borrowing

from

the

-20-

You turn once again to your economic counselor.
Recognizing
that at this point he is not about to win any popularity
contests, the advisor decides just to keep being forthright and
honest. He notes that there could be very costly political
repercussions from this course. "Economic improvement will occur
"Imports will continue to increase
only gradually, " he says.
rapidly; the trade deficit will rise astronomical]y; interim
will worsen until global growth -- including LDC
unemployment
-picks up. Other countries may not live up to the
growth
anti-protectionism " pledge if it has no teeth, worsening prospects
for your expo rts.

"What
Your Economic Minister now decides ta put his oar in.
really need, " he says, "is a change in the domestic policy
mix. We ought to ease monetary policy to reduce interest rates
and increase liquidity;
cut government expenditures; reduce the
budget deficit. " He goes on to recommend a general tax strategy
which will ease the adjustment
burdens for domestic industries
"Mr. Prime Minister, " he
and stimulate
investment and growth.
says, "you should keep your markets open to help lead the world
into economic recovery, recognizing the importance of our economy
to other nations' trade.
But let's tip the terms of trade in our
favor. "
we

Noting

countries

inflating,

ministers

the political/economic
pursue disinflationary

difficulties

caused

when

policies while others are

some

of economic
he argues for regular consultations
to assure better economic- policy coordination.

By this time, the Cabinet knows that after each statement
This time the
are going to turn to the man from Michigan.
old advisor quietly explains that -- under this scenario
interest rates should decline; as should the value cf your
currency, giving a boost to exports after a lag, as initial
J-curve increases import costs. Economic recovery will be
However,
hastened, with benefits for other countries.
protectionist pressures and unemployment will remain strong in
International policy
the interim.
The economy may reinf late.
coordination is unlikely to result in major immediate policy
i f pursued
changes and could run counter to national sovereignty
strongly.
you

Finally, your For eign Af fairs Minister proposes a new major
of U N. trade negotiations, trading a change in domestic
economic policies (to help lead other countries out of recession)
"Concessions" in policies
for trade access in foreign markets.
aiming at mutual
on both sides could be subject to consultations,
round

If not feasible, bilateral agreements to maintain
growth.
could b. sought
shares or voluntary restraint arrangements
relations.
in
political
minimize conflicts
He

increases

maintain

proposes

major debt reschedulings

market
to

to assis '.. LDCs',
pressure o. banks to

in bilateral foreign aid, and
the growth of new loans to LDCs.

-21-

the Foreign Minister finishes, heads turn again to your
advisor. "'&fell, " he says, "successful trade/economic
negotiations could have the same beneficial longer-term growth
effects as unilateral growth stimulus policies proposed by the
Economic Minister.
However, it is unlikely that economic and
trade ministers would agree to this kind of "swap". Bilateral
market share or "voluntary restraints" will have the same side
effects as protecticnist policies; increasing consumer prices and
delaying of adjustment.
Proposals to increase bilateral aid to
help LDCs will increase your budget deficit, probably cause the
central bank to increase the money supply and increase interest,
ratres. That will cause the currency to rise, which will hurt
exports and increase unemployment
in our export sensitive
industries
And, last, if you' re going to tell the banks who to
lend to and how much, they are going to want the profits and ask
the government
to ta ce any losses. That's like nationalization
the government is on the hook. "
As

personal

At
members

this point, you thank your economic counselor
of your Cabi:iet.

At the

tally.

end

of the meeting,

your

Ministers

They announce that they have reached
recommendation
for your action: you should

counselor.

He, obviously

does not understand

take a
a common

and

the

secret

fire your economic
political realities.

Now you leave the room with your faithful
speechwriter, Sir
What do you tell him to write?
Flak, to prepare your TV address
~

relative merits of each
However, let me leave
that will belie my policy

I will not attempt to delve into the
recommendations.
of the Cabinet Ministers'
you

bias

general observations
-- ifa few
it is not already clear

with

to you.

Virtually every country faces, to varying degrees, this kind
of internal policy c ebate. And it is usually, if not always, the
case that short run gains and long-term gains seldom run on the
faced with choosing one over the
same track.
One is usually
other.

Second, the lone-term value of a course of action is often
And this
to its immediate popularity.
inversely proportional
what
Because
this
case study
here.
issue
brings me to the reaL
courageous, political
is really all about is leadership:
leadership to take those actions which will redound to .the
long-term benef it of one' s country.
maximum

those hard decisions, and sticking with them, is not
But if
in
the Uni:ed States or in any other country.
easy here
system as
individual economies -- and therefore the international
to progress, the hard, tough political
a whole -- are to cor. tinue
must
be
made.
deci s ions simply
4
Making

-22-

of the current trade issues are closely linked to
slow domestic growth, high
macroeconomic problems:
of the dollar in the
appreciation
unemployment,
and the strong
past two years, which is now being reflected in increased U. S.
imports and declining U. S. exports.
Many

broader

Administration

The

to the

in many

is very sensitiv

e to these

problems

and

difficulties they are causing for workers and industries
sectors. We know that the auto industry is now

20 percent unemployment
and that capacity
utilization has dropped to 60-65 percent
Similarly, fo: the
steel industry, capac i ty ut i 1 i za t ion for 1982 to date is
estimated at 50 percent, losses are proj ected to exceed ~3
billion, and 40 percent of the workforce is on layoff or working

experiencing

short weeks.

These are sobering

quick-fixes

that bring

statistics. But
immediate relief.

can't

promise any
have reached an
on steel which should help
we

the European Community
the problems of injury due to dumped or subsidized
And we will be discussing
the issue of japanese auto
imports.
restraints for the third year of its restraint program in the
We have tried
to be
We have not been purist.
months ahead.
with

agreement
deal with

pragmatic.

But the trade

measures

have taken

for these industries

need to
not offer a panacea.
They do not address the fundamental
adjust to increasing global competition, to improve U. S.
The
productivity, and to meet the challenge of new technologies.
the
auto
industry
increasing use of plastic i»stead of steel in
will have a profound affect on the steel industry in the ~. uture;
its impact is already felt. Similarly, automation and the
increasing use of robotics in automobile production will
ultimately mean fewer workers per car produced -- and these
somewhere else.
workers need to be able to find employment

will be vigorous in defend ing U. S
The U. S. Government
But this
industries against unfair foreign trade practices.
doesn't mean there will be no pain. The U. S. , just like any LDC
The ZC must
the need to adjust.
or other nation, cannot escape
'
recognize that it may be on he very verge of choosing a
protectionist path that will re"ult in its long-term industrial
Today there can be no long-term
decay rather than recovery.
Those who argue for short-term
economic future alone.
self-serving protectionist policies have neither read history nor
Loss of comparative
fully understood today's integrated world.
advantage is politically pai.-. ful, but domestic political actions
can' t restore an international
comparative advantage
~

without

effects

costs
on

and

reactions.

other domestic

the actions can have adverse
through increased inflation.

And,

groups

to face these facts. We also have to recogr. ize the
States will lead the global economic
the
. United
fact that
next
that
and
year other nations wi 11 grow more slowly
recovery
-S.
resulting
in slower growth in U. S. expor:s than
U.
the
have

zmpor

ts.

-2 3-

This will be compounded by the short-term adjustment of LDCs
to their current debt problems.
New credits will be provided.
Resched ul ings wi 1 1 take place.
The U. S. trade deficit will grow substantially:
from about
billion i~ 1982 to perhaps $75 billion in 1983. The current
account will ~iso sharply deteriorate.
We can' t. unilaterally
change this —- even the U. S. is influenced by other nations'
actions.
I began this lecture with a broad analysis of what happened
in the international
economy during the 1970s and the early part
of this decade. I then moved to the rather parochial policy

$40

decisions

Why'?
Most
What links the two?
country.
that international
economic policy comes as the
result of intr rnational meetings -- that the upcoming GATT
Ministerial, f or example, can alone set the framework for trade

think

people

a mythical

relations.

I would contend that international
economic policy is
it
actually something quite different:
is the aggregate of all
the separate decisions -- whether labeled international
or
domestic policy -- taken in individual
countries that taken
economy.
together determine the future of the international
The

trade ministers

of the

GATT

countries

may

meet

in Geneva

all pledge to avoid trade protectionism.
But if they then go
and impose import restrictions
or agree to voluntary
restraint arr-ngements or subsidize exports because of political
pressures, what happened in Geneva will not really matter at all.
The United States must take the lead in opposing further
protective measures in response to domestic trends. We must
provide the mom, ntum toward further liberalizing
of the world' s
trading system.
Our own economic growth and future prosperity
and that of o her nations with which is integrally
related -- is
too important to risk setting off a trade war, and imperiling
global economic recovery in the process.
If we ar to continue to be the political and economic
and
home

leader of the Free World we must eschew the easy political
choices and demand the hard economic adjustment -- of ourselves,
of the OECD countries, and the G-77. It is our obligation.
Indeed it is a test, because the poor and hungry of the world
look to the United States for future hope and for help in
We will
not turn our back on the LDCs
economic development.
regardless of the posture of our Japanese or EC partners take in
Geneva.

The United

opportuniti

States will exercise the responsibility

not abdicate

leadership,

And,

call

to short-term
on

all

who

political

seek economic

prosperity to join us in preserving, enhancing, and accelerating
trade and
the inexorable linkage of the world's integrated
financial syst m.

Department

of the Treasury

FOR IMMEDIATE

November

RELEASE

15, 1982

O. C. ~ Telephone 566-2041

Washington,
CONTACT:

INTERNATIONAL

Steve Hayes
202/566-2041

TRADE

Deputy Secretary of the Treasury R. T. McNamar today
said that "isolationism in trade -- or other economic policies
is virtually infeasible
and totally unacceptable
as a policy
"

prescription.

to the University of Michigan Business School
said, "The very real danger is that individual
governments will choose the course of economic isolationism
on the basis that their own 'domestic'
economic situation
makes it politically impossible to make any major new commitments to the open trading system -- or even to uphold present
"The GATT Ministerial decision
ones fully, " McNamar said.
may well set the tone of international
economics, and
therefore international political relations generally for
the rest of the 20th century. "
"Today the world watches the United States, Japan, and
the European Community to see whether they will assume or
abdicate their role as world economic leaders. Each is
vulnerable to abdication.
Each has opportunities
to lead.
The U. S. faces intense domestic political pressures to avoid
adjustment to new economic realities and loss of comparative
advantage in some established industries.
This has led to
calls for further subsidizing its industries.
Japan is
threatened with exclusion from its U. S. and EC markets unless
it assumes the full measure of international economic responsibility and liberalizes its policies on imports. And, with
record unemployment rates in the EC, coupled with recent
political polarization, there is a distinct possibility that
the EC will continue its pro-protectionist
trends, turn its
back on the developing nations of the world in its futile
search for domestically politically popular, economically
short-sighted policies. Indeed, it is fair to ask whether
Western liberal democracies can maintain both an open market
and free trade consumer welfare policies in the face of
"
today

Speaking

McNamar

today's challenges.

collective response to the developing countries'
will be crucial to the future of the international financial system, and the actions we take " in the trade
area should in no way jeopardize this situation.
"The less developed nations must be able to import the
equipment and energy-needed
goods to continue their domestic
"This will require net new
economic growth, " McNamar said.
"The

debt problems

their export markets in the inAll are necessary to preserve the
economic gains necessary to underpin the Free World' s
political stability. "
financing,

dustrialized

and preserving

countries.

"Trade measures adopted because of the transient political
imperative of the moment only defer the inevitable economic
adjustment, "he said. "Protectionist measures only deal with
the symptoms of problems -- import penetration, weak exports,
loss of comparative advantage -- not their underlying causes.
More to the point, all industrial
and developing nations
cannot simultaneously
restrict imports and increase "exports'
Each nation's export is some other nation's import.
"The European Community has done well at conserving
energy, but has also done perhaps the least of the OECD
nations in terms of adjustment to the indirect effects of
the oil price shocks and over-expansionary
monetary policies, "
"The EC has barely bequn to reduce overcapacity
McNamar said.
and to accept the loss of comparative advantage to the
Japanese and LDCs of the world. The result is reflected in
part in their weaker exchange rates vis-a-vis the U. S. dollar. "
"The U. S. trade deficit will grow substantially;
from about
billion
in 1982 to perhaps $75 billion in 1983. The current
$40
We can't unilaterally
account will also sharply deteriorate.
change this -- even the U. S. is influenced by other n itions'
actions. "
"I would contend that international economic policy is. . .

of all the separate decisions
international or domestic policy -- taken in individual
determine the future of the
countries that taken together
"
he
said.
international economy,
the aggregate

"The trade ministers

of the

GATT

countries

whether

may

labeled

meet in

But if
all pledge to avoid trade protectionism.
restrictions
home
and
import
or
then
impose
agree
they
go
to voluntary restraint arrangements or subsidize exports because of political pressures, what happened in Geneva will
"
Geneva

and

not really matter at

all.

Department

of ihe Treasury

Washington,

D.C. e Telephone 566-2041
I

FOR RELEASE AT

4:00 P. M.

November

16, 1982

TREASURY'S WEEKLY BILL OFFERING

of the Treasury, by this public notice,
two series of Treasury bills totaling
approximately $11,200 million, to be issued November 26, 1982.
This offering will provide $750
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ 10, 449 million, including $1, 286 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2, 307 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
90 -day bills (to maturity date) for approximately
$5, 600
million, representing an additional amount of bills dated
and to mature February 24, 1983
(CUSIP
February 25, 1982,
in the amount of $j, 0, 790
No. 912794 BZ 6), currently outstanding
million, the additional and original bills to be freely
The Department

invites tenders

for

interchangeable.

181-day bills for approximately
26, 1982,
and to mature
No. 912794 CV 4)

November

$5, 600 million, to
May

26, 1983

be issued

for cash

be dated
(CUSIP

Both

series of bills will

and

in exchange

Tenders from
for Treasury bills maturing November 26, 1982
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will be accepted at the
Addiweighted average prices of accepted competitive tenders.
Federal
bills
be
issued
to
Reserve
Banks,
tional amounts of the
may
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
Both series of bills will be
will be payable without interests
issued entirely in book-entry form in a minimum amount of $10,0pp
and in any higher $5, 000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Tr easur y.
R-1029

Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C20226, up to 1:30 p.m. , Eastern Standard time, lvfonday,
November 22, 1982.
Form PD 4632-2 (for 26-week serzes) 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 .
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 three decimals, e .g . , 97 .920 . Fractions may not be used
and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
if the names of the
may submit tenders for account of customers,

customers and the amount for each customer are furnished . Others
Each
are only permitted to submit tenders for their own account
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 as of 12:30 p .m . Eastern
Such positions would include bills
time on the day of the auction.
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
No

in the auction

deposit need accompany

tenders

from incorporated

banks

accompanies

the tenders

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
in cash or other immediately-available
funds
on November 26, 1982,
or in Treasury bills maturing November 26, 1982. 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.

amount

the excess gain

of the Treasury Circulars, Public Debt Series
27-76,
and this notice, prescribe the terms of
Nos. 26-76 and
and
these Treasury bills
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
Department

Debt.

of the rreasury

department

FOR RELEASE AT

Washington,

4:00 P. M.

O.C. ~

telephone S66-2040

November

16, 1982

TREASURY TO AUCTION $5, 000 MILLION
OF 5-YEAR 2-MONTH NOTES

of the Treasury will auction $5, 000 million
of
notes to raise new cash. Additional amounts
of the notes may be issued to Federal Reserve Banks as agents for
foreign and international monetary authorities at the average price
of accepted competitive tenders'
The Department

5-year 2-month

Details about the new security are given in the attached
of the offering and in the official offering circular'

highlights

Attachment
oOo

R-1030

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED DECEMBER 2, 1982

16, 1982

November
Amount

Offered:

To the

publxco ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

~ ~ ~

of Security:
security. . . .
designation. .

Description

Term and type of
Series and CUSIP

5-year 2-month notes

Series G-1988

(CUSIP No. 912827

.... .... .
Interest rate. . . . . . . . .

Maturity date.
Call date. . . .

February
No

Premium

Interest

the average

... .
...

15, 1988

provision

based on

To be determined

Investment salerno
yield.

$5 000 million

of accepted bids

To be determined
at auction
after auction
To be determined
August 15 and February 15 (first
payment on August 15, 1983)

~ ~

or discount.

dates.
Minimum denomination
available. . . . . . $1, 000
Terms of Sale:
payment

Method

Accrued

investor.

. .. . . . . . . . . . . .
by
...... .................
allotment. . . . . . . . . . . . .
~

interest payable

Preferred

by non-institutional
investors. . . . . .

Payment

Deposit guarantee by
designated institutions.
Key

Dates:

Deadline

.......... ...

Yield auction

None

Noncompetitive
$1, 000, 000 or

due from

( f inal payment
institutions)

date

a) cash or Federal funds. . . . .
b) readily collectible check.

Delivery date for coupon

securities. .

to be submitted

Full payment

with tender

Acceptable

for receipt of tenders . . ~. . . Tuesday,

Settlement

bid for

less

November
EST

1:30 p. m. ,

23, 1982,

Thursday, December 2, 1982
Tuesday, November 30, 1982
Wednesday,

December

15, 1982

Department

of the Treasury

FOR IMMEDIATE

Washinciion, O.C. ~ Telephone 566-2041
17, 1982

November

RELEASE

RESULTS OF AUCTION

OF 2-YEAR NOTES

of the Treasury has accepted $6, 753 million of
of tenders received from the public for the 2-year
notes, Series Y-1984, auctioned today. The notes will be issued
November 30, 1982, and mature November 30, 1984.
The Department

j-4i528 million

The interest rate on the notes will be 9-7/8%.
The
range of accepted competitive bids, and the corresponding
the 9-7/8% interest rate are as follows:

Prices
100. 044
99. 902

Bids

9. 85%

Lowest yield

yield
Average yield
Highest

Tenders

at the high yield

93-

9. 91%
were

New

York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury

Totals
The

$6, 753

of noncompetitive
from the publica

99. 938

allotted 96%.

TENDERS RECEIVED AND ACCEPTED

Location
Boston

prices at

Rece ived
76, 630
12, 059, 925
95, 900
247, 265

97, 515
89, 240
952, 205
155, 450
57, 930
69, 975
24, 000
596, 115
6, 155
$14, 528, 305

(In Thousands)
$

Accepted
65, 550
5, 358, 495
75, 900
206, 025
65, 455
62, 660
432, 860
131,330
47, 930
68, 955
18, 000
213, 995
6, 155

$6, 753, 310
million of accepted tenders includes $1, 258 million
tenders and $5, 495 million of competitive tenders

In addition to the $6, 753 million of tenders accepted in the
auction process, $280 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
An additional
$437 million of tenders was also
monetary authorities.
accepted at the average price from Government accounts and Federal
Reserve Banks for their own account in exchange for maturing securities.

R-1031

department

of the Treasury

FOR RELEASE AT

12:00

Washington,

NOON

TREASURY'S

D.C. e Telephone %66-2041
November 19, 1982

52-WEEK BILL OFFERING

of the Treasury, by this public notice,
for approximately $7, 000 million of 364 -day
bills to be dated December 2, 1982, and to mature
1, 1983 (CUSIP No. 912794 DF 8). This issue will
about $1, 800 million new cash for the Treasury, as the
52-week bill was originally issued in the amount of
million.

The Department

invites tenders
Treasury
December

provide

maturing
$5, 194

bills will be issued for cash and
bills maturing December 2, 1982.

in exchange for
In addition to the
maturing 52-week bills, there are $10, 450 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition
of this latter amount will be announced next week.
Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold $1, 705 million, and Federal
Reserve Banks for their own account hold $3, 531 million of the
maturing bills.
These amounts represent the combined holdings of
such accounts for the three issues of maturing bills.
Tenders from
Federal Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the weighted
Additional amounts
average price of accepted competitive tenders.
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
For purposes of
aggregate amount of maturing bills held by them.
determining
such additional amounts, foreign and international
million
monetary authorities
are considered to hold $375
of the original 52-week issue.
The

Treasury

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,
Form PD 4632-1 should be used to submit
November 24, 1982.
tenders for bills to be maintained on the book-entry records of
the Department of the Treasury.
R-&O32

Each tender must be for a minimum of $10,000 . Te„ders 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 ]00,
with three decimals, e .g . , 97 .920 . Fractions may not
and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities

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 as of 12:30 p m Eastern
time on the day of 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 .

may

. .

of the bills applied for
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
Payment for the full par amount
must accompany all tenders submitted

tenders

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 December 2, 1982,
in cash or other immediately-available
funds
or in Treasury bills maturing December 2, 1982 '
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.

amount

is determined by multiplying such discount by a fraction, the
of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bilk . If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.
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
numerator

Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

FOR INNEDIATE

The Treasury

RELEASE NOVEMBER

announced

22, 1982

today that the 2-1/2 year

Treasury

yield curve rate for the five business

November

22, 1982, averaged

five basis points.
in

effect

~PQ

rounded

Ceiling rates based

from Tuesday,

to the nearest

this rate will

23, 1982 through

November

days ending

&monday,

6, 1982.
Detailed rules as to the use of this rate in establishing
the ceiling rates for small saver certificates were published
in the Federal Register on July 17, 1981.
Small saver ceiling rates and related information is
available from the DIDC on a recorded telephone message.
The phone number is (202)566-3734.
December

Approv

Francis X. Cavanaugh
Director
Office of Government
Narket Analysis

Finance

Ielsartment oy the Treasury ~ Washington,
FOR IMMEDIATE

Telephone 566-2O4%

D.C.

November

RELEASE

22, 1982

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

for $5, 606 million of 13-week bills and for $5, 601 million of
both to be issued on November 26, 1982, were accepted today.

Tenders

bills,

26-week

OF ACCEPTED
COMPETITIVE BIDS:

RANGE

High
Low

Average

at the
at the

Tenders
Tenders

13-week bills
maturing February 24, 1983
Discount
Investment
Price
. Rate
Rate 1/
98. 025 7. 900/
8. 17%
98. 012 7. 952%
8. 23%
98.014 7-944/
8. 22%
low
low

26-week bills
Ma
maturing
26, 1983
Investment
Discount

Price

Rate

95 952

8 051/

Rate 1/

price for the 13-week bills were allotted
price for the 26-week bills were allotted

51/

95. 900 8. 155%
95. 923 8 . 109% 2/

8.62%

8 57%

83%.
5%.

TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Location

Received
71, 065
$

Boston
New York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St. Louis
Minneapolis
Kansas

City

Dallas
San

Francisco

Treasury
TOTALS

Competitive
Noncompetitive

Subtotal,

Public

Federal Reserve
Foreign Official

Institutions
TOTALS

10, 954, 240
28, 860
71, 710
34, 330
55, 385
908, 710
42, 620
15, 795
40, 685
35, 295
829, 680
221, 645
$13, 310, 020

ted:
:
51,

Received

~Acce
$

835

4, 882, 045
28, 860
44, 725

33, 980
49, 685
117, 430
38, 870
8, 795
38, 370
25, 295
64, 130
221, 645
$5, 605, 665

:
:
:
:

66, 680
34, 640
5'4, 775

:
:
:

26, 635
889, 840
37, 300
46, 380
37, 910
16, 205
714, 865

:
:
:
:
:

64, 725
8., 867, 055

200, 955
$11,057, 965

37, 910
16, 205
379, 865
200, 955
$5, 600, 965

$3, 358, 765
671, 700
$4, 030, 465
1, 150, 000
420, 500
$5, 600, 965

$10, 869, 780
957, 340
120
827,
$11,
1., 156, 600

$3, 165, 425
957, 340
$4, 122, 765

1, 156, 600

8, 815, 765
671, 700
465
487,
9,
1, 150, 000

326, 300

326, 300
$5, 605, 665

420, 500
$11,057, 965

$13, 310, 020

Accepted
60, 975
$
4, 275, 305
41, 680
28, 640
39, 775
26, 635
409, 840
37, 300
45, 880

coupon-issue yields
1/ Equivalent
the maximum
2/ The four-week average for calculating
market
certificates is 8. 319%.
on money

interest rate payable

yepartment

of ihe Treasury

FOR IMMEDIATE RELEASE
'
Nedne sday, l'ovember 24', 1982

Was¹ngton,

O.C. ~ Telephone 566-2041

CONTACT:

Charles Powers
202/566-2041

TREASURY DROPS TAX PROPOSAL

Secretary of the Treasury Donald T. Regan today
that the Treasury Department has dropped its
plans to go forward with the proposal to require individuals
to make deposits of estimated taxes directly with banking
institutions through the Federal Tax Deposit (FTD) system.
about 10 million individuals
Under existing regulations,
tax payments to IRS service centers.
now make estimated
announced

that, after further review, it has
the proposed estimated tax payment regulations
could create undue complications for individual taxpayers
Regan explained

been decided
and

financial

R-1034

institutions

at this time.

|epartment of the rreasIIry ~ washington,
FOR IMMEDIATE

RELEASE

o.c. ~ Telephone
November

RESULTS OF AUCTION

5- YEAR

2-MONTH

S66-2048

23, 1982

NOTES

The Department of the Treasury has accepted $5, 004 million
of $10, 184 million of tenders received from the public for the
5-year 2-month notes, Series G-1988, auctioned today. The notes
will be issued December 2, 1982, and mature February 15, 1988.

interest rate on the notes will be 10-1/8%. The range
bids, and the corresponding prices at the
10-1/8% interest rate are as follows:
The

of accepted competitive

Prices
99. 684

Bids

10. 18% 1/
10. 23%
10.21%

Lowest yield

yield
Average yield
Highest

Tenders

at the

high yield were

allotted 18%.

TENDERS RECEIVED AND ACCEPTED

Location
Boston
New

York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas

San

Francisco

Treasury

Totals

99. 486
99. 565
(In Thousands)

Received
37, 831
8, 472, 575

40, 046

31, 743
51, 908

Accepted
19, 525
4, 501, 290
25, 946
19, 463

32, 448

28, 156
900, 222
73, 265
27, 880
22, 551
25, 882
470, 434

16, 336
199, 062

$10, 184, 327

$5, 003, 936

1, 834

The
$ 5, 004 million of accepted tenders
million of noncompetitive
tenders and $4, 126
tive tenders from the public.

64, 445
20, 880

21, 551
5, 962
75, 194

1, 834

includes $878
million of competi-

In addition to the $5, 004 million of tenders accepted in the
auction process, $20 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international monetary authorities.
1/ Excepting 1 tender of $15, 000.
R-1035

department

of the Treasury

FOR RELEASE AT

4:00

Was¹ngton, D.C.

Telephone S66-204'

November

23, 1982

TREASURY'S WEEKLY BILL OFFERING

of the Treasury, by this public notice,
for two series of Treasury bills totaling
approximately $11,600 million, to be issued December 2, 1982.
This offering will provide $1, 150 million of new cash for the
Treasury, as the matur'ing bills were originally issued in the
amount of $10, 450 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $5, 800
million, representing an additional amount of bills dated
September 2, 1982,
and to mature March 3, 1983
(CUSIP
No. 912794 CL 6), currently outstanding
amount
in the
of $5, 512
million, the additional and original bills to be freely
interchangeable.
The Department

invites tenders

182-day

bills for

approximately

December 2, 1982,
(CUSIP No. 912794 Cw 2

dated

and

$5, 800 million, to

to mature

June 2, 1983

Both series of bills will be issued for cash and in
exchange for Treasury bills maturing
December 2, 1982.
In
addition to the maturing 13-week and 26-week bills, there are
$5, 194 million of maturing 52-week bills. The disposition of
this latter amount was announced last week. Federal Reserve
Banks, as agents for foreign and international
monetary
authorities, currently hold $1, 736 million, and Federal Reserve
Banks for their own account hold $3, 546 million of the maturing
bills. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills.

to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing bills
held by them.
For purposes of determining such additional

authorities,

foreign and international monetary authorities are
to hold $1, 361 million of. the original 13-week and
26-week issues'
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $10,000
on the records either of the
and in any higher $5, 000 multiple,
Banks
and
Reserve
Branches,
or of the Department of the
Federal
Treasur y.
amounts,

considered

R-1036

Tenders will be received at Federal Reserve manas and
Branches and at the Bureau of the Public Debt, Washington,
20226, up to 1:30 p.m. , Eastern Standard time, Monday,
November 29, 1982.
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

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 three decimals, e .g . , 97 .920 Fractions may not be used.
and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
for account of customers, if the names of the
may submit tenders
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 as of 12:30 p .m . Eastern
time on the day of 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

accompanies

the tenders

Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Competibidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
~

Settlement

for accepted tenders

for bills to be maintained

on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 2, l982,
in cash or other immediately-available
funds
bi.
lls maturing December 2, 1982.
or in Treasury
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.

Section 454(b) of the Internal Revenue Code, the
of discount at. which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
Under

amount

the excess gain

of the Treasury Circulars, Public Debt Series
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
Department
Nos. 26-76 and

Debt.

27-76,

pepartnlent

of ihe Treasury

FOR RELEASE AT

12:00

Washington,

D.C. e Teleiehone 566-204$
November

NOON

TREASURY OFFERS $8 i 000 MILLION
CASH

MANAGEMENT

26, 1982

BILLS

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $8, 000 million, as follows:

bills (to maturity date) for approximately $5, 000
1, 1982, representing an additional
amount of bills dated July 22, 1982, and to mature January 20, 1983
(CUSIP No. 912794 CG 7), and
143-day bills (to maturity date) for approximately $3, 000
million, to be issued December 6, 1982, representing an additional
amount of bills dated October 28, 1982, and to mature April 28, 1983
50-day

to be issued December

million,

(CUSIP No.

912794

1).

Competitive tenders will be received at all Federal Reserve
Branches up to 1:30 p. m. , Eastern Standard time, Tuesday,
November 30, 1982. 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.
Banks and

Noncompetitive
tenders from the public will not be accepted.
not be received at the Department of the Treasury,

Tenders will
Washington.
The

bills will be issued on a discount basis under competiand at maturity their par amount will be payable
interest. The bills will be issued entirely in book-

tive bidding,

without
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. Additional amounts of the bills may be issued to Federal
Reserve Banks as agents for foreign and international
monetary

at the average price of accepted competitive tenders.
and dealers who make primary markets
Banking institutions
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.
should reflect positions held as of 12:30 p. m. ,
This information
authorities

Eastern
R-1037

time, on the day of the auction.

Such

positions

would

include

bills acquired

through

"when

issued" trading,

and

futures

as well as holdings of outstanding bills
and forward transactions
e. g. , bills with
with the same maturity date as the new offering;
six-month
bills.
as
fered
of
previously
three months to maturity
and
securities
Government
in
markets
Dealers, who make primary
York
their
Ilew
positions
of
Bank
Reserve
report daily to the Federal
tenders for
in and borrowings on such securities, when submitting
whose
each
customer
for
tender
separate
customers, must submit a
million.
exceeds
offered
$200
being
net long position in the bill
t!o deposit need accompany tenders from incorporated banks
and recognized dealers
and trust companies and from responsible
of
2
percent of the par
A deposit
in investment securities.
tenders for such
must
accompany
for
amount of the bills applied
of
payment by an
guaranty
bills from others, unless an express
the
tenders.
accompanies
incorporated bank or trust company

Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Those
will be advised of the acceptance or rejection
submitting tender
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 Llednesday, December 1, 1982, for the
50 —day bills and on Nonday, December 6, 1982, for the 143-day bills.

Section 454(b) of the Internal Revenue Code, the
discount at which these bills are sold is considered
to accrue when the bills are sold, redeemed, or otherwise disposed of. Section 1232(a)(4) provides that any gain on the sale
or redemption of these bills that does not exceed the ratable
share of the acquisition discount must be included in the Federal
income tax return of the owner as ordinary income.
The acquisition discount is the excess of the stated redemption price over
the taxpayer's basis (cost) for the bill. The ratable share of
this discount is determined by multiplying such discount by a
fraction, the numerator of which is the number of days the taxpayer held the bill and the denominator of which is the number
of days from the day following tne taxpayer's date of purchase
to the maturity of the bill. If the gain on the sale of a bill
exceeds the taxpayer's
ratable portion of the acquistion discount, the excess gain is treated as short-term capital gains
Under
amount. of

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 may be obtained from any Federal Reserve
Bank

or Branch.

department

of the Treasury

~ Washinciton,

Release
Friday, November 26, 1982

For Immediate

TREASURY

SEEKS CLARIFICATION

Contact:

OF SUBCHAPTER

p.c. ~ Telephone 566-2041
Charles Powers
(202) 566-2041
S REVISION ACT

The Treasury Depar tment today announced
that it will seek a
technical correction to the Subchapter S Revision Act of 1982
relating to when a Subchapter S corporation may have a taxable
year other than the calendar year.
This technical correction
will make it clear that the election of Subchapter S status by a
corporation with a taxable year other than the calendar year will
not be effective unless the election was made on or before
October 19, 1982, or the Secretary of the Treasury approves such
taxable year.

The Subchapter
S Revision Act generally
requires that a
corporation electing Subchapter S status may not have a taxable
year other than the calendar year unless the corporation
establishes a sufficient business purpose for such taxable year.
An exception
to this ru] e permits a Subchapter S corporation
that has a taxable year other than the calendar year, which
taxable year includes December 31, 1982, to retain its taxable
year until more than 50 percent of its stock is transferred.
The Treasury Department
believes that Congress did not intend for
this exception to apply to corporations electing Subchapter S
status after the date of enactment of the Subchapter S Revision
Act (October 19, 1982). Accordingly,
the Treasury will, at the
earliest possible time, seek a technical correction to the
Subchapter S Revision Act to make this exception applicable only
to corporations that had elected Subchapter S status on or before

October

R-1038

19, 1982.

of the Treasury

Oepartment

FOR IMMEDIATE

was¹ngton,

RELEASE

D.C. 0 Telephone %66-204%
November

24, 1982

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION

Tenders

to mature
as follows:

and

for $7, 001 million of 52-week bills to be issued December 2, 1982,
The details are
December 1, 1983,
were accepted today.

OF ACCEPTED COMPETITIVE

RANGE

BIDS:

Price

Discount Rate

Low

91.585
91.507

Average—

91 535

8. 323%
8. 400%
8. 372%

High

Tenders

at the

low

Investment Rate
Coupon-issue

(Equivalent

Yield) 1/

9.01%
9. 10%
9.07%

price were allotted

3%.

TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Location
Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago
St. Louis
Minneapolis
Kansas City

Received

Accepted

710
$43,
11,676, 995

710
$28,
-6,

2, 880
84, 975
46, 115
32, 235
005
122,
1,
58, 370

2, 880
71, 975
46, 115

9, 400
20, 425

Dallas
San Francisco
Treasury
TOTALS

8, 020
744, 290

016, 095

31, 735

492, 535
32, 370
9, 390
17, 940
6, 020
210, 320
34, 570

34, 570
$13, 883, 990

$7, 001, 155

$12, 081, 295

$5, 198, 460

Type

Competitive
Noncompetitive

Subtotal,

Public

Federal Reserve
Foreign Official

Institutions
TOTALS

R-1039

202, 695

1, 300, 000

$5, 401, 155
1, 300, 000

300, 000

$13, 883, 990

$7, 001, 155

annual investment yield is 9-27%. This requires an
investment yield on All-Savers Certificates of 6. 49%.

1/ The average

annual

202, 695
$12, 283, 990

pepartment

of the Treasury

FOR RELEASF, AT

Tuesday,
UNITED

washinyton,

10:00 A. M

November

O.C. ~ Telephone 566-2041

CONTACT:

30, 1982
$10 MILLION
COIN SALES

STATES OLYMPICS RECEIVE

Robert E. Nipp

(202)566-2133

FROM COMMEMORATIVE

Treasurer of the United States Angela M. (Bay) Buchanan
presented checks totalling $10 million today to representatives
of the United states Olympic Committee (USOC) and the Los Angeles
Olympic Organizing Committee (LAOOC).
The funds were generated
coins since the limited
by advance sales of Olympic commemorative
pilot introduction of the program in mid-October.
The Olympic

Commemorative

Coin Act passed by Congress

earlier this year authorized a 1983 silver dollar, a 1984 silver
dollar, and a 1984 ten-dollar gold coin -- the first gold coin
issued by the United States in over fifty years. The legislation
specified surcharges of $10 on each of the two silver coins and
$50 on the gold coin to provide financial support for the
training of young American athletes and for the staging and

of the Los Angeles Olympic games.
and
Roy Ash, former director of the Office of Management
Budget and Vice Chairman of the LAOOC and Bob Kane, past
President of the USOC, accepted the two $5 million checks on
behalf of their Olympic organizations.
The
The coins will be produced by the Bureau of the Mint.
selling price is equal to face vajue, plus the cost of issuinq
such coins (including labor, materials, dyes, use of machinery,
All sales shall include the Olympic
and overhead expenses).
surcharge and the proqram will result in no net cost to the
United States Government or to the American taxpayer.
In recognizing this new means of financial support for the
Olympic games, Secretary of the Treasury Donald T. Regan said:
"We are encouraged
by the stronq support within the numismatic
We
the
growing interest of the general public.
community and
look forward to increasing sales as a broad based marketing
and as these coins are offered outside
program goes nationwide,
promotion

the United States. "

Treasurer Buchanan reported that as of Friday, November 26,
the Bureau of the Mint had received initial orders for 630, 000
coins. Gross sales totalled $47. 6 million, with surcharges
amounting to $10.9 million earmarked for the Olympic Committees.
More than 40 percent of the orders are for the complete

three-coin

set.

Proceeds from the sale of U. S. Olympic commemorative coins
are to be shared equally by the United States Olympic Committee
Funds received
and the Los Angeles Olympic Organizing Committee.
athletes,
to
the
USOC
U.
S.
are
train
designated to
Olympic
by
support local or community amateur athletic programs, and to
erect facilities for the training of such athletes. The IAOOC
will use its share of the funds to help stage and promote the
1984 (July 28-August 12) Olympic games to be held in the United

States at Los Angeles.

Preliminary designs for the three commemorative coins were
introduced October 14 by Treasurer Buchanan.
Today she
introduced the final two-dimensional
rendering of the new 1983
silver dollar designed by Elizabeth Jones, Chief Sculptor and
Engraver of the United States. The obverse is a representation
of a Greek discus thrower, and the reverse is the upper torso of
an eagle.
This coin will be available shortly after the first of
the year, Buchanan said.
The

initial orderinq period

announced

last

month

has been

31, 1982. Prices are $24. 95 for the
1983 silver dollar, $48 for the 1983 and 1984 silver dollars, and
$352 for the two silver dollars and the 1984 ten-dollar gold
In
coin. Prices after December 31 have not been established.
event
the
a significant increase in bullion prices should occur,
the Mint reserves the right, to discontinue the acceptance of
orders. Once an order is accepted by the Mint, however, it will
not be cancelled. due to changes in bullion prices. Orders for
the coins should be directed to Bureau of the Mint, 55 Mint
Street, San Francisco, CA 94175.
extended

through

December

Depclrt~ent 5f the treasury
FOR

I~M~

n. c. o Telephone 566-204$

Washington,

29, 1982

November

RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $5, 800 million of 13-week bills and
26-week Milan both to be issued on December 2, 1982,
OF ACKPC171D

RANCE

COHPETiTIVE

BIDL'!

Kgh
Low

Aver'age

a/ Excepting

b/ Excepting

Tenders
Tenders

for $5, 801 million of
were accepted

today-

26-week bills
maturing
June 2 1983
Investment
Discount
Rate 1/
Price
Rate

13-week bills
maturing
March 3 1983
Discount
Investment

I/:

Price
Rate
Rate
8. R7/
8. 93%
95. 735 b/ 8. 436%
97. 931 a/ 8. 183%
8. 64%
9.06%
95. 678 8. 549%
97. 892 8. 339%
8. 57%
95. 697 8. 511% 2/ 9.02%
97. 907 8. 280%
1 tender of $500, 000.
1 tender of $590, 000.
at the low price for the 13-week bills were allotted 2%.
6t the low price for the 26-week bills were allotted 90%.
TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Location
Boston
New York

Philadelphia
Cleveland
Hchmond
At), inta

Chicago

Stt Louis
Minneapoiis
Kansas

City

Dallas
San 1PrancisCo

Treasury
TOTALS

Received
26, 310
$
8, 988, 045
28, 885

33, 645
29, 315
48, 040
894, 115
36, 235
13,410
42, 460
27, 970

Accepted
26, 310
4, 602, 045
28, 885
33, 645
29, 315
47, 790
402, 315
35, 235

13, 410

762, 680
204, 180

42, 460
27, 970
306, 700
204, 180

$11, 135, 290

$5, 800, 260

8, 952, 880

1, 125, 885

$3, 617, 850
821, 125
$4, 438, 975
1, 125, 885

235, 400
$11, 135, 290

235, 400
$5, 800, 260

:
:
:
:
:
:

Received
$

:
:
:

:
:
:
:
:

65, 705
9, 281, 720
14, 005
50, 330
32, 405
29, 335
686, 640
45, 560
14, 040

Accepted

705
$25, 820

5, 075,

14, 005
38, 330
32, 405
29, 335
154, 640
45, 560
14, 040

31, 225

15, 150

171,300

10, 150
158, 665
171,300

: $11,222, 180

$5, 801, 180

8, 707, 405

$3, 286, 405
589, 375
$3, 875, 780
1, 125, 000

800, 400

800, 400
$5, 801, 180

784, 765

Type

Competitive
Noncompetitive

Subtotal, Pbbiit
Fede&ai Reserve

Foreign

Official

Ihstituti6tas
Tb'rAL'S

9, 774, 005

$
$

'The

589, 375
9, 296, 780
1, 125, 000

$11,222, 180

aottpon-issue yield.
four-week average for calculating the maximum
od mone) matket certificates is 8. 389%.

1/ E(Qivaleht

821, 125

interest rate payable

Department

of the Treasury

FOR RELEASE UPON

Washington,

D.C. ~ Telephone

DELIVERY

Expected at 2:00 p. m.
November 30, 1982
STATEMENT

OF THE HONORABLE

JOHN

CHAPOTON

ASSISTANT SECRETARY

(TAX POLICY)
DFPAFTMENT OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE

Yr. Chairman

and

Members

of the Committee:

I am pleased to appear before you today to discuss the
Administration' s proposals to increase and restructure the
excise taxes currently dedicated to the Highway Trust Fund.
The Administration
has decided that increased Federal funding
is needed at this time to maintain the guality of the
nation's highway system. Therefore, it is appropriate that
highway excise taxes be increased to finance these needed
investments in the nation's public capital stock.
The Administration
strongly
taxes to finance Federal highway
user taxes to finance particular

supports
program

reliance

on user

costs. Reliance

Federal programs, such as
highways and airports, is fair because costs of the program
are then paid by the beneficiaries of the service rather than
User taxes also promote
by the general taxpaying publica
economic efficiency by encouraging the best use of scarce
productive resources.
By forcing highway users to confront
the costs resulting from their use of the highway system,
highway user taxes promote an economically rational use of
the highway system and contribute to rational choices between
highways and other methods of transportation.

566-244|

Notor Fuels Taxes
highway excise tax proposals,
Under the Administration
the tax rates applied to gasoline, diesel, and other highway
motor fuels will increase from 4 cents per gallon to 9 cents
The present 2 cents per gallon tax on gasoline
per gallon.
and other motor fuels used for non-highway
purposes will be
of
taxation
motor
fuels will
in
These changes
repealed.
increase revenue to the Highway Trust Fund by $5. 3 billion
per year in FY 1984.
4

The tax rate on gasoline and other motor fuels has been
cents per gallon since 1959. During that period, the price

level, as measured by the GNP deflator, has more than
tripled and the price of gasoline has increased by an even
greater proportion.
Thus, the gasoline tax has declined
significantly both in real terms and as a percentage of the
price of gasoline. Noreover, the reduction in fuel
consumption
induced by the large increases in fuel prices in
the past decade has further contributed to the decline in
real revenue from Federal motor fuel taxes.

Under the Administration's
proposals, the tax burden per
gallon of gasoline consumed, whether measured in real terms
or as a proportion of the price of gasoline, will continue to
remain significantly
below the tax burden when the 4 cent
rate wa first imposed. For an average motorist driving
12, 000 miles per year in an automobile with fuel consumption
of 20 miles per gallon, the increased tax will raise the cost
of driving by only $30 per year.
Hi hwa

Excise Tax Structure

The Administration's
proposals also provide for a major
restructuring of the highway excise taxes' These proposals
reflect the conclusions from studies undertaken by the
Departments of. Treasury and Transportation
on the highway
excise tax structure, in response to a Congressional mandate
contained in the Surface Transportation Assistance Act of
1978. The proposals are designed to promote a more equitable
distribution of the burden of highway excise taxes among user
classes, and at the same time reduce the compliance burden on
taxpayers and the cost of administration
to the Internal

Revenue

Service.

The Administration
believes that the share of highway
taxes paid by different highway users should be correlated
with the share of costs each user imposes on the highway

system.
To the extent that some highway costs cannot be
separately attributed among users, tax shares should
correspond with the amount of benefit from highway use.

conclusion of the recently compl, eted
of Transportation study on highway cost a11ocation
is that, under the current tax structure, single unit trucks
and light combination
trucks pay a tax share substantially
exceeding their cost share, while the tax shares of heavy
combination trucks are significantly less than the relative
costs they impose on the highway systems Autos, pickups, and
vans appear to pay taxes roughly in line with cost
responsibilities, but will pay less than their cost share in
future years under the current rate structure because the
relative share of revenues raised by fuel taxes will declineThe major

Department

Restructuring

Pro osals

The Administration
proposals are designed to redress
these imbalances and to bring tax shares paid by different
user classes more closely in line with cost shares for the
remainder of this decade.
These objectives are accomplished
the share of Highway Trust Fund revenues raised
by increasing
other excise taxes
by motor fuels taxes and by restructuring
so as to shift the tax burden from lighter to heavier

vehicles.

There are three major parts to the restructuring
proposals.
First, the highway use tax imposed annually on
heavy vehicles registered for highway use will be increased
and graduated
for the heaviest vehicles. The exemption from
this tax will be increased from 26, 000 pounds to 5 5, 000
pounds, but the rates for vehicles over 55, 000 pounds will be
increased from the current rate of $3 per thousand pounds to
$100 plus $6 per hundred pounds in excess of 55 000 pounds
for vehicles between 55, 000 and 70, 000 pounds, 83. , 000 plus
$17 per hundred pounds in excess of 70, 000 pounds for
vehicles between 70, 000 and 80, 000 pounds, and $2, 7QO for
vehicles in excess of 80, 000 pounds. Second, the exemption
excise
for light weight vehicles from the manufacturers'
taxes on trucks and truck parts will be extended from the
current 30, 000 pound exemption to vehicles weighing less than
33, 000 pounds, but the tax rates will increase from
10 percent to 12 percent on the truck sales tax and from
This increase in
8 percent to 12 percent on the parts tax.
eliminate
excise
tax
liability
for 76
the exemption will
percent of all trucks and trailers currently subject to the
tax and for 96 percent of the truck parts and accessories

that are currently taxable. Third, an exemption from the
excise tax on tires will be provided for tires
manufacturers'
weighing less than 100 pounds, but the tax rates for those
items remaining subject to tax will increase from 9. 75 cents
per pound to 25 cents per pound for highway tires and from
5 cents per pound to 25 cents per pound for tread rubber.
In addition to these changes, we are recommending the
elimination of Federal excise taxes on inner tubes and
lubricating oil. These taxes are not needed to provide an
equitable distribution of tax shares among user groups and
the lubricating oil tax in particular has been found to be
excessively' costly to administer relative to the amount of
revenue

collected.

Modifications

rove Use Tax Administration

and

Equit

Administration's
proposals al. so include two
important modifications to the highway use tax designed to
First, the
and increase equity'
improve administration
bill provides
this
highway spending proposal that accompanies
highway
the
enforcing
for increased state participation in
eligible
be
not
will
states
use tax. Under that proposal,
for Federal highway assistance unless they require that
taxable vehicles show proof of payment of the Federal highway
The effective date of
use tax before they can be registered.
will
be
January
enforcement
requirement
1, 1985, leaving
this
states ample time to make the needed changes in vehicle
registration procedures. The Treasury Department views this
provision, or some alternative proposal to accomplish the
same objective, as an essential component of any
restructuring of the highway excise taxes that relies on the
highway use tax as the primary method of ensuring that
different types of vehilces pay taxes in proportion to the
costs they impose on the highway system. The Administration
proposal will greatly reduce the number of vehicles subject
to the highway use tax by exempting from the tax all vehicles
At the same
with a gross vehicle weight under 55, 000 pounds.
time, tl e tax will be significantly increased for the
heaviest vehicles. For example, the annual tax imposed on
the vehicles weighing 80, 000 pounds would be increased from
$240 to S2, 700. In the absence ot improved enforcment
procedures, these higher tax rates on the heaviest vehicles
would greatly increase incentives for tax avoidance.
l'moreover, at higher tax rates, non-compliance
would have much
more severe adverse effects on trust fund revenues, on the
competitive position of taxpayers who pay the tax, and on the
For these reasons, the Treasury
equity of the tax structure.
The

regards it as essential that accompanying
legislation include some mechanism to assure that state
registration procedures can be used as a tool in enforcement.

Department

Second, the tax proposal provides an exemption from the
highway use tax for vehicles that drive less than 2, 500 miles
This type of exemption is
per year on public highways.
necessary to prevent imposing an excessive and unjustified
tax on those vehicles, such as trucks used primarily in
farming or logging, that are mostly used off-highway but that
do occasionally use public highways to bring products to
markets.
The Treasury Department believes that a flat
mileage exemption is the best method from an administrative
and enforcement
standpoint of relieving low-mileage vehicles
from an excessive burden under the highway use tax.
Conclusion

proposals we are presenting will provide needed
revenues to finance Federal highway programs, restructure the
highway excise taxes to allocate the tax burden more
eguitably among user groups, and improve enforcement and
We
reduce costs of compliance with the new tax structure.
The

urge

their prompt enactments

Revenue

Effect
1983

Increase in Excise
Receipts
2, 628

Tax

Income

offset

Tax

51et Revenue

Increase

657

1, 971

1984

1985

Fiscal Years
1986
($ billions)

1987

1988

5, 417

5, 310

5, 279

5, 389

1i3541~327
4, 063

3, 983

5, 244

1 ~3111i320

li347

3, 959

4, 042

3, 933

lepartment

of the Treasury

FOR RELEASE AT

Washington,

4:00 P. M-

D.C. ~ Telephone 566-2041
November

30, 1982

TREASURY'S WEEKLY BILL OFFERING

of the Treasury, by this public notice,
for two series of Treasury bills totaling
approximately $11, 600 million, to be issued December 9, 1982.
This offering will provide $ 950
million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $10, 644 million, including $1, 057 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2, 510 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
The Department

invites tenders

91-day bills (to maturity date) for approximately $5, 800
million, representing an additional amount of bills dated
September 9, 1982,
and to mature
(CUSIP
March 10, 1983
in the amount of $5, 627
No. 912794 CM 4), currently outstanding
million, the additional and original bills to be freely
interchangeable.
182 -day
December
No.

bills for

9, 1982,

912794

CX 0 )

approximately
and

to mature

$5, 800 million, to
June 9, 1983

be dated
(CUSII'

Both series of bills will be issued for cash and in exchange
Tenders from
for Treasury bills maturing December 9, 1982.
Federal Reserve Banks for themselves and as agents for foreign
monetary authorities will be accepted at the
and international
Addiweighted average prices of accepted competitive tenders.
tional amounts of the bills may be issued to Federal Reserve Banks,
monetary authorities, to
as agents for foreign and international
the extent that the aggregate amount of tenders for such accounts
exceeds the aggregate amount of maturing bills held by them.

bills will

be issued on a discount basis under competinoncompetitive bidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $l0, 000
on the records either of the
and in any higher $5, 000 multiple,
Federal Reserve Banks and Branches, or of the Department of the
Tr easur y.

tive

The
and

Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington
D
20226, up to 1:30 p.m. , Eastern Standard time, monday,
Form PD 4632-2 (for 26-week series) or Form
December 6, 1982.
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of
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 three decimals, e .g . , 97 .920 . Fractions may not be used .
and dealers who make primary markets in
Banking institutions
Government securities and report daily to the Federal Reserve Bank
of New York their positions in and borrowings on such securities
for account of customers, if the names of the
may submit tenders
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 as of 12:30 p .m . Eastern
time on the day of 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 (in three decimals) of
accepted competitive bids for the respective issues.

for accepted tenders for bills to be maintained
of Federal Reserve Banks and Branches
at the Federal Reserve Bank or Branch
cash or other immediately-available
funds
Cash adjustments
or in Treasury bills maturing December 9, 1982.
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.
Settlement

on the book-entry records
must be made or completed
in
on December 9, 1982,

Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered

Under
amount

accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer 's
basis (cost) for the bill. The ratable share of this discount
is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill.
If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gain.

of the Treasury Circulars, Public Debt Series
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
Department
Nos. 26-76 and

Debt.

department

of the Treasury

FOR INNEDIATE

O.C. ~ Telephone S66-2041

Washington,

30, 1982

November

RELEASE

RESULTS OF TREASURY'S AUCTION OF' 50 —DAY
CASH NANAGEME2K

AND

143-DAY

BILLS

for $5, 008 million of 50&ay Treasury bills to be issued on
1982, and for $3, 002 million of 143&ay Treasury bills to be issued
6, 1982, were accepted at the Federal Reserve Banks today. The
details are as follows:
Tenders

December 1,
on December

50-day bills
maturing January 20, 1983

OF ACCEPTED
CONPETITIVE BIDS
RANGE

Hxgh
Low

Average—
Tenders
Tenders

Discount
Rate

Price
98.919

7. 783%
8. 050%
7. 920%

98. 882
98. 900

at the
at the

low
low

143-day bills
April 28, 1983

maturing

Investment
Rate 1/

Price
96. 672
96. 649
96. 659

7. 98%

8. 25%
8. 12%

Inves tment
Rate 1/

Discount
Rate

8. 378%
8. 436%
8. 411%

8. 79%
8. 85%
8. 82%

price for the 50-day bills were allotted 14%.
price for the 143-day bills were allotted 46%.

TOI'AL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS

(In Thousands)
location
York

Accepted

$8, 280, 000

$4, 352, 000

9.620, 000

$2, 810, 000

40, 000

10, 000

15, 000

2, 000

905, 000

250, 000

678, 000

110,000

Boston
New

Received

10, 000

Philadelphia
Cleveland
Richmond

Atlanta
Chicago
St. Louis
Ninneapolis
Kansas City

1, 000

675, 000

395, 000
$5, 008, 000

Dallas
San

Francisco

$9, 901, 000
1/ Equivalent
R-1044

coupon-issue

yield.

1, 000

585, 000

$10, 909, 000

80, 000
$3, 002, 000

&ePa«~ent of the Vreasury ~ Washineton, D.C.

FOR RELEASE UPON

Expected at,

December

9:30
1982

Teieilhone 566-QO@p

DELIVERY
m.

STATEMENT

OF THE

HONORABLE

JOHN

CHAPOTON

(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS

ASSISTANT SECRETARY

Mr. Chairman

and

Members

of the Committee:

I am pleased to appear before you today to discuss the
Administration's
proposais to increase and restructure the
excise taxes currently dedicated to the Highway Trust Fund.
The Administration
has decided that. increased Federal funding
is needed at this time to maintain the quality of the
nation's highway system. Therefore, it, is appropriate that
highway excise taxes be increased to finance these needed
investments
in the nation's public capital stock.

reliance

on user
Reliance on
Federal programs, such as
highways and airports, is fair because costs of the program
are then paid by the benef iciaries of the service rather than
public. User taxes also promote
by the general taxpaying
economic efficiency by encouraging the best use of scarce
productive resources.
By forcing highway users to confront,
the costs resulting from their use of the highway system,
highway user taxes promote an economically rational use of
the highway system and contribute to rational choices between
highways and other methods of transportation.
The Administration
strongly
taxes to finance Federal highway
user taxes to f inance particular

R-1045

supports
program

costs.

Motor Fuels Taxes
highway excise tax propo
diesel, and other highway
gasoline,
the tax rates applied to
cents
4
from
per gallon to 9 cents
increase
will
motor fuels
tax on gasoline
gallon
cents
2
per
The
present
per gallon.
purposes will be
and other motor fuels used for non-highway
These changes in taxation of motor fuels will
repealed.
increase revenue to the Highway Trust Fund by $5. 3 billion
per year in FY 1984.
The tax rate on gasoline and other motor fuels has been
4 cents per gallon since 1959. During that period, the price
level, as measured by the GNP deflator, has more than
tripled and the price of gasoline has increased by an even
greater proportion.
Thus, the gasoline tax has declined
significantly both in real terms and as a percentage of the
price of gasoline. Moreover, the reduction in fuel
consumption induced by the large increases in fuel prices in
the past decade has further contributed to the decline in
real revenue from Federal motor fuel taxes .
Under

the Administration

Under the Administration's
proposals, the tax burden per
gallon of gasoline consumed, whether measured in real terms
or as a proportion of the price of gasoline, will continue to
remain significantly
below the tax burden when the 4 cent
rate was first imposed'
For an average motorist driving
12, 000 miles per year in an automobile with fuel consumption
of 20 miles per gallon, the increased tax will raise the cost
of driving by only 930 per year.
Hi hwa

Excise Tax Structure

The Administration's
proposals also provide for a major
restructuring of the highway excise taxes . These proposals
reflect the conclusions from studies undertaken by the
Departments of Treasury and Transportation
on the highway
excise tax structure, in response to a Congressional mandate
contained in the Surface Transportation Assistance Act of
1978. The proposals are designed to promote a more equitable
distribution of the burden of highway excise taxes among user
classes, and at the same time reduce the compliance burden on
taxpayers and the cost of administration
to the Internal

Revenue

Service.

The Administration
by different

taxes paid

with

believes that the share of highway
users should be correlated

highway

the share of costs each user imposes

on the highway

system-

separateiy

correspond

the extent that some highway costs cannot be
attributed among users, tax shares shouid
with the amount of benefit from highway use.

The major conclusion of the recently completed
Depart. ment. of Transport. ation st. udy on highway cost ailocation
is that, under the current tax structure, single unit. trucks
and light combination
trucks pay a tax share substantiaiiy

exceeding their cost share, while the tax shares of heavy
combinat. ion trucks are signif icantly less than the relative
costs they impose on the highway system. Autos, pickups, and
vans appear to pay taxes roughly in iine with cost

responsibi

1it i

Restructurin

Pro osais

The Administration
proposais are designed to redress
these imbalances and to bring tax shares paid by different
user classes more cioseiy in line with cost shares for the
remainder of this decade.
These objectives are accomplished
the share of Highway Trust. Fund revenues raised
by increasing
other excise taxes
by motor fuels taxes and by restructuring
so as to shift the tax burden from iighter to heavier

vehicles.

There are three major parts to the restructuring
. First, the highway use tax imposed annuaiiy on
heavy vehicles reg istered for highway use wiii be increased
and graduated
for the heaviest vehicles . The exemption from
this tax wili be increased from 26, 000 pounds to 55, 000
pounds, but the rates for vehicies over 55, 000 pounds wiii be
increased from the current rate of $3 per thousand pounds to
$100 pius $6 per hundred pounds in excess of 55, 000 pounds
for vehicles between 55, 000 and 70, 000 pounds, $1, 000 plus
$17 per hundred pounds in excess of 70, 000 pounds for
vehicles between 70, 000 and 80, 000 pounds, and $2, 700 for
Second, the exemption
vehicles in excess of 80, 000 pounds.
for iight weight vehicles from the manufacturers'
excise
taxes on trucks and truck parts will be extended from the
current 10, 000 pound exemption to vehicles weighing iess than
33, 000 pounds, but the tax rates wiil increase from
10 percent to 12 percent on the truck sales tax and from
This increase in
8 percent to 12 percent on the parts tax.
the exemption will eliminate excise tax liabiiity for 76

proposals

percent of ali trucks and trailers
tax and for 96 percent of the truck
that are currently taxable. Third,
excise tax on tires
manufacturers'

currentiy subject to the
parts and accessories
an exemption from the
wili be provided for tires

weighing less than 100 pounds, but the tax rates for those
items remaining subject to tax will increase from 9. 75 cents
per pound to 25 cents per pound for highway tires and from
5 cents per pound to 25 cents per pound for tread rubber
~

the
In addition to these changes, we are recommending
elimination of Federal excise taxes on inner tubes and
lubricating oil. These taxes are not needed to provide an
equitable distribution of tax shares among user groups and
the lubricating oil tax in particular has been found to be
excessively costly to administer relative to the amount of
revenue

collected.

Modifications

rove Use Tax Administration

and E

uit

Administration's
proposals also include two
modifications to the highway use tax designed to
improve administration
and increase equity.
First, the
highway spending proposal that accompanies this bill provides
for increased state participation in enforcing the highway
use tax. Under that proposal, states will not be eligible
for Federal highway assistance unless they require that
taxable vehicles show proof of payment of the Federal highway
use tax before they can be registered.
The effective date of
this enforcement requirement will be January 1, 1985, leaving
states ample time to make the needed changes in vehicle
registration procedures. The Treasury Department views this
provision, or some alternative proposal to accomplish the
same objective, as an essential component of any
restructuring of the highway excise taxes that relies on the
highway use tax as the primary method of ensuring
that
different types of vehicles pay taxes in proportion to the
costs they impose on the highway system. The Administration
proposal will greatly reduce the number of vehicles subject
to the highway use tax by exempting from the tax all vehicles
with a gross vehicle weight under 55, 000 pounds.
At the same
time, the tax will be significantly increased for the
heaviest. vehicles . For example, the annual tax imposed on
the vehicles weighing 80, 000 pounds would be increased from
$240 to $2, 700. 1/ In the absence of improved enforcment
procedures, these higher tax rates on the heaviest vehicles
would greatly increase incentives for tax avoidance.
The

important

For corn &nation trucks
annual tax per vehicle

over 75, 000 pounds, the
in 1985 from all the highway
excise taxes will increase from $1, 700 under current law to
$4, 150 under the Administration
proposal.

total

weighing

at higher tax rates, non-compliance would have much
severe adverse effects on trust. fund revenues, on the
competitive position of taxpayers who pay the tax, and on the
For these reasons, the Treasury
equity of the tax structure.
Department regards it as essential that accompanying
legislation include some mechanism to assure that state
registration procedures can be used as a tool in enforcement.
Moreover,

Second, the tax proposal

provides an exemption from the
use tax for vehicles that drive less than 2, 500 miles
This type of exemption is
per year on public highways.
necessary to prevent imposing an excessive and unjustified
tax on those vehicles, such as trucks used primarily in
farming or logging, that are mostly used of f-highway but that
do occasionally use public highways
to bring products to
The Treasury Department believes that a flat
markets.
mileage exemption is the best method from an administrative
of relieving low-mileage vehicles
and enforcement standpoint
from an excessive burden under the highway use tax.
highway

Conclusion
we are presenting
will provide needed
to finance Federal highway programs, restructure the
highway excise taxes to allocate the tax burden more
equitably among user groups, and improve enforcement and
reduce costs of compliance with the new tax structure.
We
urge their prompt enactment.

The proposals

revenues

Effect

Revenue

1983

Increase in Excise
Receipts
2, 628

Tax

Income

Offset

Tax

Net Revenue

Increase

657

1J971

1984

Fiscal Years
1986
1985
($ millions)

5, 417

5, 310

1 354
4

063

1987

1988

5, 244

5, 279

5, 389

1 ~ 327

1 g 31 1

1 g 320

1 g 347

983

3g933

3/959

4g042

epartment of the Treasury o Washington,
FOR IMMEDIATE

December

CONTACT:

RELEASE

, 1982

TREASURY TO REQUEST MUNICIPAL
REGISTRATION DELAY

D.C. ~ Telephone 566-204$
Charles Powers
566-2041

BOND

The Treasury Department announced today that it will
ask the Congress for a six-month delay in the registration
requirement for State and local government bonds.
and Fiscal Responsibility
Act of 1982
that all bonds, including municipal bonds, issued
after December 31, 1982, be issued in registered form.
According to Treasury some jurisdictions will experience
difficulty in complying with the registration rules by
January 1, 1983. Therefore, the Treasury will request
that the effective date for the registration requirements
for tax-exempt obligations issued by State and local
governments be deferred to July 1, 1983.
The Tax Equity

requires

o0o

R-1046

partment of the Treasury
FOR RELEASE AT

Tuesday,

Washington,

10:00 A. M.

November

30, 1982

D.C. ~ Telephone 566-204$

CONTACT:

Robert E. Nipp

(202)566-2133

Opening Statement By
Angela M. (Bay) Buchanan

The Honorable

Treasurer of the United States
Press Conference Presenting $10 million
to the United States Olympic
Committee and the Los Angeles Olympic Organizing Committee
Tuesday, November 30, 1982 -- 10:00 A. M.
At the

Good morning.
First, I would like to welcome to the Treasury
L'epartment,
Congressman Frank Annunzio, Chairman of the House
Subcommittee on Consumer Affairs and Coinage; Robert Kane, Past
President of the United States Olympic Committee, and Roy Ash, ViceChairman of the Los Angeles Olympic Organizing
Let me
Committee.

also introduce

Donna

Pope, Director of the Mint.

The Department
is particularly pleased to have Congressman
Annunzio join the Olympic Committee's
representatives since he was
a major force behind the Olympic Coin Act of 1982.
is only
appropriate that he share in the success of the program after all
his effort to see that such a program had a beginning.

it's

to present $10 million to Mr. Kane
These funds represent the
Olympic Committees.
surcharges generated by advance sales of Olympic commemorative coins
since the limited pilot introduction of the program in mid-October.
Today,

and Mr. Ash

for our

priviledge

the kickoff
Many of you were here October 14 when we announced
of the coin sales. In reviewing our marketing so far, we are
extraordinarily pleased with the strong support we are receiving
to increasing
from the American numismatic
We look forward
community.
sales as the marketing program is brought to the attention of the
general public nationwide and as the commemorative coins are sold
outside the United Sates.
The selling
These coins are produced by the Bureau of the Mint.
price reflects our costs of production and contributions to the
Therefore, the $10 million in surcharges that we
Olympic committees.
over
to the Olympic committees today, is at no cost to
are turning
States
the United.
government or to the American taxpayer.

R-,

1047

Pope tells me that the latest figures, as of last Friday,
the Mint has sold over 630, 000 coins, for gross sales
that
indicate
and surcharges amounting to almost $11 million.
million
$48
of almost
of the orders are for the complete threepercent
42.
5
remarkable
A
Donna

coin

set.

the Olympic Coin Program, we presented
When we first announced
preliminary sketches of the coin designs so that purchasers could
see the concepts which would be used in the development of the final

designs.
As

our October press conference, major refinements
of the final designs, are in the works. .

I indicated in

in the development

pleased to show to you today the final two dimensional
renditions of the 1983 Silver Dollar Coin. As you can see, the change
sketches presented at our mid-October press
from the preliminary
The Fine Arts Commission has favorably
conference is dramatic.
renditions and we are now proceeding to
final
commented on these
execute the final steps in intricate design detail. Additional
creativity to enhance the 1984 silver and gold coins also will be
from rough sketches to actual coins.
made during the transition

behalf of the Treasury Department, I want to call
public to lend their wholehearted support to the
coin sale program for the Olympic movement.
Only once in
years do our athletes have the opportunity to participate
We applaud
Olympics.
their efforts and wish them well in
competition in Los Angeles.
On

American

Now,

present

every four
in the
the 1984

Bob Kane and Roy Ash will join me, I would like to
$10 million.
Then, our guests may have some brief
Following that, Donna Pope and I will be delighted to

them with

comments.
take your

on the
commemorative

questions.

department

of the Treasury

FOR IMMEDIATE RELEASE
December 2, 1982

Washington,
CONTACT:

D.C. ~ Telephone 566-204"
Stephen Hayes

202/566-2041

TREASURY RELEASES STUDY ON FOREIGN AID

Department today released a study, "The
Economics of Foreign Aid and Self-Sustaining Development, "
funded jointly by the Departments of Treasury, State, and
the Agency for International Development.
The Treasury

The study was prepared by Professor Raymond Mikesell
of the University of Oregon. It reviews and evaluates
the findings of economic development theories as well as
case studies, in order to assess which kinds of foreign
aid are most effective, and under what conditions the
development process is best promoted.
The study is based on the view that the principal goal
of foreign aid is to assist countries in achieving a
condition of self-sustained growth (defined as maintaining
over time an annual rate of growth of per capita GNP of
2. 5%). The central conclusion of the study is that development success is most effectively encouraged by outwardoriented governmental policies which provide the incentives
of a free market.

In order to most effectively promote the objective of
growth, projects and sectoral programs
supported by aid should be primarily structured to have a
and productivity.
maximum impact on production

self-sustained

R-1048

UNDER SECRETARY OF STATE
FOR E CO NO M I C AFFAIRS
WAS HI N GTON

November

18, 1982

for International Development, and the
of State and Treasury jointly funded a study
by Professor Raymond Mikesell of the University of Oregon,
entitled "The" Economics of Foreign Aid and Self-Sustaining
Its purpose was to review and analyze
Development.
theoretical and empirical findings on economic
and to determine the condition under which
development,
foreign aid most effectively advances the development
process.
The study provides an independent
expert view
on key questions.
We hope it will be useful
in discussions
of such issues as the role of government in promoting
the allocation of foreign assistance,
development,
the most effective types of assistance, and the
measurement
of development progress.
conclusions.
The study reaches a number of interesting
According to Professor Mikesell, the principal goal of
foreign aid should be to help countries achieve a
condition of self-sustained growth. One of the major
lessons derived from the paper's review of empirical
studies is that governmental policies which are
outward-oriented
and which provide the incentives of
a free market are most conducive to economic development.
Professor Mikesell concludes that the role of
The Agency

Departments

governments

in promoting

development

includes

implementing

policies that provide appropriate incentives to productive
activity and that contribute to the development of both
Concerning the allocation
human and physical resources.
of assistance, he concludes that. assistance which makes
concessions on interest and terms of repayment should
be concentrated in low income countries, and that the
conditions attached to assistance should vary with the

level of development.

regarding measurement
growth in per capita

Inevitably,

of the recipient.
of aid focuses

His conclusion

on the

rate of

GNP.

of the study's conclusions will
One is the suggestion
that a
disagreements
per capita income of $1000 is a sufficient basis for
self-sustaining growth. Notwithstanding
such
controversial aspects of the study, we bring it to
your attention in furtherance of our goal of improving
the quality of discussion on this important subject.
We would welcome your comments
on the report, of
which a copy is enclosed.
provoke

some

Allen Wallis

Beryl

S rink

ecretary or Monetary
Affairs, Treasury

Under

Ps,

Peter McPherson

Administrator,

Enclosure: a/s

AID

department

of the Treasury

FOR IMMEDIATE

December

RELEASE

2, 1982

Washington,

D.C. ~ Telephone 566-2048

CONTACT:

M. Schneider
447-9939
Betty L. Russell
447-1391

Maurice

of Engraving and Printing will be closed during
Season from December 24, 1982 until regular business
hours on January 3, 1983, Bureau Director Harry R. Clements has
announced.
All Bureau public services, including the Tour and
The Bureau

the Holiday

Visitor Center, will be closed from 11:30 a. m. on December 23,
1982 until 8 a. m. , January 3, 1983. Security and essential
maintenance services will continue to be performed.

This is the second year that the Bureau has closed for the
year-end period.
The practice was undertaken
for cost benefit

reasons'

R-1049

epartment

of ihe Treasury

For Immediate

D.C. ~ Telephone 566-2041

Washington,

Contact: Stephen Hayes

Re]ease

566-2041

Friday, December 3, 1982
Remarks

Peryl Y. Fprinkel
Under secretary of the Treasury

for Monetary Affairs
before the
Union I.eaaue Club of Chicaao
Friday, December 3, 1982
Chicaao,

Illinois

Chanoina

Fronomy

for those kind words of introductior.
I
to be here. I arew up in Yissouri, but Chicaao is
adopted home; . o I aet back this way a often as possible.
Tn
Yet every time I am struck by the way this citv is chanaina.
--or perhaps because of it
the
spite cf the recession
economies of Chicaao, and the nation are k eainninz to take on
that has profound implications
new character -- a restructurina
for future economic arowth. It's not a renaissance by any means.
Indeed, many of the charaes are barely perceptible.
Put I think
it's time -- with economic recovery on the horizon -- to consider
some of the new faces in our economy.
Thank

am
my

deliahted

you very much

first sians of

The

chanae

evic'ent

were becomina

in the

70's.

the end c f tl e last administration,
was scouraed by failed economic

the naticn's ecoromir
policies and cratered
with infj ation and record level interest rates.
Inflation soared to 12. & percent in 1980, up from 5 percent
at the encl of 197F.
The prime interest rate hit a one hundred year peak of 21. 5
percent just before the Reaaar inauaural, up from 6. 8 percent ir
Ry

landscape

1976.

The federal reqister exploded with thousands
eland.
ouestionable reaulation, .
hand

unerrplcyment

affected

mere

than

of paaes of

7. million americans.
t

the end of 1980, fai]ed economic policies hac1 brou~l t
economic arowth to a halt. The C'NP at the start of 1982 was
v jrtua] lv the same as 2t t1 P start of 197
py

ghen

Forald Reagan took

cff ice,

tc
he was determinec
i n i strat icn proposed
and sound monetary

ur adr
rev i t al j ze this ecc nomi c wast
iahter f i seal vol i cy
econom j c proarams for
t.

and reduced
controls. We believed that lower. levels of inflation
and
increased
interest rates would f aci l it ate new investments
the economy upward.

This, in turn,

productivity.
form

idable.

Inflation

the

first

was

power

areas, the results of this program are

in several

And

would

reduced

nine months

from

2. 4 percent to

of this year.

percent for

Prime interest rates were lowered by more than one
months.
11 1/2 percent today, the lowest in twenty-five

third, to

From 1961 to 1980 federal spendinq arew six-fold from 92
billion to a burqeoninq 577 bi. llion. In 1980 the qrowth rate hit
This year the federal spending arowth
a record 17.4 percent.
rate is down to 11 percent. And by fiscal year 1983 it will be
under 6 percent.
for sourd monetary controls is in place. E. nd
The foundation
to build the economic framework for recovery
now we must continue
that will shelter American prosperity
a house of. many mansions
and

future

insure

Yet, there
unemployment'
sufferinq that
people back to

If I

had

economic qrowth.

tragic item that remains. High ]evels of
Eliminatinq this problem and the terrible human
qoes with it is our hiahest priority.
We must aet

one

work.

dollar for every time I ' ve thouaht

I think we could start an unprecedented job
retraining program. The President has sianed a bill to spend a
billion do] lars over the next three years for training vp to one
million people for new jobs. End the new Export Tradina Company
Pct is expected to aenerate 350, 000 new jobs.
unemployment,

Rut' aetting to the roots of unemp]. oyment has meant fightinq
and hiqh interest rates caused by runaway government

inflation

taxinq and excessive money arowth.
Ye know that when
shoots up, it trigqers a delayed-action
rise in
unemp]oyment.
Now inflation
is being driven back down, and ]ower
spendinq,

inflation

unemployment

Let

will fol] ow.

say, parenthetic ally, that one of tl e important
chanqe from an inflationary
economy as it qoes
throuqh the process of disinflation,
is the impact on relative
prices of real and financial assets. In periods of increasina
inflation, real assets -- houses, land, qold, antioues -- provide
investors with the qreatest expected real rate of return.
In
periods of declininq inflation, financial assets -- stocks,
bonds, bank accounts, money market funds -- provide the greatest
expected real rate of return.
me

effects of this

Dvrinq

much

of the ]ast decade, as inflation

rose rapidly&

investors realized that they received their best expected rate of
return on real assets, and they transferred their monev
accordir qly. The prices of those real assets -- houses, land,
cold -- went up. And the prices went down on the assets they
sole' to make those purchases -- stoc) s and bonds.

inflation. We are
We are row in a period of. deceleratina
experiencinq the reverse of. this process: investors have beaun
to sell their real assets and put their money into financial
assets. It is not an accident that, in recent months, the prices
of houses and qojd have come down, while bond prices and, more
recently, the Dow Jones Index, have risen.
is selling houses and rugs to
is some of that qoina on. Pnd
in a $4 trillion economy, which we are on the verge of havina, a
shift of one or two or three percentaqe points puts tens of
billions of dollars into the economy in the form of expanded
potential credit. Thanks to declining inflation, that phenomenon
is already happenir g, and additional credit needed for economic
expansion is formir g rapidly.
buy

I'm not sayinq that everyone
and bonds.
Put there

stocks

to jower its discount
digits for the
first time since 1979; the sixth reduction in iust four months.
This demonstrates
the Fed's confidence that inflation and market
rates wij 1 continue coming down, and its confidence that we can
work together for a healthy,
noninflaticnary
recovery. Ill of
this lavs the qroundwork for a recovery that will mean
more ~obs
components

rate.

The Federal
This l ey

Reserve recently

interest rate is

decided

now

below two

fcr ajl our peop1e.
But let's take a closer jook at the unemployment.
picture.
has cyclical and so —cal ) ed structural
Unemployment
.
The structural
component -- that which is related to the
vnderlyinq
prcductive capacity of the erorcmy —— is a secular
problem that reauires improvements
in labor mobility, skill
levels, and productivi ty. trnfortunately this fundamental,
lonq- term unemp3 oyment has been increasec' throuah the ravaqes o f
inflation. &he cyclical component has, of course, been increased
Put there have also been other
by the current recession.
phenomena
impacting cn the work force.
In the last decade, the labor force expanded by almost 25
millior men and women. Py the end of the 70's, the full
rate had rifted to 5 percent. beany economists today
employment
feel that a more realistic full employment rate is 6 to 6. 5
percent. Put the fact is, with unemployment at 10.4 percent, the
full employment c'iscussion is mostly academic when applied to
and

more opportunity

c".

people. It's more relevant when we consider the chanaing nature
of our economy -- the restructuring of our industries ar d the
hase.
make-up of our employment
Those of ynu in the midwest know only too we 1 1 that the
industries that have been hit hare'est in this recession are the

Pt the
aut os, steel, chemicals.
so-called "bedrock" industries:
bankina,
notably
same time, some of the service industries,
hospita3. s, information suppl iers,
computers, communications,
finar ciel services and professionel and technical workers were
emergence of the service
scarcely affected bv the slump. This -the biaaest employer
the pcoromy
sector as e new pi3 3ar of -where the iobs of
about
3ot
a
says
with the hiahest salaries
'
the 80 s will he created.
Let me hasten to say, here, that the traditional basic
industries in this country are not about to die awav. This
Pdministrat. ion is not about to let that happen and the Peaaan
program of business tax reductions wi3l qo a long wav toward
ecceleratina the modernization and revitalization of those
irdustries. 0t the same time the service sector of the economy
will continue to show strong growth.
era of economic chanae has been brought.
least in part, by an accelerated hreakthrouah ir new
This

new

about,

technoloaies.

The birth of. scientific disciplines such as information
theory, auantum c3 ectronics, and space sciences heve led to r ew
industries in computers, data processina, semi conductors, space
and advanced cor. murications.
menufacturina

There has been phenomenal arowth in computers and
electronics. Last year the software business tallied &15.5
billion in sales and services and a 20 percent increase in sales
in this industry is expected i. n '82. Tn 1981, the electronics
industrv accounted for more thar $100 billion in sales.
Fend-held calcu3etnrs, diode watches, ard video aames have become
as intearal to our society es the telephone and the typewriter.
This explocina industry is expected tn hit ~350 to $400 bi13ion
in sales by the late 1980's. Tt is would make it the fourth
leraest industry in the world after steel, eut. os and chemicals.

Finre about 1945, we have been turnina more and more to the
service industries for ~obs. Ry 1981, for exemple, 72 percent of
American workers were employed in the service industries.
Between 1977 and 1980 employment
business rose
in the restaurant
18 percent.
Fmploymer t in business services ir creased 32
percent. Leaal end arrhitectura3 and engineers. na services each
reported iob aains of 25 percent. End in those three years,
in computers and data processina increased e
emp3oyment
staagerina 64 percent. Ill told, the service sector last year
made up 65 percent of the tcte3 CNP.
put whet do these head-spinnina
becomina, or indeed, have we already

service oriented

society?

numbers rea33. y mean?
become a predominately

feer that a
decline of the
base. This notion often produces discontent, even
it is widely perceived that a service economy would

dominated

economy

would

Yany pec p3 e

siarify tl

Pre

service
industria3
horror, since
undermine

the

nation' s very economic independence and r ational security. But
has America abandoned its gra. , s roots industries like auto and
steel for the not so durable goods like Piq Macs and insurance
policies? ] don't think so. T do think it's a auestion that
should

be examined.

Let's look

again

definition

and

some

misccnceptions.

For one reason or another, the concept of the service
industry has beer a fox in the hen house. &ervices have always
been associated with eatinq and drinkinq establishments
and lower
But in reality, this represents only a small
wage menial iobs.
fraction of the total service sector.

Colin C] ark, a noted economist and author of "The C'onditions
Progress" qives a broader and more precise

of. Fconomic

definition.

"service industries

Pe writes:
themselves into buildina
communications,
commerce

public administration

naturally oroup
construction, transport and
financial, professiona] services,
defense, and personal services . "

and
and

and

Given this kind of perspective, the service industry picture
Our service economy
suddenly exhibits staqqerinq dimensions.
weaves an intricate pattern into the very fabric of. our society
and its basic industries
3 n
fact, since most qoods and services
have components of. each other in the production process, it is
exceedingly difficu]t to separate the measurement of services

from

that of qoods.

Yy friend George Ftigler from C'hicaao, and this year's Nobel
laureate in economics, attempts to liahten the burden of
"There exists no authoritative
explanation by writing:
consensus
or the classifications of service
on either the boundaries

industries. "

yet, the leading economic indicators do not
productivity in the service sector. ]'r our
society, then, there is a need to integrate the manufacturino
Both are qoira to p]av a
complex with the service industrv.
vital role in tcmorrow's free-market economy -- both
Put we need a better
internationally
as well as domestica]]y.
fi. x on how to measure service sector activity -- and on the role
End

accurately

of services

measure

in the total. econ omy.

This country
autos, chemica]s

wi]
and

l not

abandon

textiles are

its basic industries.

Ftee],

fundamental
to the
afford to abandon them.

simplv

industrial base. Besides, we can' t
These basic industries are the pathway to new products and new
processes. These industries may have to develop into more
technologically sophisti. rated businesses-- where production will be
special alloy steel for
redirected toward specialty materia] s
for
instance;
chemicals, synthetic
satelli.
special
tes,
and
ships
precision
enqineered
machines.
The
real auestior is:
and
fibers
ace
take
fast
to
offer
new iob
chanqes
enough
p]
these
wi]]

for our young people?
encouraging the transition of our
The
or unskilled
industrial base without leaving behind the displaced
immediate
the
addressed
worker.
Already the President has
Job Training
The Comprehensive
concerns of this problem.
of this year, wil]
October
Program, which was siqned into law in
teenaqers.
unskilled
and
workers
provide traininq for displaced
to jobs
these
for
people
access
Technical training will provide
can more
industries
this,
doinq
in
And
previously unattainable.
workers
skilled
of
flow
constant
that
a
easily expand, reassured
pool.
labor
the
will be enterinq
to displaced
solution reauires

opportunities

workers

and

However, the President recognizes that this proqram, and
In
similar programs, are supplements to the long-term solution.
putting our nation back to work in permanent. and rewardinq jobs,
Our basic
sustainable economic recovery must be achieved.
An environment
industries must be retooled and recharged.
encouraging the development of service industries must be
to all
And, hiah technoloay must be introduced
developed.
industries whenever feasible.

for reaching these
President's
Fconomic
the
implementina
federal
the
rate
of
decreased
have
we
in 1980 to 11.2 percent in 1982, with
The foundation

aoals has been set by
Already
Recovery Proaram.
spendinq from 17.4 percent

an estimated 4. 2 percent
1984. The rate of qrowth of federal regulations has
been decreased by one third with over 50 major burdensome
regulations havinq alreadv been termin ated. And, in fulfilling
another commitment of the President's, a responsible and sound
monetary policy has been adopted.

increase

These achievements

have

been

significant

settir

for recovery, yet nowhere have we achieved
success as with restructurina
the tax system.
foundation

the

such

The 1981 Fconomic Pecovery Tax Act is the corner stone cf
the Administration's
economic policies and essential tc long-term
recovery. It provides for a 25 percent across the board tax rate
cut for everyone.
Ãe already have 15 percent of that cut.
The
third installmert, a 10 percent cut scheduled for July, 1983,
will provide an additional boost fnr consumer purchasinq and
savings, and for long-term investment.

Additionally,
as a part cf this proaram, tax rates have been
to eliminate the inflationary impact of bracket creep.

indexed

As you know,
movinq the third

we had recently
cor sidered
year of the tax cut forward

the possibility of
to help with the
economic arquments on both sides of

recovery. There were sound
that debate. And the Corqressional leadership indicated we would
have a tough time gettinq a tax change through the lame duck
session. But we did aet one important benefit from this debate-

must

goal.

everyone

protected

agrees that the final 10 percent and indexing
. The P res ident is firmly committed to that

To further advance economic recovery, the President had
endorsed a "users fee" to preserve and rebuild deteriorating
This proaram,
hiqhways, bridges, and urban transit systems.
calling for a 5 rent increase in the federal gasoline tax, would
raise $5. 5 billion annually while costing the average driver no
more than S30 per year.
It is a first and important step in
rebuilding our nation's neglected transport. ation system and
ger crating activity in the depressed construction
industry.

these programs indicate, we are looking at 3ong term
to our economic problems.
Ye now know that the
short-term approach wi13. not do the job.
For. the last 40 years
this kind of thinking has prevailed, and we have lost around to
foreign competi. tion —— to those who took the long view on
This was true in both government and industry.
economic growth.
I want to focus just for a moment on the government side.
As

approaches

In past periods

programs

policy
course,

of difficulty,

instead

trimming

budget

and tightening
monetary qrowth, there was loose fiscal
and profligate government
The net effect, of
spending.
to
was
overflood the economy with undervalued do31ars.

The economic

uneauivoca3ly,

record of the past decade should establish,
that these policies are ineffective and ephemeral.

designed a program to help stimulate
provide incentives for businesses to make
investmer ts. This is crucial for. long-term economic
resu3 ts as well.
And we are seeing some immediate

President
consumer

capital

growth.

savinqs

Reaaan
and

There has been a surge

inflation

down

also has beer

and interest
in
an upsurge

i. n

stock

and

bord

prices.

rates reduced dramatically,
the housing

industry.

With

there

and the
In January, both the Federal Housing Administration
mortgage ratfs were 16 1 /2 percent.
They
Veterans Administration
The discount interest rate is now down to
are now 12 percent.

9. 0 percent.

stimulated by the decline in mortgage interest rates,
This
overal3 housing starts escalated 14.6 percent in september.
is the largest increase in any month for more than a year. An
increase in home building, traditionally a sure-fire indication
that the country is climbing out of a recession, will have a

significant

impact

large numbers

of suppliers.

rates have plummeted.
Treasury
movement
in
interest
rate
indicator
a leading
percent.
8
about 7 or

Interest

I cad ing

ind

icators rose again

in h'ovember

three month bills
-are now down to

the s ix th

which
In addition, the money supply
in seven months.
has
increased.
recovery
of
a
advance
in
moves
up
historically
Thjs should aive some boost to total spendina in the economy.
eptember and personal income has
Consumer spending increased in
So, all in ajl, and contrary to what we
been edging up steadily.
keep reading in the press, I think there are artually cruite

increase

that the recovery is

of specific indications
about to be -- underwav.
number

or is

Whi)e I came here today mainly to taj k about the american
economy, I would like to discuss briefly the internationa3

situation.

In the

last

few months,

great deal has appeared

in the

monetary system
newspapers about the state of the international
debt. Fvery
world
growing
of
implications
particularly the
that
to
speculation
and
and
doom,
gloom
day we are treated to
billions
of
tens
of
which
owe
countries
of
the
developing
some
their
debts,
to
repudiate
ecide
might
banks
dol]ars to U. F.
triggering a collapse c f the international banking system. Yy
basic reaction is that these accounts are considerably
international challenge,
We do face a significant
overstated.
but the challenge is manageable.
Rut as difficult as the situation has been for overextended
borrowers and for the banks which have l. ent them money, there
have already been some positive results from our attempts to rope
Even as the rl ickens were romir a home to
with the chaljenae.
roost for countries like mexico, Rrazil and argentina, an
impressive cooperative spirit was being displayed by the key
players on each side of. this drama -- private banks, the IYF and
other international
organizations, and governments in the major
nations. They have been wcrking together to help cope with those
situations where the current strains are greatest.
c'.

Borne elements of a longer-run
foundation are a] ready coming
into place. Rorrowing cour tries are showing a greater
willingness to take needed adjustment. measures.
In order to
ensure their future creditworthiness,
I think they have learned
they will have to pay greater attention to balance of payments
adjustment in the future, and will need to have sounder economic
policies. Lenders, hy exercising greater caution and prudence in
their lending decisions, wjjl help make sure this happens.

Pere in the U .F. , we are row entering an exciting, albeit
apprehensive,
period of economic change.
It. is reshaping our
businesses, our economy and our thinking.
This economic change
is a natural force, and like the flow of a great river, its
movement cannot be blocked, its undercurrents
cannot be ignored.

believe that the course of economic growth has been set.
are aware of the currents.
End I believe that all of us
need tn step back and take a contemplative
look at the ba. . ic
Ye

But

structure

Thank

you.

of tomorrow's

economv.

of ihe Treasury

Department

FOR IMMDIATE

washington,

RELEASE

Friday, December 3, 1982

D.C. ~ 7elephone 566-204%

Contact:

Fitzwater
(202) 566-5252

Marlin

BY DONALD T. REGAN
SECRETARY OF THE TREASURY
THE DEATH AND WOUNDING OF ATF AGENTS
IN MIAMI, FLORIDA
1982
FRIDAY, DECEMBER
STATEMENT

I want to express my deepest sympathy, both personally and
behalf of the Treasury Department, to the families of Alcohol,
Tobacco and Firearms Agents Ariel Rios and Alex D'Atri.
Agent
Rios, who was killed, and Agent D'Atri, who was seriously
wounded, were part of this nation's determined
effort to stop the
flow of drugs into this country'
As part of the Vice President's
Task Force on Crime in South
Florida, Agents Rios and D'Atri were providing valiant service to
our nation.
that Agent D'Atri
We offer our hopes and our prayers
willmake a successful recovery.
on

Our

R-1051

hearts

go out

to the families

and

friends of both

men

FOR IMMEDIATE

The Treasury

RELEASE DECEMBER

announced

6I 1982

today that the 2-1/2 year

yield curve rate for the five business days ending
rounded to the nearest
December 6, 1982, averaged
Treasury

~pa

Ceiling rates based on this rate will be

f ive basis points.
in

effect

December

from Tuesday,

December

7, 1982 through

Monday,

20, 1982.

Detailed rules as to the use of this rate in establishing

rates for small saver certificates were published
in the Federal Register on July 17, 1981.
Small saver ceiling rates and related information is
the ceiling

available

from the DIDC on a recorded

The phone

number

telephone

message.

is (202) 566-3734.

Approved

Francis X. Cavanaugh
Director
Office of Government
Market

Analysis

Finance

of Points

Summary

Vade by

Secretary Regan with Selected
of the Press

December
NOTE:

members

6, 1982

comments reflect Secretary Regan's
thinking, but there is no plan or strategy for presenting this issue as a formal proposal, contrary
to what you may read tomorrow in the Washington Post.

The following

are going through a worldwide period of disinflation.
The effects on the Lesser Developed Countries are just as serious
as on the industrialized
nations.

are facing "a conundrum, a big puzzle. " ovations are all
being urged to increase exports and decrease imports.
Yet, if we
are all decreasing imports, the world export market will
"Somethina has to give here. "
diminish.

The U. S. cannot remain
All must share, the burden.

want

this

Ministers

-monetary

to talk about this problem with the
week

matters.

such problems.

overall

C'-5 Finance

in Furope.

have practiced "ad hoc financing"
assistance where it is needed. e. g. recent
and Brazil.
But there is no overall system

in the world.

Also I want to talk with them about the international
system and the role of central banks in international

financial

the only open market

(the Finance Ãinisters)

terms

had

to provide short term
assistance to Yexico
in place to approach

better start thinking

all the answers now. We are aropina for
will take a lot of time and we should start,
first, with a series of informal discussions. Then perhaps, more
of the
formal talks.
We first need to get a better understanding
dimensions of the problem.
In response to a auestion of whether a Pretton Wood-type
conference was beina suggested, I said perhaps; but we are not
ready yet for such a move.
We

the

do not h ve

solutions.

of ihe Treasury

Department

washington,

D.C. ~ Telephone 566-2041

FOR RELEASE ON DELIVERY
EXPECTED AT 2:00 P. M.

December

DEPUTY

6, 1982

STATEMENT OF C. ilARREN CARTER
SECRETARY OF THE TREASURY (FEDERAL FINANCE)
BEFORE THE SUBCOMMITTEE ON SOCIAL SECURITY
OF THE HOUSE COMMITTEE ON liAYS AND MEANS

ASSI'"

Mr. Chairman

ANT

and Members

of the Subcommittee:

pleased to present the views of the Treasury Department
7326, the "Social Security Miscellaneous and Technical
Improvements Act of 1982". My comments will be directed only at
the investment provisions of section 103 of Title I of the bill.
The Treasury's Office of Tax Policy would like to present its
views on the other titles of the bill at a later date.

on H. R.

outset, let me emphasize that decisions on the broader
e. , assuring adequate
of social security ~fundi. n,
social security taxes or other sources of funds to meet future
benefit payments, could affect inve"tment policy. On the other
hand, investment earnings are only a minor source of income to
the funds (1.3 percent of total receipts for the Old-Age Fund
in fiscal 1982). Thus, the funding problem obviously cannot be
resolved by changes in investment policy.
At the

question

trust funds consist of four separate
Survivors Insurance Trust Fund, the
Disability Insurance Trust Fund, the Hospital Insurance Trust
Medical Insurance Trust Fund.
The
Fund, and the Supplementary
assets of the funds were $38el billion as of November 30, 1982.
of the funds is by law the responsibility of the
The investment
Secretary of the Treasury.
security
-- social
the Old-Age and

The

funds

Under the social security laws, amounts in the social
-ecurity trust fund" not needed to meet current benefit payments
expenses may be invested in interest-bearing
and administrative
obligations of the United State' or in obligations guaranteed
as to both principal and interest by the United States. The laws
authorize the Secretary of the Treasury to issue special, nonmarketable public debt obligations to the trust funds and provide
R-1052

that the funds be invested in these special non-marketable issues
Under a 1960
unless the public interest indicates otherwise.
interest
determined by
bear
obligations
special
these
amendment,
interest rates
the
approximate
to
seeks
which
formula
a statutory
for
a period
borrowing
for
market
the
in
would
Treasury
pay
the
provides:
law
The
more
four
or
of
years'
obligations issued for purchase by the Trust
shall have maturities fixed with due regard for
the needs of the Trust Funds and shall bear interest
at a rate equal to the average market yield (computed by
the Yianaging Trustee on the basis of market quotations
as of the end of the calendar month next preceding the
date of such i"sue) on all marketable interest-bearing
obligations of the United States then forming a part
of the public debt which are not due or callable until
after the expiration of four years from the end of such
Such

Funds

calendar

month;.

interest formula, trust fund investments
made during the month of December 1982
bear interest at 10-3/4 percent.
to
The Treasury Department presented detailed testimony
your Subcommittee on October 16, 1981 on policies and procedures
governing the investment of the social security trust funds.
I will direct my prepared comments today to the specific pro-

Under

this statutory

in special obligations

visions of the bill you are

now

considering.

Section 103 of the bill would amend the exi ting statutory
interest rate formula to provide that the trust funds be invested
at the higher of two interest rates -- the current rate based on
market yields on Treasury obligations of four or more years to
maturity, and a new short-tern rate based on market yields on
Treasury obligations with less than four years remaining to
maturity.
The explanatory
material accompanying the bill indicates
that the proposed amendment was prompted by the recent period of
high short-term

rates.

Lfe believe
that the long-range investment policies governing
social security trust funds, and other trust funds, should not
be dictated by the happenstance
of current relationships between
short-term and long-term interest rates. At the time the present
law governing the investment
of the social security funds was
enacted, in 1960, long —term market rates were higher than shortterm rates.
For example, 3-month Treasury bill yield" were about
2. 9 percent (coupon equivalent), and yields on 10-year Treasuries
were about 4. 1 percent.
Thus, the statutory requirement
that the
interest rate on fund investments be based on market yields on
Trea ury securities with Cour or more years to maturity resulted
in a higher return to the funds than would have been realized from

the

rates
relationwith changing market conditions,
ship has fluctuated substantially
and in recent years there have been prolonged periods when shortterm rate - were higher than long-term rates.
This relationship
has changed dramatically over the past year, as short-term rates
declined relative to long-term rates. The 3-month bill rate is
currently about 8. 6 percent (coupon equivalent) and the 10-year
rate is about 10.7 percent. In comparison, in Nay 1981 the
3-month bill rate was as high as 18.0 percent, while the 10-year
rate was 14. 7 percent. Thus, the earnings of the funds will not
necessarily be maximized by requiring that future investments be
tied to either short-term or long-term rates.
In Treasury's testimony before the Subcommittee on October 16,
1981, Deputy Assistant Secretary Stalnecker identified three
deficiencies with the existing statutory formula for determining
interest rates on social security trust fund investments:
First, the requirement that the intere-t rate be based on
yields on Treasury marketable issues with four or more years to
~naturit
prevents the Tres ur"y from providing intere t "rates
related to the specific maturities of the issues to the trust funds.
Thus, when short-tern rates are higher than long-term rates,
as was generally the case in 1979-1981, the trust funds receive
a lower rate of return than they would receive if the statute
permitted Treasury to pay interest rates related to the yields
issues of comparable maturities.
on Treasury marketable

a formula based on short-term rates.
Since 1960 long-term
have generally been higher than short-term rates, but the

Second, the requirement that the obligations issued to the
bear intere"t at a rate equal to the average market yield
at the end of the month preceding the date of issue subjects the
earnings of the funds to erratic fluctuation" which may occur on
any one day in the market, because of market reactions to shortor other unsettling news
term economic or financial developments
events. A better approach would be to base the interest rate on
an average over a period, which would provide a more equitable
rate of return and would help assure more stability in the earnings
of the funds.
funds

Third, the requirement that the obligations issued to the
funds bear interest rates equal to market yields on all marketable
obli ations of the U. ST of the prescribed maturinterest-bearin
in
a somewhat lower rate of return to the fund- than
xties results
Treasury would be required to pay on new issues in the market.
That is, under this statutory formula, Treasury must include in
its rate computation the yields on many outstanding securities
which were issued nany years ago at market rates considerably below
current market yields. Since such issues are thus traded at deep
discounts in the current market, they are especially attractive

to purchasers who benefit from the capital gains tax advantage
of deep discount issues as well as to purchasers who gain special
tax advantages from the so-called "flower bonds" which are
redeemable at par for the payment of estate taxes. Consequently
such issue are traded at lower nominal yields than would be
required on Treasury new issues. This inequity to the trust
the Secretary of the Treasury
funds could be remedied by permitting
greater discretion to base his rate determinations on current
issues which are reasonably
market yields on selected outstanding
reflective of Treasury's current borrowing costs'
The two tier interest rate setting system proposed in the
bill would not deal with these three deficiencies in existing
law and it would not provide sufficient flexibility to assure an
equitable rate of return to the funds.
I am particularly concerned with the requirement in section 103
that the trust fund" be invested only in short-tern securities
rates, and vice
when short —term rates are higher than long-term
versa. Such a policy would not necessarily benefit the funds in
the long run, and such a policy would clearly not be consistent
For example, as indicated
with prudent investment practices.
above, short —term interest rates are generally higher than longterm rates during periods when all interest rates are at cyclical
highs. Thus a consistent policy of shunning long-terri investments
when short-term
rates are higher than long-terra rates would
clearly be inadvisable and would not be followed by a prudent
As indicated
fund manager.
above, we believe that the long range
investment policies governing the Social Security trust funds
and other trust funds should not be dictated by the happenstance
of current relationships between short —term and long-term interest
rates. There is no way of knowing whether any policy of maturity
selection on the basis of interest rate forecasts will maximize
fund earnings.
LJe believe
that the selection of maturities
should be based on the expected cash needs of the funds and that
the appropriate policy is to pick one strategy and stick to it.
Accordingly, a possible approach would be to consider the
above alternatives
to correct the deficiencies in the existing
formula.
&awhile correction
of these deficiencies in the statutory
interest rate formula night not have a significant impact on the
current earnings of the trust funds, there would be greater
assurance of a more equitable and market-related
return to the
funds in the future.
I would note, however, that the National Commi"sion
Security Reform is addressing this issue, and I am sure
want to consider their recommendations.
This completes
any questions

answer

provisions

on
we

Social
will all

prepared remarks.
I will be happy to
the Subcommittee may have on the investment
oi section 103 of II. R. 7326.
my

OoO

department

of the Treasury

For Release
Expected at
December

~ Washingion,

Deliver

10:00 a.m.

7, 1982

D.C. ~ Telephone 566-204$

EST

STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON ENERGY AND AGRICULTURAL
OF THE
SENATE FINANCE COMMITTEE

TAXATION

of the Subcommittee:
I am pleased to have the opportunity to present the
views of the Treasury Department on S. 1911 and S. 2642,
which would permit both cash and accrual method taxpayers to
deduct the estimated cost of surface mining reclamation work
in a taxable year prior to the year such work is performed.
For reasons that I will discuss, Treasury is strongly opposed
to both of these bills.
Mr. Chairman

and Members

Back round
The Surface Mining Control and Reclhmation Act of 1977
similar state laws require surface mine operators to
restore ?and that is damaged by the mining process. In many
cases the mine operator either must post a bond to insure his
future performance of the required reclamation work or
otherwise must demonstrate financial capability to perform
the required reclamation work after mining activities are
completed.
and

R-1053

of a controversy
which has existed for some time between mine operators and
the Internal Revenue Service over the proper time to accrue
deductions for the cost of statutorily mandated reclamation
The Service takes the
work to be per formed in the future.
position that such expenses are not accruable until the
taxpayer incurs a present liability to pay for the
reclamation work. Taxpayers argue that the estimated amount
of the reclamation expenses should be deductible when the
statutory obligation to perform the reclamation work arises.
In a recent decision, the Tax Court held that the
estimated expenses of an accrual method taxpayer to be
incurred in future taxable years to satisfy its statutory
obligation to reclaim strip-mined land were accruable during
the year of the mining operation, even though reclamation
work had not been started and the taxpayer had no present
liability to pay for the performance of such work. Ohio
River Collieries Co. v. Commissioner, 77 T. C. 1369 (1981) .
S. 1 ll and S. 2642 would codify the Tax Court's decision on
this issue for accrual method taxpayers and would provide

S. 1911 and S.

similar

treatment

2642

are

for cash

an outgrowth

method

Descri tion of

taxpayers.

S. 1911 and S.

2642

S. 1911 and S. 2642 would permit both cash method and
accrual method taxpayers, in computing taxable income for any
year, to elect to deduct a reasonable addition to any reserve
established for the estimated expenses of surface mining land
reclamation.
The election would be made on a
basis. For this purpose the term
property-by-property
property" has the same meaning as in section 614 of the
Code; that is, each separate interest owned by the taxpayer
in each mineral deposit in each separate tract or parcel of
land . is treated as a separate property.
The estimated
expenses would be allocated to .the minerals extracted.
Thus,
the accrued reclamation expenses would be deducted over the
life of the mine as minerals are produced.
2642

The primary difference between
would allow a taxpayer to

also

bills is that S.
elect to allocate

the two

estimated expenses to the property "disturbed" rather than to
minerals extracted.
This would mean that expenses could be
deducted as the land is "disturbed ." S. 2642 does not
clarify what types of "disturbance" would give rise to the
deduction.

bills define

the "estimated expenses of surface
reclamation" as those expenses otherwise
deductible under the income tax law which are (1)
attributable to "qualified reclamation activities" to be
conducted in future years, (2) are subject to estimation with
reasonable accuracy, and (3) are either allocable to minerals
extracted before the end of the taxable year (or, in the case
The

mining

land

of S 2642 g are al locable to that portion of the proper ty
disturbed in the taxable year) . The term "qualif ied
reclamation activities" is defined as land reclamation
activities conducted under a reclamation plan submitted as
part of a surface mining permit application under the Surface
Mining Control and Reclamation Act of 1977 or under a plan
submitted pursuant to a Federal or State law imposing
substantially similar surface mining land reclamation
requirements.
If the amount in any reserve for estimated
of
to
surface
expenses
mining land reclamation is determined
be excessive at the close of any taxable year, then the
excess shall be included in gross income in that year.
Nonqualified land reclamation expenses of electing taxpayers
to be
would be deductible in accordance with regulations
prescribed by the Secretary.
~

S. 1911 and S. 2642 also provide special treatment for
estimated expenses of surface mining land reclamation that
are attributable to mining activities occurring before the
first taxable year for which the reserve accounting method is
elected and that have not previously been deducted. These
estimated expenses are treated as deferred expenses and may
be deducted ratably over a 60-month period beginning with the
first month of the first taxable year for which reserve
accounting is elected. If mining of a property with respect
to which there are deferred expenses will be completed in
less than 60 months, then the expenses can be deducted
ratably over that shorter period .

bills generally would be effective for taxable years
after the date of enactment. However, they also would
validate retroactively the deduction of these estimated
The

ending

future expenses for accrual method taxpayers who have accrued
such expenses for one or more taxable years ending on or
-before the date of enactment.
Discussion

S. 1911 and S. 2642 deal with a problem of income
that is not unique to the mining industry.
Taxpayers often generate income in one year and incur an
expense directly associated with generating that income in

measurement

Indeed, generally accepted accounting
principles frequently require the establishment of reserves
for such future expenses, thus reducing net profit as
reported on financial statements.
subsequent

year.

first glance,

there is

some appeal to taxpayers'
claims that they should be entitled to current deductions for
The true profit from any incomethese future expenses.
producing activity can only be determined by taking all
related expenses into account. Nevertheless, there are three
broad considerations
that militate against permitting current
First, a rule that grants a
deductions for future expenses.

deduction today for tomorrow' s expense overstates the true
cost, of the expense to the extent that the rule fails to take
into account the time value of money. Second, such a rule is
difficult to administer, since estimates of future expenses
are inherently uncertain.
Finally, the revenue loss from
to all similarly situated
such a rule, applied evenhandedly

taxpayers,

would

prohibitive.

of the
The first of these problems -- the overstating
true cost of the future expense outlay
is best
demonstrated by example.
Assume the taxpayer generates $100
of income in year 1 from an activity which will generate a
If
corresponding expense of $100 six years later (year 7)
the taxpayer is permitted to accrue the $100 expense, he will
report no net income from the activity. But since the
taxpayer has the unfettered use of the $100 of income
beginning in year 1, at the end of six years he will have
substantially more than $100 with which to pay the expense.
If he has been able to earn a 12 percent, after-tax return on
the funds during the six-year period, he will have about
$200. The problem lies in the fact that the true cost in
year 1 of the future outlay is the present value of the
outlay amount, which in this case is about $50. Thus, the
taxpayer's true profit in year 1 is $50 ($100 income less the
$50 present value of the future expense), and the appropriate
tax (assuming a 50 percent tax rate) is $25. Unfortunately,
our present income tax system does not reach this result
because it does not take into consideration the time value of

—

money.

Conversely,

delaying

the taxpayer's

deduction

to year

always produces the correct result.
In reality what has
happened is that the taxpayer has charged $50 for the product

sold and $50 to fund his future obligation seven years
hence. * This latter $50 will bear a $25 tax in year 1 and
the remaining $25 will grow to $50 in year 7, which will
equal the taxpayer's net after-tax cost ($100 expense less
$50 tax savings) of the obligation in year 7.

While deferring the tax deduction to the year in which
the expense is incurred thus produces the correct result,
taxpayer in some cases may have insufficient income in the the
later year against which to offset the deductions
The
operating loss carryback provisions will not remedy the net
situation if the taxpayer had insufficient income in the
taxable years to which the deduction can be carried back
If

detailed discussion of the effect of the timing of
for the future obligation on the amount charged
fund that obligation is set forth in the attached appendix to

deduction

is forced to carry the loss forward, the value

the taxpayer

will decline in present value terms'
If
then the appropriate solution
would be to amend the net operating loss provisions
to
provide for a longer carryback period in the case of losses
of the type at issue here, as has already been done in the
case of product liability losses under current law.
A second
inequity with deferring the tax deduction
is required to escrow funds
may arise when the taxpayer
currently to meet the future obligation but the taxpayer is
not entitled to receive the benefit of a market rate of
interest earned on the escrowed funds. However, if the
taxpayer is denied such interest on the escrowed funds, his
economic disadvantage
is caused by the terms of the escrow
arrangement
rather than by the Federal tax law.

of the deduction

relief is considered necessary,

There

is precedent

in the tax law for reserve

accounting

of the type provided by S. 1911 and S. 2642. The
Internal Revenue Code of 1954, as originally enacted by
Congress in 1954, contained a provision, section 462, which
permitted the accrual of current deductions for future
expenses attributable to income generated in the current
year. This provision was repealed, retroactively, in 1955.
Even though section 462 was consistent with generally
accepted accounting principles, the administrative
problems
and potential
revenue losses caused by the provision were
found to be intolerable shortly after enactment of the 1954
Code. It was simply impossible to impose any workable
limitations on the categories or amounts of the future
expenses for which reserves could be established and current
deductions claimed, and the potential revenue losses from
allowing all similarly situated taxpayers to create and
methods

deduct

such reserves

were unacceptable.

The foregoing discussion makes it clear why Treasury
examples show
opposes S. 1911 and S. 2642. The mathematical
that the denial of current deductions for future reclamation
expenses required by Federal or State statutes penalizes
taxpayers only to the extent that the taxpayers are unable to
obtain immediate tax benefits from the deductions in the year
This hardship, if it exists
the expense outlays are made.
at all, is minimal compared with the unfair advantage that
would be given to mining companies by allowing current
deductions for the undiscounted amount of the future outlays.

the enactment of either of these bills to give
special treatment to mining companies would have broad
implications with respect to the deductibility of reserves
If current
for similar expenses incurred by other taxpayers.
deductions are allowed for estimates of future reclamation
expenses, it would be difficult to deny taxpayers the right
to establish reserves for the estimated amount of workers'
Moreover,

compensation costs, product liability and warranty claims,
pension liabilities, costs of dismanteling offshore
drilling rigs or decommissioning nuclear power plants, and
the like. The past experience with the broad rule of section
462 of the 1954 Code shows that the potential revenue losses
from applying this accounting method to similarily situated
taxpayers would be prohibitive.
unfunded

Proponents of S. 1911 and S. 2642 argue that our
concerns in this area are rendered moot by the Ohio River
Collieries case, and that the legislation merely codifies
We believe that Ohio River
We disagree.
Collieries was incorrectly decided and that the "all events"
test for accruing deductions under current law does not
mandate the results provided by the two bills.
Rather, we
believe that current law allows a deduction for reclamation
expenses only when the taxpayer has a present liability to
However, if legislation is needed to
pay for such expenses.
eliminate the uncertainty resulting from the current conflict
between the Internal Revenue Service and taxpayers on this
issue, the legislation should confirm the correctness of the
Service's position and eliminate the ability of mining
companies to understate their incomes in the manner allowed
In the interim, we intend
by the Ohio River Collieries case.
to continue litigating cases such as Ohio River Collieries in
order to assure consistent application of the a
events
test of present law.

expenses.

Finally, regardless of the argument that can be made as
to the proper time for accrual method taxpayers to deduct
future expenses, there can be no debate about the appropriate
time for cash method taxpayers to deduct these expenses.
The
law has been consistently clear that a cash method taxpayer
can only deduct an expense when he has actually paid it. We
strongly object to the provisions in both S. 1911 and S. 2642
that would permit an exception to this longstanding rule.
Conclusion

strongly opposes S. 1911 and S. 2642. The
permit mining companies to understate their
incomes significantly by claiming current deductions for the
undiscounted
amount of future expense outlays.
More
importantly, enactment of either bill would open the way for
additional legislation to permit other taxpayers to establish
reserves for the estimated amount of future expenses
associated with current income-producing activities.
bills should not be viewed as merely codifying existingThecase
law in a discrete area.

bills

Treasury
would

would

be happy

to answer your questions.

Append

of Alternative

Analysis

Nature

It is

of the

Deferred

Tax Treatments
Expenses

problem

frequently

the case that a current

of
action by
the seller. When that future action requires the expenditure
of resources by the seller, the question arises as to whether
those expenditures should be taken into account in
determining the seller's current year pre-tax or taxable
income. The correct answer to this question is a rule which
ensures that the amount charged by the seller reflects no
more than the resource cost of completing the transaction.
The purpose of this Appendix is to demonstrate
that the
present law rule which requires that the seller include in
his gross income for the current year the entire proceeds of
his sale while deferring to the later year the deduction of
the associated expense generally produces the correct result.
The analysis also identifies the error implicit in an
alternative rule that would permit the seller to currently
deduct the future cost.
goods and services

entails completion of

exchange

a future

The exposition following includes: first, a description
of the determination of the price to be charged absent the
influence of income taxation; second, a measure of the
seller's income in the year a sale is made which requires a
future year expenditure; third, a demonstration that the
present law rule does not affect the current year price
charged; and finally, an identification of the logical error
in formulation of the alternative rule under which the
seller's current year taxable income is measured as the sales
price less the future cost of completing the transaction.
The facts of the example used in the testimony will be used
to provide numerical results.

II. Determining the current year price to be charged a buyer
of goods or services when the seller becomes obligated to
incur a future expense.
If all a coal mining company must do to produce a ton of
coal for sale is mine it and otherwise prepare it for
delivery to a buyer, the price charged would have to be
sufficient to cover all the expenses incurred in its
production:
wages of coal miners, the cost of materials
consumed in mining, and a gross return to mining company
capital sufficient to cover depletion of its reserves,
and depreciation
of its equipment and to provide a return to
its creditors and equity owners. Since the price to cover
all these costs of production multiplied by the quantity

mined is reported by the mining company as "gross income, "
the company is allowed to deduct the wages paid and the cost

of materials used up, since these elements of gross income
are allocable to those productive agents. The coal company is
similarly permitted to deduct depletion and depreciation
costs to determine pre-tax income. After the mining company
deducts the interest paid creditors--their
share of the
pre-tax income from capital employed in the mine--the
residual is the pre-tax income of equity owners. Taxation
affects the cost of mining coal only to the extent it affects
the cost of wages or materials or the pre-tax rates of return
of creditors and equity owners. So long as costs incurred in
simple mining are appropriately measured and allowed as
deductions to the mining company, the income taxation of coal
mining companies, ~er se, does not affect the price of coal.

Now suppose
that, in addition to incurring these current
costs of mining coal for sale, the mining company must also
restore the land to some specified condition after mining is
completed.
Clearly, an additional cost to the mining of coal
has been imposed.
Since this future reclamation expense is
effectively independent of the mining cost, it can be
isolated in determinating its effect on the price of mined
coal. Let us symbolize the cost to be charged coal buyers
for this service as Pl, the subscript indicating that it is a
price to be charged in year ¹1, when the coal is mined.

as On,
reclamation
determinant
year charge
land

symbolize the future outlay to reclaim the mined
the subscript indicating the year when the
outlay will be made, then the only other
of P, is the discount rate by which the current
can Se related to the future outlay.
Let us call

this discount rate,
obligations
0
Pl

payment

which is the opportunity
cost of shifting
over time, r. Then, ignoring taxation,

(

1+r)

(1)

is,

referring to the example in the tesgimony, where
= $50. 66. The
$100, n=7 and r= 0. 12, P = $100(1.12)
seller would have to charge the buyer at least $50. 66 in year
¹1 so that, 6 years later, he would have accumulated $100
with which to cover the costs of reclamation (in year ¹7) .
From the buyer's point of view, he would pay no more than
$50. 66 in year ¹1 for he could take that capital sum and
accumulate it over 6 years to $100 and, himself, requite the
reclamation cost of $100.
That

On =

III.

seller ' s income.
Suppose that the cost assumptions of the above example
hold. What is the measure of the coal miner's income in
year ¹1 when he receives the $50. 66? Obviously, with respect
to the $50. 66 received for the sale of coal, it is zero: He
has simultaneously
received a market payment of $50. 66 but
The

incurred an obligation to cover a future expense the resent
value of which is exactly equal to $50. 66. Therefore,
or
%financial statement purposes, the receipt of the 650. 66 has
no effect on the company's income statement;
but it will have
a balance sheet effect. On the balance sheet, the $50. 66
will be an increase in assets (earning 12 percent, by
assumption)
offset by the recognition that there is a future
$100 obligation, less a "discount" of $49. 34, which
represents the 6-year cumulation of earnings of the $50. 66.
With each passing year, the mining company will record
interest income and a corresponding decline in the "discount"
associated with the year 47 reclamation obligation.
If it
does not in fact accumulate among its assets the interest
earned, when the $100 outlay is made the mining company will
suffer a $49. 34 decline in net worth.

taxation.
In order to simplify exposition, we shall now assume the
r in equation (1) represents an after-tax rate of return to
capital employed in the enterprise.
There are two income tax
formulations for the treatment of Pl that will give the same
result as equation (1): The present law rule, and another
rule which applies the result in III, above, namely, that
there is zero pre-tax income in year 41.
First, we rewrite equation (1) to introduce an income
tax levied at rate m. If Tl = tax due in period 41 and T
n
IV.

Introducing

income

the tax due in period n,
1

(2)

equation (2) simply says that Pl, less tax due
received, must be euqal to the future outlay, plus
tax then due, when the outlay is made in year n, all
discounted to the present.

Symbolically,

when

it is

Under
a deduction

present law, which taxes Pl as received
of 0n in year n,

= mP1

= -mO

1 (1-m)

(4a)

=0 (1-m)
n

allows

(3a)

If equations (3a) and (4a) are substituted
the result is:
P

and

(1+r)

—( n-1)

in equation

(2),

of course, is exactly the same as equation (1) after
cancelling the (1-m) . Applying the present law rule to the
factual assumptions in the testimony example produces a Pl
$50. 66, and if we take m = 0. 40, $20. 26 will be paid in tax
(T1=$50.66 x 0. 40) leaving the miner a capital fund of $30. 40

which,

which will accumulate to $60 in year 57, at which time the
$100 x 0 40)
miner will receive a refund of $40 (T7
enabling him to cover the $100 year 47 cost.
Of course, if the taxpayer is allowed a $50. 66 deduction
in year 41 against his Pl = $50. 66 to signify his lack of
economic income in that year and is not allowed to take a
deduction when the expense is incurred in year 47, T7=O, the
same result is achieved as under present law, and neather
rule causes an alteration in the charge for reclamation.
But
note that, in order to apply the latter rule, the resent
value of the future cost must be determined, and t rs
requires estimation of a discount rate. ln contrast, the
present law rule which taxes Pl and refunds with respect to
O
operates only with actual transactional data and requires
n

discounting.

effect

of' erroneously

permitting the current
of future (undiscounted) costs.
Suppose we define Pl to be the year $1 charge for future
costs to be incurred by the seller under a tax rule that will
permit the amount of the future outlay, On, to be currently

The

deductibility

deducted.

Then,

Tl = m(P 1 — O n )

(3b)
(4b)

and substituting
obtain

Pl=0

these in euqation

[(1+r)-(n-1) -m] /(1-m)

(2)

and

simplifying,

(4)
In contrast with P, as determined under present law rules for
Pl and On, this ruIe makes P, a function of the tax rate m.
In general, for all tax ratek greater than zero Pl(P, the
difference being a tax subsidy to benefit the cause 1'
of the
deferred expense; it results from the deduction of an
undiscounted
amount On, in year 41, and the subsidy increases
with the taxpayer's marginal rate.
For example, continuing to use the testimony example in
which $50. 66 is the true charge for reclamation
a buyer of
coal should pay, allowing current expensing of $100 would
result in the following:

Buyer's reclamation
char e

Miner's

rate:
0. 20
0. 40
0. 46

Subsidy

($50.66-P1)

tax

$38. 33

17.77

8. 64

$12. 33
32. 89
42. 02

course, if competition does not drive down the reclamation
charge to miners' customers, the subsidies will be converted
into increased monopoly profits of miners.
If for example, a
monopolistic corporate miner keeps the charge at $50. 66, this
will increase its after-tax monopoly profit by $22. 69 (=the
"refund" on $50. 66 of current income, less $100, times 0 ' 46),
eguivalent to a taxable subsidy to him of $42. 02, as shown
above.
Of

of the Treasury

Department

D.C. e Telephone 566-2048

Washington,

December

RELEASE

FOR IMMEDIATE

6, 1982

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

for $5, 802 million of 13-week bills and for $5, 803 million of
both to be issued on December 9, 1982, were accepted today.

Tenders

bills,

26-week

OF ACCEPTED
CO&iPETITIVE BIDS:

RANGE

High
Low

Average
a/ Excepting

26-week bills
June 9, 1983
maturing
Discount
Inves tment
Price
Rate
Rate 1/

98. 008a/ 7. 880% 8. 15%
97. 983
7. 979% 8. 26%
97. 989
7. 956% 8. 23%
tenders totaling $580, 000.

at the
at the

Tenders
Tenders

13-week bills
maturing
March 10 1983
Investment
Discount
Price
Rate 1/
Rate

low
low

95. 850
95. 819
95. 827

8. 209%

8. 68%
8. 75%
8. 73%

8. 270%
8. 254%2/

price for the 13-week bills were allotted 89%.
price for the 26-week bills were allotted 87%.
TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Location

Received

Boston
New York

45, 275
9, 684, 305
29, 135
84, 210
37, 770
55, 550
1, 004, 595

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St. Louis

59, 275
21, 380

Minneapolis
Kansas

City

Dallas
San

Francisco

Treasury
TOTALS

Type

Competitive
Noncompetitive

Subtotal,

Public

Federal Reserve
Foreign Official

Institutions
TOTALS

46, 175
30, 615
838, 720
230, 515
$12, 167, 520

Accepted
45, 275

4, 374, 775
29, 135
53, 210
37, 770
55, 550
502, 265
49, 735

18, 380
46, 175
30, 615
328, 520
230, 515
$5, 801, 920

$9, 634, 560

967, 760
$10, 602, 320
1, 282, 500

$3, 268, 960
967, 760
$4, 236, 720
1, 282, 500

282, 700

$12, 167, 520

$5, 801, 920

Received
75, 240
10, 756, 990
19, 090
257, 950
32, 160
33, 230
1, 125, 375
62, 110
13, 635

Accepted
42, 850
4, 420, 305
19, 090
230, 560
31, 160
30, 230

38, 495

36, 605

24, 380

467, 445
50, 860

11,375

24, 380

716, 695
220, 555
$13, 375, 905

220, 555
$5, 803, 110

$10, 894, 440
706, 865
$11,601, 305
1, 250, 000

$3, 321, 645
706, 865
$4, 028, 510
1, 250, 000

524, 600

$13, 375, 905

$5, 803, 110

1/ Equivalent coupon-issue yield.
the maximum
2/ The four-week average for calculating
on money market certificates is 8. 353%.

217, 695

interest rate payable

DIDC ECONOMIC

CONDITIONS

December

6, 1982

BRIEFING

Chart

(Discount

Basis,

and

flows.

savings

Percent

Bill Rate

Treasury

3-Month

Interest rates

Average)

Monthly

17
14

Savings

Time Deposit

and Small

(Percent, Seasonally Adjusted

Growth
Annual

Percent

Commercial
Banks and Thrifts
Rate, Monthly Average Data)

baloney

Market

(Excluding

Mutual

Billions

Inflows

Fund

Institutional-only

Funds, Monthly,

Not

Seasonally

Adjusted)

J J
1

981

982

Chart

of savings

Growth

adjusted

annual

small time deposits (percent,
monthly average rate).

and

rate,

seasonally

Thrift Institutions

Percent
Time Deposit
Growth

Small

Ily

I
I

10
20

Deposit

Savings

Growth

Commercial

Percent

Banks
Time Deposit
Growth

Small
l

ia
I
'IL

r
/

llg

10
20

Deposit

Savings

Growth

J
1

981

J
1982

Chart

MMCs

and SSCs as a

percent of total savings

and

small

time deposits.

Thrift Institutions*

Percent

60
50
MMC

20
SSC

Commercial

Banks

Percent

50
MMC

20
SSC

I'j

1981

*Includes savings

J J

and

loan associations

and mutual

982

savings

banks

only.

Teble

Net

inflovs to selected categories at commercial
(Billions of dollars, not seasonally

thrif t inst ituti«s l

banks end
ad )usted)
Money

7- to 31-Da
Comm.

Certificates

91-Da

Thrif t

Comm.

Institutions

Banks

Honth

Certificates
Total

Comm.

Institutions

Banks

Total

19S2-Jan.
Feb.
Mar.
Apr.

1.8

June

1.9

July
Aug.

Sept.
Oct.

1.9
1.4
1.4
-0. 2
-0. 2

2. 0

Hay

1.9

3.4

5. 3

6. 0

4. 9

10.9

0. 2

October

7. 9

8. 3
1-1

Time

1982-Jan.
Feb.
Her.
Apr.
May

June

July
Aug.

Sept.
Oct.

16.2

Comm.

Institutions

Total

Banks

1.3

1.4
1.0
1.2
1.6
0.6
0. 6
0.6
0. 5
0. 7
0. 9

2. 7
2. 1
2. 5
4. 2

2. 7
2. 6

2. 6

0.8
0. 5
0. 5

0. 3
0. 6
0. 6

1.4
1.1
1.1
0. 8
1.3
1.5

October

IThrif t institutions

include

*Less than $50 million.

-3.3

-4 9

Thri f t
Institutions

4. 6

6. 3
4. 2
6.03. 6
2. 1
5. 4
3.6
5. 2
5. 9
S.S

Outstanding

SSC

3. 6
3. 2

2. 1

2. 3

3.1
2. 8
3.4

1.3
-2. 4
-0.6
-1.0
-4. 1
-8. 2

-4. 4

0.3

-1.8

Outstanding

10.7

4. 5
6. 4
3.0

Balances:

MHC

217.54

231.0

3-1

2 Year

aag, s

Ceiling-

Free Time Deposit
Comm.

Total

Banks

Thrift
Institutions

Total

9, 0

6.8
9.6
6. 8
4. 2
7. 7

6. 7
8. 0
9.3

10.4

0.3

0. 2
0.4
0. 5

0. 6

1.1

0.1
0. 4
0. 8

0.6
1.6

0. 5
1.0
0. 5
1.2
1.0
2. 4

Outstanding

Balances:

9.5

9. 9

2. 3

1.2
1.9
-0.9
-1.6
-2. 8
-1.2
-3.3

3.3
4. 5
3.9
2. 9
o. a
0. 6

Certificates

Outstanding
IRA/Keogh

Banks

2 Year Small

Saver

Banks

1.1
1.3

0.6

4. 5

6. 2
2-1

year IRA/Keogh
Deposits
Thri

Comm.

-0.2

Outstanding
91-Day Balances:

Outstanding

7- to 31-Day Balances:
As

3.9
3. 2
3.3

0.2

0.4

Certificates
Thrif t
Total
Institutions

Market

19.4

only savings

87. 4

and loan

3-1/2 year Balances:

Balances:

163.4

associations

250. 8

2. 1

and mutual

savings

4. 4

banks.

6. 5

All
Saver Certificates
Comm.

Banks

Thrift
Institutions

1.1

0.7
1.0
0. 7
0. 5
0, 2
0.4
0.4
0.4
-10.4
Outstanding

13.6

1.1
1.1
0. 7
0.6
0.5
0.4
0.4
0.4
-15.8
0. 8

ASC

13.1

Total

2. 2

1.5
1.4
I.l
0' 7
0.8
0.8
0.8

2. 1

-26. 2
Balances:

26. 7

apartment

of the Treasury

FOR

Washington,

RELEASE

IMMEDIATE

Tuesday,

7, 1982

December

D.C. ~ Teiephone 566-204$

CONTACT:

Marlin Fitzwater
202/566-5252

SOCIAL SECURITY BORROWING

Secretary of the Treasury

Donald T. Regan announced today
Tuesday, December 7, 1982, the Federal Old Age and
Survivors Insurance Trust, Fund borrowed $3, 437, 270, 125. 90 from
the Federal Hospital Insurance Trust Fund in order to assure
payment of OASI benefit checks mailed December 3. The borrowing
interest rate is 10-3/4%, as required by section 202(1) of the
Social Security Act. This is the second of three scheduled
borrowings to fund OASI benefits.
The final borrowing permited
by law, which will support OASI benefit payments
through June,
1983, will be made as of December 31, 1982.

that

In order

the loan to the Federal Old Age and
Trust Fund, the Hospital Trust Fund has
redeemed securites in its portfolio with a composite interest
rate under 10-3/4$. This permits the Disability Insurance Trust
Fund to retain its $6. 5 billion portfolio of securities,
at least
through the end of the month.
The interest rates on the majority
of these securities are significantly in excess of 10-3/4$.
Survivors

make

Insurance

will consult with the other Trustees of the Social
Funds
to determine the division of the December
31 borrowing between the Hospital Insurance Trust Fund and the
Disability Insurance Trust Fund. Among the factors the Trustees
will consider are the state of the reserves of the two funds in
comparison to projected benefit obligations and the cost to the
lending funds.
Treasury

Securitiy Trust

R-1055

pepartment

of the Treasury

FOR RELEASE AT

Washington,

4:00 P. M.

O. C. ~ Telephone 566-2041
December 7, 1982

TREASURY'S WEEKLY BILL OFFERING

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $11, 600 million, to be issued December 16, 1982.
This offering will provide $950
million of new cash for the

Treasury, as the maturing bills are outstanding in the amount
of $10, 660 million, including $655
million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2, 867 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 $5, 800
million, representing an additional amount of bills dated
September 16, 1982,
and to mature
(CUSIP
March 17, 1983
No
912794 CN 2 ), currently outstanding
in the amount of $5, 638
million, the additional and original bills to be freely
interchangeable.
~

182-day bills (to maturity date) for approximately $5, 800
million, representing an additional amount of bills dated
June 17, 1982,
and to mature
(CUSIP
June 16, 1983
No. 912794 CD 4), currently outstanding
in the amount of $5, 777
million, the additional and original bills to be freely
interchangeable.
Both

series of bills will

be issued for cash and in exchange
Tenders from
December 16, 1982.

for Treasury bills maturing
Federal Reserve Banks for themselves

and as agents for foreign
will be accepted at the
authorities
international monetary
tenders. Addicompetitive
of
accepted
weighted average prices
issued
to
Federal
Reserve Banks,
bills
be
the
tional amounts of
may
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
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $10,QQQ
on the records either of the
and in any higher $5, 000 multiple,
Federal Reserve Banks and Branches, or of the Department of the
Treasur y.
and

R-1O56

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,
December 13, 1982.
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 .
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 three decimals, e .g . , 97 .920 . 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
if the names of the
may submit tenders for account of customers,
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 as of 12:30 p .m . Eastern
time on the day of 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 auctions
~

deposit need accompany

tenders

from incorporated

banks

Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Competitive bidders will be advised of the acceptance or rejection of
their tenders. The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
funds
on December 16, 1982, in cash or other immediately-available
December
1982
'
16,
Cash adjustments
or in Treasury bills maturing
will be made for differences between the par value of the maturing
bills accepted in exchange and the issue price of the new bills.

amount

is determined
of
bill and the
numerator

such discount by a fraction, the
by multiplying
which is the number of days the taxpayer held the
denominator of which is the number of days from the

the taxpayer's date of purchase to the maturity of
the gain on the sale of a bill exceeds the taxpayer
portion of the acquisition discount, the excess gain is
as short-term capital gain.

day following

the

bill.

ratable
treated

Debt.

27-76,

OIpartment

of the Treasury

Washington,

REMARKS

D.C. ~ Telephone 566-204$

ROBERT E. POWIS
DEPUTY ASSISTANT SECRETARY FOR ENFORCEMENT
DEPARTMENT OF THE TREASURY
BEFORE THE
DEFENSE DEPARTMENT CONFERENCE
REGARDING

POSSE COMITATUS

MILITARY SUPPORT TO CIVILIAN
MONDAY f

DECEMBER 6 i

LAW

ENFORCEMENT

1982

I deeply appreciate the opportunity to appear before you
today to discuss how the Treasury Department fits into the
National Strategy Against Drug Trafficking and how you in
the military can support us within the scope of the changes
to the Posse Comitatus Act. I am here as pinch-hitter for
Assistant Secretary John Walker who, regrettably, had to
travel to Puerto Rico today to attend the funeral of Bureau
of Alcohol, Tobacco, and Firearms' special agent Ariel Rios,
who was killed in the line of duty in Miami last Thursday
night. More about that incident later. John Walker truly
regrets that he cannot be here today because of his strong
feeling about the tremendous importance of the military
effort in the War against drug trafficking.
I think that it is important that you understand somestructure of the law enforceabout the organizational
of the Treasury Department.
These
ment responsibilities
responsibilities are diverse and wide ranging. Our office,
the Office of Enforcement and Operations, within the Departfor and exercises line
ment has direct responsibility
authority over the U. S. Customs Service, the U. S. Secret
Service, the Bureau of Alcohol, Tobacco and Firearms, and
thing

the Federal Law Enforcement Training Center at Glynco,
Georgia. Assistant Secretary Walker heads up this operations
In addition the office gives law enforcement policy direction
to the Internal Revenue Service.

R-1057

significant law enforcement problem which the
States faces is the drug problem. It is also a major
national social problem.
The President has identified the
effort to eliminate
problem and has pledged an unprecedented
it through a coordinated national effort involving task forces
in 12 geographic locations.
The President has stated that
the drug problem is the number one law enforcement priority
of this Administration.
The Treasury Department
fully supports
this position and has made the drug problem its top priority.
Earlier in my remarks I used the terminology "War against
drug trafficking".
This was very deliberate.
We are in a
war against the people involved in this business.
If you
have any doubt about this fact, let me cite 4 factors which
lead me to this conclusion.
The most

United

The vast majority of drugs used in this country are
grown, refined and manufactured
in foreign countries.
The drugs are smuggled across our borders by maritime
vessels, aircraft, motor vehicles, and individuals
utilizing body concealment'
The movement of these
drugs is controlled by international
and domestic
criminal conspiracies.
Aircraft and maritime vessels

regularly penetrate our borders with insidious
cargoes of heroin, cocaine and marijuana

profits from drug trafficking are fantastically
high and the amount of cash flow connected with drugs
is staggering.
Drugs siphon at least $50 billion
per year out of our financial system, robbing us
of tax revenues while enriching criminal organiThe

zations.
o

few

The major drug
was

until

laundering
he was

sentence

cases illustrate
money

1/2

launderer

in South Florida

billion dollars per year

convicted

last year.

this point:

and

received a 30-year

IRS and Customs agents last year seized $9
million in cash from a drug money laundering
operation named Sonal. This organization was
run by three Colombian nationals.
In the nine
months prior to the seizure this group had
laundered $242 million in U. S. currency.
Recently, IRS and Customs agents broke up two
smaller drug money laundering operations.
They were laundering
only $120 million and
$80 million per year.

Drugs

insidious, debilitating effect
We risk the loss of the greater
Drug
whole generation of our people.

have an

on our youth.

part of

abuse among the general population reduces the pool
of young Americans from whom the military services
can draw.
It also affects our military readiness
the effectiveness of those in uniform.
by impairing
In a real sense, the drug problem is a hidden threat
to our very security.

Drugs have a major impact on crime in general and
Drug users rob,
on violent crime in particular.
steal and mug to provide for their needs. They
obtain and utilize weapons of all kinds. Drug
trafficking organizations utilize violence as a
means of protecting
their turf, eliminating competition and safeguarding against ripoffs. Informants must be eliminated.
Drug traffickers at

all levels utilize firearms, particularly

autoto further

shotguns and silencers
This was painfully driven home
evening when two undercover
last
Thursday
just
ATF agents, Rios and D'Atri, were gunned down in
These agents had made an undercover purMiami.
chase of firearms from three suspects on the
previous day. At this time they were offered a
kilo of cocaine. Working with other ATF agents
and agents from the Florida Joint Task Group,
The
meeting with the suspects.
they set up ashoto'
three suspects produced a kilo of cocaine, and
the agents produced $48, 000 in cash. Just prior
to the time that arrests were to have been made,
the suspects opened fire on the undercover agents.
Rath agents were
The agents returned the fire.
hit as was one of. the suspects. Arresting agents
then forced entry into the apartment and another
Agent Rios died of two gunshot
suspect was
Agent O'Atri was hit four
wounds to the head.
and is in satisfactory
survived
He
has
times.
Six weapons belonging to the suspects
condition.
were recovered in the apartment.

matic weapons,

their operations.

Can

there be any doubt that this is a war.

I would now like to discuss the mission of the Treasury
First
Enforcement Rureaus with respect to drug traf f icking.
Customs has a prime mission with respect to
interdiction.
the interdiction of drugs or any other contraband coming

across our borders.

mission

The Customs

with some 4300

inspectors,

Service works at this
1400 Patrol Officers

and

has a relatively small Air
700 Special Agents.
Patrol — 58 aircraft of all kinds and 111 small patrol boats
to assist in this mission. With this force Customs is charged
with the protection of more than 10, 000 miles of U. S. border.
I would be remiss today if I did
Speaking of interdiction,
job which the Coast Guard is
not mention the outstanding
doing in nabbing drug carrying maritime vessels off our
coasts. The joint efforts of the Coast Guard and Customs on
maritime vessels is a model of interagency
marijuana-laden
Customs

cooperation.

can readily see from the broad expanse of our
borders and the limited resources available to the Customs
Service that we face a very formidable job. Good intelligence is absolutely necessary if we are to be effective.
information on the suspicious
We need timely and accurate
We also need
movement of maritime vessels and aircraft.
that same kind of information on drugs being shipped in
commercial cargo or on commercial aircraft and maritime
vessels. In particular we need the kind of intelligence
that was developed by Customs Patrol Officers which led
to the seizure of 685 pounds of cocaine from a Colombian
merchant vessel tied »p in Miami early last Saturday
morning.
Customs needs all the help it can get in the
area of intelligence.
It needs the kind of information
which the military has the unique ability to gather regarding the movement of planes and ships.
Above all we need
additional equipment if we are to be effective in interdiction efforts. We need additional fixed-wing aircraft,
helicopters, patrol boats, radar and communications
equipment and training.
More about this later.
You

strongly believes that i. nterpart of the overall effort
against drugs. Any program which seeks to attack drug
trafficking on a national scale must include a heavy
emphasis on interdiction.
As a practical matter,
this is
not possible without the loan of DOD hardware.
The Treasury
a very

diction is

Department

important

The second mission of the Treasury Department
with
respect to drug trafficking deals with financial investigations. These investigations follow two prongs. One
deals with investigations under the reporting requirements
of the Rank Secrecy Act, which is administered by the
Treasury Department, whereby Customs and IRS Special Agents
target individuals and groups involved in major cash flows.

in heavy cash flows are also
trafficking or in money laundering for
The second prong deals
drug trafficking organizations.
conducted hy the IRS targetwith income tax investigations
The IRS presently has
ing high level drug traf f ickers.
over 800 cases open in this category.
Most

of the people involved

involved

in drug

In the area of Rank Secrecy Act invest ig at ions, Customs
I RS have formed 20 financial task forces in 20 cities
around the country targetting major drug traf f ickers and
their money launderers.
Investigations conducted by these
groups seek to uncover and d isrupt drug tra f f ick ing activity
by locating and se i z ing currency and other assets produced
from narcotics traf f ick ing.
Our intent is to attack drug
operations where they seem to be most vulnerable in the
fruits of their crimes and in the need to launder money.
These investigations
f requently uncover a f inane ia 1 trail
that leads to major drug traf f ickers. DEA agents are
represented on most of these task forces. The best known
of the f inane ia 1 task forces is Operation Greenback,
located in Florida. This one task force alone has produced
substantial results in just two years. Among its accomplishments is the seizure of more than $27 million in cash, the
levying of IRS jeopardy assessments in the amount of S 1 12
million and the indictment of 123 persons involved in laundering drug prof its.
and

f inal

drug oriented mission which the Treasury
has concerns f i rearms violations which come
jurisdiction of the Bureau of Alcohol, Tobacco
and Firearms.
In th is area our s tra tegy has been to support
with an attack on f irearms violations
drug investigations
I 1 leg a 1 f i rearms
that are connec ted with drug activity.
dealers
with
weapons including
traf f icking provides drug
and
and
automatic weapons
silencers
is sometimes part of a
arms
shipments
to
drug
produc
of
ing and processing
pattern
The

Department
under the

The two ATF agents who where shot last week were
where they were target ting drug
processing and dealing in
who were also illegally

countries.

working

dealers
f i rearms.

in a situation

I have d i scussed some details about the problems we
and about Treasury ' s mission with respect to the problem.
Now I want to dea 1 with what has been done about the problem
What has been done deals
and what we intend to do about
This
with South Florida and the Vice Pres ident ' s Task Force
face

it.

Task Force represents a coordinated Federal enforcement
ef f or t involving Customs and the Bureau of Alcohol, Tobacco
and F irearms working close ly with PEA and the Coast Guard
other Federal agenc ies who are part of. the Task Force.

operation of the Florida Task Force has greatly exceeded
This Task Force has proven beyond all
expectations.
our
and DEA agents can work closely together
Customs
that
doubts
to destroy the enemy, the drug
effort
cooperative
a
in
Treasury has placed
smuggler and the drug trafficker.
250 Customs personnel and 50 ATF personnel into the Florida
part of
We have moved a considerable
Task Force effort.
our air fleet to South Florida to provide an effective
air suppnrt effort. to curtail the smuggling of drugs into
In conjunction with the help
Florida by private aircraft.
The

and workwhich we have received from the Defense Department
the
Task
Force
has
and
Guard
DEA,
ing closely with the Coast
or
their
operations
to
suspend
been able to force smugglers
locations.
and
more
expensive
riskier
move
to
forced them to
Mothership
are now bypassing Florida.
Many drug shipments
and
and
northward
eastward
further
inns
are
moving
operat.
job in pickthe Coast Guard continues to do an outstanding
role in interdiction
The Defense Department's
ing them off'
The Navy's
efforts has been nothing less than sensational.
contribution of E2-R and F2-C radar flight coverage, the
broad range stationary radar coverage from the Skyhook
tethered aerostat provided by the Air Force, in cooperation
with NORAD, have all built a capacity to detect smuggling
activity that greatly surpasses what Customs resources
alone could have achieved.
This has allowed us to use Customs

capabilities to their fullest extent. This pursuit
capability itself has been greatly enhanced by the Cobra
helicopters which Defense has provided and we look forward
with great. anticipation
to the operational testing of the
Rlackhawk in Florida.
pursuit

to the interdiction effort, Customs has
closely with DEA in a joint task group which has
conducted follow —up investigations
to every interdiction
and which conducts investigations
aimed at gathering drug
intelligence.
This feature of the South Florida
smuggling
Joint Task Group has provided Customs with needed intelligence tn perform its interdiction effort even more efficiently.
In addition

worked

This has been accomplished because the Attorney General has
confered the authority to conduct joint drug investigations
on the Customs Service working under the lead of DEA.
Some of.

the results of. the Vice President's
listed as follows:

Task Force are
n

Drug

smuggling

percent;

Cocaine seizures

percent;

arrests
have

have

increased

South Florida

by 43

by over

300

seizures have increased

Marijuana

There has been a substantial

seizures.

by 80

increase

percent;

in non-drug

to the Florida Task Force
ATF Special Agents assigned
since July have opened 326 cases. Many of them involving

drug

traffickers.

confiscated

76 3

They have made 144
with a value

firearms

arrests

and have

of S225, 000.

Florida is that we must
to other areas of the
about
national
shutdown similar to the
a
country to bring
regional shutdown which we accomplished in Florida. Drug
trafficking organizations are going around us in Florida
right now. We have to step-up our interdiction efforts
on the Gulf Coast, on the West Coast and on the Fast Coast.
The Treasury Department
fully supports the Administration's
new initiatives
to establish 12 additional task forces. We
believe that from an investigative standpoint they will be
extremely valuable and that they will generate additional
intelligence for Customs and break up trafficking organizations. We are committed to obtaining additional investigative resources for Customs, IRS and ATF to participate
in these task forces in a cooperative effort.
In addition,
we are committed
to enhancing Customs drug interdiction
Customs recently conducted a National Air
capabilities'
Threat Drug Smuggling Study which indicates a need for
additional resources in the form of pursuit aircraft both
fixed-wing and helicopters, tracker aircraft with radar
mounts, patrol boats, radar equipment and radio and communications facilities. We may need the availability of additional
need better intelligence
in terms
We definitely
Skyhooks.
the
movements,
of
and
aircraft
identity
smuggler
of ship
aircraft and maritime vessels and specific information with
regard to individuals and groups who seek to smuggle drugs.
Military assistance and support in South Florida has been
The project would not have been successful
outstanding.
without it. We in Treasury and the Customs Service in
particular will be coming to Defense in the near future for
additional support by way of equipment, training and intelliin dealing with
We feel very comfortable
gence information.
this is a war and we
the military.
As I said previously,
need all the resources which the Federal Government can
bring to bear on the enemy.
The prime lesson of South
expand this Task Force concept

with

Thanks again
you even more

for your help and we look forward
closely in the future.

to working

impartment

of the Treasury

FOR RELEASE AT

Washington,

O. C. o Telephone 566-2041

4:00 P. M.

December

8, 1982

TREASURY TO AUCTION 2-YEAR AND 4-YEAR NOTES
TOTALING $12, 000 MILLION

The Department of the Treasury will auction $7, 000 million
of 2-year notes and $5, 000 million of 4-year notes to refund $7, 217
million of securities maturing December 31, 1982, and to raise
$4, 783 million new cash. The $7, 217 million of maturing securities
are those held by the public, including $702 million of maturing
securities currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
The $12, 000 million is being offered
amounts tendered by Federal Reserve Banks

international

maturing

monetary

authorities

securities) will

be added

to the public, and any
as agents for foreign and
(including the $702 million of

to that amount.

In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $943 million of
the maturing securities that may be refunded by issuing additional
amounts of the new securities at the average prices of accepted
competitive tenders.

Details about the new securities are given in the attached
of the offerings and in the official offering circulars.

highlights

Attachment

o0o

HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 4-YEAR NOTES

BE ISSUED DECEMBER

31, 1982
December

Offered:
To the public
Description of Security:

Amount

Term and type of
Series and CUSIP

. $7, 000 million

security.

.. . .

. .2-year

date
Call date.

yield. . . . . . . . . . . . . .
or discount
Interest payment dates. . . . . . . .
Minimum denomination
available
Investment

Premium

interest payable

Dates:

Deadline

December
No

31, 1986

provision

based on
the average of accepted bids
To be determined at auction
To be determined after auction
June 30 and December 31
To be determined

$1,000

as an

None

~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Deposit guarantee by
designated institutions.
Key

(CUSIP No. 912827

Yield Auction
Must be expressed as an
annual yield, with two
annual yield, with two
decimals, e.g. , 7.10%
decimals, e.g. , 7.10%
Accepted in full at the
Accepted in full at the
average price up to $1,000, 000 average price up to $1,000, 000

by investor.
Payment by non-institutional

investors.

. . . . . . .. . . . ..

Noncompetitive
Accrued

.Yield Auction
. . . . . .Must be expressed

tenders'
tenders

Competitive

Series K-1986

. .To be determined based on
the average of accepted bids
. .To be determined at auction
.To be determined after auction
. .June 30 and December 31
.$5, 000

Interest rate.

Sale:
of sale.

4-year notes

notes

. .Series Z-1984
(CUSIP No. 912827
. .December 31, 1984
.No provision

Maturity

Terms of
Method

$5, 000 million

designation.

8, 1982

. . . . .Full
~

None

to be submitted

payment

with tender

. . . . . . . . . . . .Acceptable

. . . . .Wednesday,
by

to be submitted

Acceptable

for receipt of tenders.

Full payment
with tender

December
EST

1:30 p. m. ,

15, 1982,

date (final payment
institutions)
a) cash or Federal funds. . . . . . . . .Friday, December 31, 1982
b) readily collectible check. . . . . . .Tuesday, December 28, 1982
Delivery date for coupon securities. .Friday, January 14, 1983

Thursday,
by

December
EST

1:30 p. m. ,

16, 1982,

Settlement
due from

Fr today December 31 1982
Tuesday, December 28, 1982
Monday, January 17, 1983

apartment

of the Treasury

FOR RELEASE AT

Washington,

D.C. o Telephone 566-2041

4:00 P. M.

TREASURY ANNOUNCES

December
HOLIDAY

AUCTION

8, 1982

SCHEDULE

The Treasury

announced today in a separate release the
December 2-year and 4-year note auctions.
Because
of the holiday-shortened
week before Christmas,
the 4-year note
is being auctioned earlier than normal, on December 16, 1982.

details of the

The details of the 7-year note and the 20-year bond will
be announced on December 14, 1982. The 7-year note will be
auctioned on December 21 and the 20-year bond on December 22.
The
December

details of the 52-week bill will be announced on
17, 1982, and the bill will be auctioned on December 23.
oOo

epettment of ihe Treasury ~ Washington. D.C. ~ Telephone 56$-204$
Contact: Stephen Hayes

For Immediate Release
Thursday, December 9, 1982

Secretar
On

December

Regan

566-2Q41

to Host Meeting of U. S.

— China

Economic Committee

13,

14 and

15, Treasury Secretary

Joint

Donald

Regan

meeting of the U. S. — China Joint
Economic Committee.
The meetings will be held at the Treasury
Department in Washington and will focus on finance, investment,
trade and tax issues which relate to the overall U. S. — China

will host the 3rd Annual
economic

relationship.

delegation will be headed by Minister
of Finance, People's Republic of China.

The Chinese

Minister

Wang,

relations between the two countries have developed
in the last four years. Bilateral trade has grown
from S1.2 billion in 1978 to $5. 5 billion last year, making the
United States China's third largest trading partner and China our
fifth largest market for agricultural exports.
The U. S. — China Joint Economic Committee was created in 1979
shortly after establishment of diplomatic relations between the
two countries.
Its purpose is to coordinate the entire spectrum
of bilateral economic ties between the United States and China.
Economic

significantly

the Chinese delegation will
In addition, while in Washington,
participate with American corporate executives in a meeting
hosted by the National Council for U. S. — China Trade to discuss
The Chinese
commercial opportunities.
ways to expand bilateral
will also have an opportunity to meet with investment bankers in
a banking
forum hosted by the Overseas Private Investment
These meetings should provide an excellent
Corporation.
opportunity for the Chinese to become more familiar with the
interests and expertise of the American business community.

R-1060

of the Treasury

pepartment

FOR RELEASF. [JPON

December

9, 1982

Washlnyton,

O.C. ~ Telephone 566-204%

DELIVERY

STATEI"IENT RY
F,
POWI S
DI. PIJTY ASSISTANT SFCRFTARY FOR ENFORCFMFNT
DFP ARTMFNT OF' THE TREASURY
RF, I'ORF,' THE
SURCOMMITTEE ON GOVERNMENT INFORMATION AND INDIVIDUAL
HOIJSF, COMMITTFF, ON GOVERNMFNT ()PFRATIONS
RORF, RT

Mr. Chairman

and Members

RIGHTS

of the Subcommittee.

It is my pleasure to appear before you today to testify
hehalf of the Treas&)ry Department concerning the activities
of its enforcement bureaus regarding training, information
coordination and resources which are provided tn states and
Localities and also tn discuss the cooperative relationship
which exists between these bureaus and their. co»nterparts
in state and local law enforcement.
I intend tn discuss
overall philosophy in this regard and give specif ic examples
ahout training which
nf cooperative efforts and information
is afforded tn state and local law enforcement.
on

Initially, I would like to advise yn&) of the structure
The Otfice of F.'nfnrcement
and
of Treasury law enforcement.
Operations within the Treasury Department was set up some
years agn to exercise line authority over the enfnrceinent
hureaus.
This office oversees the operations of the IJ. S.
Secret. Service, IJ. S. C»stnms Service, the Rureau of Alcohnl,
Tobacco and Firearms and the F'edera1 Law Fnfnrcement Training
Center at Glynco, Genrg ia. In addition the off. ice, currently
headed by Assistant Secretary, Tohn M. Iaalker, .Jr. , provides
policy guidance nn a wide range nf law enforcement and
adm

istrat

R-1061

ive issues.

The major premise upon which our nf f ice operates is
that successful law enforcement activity demands cooperation and coordination at all levels. We f irmly believe in
bureaus to cooperate with
the need for Federal enfnrcement
activities in joint
their
each other and to coordinate

essential
we also believe that it is absolutely
endeavors.
relationmaintain
working
for. Federal enforcement bureaus to
and
local
enforcement
state
with
ships with and tn cooperate
officials on a daily basis. Law enforcement etforts are at
their best in those areas where cooperation and coordination
ederal, state and local enforcement agencies is at its
hy
highest. Part nf this cooperation involves training and
bureaus should make
we firmly believe that our enforcement
training available to state and local enforcement personnel
to the extent possible wi. thin the limits of their expertise
I

and

funding

resources.

Tustice/Treasur

, State and Local Training

Program

Recommendations
11 and 44 of the Attorney General's Task
Force on Violent Crime stated that the Attorney General should
expand where possible the training and support programs provided
to state and local law enforcement
by the Federal Government
personne. l and that the Attorney General should establish and,
where necessary, seek additional
resources for specialized
training prngrams to allow state and local law enforcement
personnel to enhance their ability to c:ombat serious crime.
Purs»ant tn these recommendations
the J»stice and Treasury
Departments agreed to jointly sponsor a program to carr y them
nut. It was agreed that the facilities of the Federal Law
Enfnrcement Training Center. (FLFCTC) at Glynco, Georgia,
wo»ld be used tn develop a training program to be made
available tn state and local enforcement nff. icers aimed
at the reduction of violent and serious crime. It was also
agreed that c onsideratinn
wo»ld be given tn the creation of
a National Center for state and local law enforcement
training
tn he located at Glynco.
Teffrey Harris, Deputy Associate
Attorney General in the T»stice Department and myself were
named as cn-chairmen
of. this project.
An Interagency
Working
Gro»p directed by George Rohlinger, former Acting Administrator
of. the LFAA, was set up tn design and conduct pilnt training courses and tn determine the feasibility
of. the projected
s1atinnal Center.
A f inal
report is to be submitted by the
Working Group in, january l983. An Interagency Multi-J»rissdict ional Advisory Committee was appointed tn assist the cochairmen of. the working grn»p tn achieve their objectives.

focus of the program is the development of advanced
speciali~ed and technical training courses fnr operational
personnel serving law enforcement at the state and local
level and those individuals involved in training such
personnel.
Fxperts availah1e in the Federal Government and
the various states have been identif ied and made available
to teach in various courses offered under the auspices nf
this program. Cnurses being presented and under consideration for development are nnt designed to duplicate existing
training but rather tn develop new programs and to engage in
joint sponsorship with state and local officials when appropriate. A number of pilot programs have been developed and
presented and several others are scheduled tn be of. fered in
1983. It was dec. ided that the training offered will he on a
reimh»rsable basis and that scheduling will be developed on
the basis of. demand.
A quality
product designed to meet the
needs of. the state and local law enforcement community is
the objective of each course. The following pilnt courses
have already been developed and presented.

The

Court Securit

Offered by the U. S. Marshalls
hy the Natinnal
Sheriff's Association. Twn cnures have already
been presented.

Service

and

2. Ouestioned
Service.

jointly sponsored

Documents.
One

offered

course has already

the U. S. Customs
been presented.

Advan&-ed Arson for Profit.
Offered hy the Rureau
of Alcohol, Tobacco and Firearms.
The first
course is being presented at this time.

Advanced

Fx lnsives Investigative
Techni ues.
Offered hy the Rureau ot Alcohol, Tobacco and
Firearms.
Six courses have already been pre-

sented.

5. Officer Safet

and Survial
course has been presented.

courses
The fnllnwing
on a pilot basis

presented

1983.

for Trainers.

One

and will be
three months of

have been developed

during

the

first

Undercover Investigative Techni ues. Offered
the Bureau of Alcohol, Tnbaccn and Firearms.

Protective O erations Rrief ing.
tlnited States Secret Service.

Of fere(1 by the

Offered by the
F)river Tnstructer Training.
Federal Law Fnfnrcement Training Center (FLFTC).

Advanced
hy

Photogra h . Offered
Law Fnforcement
the Federal Law Fnforcement Training Center.

(I LFTC).

ment

I'marine Law Fnforcement.
Law F'nfnrcement
Training

Fraud

and

Financial

the Federal

Law

the Customs
on Cargo

overall prngram

Training

Service is working
Theft.

In addition
The

Investigations.

'nforcement

of. a

co»rse

Offered by the Federal
Center.

on the develop-

excellent results.
response to several of the
d and eighty
(180) state and

to date has

There has been an enth»siastic

Offered by
Center.

had

courses presented.
One-hundr&.
1ocal law enforcement of. f icers have already gone thrn»gh
the Advanced F'xplnsives Techniques.
There is a backlog of.
over 400 local enforcement off. icials who wish to attend this
cnurse. The Rureau of Alcohol, Tobacco and Firearms has &jsed
an innovat. ive approach in developing
some of their cour. , es
by utilizing
recognized experts on the state and local level
in the act&Ial preparation
nf. course content.
This concept
is hei ng »sed in the development nf several additional
courses. A decision has been Inane for. the FLFTC to take
over operatinna1 control of the Tustice/Treasury,
State
and Local Training Program on February 1, 1983, based on
the success of some of. the first co»rses presented and the
potential for other courses which wi1.1 be presented.
IJ. S.

Secret Service

Secret Service recognizes f»lly the importance of
and assistance with members of the state and
local law enforcement community.
S»ch cooperation is vital
tn the Service's protective mission which includes the
protection of the President, members of his immediate family,
the Vice President, former Presidents, visiting heads of
states/governments
and the major candidates for the Presidency
an d Vice Presidency during campaign years.
The Service cannot
The

cnnperatinn

its protective

mission without the cooperation and
receives f rom state and local law enforcement.
Coordinated planning is carried out hy the Secret Service
with state and local law enforcement agencies in connection
with each visit hy a prntectee to a local jurisdiction.

carry out

assistance

The Secret Service also relies heavily upon information
provided by .local and Federal law enforcement agencies in
the conduct of its protective responsibilities.
The Service
cannot make intelligent and informed decisions concerning
potential sources of. dange~ to its protectess in a vacuum.
It m»st have information which lncal agencies and other.
Federal agencies can obtain and provide.
Conscious efforts
Service
the
Secret
in
this
area
date
hack
tn the Warren
by
Commission and its findings and recommendations.
One of the
primary concerns centered on the acquisition of possible
threatening information through liaison affected by the
Service. This concern has been reiterated at critical
moments since that ti. me.
Fvery effort is expended hy the
Secret Service tn maximize relations with enforcement agencies
with a veiw toward keeping lines of communication open so as
to receive informatinn about persons or groups who may intend
tn harm Secret Service protectees.

Secret Service field off. ices and resident agents are
for the establishment and maintenance of active
liaison with all intelligence and law enforcement agencies
and their respective districts tn ensure that all inforwho might constitute
mation on groups or individuals
a potential threat is furnished on a timely basis. They in turn
report this immediately to the Headquarters Intelligence
Division. The Service has a set of guidelines which include
broad categories of informatinn of interest to assist in
evaluating not only individuals but situations which could
This
pose a danger to its prntectees and their movements.
is not a one-way street. Secret Service field offices as well
as its Intelligence Division review i. ncoming information
is received dealing with
Tf information
from all sources.
threats to non-Federal public ofticials, e. g. , Governors,
Mayors or even private citizens, the Service ensures that
.law
immediate notif. icatinn i. s made to the appropriate
responsible

enforcement

agency.

Cnoperative intelligence s ecurity efforts are especially
evident during major events whi ch draw upon hoth Federal and
Fxamples are the Olympics, National Political
local resnurces.
Conventions, World Fairs, etc. During such activity the
Service participates willingly in the analysis and infnrmation
sharing required to assess and prevent potent]. a 1 violence.

Secret Service agents, in addition to their protective
ef forts, made over 8000 arrests in FY 1982 in cases involving
nf our currency and obligations and the
the counterfeiting
thef t and forgery of government checks, bonds and food stamps.
the Secret Service routinely
In the area of counterfeiting,
These authorcnoperates with state and local authorities.
tn
counterfeit
ities are frequently the first to respond
tn
In certain instances it is advantageous
notes passed.
prosecute criminal offenses under the jurisdiction of the
Service at the state and lncal level. When that happens,
the Secret Service provides the necessary expertise tn
facilitate the prosecution. Expert testimony, courtroom
exhibits and Laboratory services are examples of the type
In the area of counterfeit investinf support rendered.
between the Secret Service
of
the
cooperation
much
gations
and its counterparts
at the state and local level is generally
the "unstructured agent-to-police officer type contact. "
The following are example~ of cooperative enforcement
ventures between the fJ. S. Secret Service and local law
enforcement authorities.

1. The St. r.ouis Field Office recently concluded a
s»ccessful undercover "sting" operation with members of. the
St. J.o»is City Police Department. The two agencies jointly
planned, staffed, financed and ran the operation.
The
Secret Service leased the building and installed sophisticated
audio and visual equipment used tn document each transaction
between a violator and the undercover law enforcement personnel.
A Secret Service
undercover agent worked alongside a poLice
undercover officer to purchase stolen government obligations
and other stnlen property.
The operatinn
lasted six months
and successfully
recovered $558, 000 in stolen contraband
while expending $40, 000 in "buy" money.
Eighty-five violatnrs
were arrested.
Through cooperation between the U. S. Attorney
and the St. J.ouis City Attorney,
they were prosecuted in both
Federal and State courts.
2
The Secret Service is a member in the U. S. Departof T»stice's Task Force against food stamp fraud. As
such its Atlanta, Georgia, field office initiated a joint
investigation with Local Georgia Rureau of Investigation
Agents intn a S400, 000 fraud scheme masterminded
by a
suspect and t»gitive from a similar scheme in Florida'
The
investigation disclosed the fugitive had fled to Houston,
Texa~
Based nn information jointly developed by Federal
~

ment

state investigators, the fugitive was swif tly arrested
Florida state warrants by Secret Service Agents in Houston,
Texas.
and
on

3. Electronic Fund Transfer (EFT) cases frequently
local banks as recipients and lend themselves to
effective Federal and state law enforcement cooperation.
Field office and the Arlington,
The Service's Washington
Virginia, Police Department recently initiated an investigation
involve

obtained $13, 000 in
involving a suspect who had fraudulently
Federal funds through the FFT system.
Because of a lack of
state computer fraud laws, the local police would have been
able to charge the defendant with only state misdemeanor
violations.
Because of the cooperation with the Secret
Service, the defe'ndant was charged with felony violations
in Federal court.
tJ. ST Customs

Service

The (J. S. Customs Service, due largely to its unique
position as the first line of defense at our nation's
borders, has long enjoyed a reputation for assistance and
cooperation with other law enforcement agencies. Violations
of the numerous laws enforced by Customs often involve
parallel or tangential violations of those statutes enforced
agencies
by other Federal, state and local law enforcement
as well as foreign governments'

The JJ. S. Customs Service has assumed a significant role
task forces. The
in narcotics and financial investigative
ongoing South Florida Task Force (Operation Florida) has

in many instances nf cooperation and coordination
the Federal 4nvernment and local/state agencies.
The presence of. such a Federal force is a valuable asset
to local law enforcement agencies in that it is a source
of equipment and expertise which might otherwise be unavailable at the local level.

resulted
between

specific example would be the undercover operation
involving the vessel sailing tn Colombia for the purpose
This case was initiated
of obtaining a load of marijuana.
Police Department and consisted of
by the Ft. Lauderdale
undercover officers being approached hy a narcotics organization to transport a load of marijuana from Colombia to the
IJnited States. After several undercover meetings with the
co-conspirators, it was the intention of the department to

indict on a cold conspiracy. The situation was then brought
to the attention of the task force and arrangements were made
to provide a boat, tracking equipment, and undercover federal
agents, all of which made the actual trip to Colombia possible.
The assistance provided by the task force produced more
indictments and resulted in a stronger case than would have
existed had the police department not requested the Federal

participation.

area of substantial expertise, financial
investigations involving provisions of the Rank Secrecy Act,
task force approach
Customs is utilizing the multi-agency
narcotics
trafficking
of
cash
flow
the
in targetting
major
In keeping with the
and organized crime organizations.
intent of Congress in enacting the Rank Recrecy Act, Customs
of felony currency viohas designated the investigation
Our enforcement
strategy
lations as a national priority.
includes imprisoning the principle violator, seizure and
forfeiture of their assets, and prevention of their use of
legitimate channels to launder the proceeds of illicit
In another

activities.

Financial

investigations

influence

large segment of

the United States and overseas financial, criminal and law
enforcement communities.
To successfully enhance law enforcement's ability to ne»tralize organized criminal activity,
interagency cooperation at all levels of government is
essential. Code named F. l Dorado, these task forces draw
upon the expertise, resources, and intelligence-gathering

capabilities

of various Federal, state and local law
In support of this effort, Customs
agencies'
established the Treasury Financial Law Fnforcement Center
(TFLEC) to facilitate both drug and non-drug case development for violations having the greatest potential for prosecution. TFLEC is an important financial crimes intelligence center serving the entire law enforcement community.
It utilizes the specialized talents of criminal investigators, intelligence research specialists, and automated
data processing specialists, combined with sophisticated
electronic equipment, to collect, collate and analyze
financial data generated by the Rank Secrecy Act reports
to target suspected criminal organizations involved in
large-scale currency transactions'
TFLEC personnel
also
provide flow charting, link analysis, and on-site consultancy capabilities.
Neither TFLEC nor F. l Dorado are
merely C»stoms programs.
Roth are dependent upon interaction, cooperation, and participation of other agencies.
enforcement

indict on a cold conspiracy. The situation was then brought
to the attention of the task force and arrangements were made
to provide a boat, tracking equipment, and undercover federal
agents, all of which made the actual trip to Colombia possible.
The assistance provided hy the task force produced more
indictments and resulted in a stronger case than would have
existed had the police department not requested the Federal

participation'

In another

investigations

area of substantial

expertise,

financial

involving provisions nf the Rank Secrecy Act,
the multi-agency task force approach
Customs is utilizing
the cash flow of major narcotics trafficking
in targetting
and organized crime organizations.
In keeping with the
intent of Congress in enacting the Rank Secrecy Act, Customs
of felony currency viohas designated the investigation
lations as a national priority.
Our enforcement
strategy
includes imprisoning the principle violator, seizure and
forfeiture of their assets, and prevention of their use of
legitimate channels to launder the proceeds of illicit

activities.

Financial investigations influence a large segment of
the United States and overseas financial, criminal and law
enforcement communities.
To successfully enhance law enforcement's ability to neutralize organized criminal activity,
interagency cooperation at all levels of government is
Code named El Dorado, these task forces draw
essentials
upon the expertise, resources, and intelligence-gathering

Federal, state and local law
of this effort, Customs
established the Treasury Financial Law Fnforcement Center
(TFLEC) to facilitate both drug and non-drug case developfor prosement for violations having the greatest potential
cution. TPLEC is an important financial crimes intelligence center serving the entire law enforcement community.
It utilizes the specialized talents of criminal investigators, intelligence research specialists, and automated
data processing specialists, comhined with sophisticated
electronic equipment, to collect, c.ollate and analyze
financial data generated by the Rank Secrecy Act reports
involved in
to target suspected c:riminal organizations
TFLEC personnel
also
large-scale currency transactions.
provide flow charting, link analysis, and on-site consulNeith& r TFLEC nor El Dorado are
tancy capabilities.
Roth are dependent upon intermerely Customs programs.
action, cooperation, and participation of other agencies.

capabilities
enforcement

of various

agencies.

In support

and
on

state investigators,

Florida state warrants
Texas.

was swiftly arrested
Secret Service Agents in Houston,

the fugitive
by

3. Electronic Fund Transfer (FFT) cases frequently
local banks as recipients and lend themselves to
effective Federal and state law enforcement cooperation.
Field office and the Arlington,
The Service's Washington
Virginia, Police Department recently initiated an investigation
ohtained Sl3, 000 in
involving a suspect who had fraudulently
involve

Recause of a lack of
Federal funds through the FFT system.
would have been
local
police
the
state computer fraud laws,
state
misdemeanor
with
defendant
only
able to charge the
with
the Secret
cooperation
of
the
Because
violations.
defe'ndant
violations
with
was
charged
felony
the
Service,
in Federal court.
JJ. S. Customs

Service

The JJ. S. Customs Service, due largely to its unique
position as the first .line of defense at our nation's
borders, has long enjoyed a reputation for assistance and
cooperation with other law enforcement agencies. Violations
of the numerous laws enforced by Customs often involve
parallel nr tangenti. al vinlatinns of those statutes enforced
agencies
by other Federal, state and local law enforcement
as wel. l as foreign governments.
The 0 AS. Customs Service has assumed a significant
role
in narcotics and f. inancial investigative
task forces. The
ongoing South Florida Task Force (Operation Florida) has
resulted in many instances of cooperation and coordination
be'tween the Federal 4nvernment
and local/state
agencies.
The presence nf. such a Federal force is a valuable asset
tn local law enforcement agencies in that it is a source
of equipment and expertise which might otherwise be unavail-

able at the local level.

specific example would be the undercover operation
involving the vessel sailing to Colombia fnr the purpose
of obtaining a load of marijuana.
This case was initiated
Police Department and consisted of
hy the Ft. J.auderdale
undercover officers being approached hy a narcotics organization to transport a load of marijuana from Colombia to the
IJnited States. After several undercover meetings with the
co-conspirators, it was the intention nf the department to

The

success of both entities

the interaction

all levels of

and

requires, to a large extent,
participation by law enforcement at

government.

Utilizatinn of TFLFC information, combined with the
diverse talents of investigators from different law enforcement agencies, is proving to be one of the most innovative
and successful concepts in law enforcement
in recent years.
to encouraging
As a result, Customs is fully committed
increased cooperation between all facets of the law enforceIn support of this objective, Customs has
ment community.
actively pursued a program of briefings and training on
all financial investigations, Rank Secrecy Act requirements,

capabilities. This program, conducted at both
and field element levels, has been presented
numerous
Federal,
state and local law *nfnrcement
to

and TFLFC

Headquarters

agencies. Such a program was recently presented to representatives of. the New York Police Departments
Rased on
requests for information from numerous local and state law
enforcement agencies nationwide, TFLFC support has been
provided to assist those agencies in ongoing criminal
Local and state pnlice officers are also
investigatinns.
active participants in the Fl Dorado task force operations
in

New

York, Los Angeles

and Miami.

lJ. S. Customs has also headed and participated in many
task forces with state and local pnlice investigating
violations in the areas of cargo theft, auto theft, and
stolen art. For example, pursuant to nur goals in Operation
the U. S. Customs Service is participating with the
F,'xodus,
thefts
Santa Clara County Sheriff's office in investigating
of critical technology hardware and data from firms operating
This coordinated
in the Silicon Valley area of California.
effort is aimed at stemming the flow of illegal exports to
Communist Rloc nations.

Recently,

U. S. Customs

was

requested

the Fxecutive

State and Local Law
Director, of the 7ustice/Treasury,
Enforcement Training Program, to develop and present a course
for state and local police in cargo theft. The school is
projected tn run 1 — 2 weeks, approximately 3 — 4 times a
In addition to this formalized
year at Glyncn, Georgia.
training, U. S. Customs agents routinely .lecture at classes
For example, the Office of
for local police departments.
trains state and
the Special Agent in Charge, Philadelphia,
local police at Harrisburg, Pennsylvania, and Sea Girt, New
in Customs matters such as, the usefulness of Treasury
,Iersey,
Sytem (TFCS) to their investiFnforcement Communications
gations, narcotics identification and currency laws.

basis, Customs personnel are in daily
a nationwide
state law enforcement agencies
and
local
contact with
investigative and intelliproviding
as
well
as
obtaining,
It is
of mutual interest.
gence support to investigations
successbe
only through this cooperation that we can hope to internaof.
operations
f ul in our efforts to neutral i ze the
t innal and domest ic criminal organizations.
On

Rureau

of Alcohol, Tobacco

and Firearms

of Alcohol, Tobacco and F i rearms has enjoyed
the reputation as a close ally and working partner with state
and local law enforcement of f icers since the inception of
This relationship is founded on mutual respect
the agency.
other'
s expertise, and the f act that ATP agents
for each
enter into law enforcement initiatives with their state and
local counterparts as full partners.
The Bureau

The joint efforts of. ATF and their associates in state
local agenc ies has resulted in the f ormation of many
innovative projects that have directly suppor ted these
agencies in their f ight against violent crime. These
projects include the sharing of information and the - joining
of. resources at the street level, through "s ta te-of. theart" training programs which produce an enforcement of f icer
I would like to
that is f ar superior to h is predecessors.
demonstrate
now discuss several of these projects to further
this cooperative ef f ort.
and

Federal agency with statutory
ATF is the principal
j»ri sd iction over arson crimes — but unfortunately there
are a lot more arsons committed than ATF has the reso»rces

to investigate.

s arson program provides for investigative
assistance to state and local authorities experiencing a signif icant arson problem, particularly where the nature or magnitude
of the problem exceeds their jurisdiction or resources . ATF
has promoted and applied the task force approach to attac k
complex arson crimes occurri ng in ma j or metropol i tan areas.
ATF '

Another viable team concept developed by ATF involves
the National Response Team. These highly trained cadres of
experienced arson investigators are located in four key
areas o f the country.
The se teams are able to mob i I i ze
immediately and move to any location in the country with in
24 hours to assist in major arson incidents.
Because of
their phenomenal clearance rate ( over 6 0% ) these teams have
been commended by state and local law enf orcement bodies
g

companies, and by the Attorney General' s
by major insurance
of f ice for the vigor and selflessness with which they pursue
arsonists. This National Response team is the only concept
of its kind by a Federal law enforcement agency.
Perhaps

the most widely

services to state

and

local

utilized and
law enforcement

successful of ATF's

is its National

Since its inception, the tracing
center has accurately and quickly traced tens of thousands
nf firearms for. other law enforcement agencies, with a very
significant percentage of those traces providing information
vital to the apprehension of crime suspects. Within the
last three months alone, ATF traces have led directly to the
arrest of two suspected murderers.
Firearms

Tracing Center.

ATF traces in recent years have resulted
in a hetter
than 60 percent ratio of success in providing assistance
in the solution of crimes and successful prosecutions.
In the Presidential
assassination attempt of 1981, an ATF
trace taking only 16 minutes provided critical information
the United States Secret Service as they worked at crisis

pace to determine

the scope of the attack,

Nr. Chairman,
Task Force before,

we' ve discussed the South Florida
would he remiss if I didn't touch upon
The unsung heroes of the drive against

for "follow-up" assaults.

and

the potential

although

it briefly herc'
narcotics traffickers of Southern Florida may well prove to
he the agents and inspectors of the Bureau of Alcohol,
Tobacco and Firearms.
Working with little publicity and
restricted resources, the 45 agents assigned to the task
force have made over 200 felony cases in just 17 weeks nf
Concentrating their efforts on the suppliers of
operation.
the small caliber handguns and easily concealable machine
guns which are the weapons of preference among these dealers
in death and corruption, ATF agents risk their lives every
time they hit the streets.
Fven as I was preparing this testimony, on December 2,
1982, I learned that one ATF undercover agent had been
killed and another wounded during the course of an investigation in South Florida.
The joint ef forts of these agents with state and local
of f icers, as well as with DF'A, Customs and the FBI have
drawn very high praise from local police administrators,

ncluding

the ~1iami Chief of

Police,

and Dade Co»nty

reacting to the shooting
President,Forceps
police of f icials.
dedication and heroism
the
praised
has
of the ATF agents,
Task
the
of
members
of all ATF
The

Historically, ATF has been involved in the development
Rome
nf training programs for state and lncal officers.
firearms,
were
programs
these
covered
by
subjects
of the
organized crime, cigarette smuggling, arson, explosive
investigations and hazardous devices. Fxperts in the field

that there was a need fnr a comprehensive advanced
course for the ~oat explosives incident investigator. ,
that would permit a blend of.
conducted in an environment
It was
classronm and actual hands-on training experience.
the
efforts
complement.
envisioned that this training wnuld
nf the Redstone Arsenal Hazardous Device School and other

concluded

programs.

State and local poli ce of f icers are usually the f. irst
at the scene of. a bombing, and it is essential fnr
arrive
tn
successful investigation and prosecution that they have the
proper tra ining for these highly comp. licated investigati. nns.
Nationwide the arrest and conviction rate in explosives/
incendiary crimes has bee n una&-ceptable and we feel will
.

he improve d through

these

efforts.

of 1981, discussinns of the foregoing issues by staff members of the Department of. the
Treasury and the Department of 7»stice resulted in a decision
such a course.
by RATF to develop and implement
At

the conclusion

was done at a workshop/seminar
The development
(.
the FLFTC, lyncn, Genrgi. a, involving experts

conducted

selected

of Rnmb Technicians and
Investigators and the Rureau of Alcohol, Tobacco and Firearms.
was to produce a product
The goal in the course development
which would enhance the skills of state and local investigators having the legal responsibility for explosive/incendiary
incident investigations.
the International

Association

This development process came on line at the same time
as the formation of the pilot courses under the, 7ustice-

Treasury, State and Local Training Program at FLFTC. It
this ATF course into this new
was decided tn incorporate
Indeed the development of this course was sn
program.
successf»l that it is heing used as a model fnr the development nf other highly specialized courses for the, j'usticeTreasury, Program.

ATF

has since added

two

other cnurses under the Justice-

State and Local Training Program. The f irst is
Undercover Investigative Techniquesg which was developed
cooperatively with DEA, Secret Service, FBI and the New
York Police Department and other state and local of f ices.
The second, Advanced Arson for Profit, was a joint effort on
the part of ATF and the International
Association of Arson
Investigators, the International Association of Chiefs of
Police, and the Federal Emergency Management Agency with
assistance from the insurance industry and state officers.

Treasury,

All three of the foregoing

programs,

Advanced

Explo-

for Profit, and Undercover Techniques,
are recognized throughout the law enforcement community as
"state-of-the-art" and are consistent with ATF. 's mission of
assisting and supporting states and municipalities to combat
violent crime in the most effective manner possible.

sives,

Advanced

Arson

In addition to the foregoing, it should be noted that
our Treasury enfnrcement bureaus have representation
Law Enforcement
on the U. ST Attorney's
Coordinating Committee.
This program was initiated by the Attorney General to formally coordinate Federal, state and local enforcement priorities and activities. Likewise, all of our enforcement bureaus
are represented on the Department of Justice's Organized
Crime and Racketeering Task Forces around the country.
These task forces have hoth state and local enforcement
that the Customs Service
representatives.
We also anticipate
and ATF will participate
in the Presidential Task Forces
in the near future.
One of the
which will be established
forces
nf
these
task
is
to
cooperate
fully with state
goals
and local enforcement
agencies.

all

nf.

Nr. Chairman, I believe that the information which I
have provided sets forth a good record of cooperative efforts
with state and Jncal law enforcement on the part of. Treasury's
bureaus.
We want our bureaus
to work to
law enforcement
Rnth
improve their already excellent cooperative eftorts.
bureaus know that they cannot do
we and the enforcement
their job effectively without cooperation from other Federal
bureaus and from state and local law enforcement agencies.
I am nnw ready to answer any questions
Thank you very much.
which you may have.

of the Treasury

eportment

Release

For

";;:-„ected
t;ecember

Upon

Washington,

D.C. ~ Telephone 566-204t

Deliver

at 9: 30 a. m. E. S.T.
i 0, l982

STATEMENT Ol
WILLIAM
McKEE
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE FINANCE COMMITTEE

Nr. Chairman

and

Members

of the Subcommittee:

to have the opportunity

to present the views of the
the following bills: ST 2987, which would
exempt all bloodmobiles
from the Federal motor vehicle manufacturers
excise tax; S. 2647, which would allow a deduction for the expenses of
attending business conventions conducted on cruise ships registered in
am

Treasury

pleased

Department

sailing exclusively between American ports; and S. 3064,
for four additional years the special exclusion
income
on
gross
cancellation of certain student loans. I will
discuss each of these bills in turn.
the UPS. and
would

which
from

extend

Excise Tax
ST

(relating

S.
Exem

2987

tion for Bloodmobiles

2987 would amend section 4063 of the Internal Revenue Code
to the Federal manufacturers excise tax on motor vehicles)

this tax all vehicles which are used exclusively in
transportation of blood. Under present law,
&ehicles such as school buses, fire trucks, ambulances and hearses are
exempted from the motor vehicle excise tax.
The American Red Cross
has long been ruled exempt from the motor vehicle excise tax under
aection 4293 of the Internal Revenue Code (authorizing
the Secretary
to grant excise tax exemptions on articles for the exclusive use of
the United States) in recognition
of the auasi-governmental
role which
the American Red Cross historically
has played.
In general, vehicles
Purchased by nonprofit organizations
are not exempt from this excise
by

exempting

the

collection

tax.

R-106 Z

from

and

preliminary matter, the Treasury Department wishes to point
Act of 1982, H. R. 6211, which this
out. that the Surface Transportation
supports and which has been passed by the House of
Administration
by the Senate Finance
Representatives and has been reported favorably
tax to exempt all
excise
Committee, would amend the motor vehicle
or less. It is
000
pounds
trucks with a gross vehicle weight of 33, be classified
as trucks
that bloodmobiles would
our understanding
is
bloodmobiles
approximately
that the average gross vehicle weight of
most
of the
Hence,
25, 000 pounds ano rarely exceeds 33, 000 pounds.
kv
a sace
arq. oF t&, advocates nP S 2987 would Qp alleviatod
H. R. 62' l.
Turning now to S. 29R'7, the Treasury Department recognizes that
donors is an important
t he collection of blood from voluntary
However, while the
care
system.
component of our nation's health
Treasury supports exemptions to the motor vehicle excise tax which are
directly related to highway usage such as the weight classifications
described above, we are generally opposed to exemptions which are not
An important
purpose of the motor vehicle excise tax is
so related.
to help ensure that all h'ighway users bear their fair share of the
cost of constructing, maintaining, and improving our highway system.
The fact that many of the vehicles are used in charitable or other
worthwhile pursuits does not alter the fact that the owners of such
vehicles should pay their fair share of the expense of maintaining our
nation's highways.
Therefore, Treasury opposes S. 2987.
As a

estimates that this
less than $500, 000 per year.
Treasury

bill

would

reduce budget

receipts

S. 2647
Deductions for Certain Ex enses
of Attendin
Conventions on Domestic Cruise Shi s
Back round

In 1976, Congress first enacted legislation attempting to deal
the problem of taxpayers who were taking deductions for the
expense of attending foreign conventions which were in reality thinlyThe 1976 legislation
disguised vacations.
imposed a number of
detailed limitations on the deductibility of convention expenses which
depended heavily on detailed information
reporting by the taxpayer.
with

By 1980, it became clear that the 1976 limitations
had not been
effective in preventing the use of the tax system to subsidize
foreign vacations.
Therefore, Congress discarded the 1976 approach i~
favor of a rule denying a deduction for the expenses of attending a
convention outside the North American area (defined to include the
United States, its possessions, and the Trust Territory of the Pacific
Islands, and Canada and Mexico), unless it is established that "it is
as reasonable for the meeting to be held outside the North American
area as within the North American area. " In addition, a provision was
enacted denying a deduction for all expenses of attending any
convention on board a cruise ship.

6. 2647

allow a taxpayer to deduct the expenses of
that
on board a cruise ship if he establishes
attending
to
the
active
or
related
conduct
his
trade
of
the meeting is directly
business, if the cruise ship is a vessel registered in the United
States, and if all ports of call of such cruise ship are located in
In addition, the bill would
the United States or its possessions.
reporting requirements on taxpayers
impose detailed information
attending cruise ship conventions and on cruise ship convention
These information reporting requirements
sponsors.
are virtually
o those which were enac-ed in 1976 but repealed in 1980.
identical
restrictions on the
However, the bill would not impose any additional
deductibility of cruise ship convention expenses such as those
contained in the 1976 statute.
2647 would

a convention

Treasury is strongly opposed to S. 2647. From the context of the
other changes made in this area in 1980, it would appear that the
cruise ship rule reflects the judgment of Congress that it is never
"as reasonable" for a convention to be held on a cruise ship as it is
for the convention to be held on land.
The Treasury agrees with this
In our view, the decision to hold a convention aboard a
judgment.
cruise ship is invariably motivated almost exclusively by personal,
non-business considerations.
H. R. 3191, a bill which the Treasury
opposed in testimony before the Select Revenue
|6easures Subcommittee of the House Ways and Means Committee.
The only
differences between H. R. 3191 and S. 2647 are: (1) S. 2647 limits the
cruise ship exception to cruises which stop only at United States
ports while H. R. 3191 would have allowed all ports within the North
American area;
and (2) S. 2647 imposes more detailed information
on taxpayers and convention sponsors in order
reporting requirements
to gualify for the exception.
Neither of these changes serves in any
way to lessen
the opposition which Treasury has voiced to H. R. 3191.
First, the primary personal benefit of a cruise ship convention is the
time spent aboard the ship
The Treasury does not see the limitation
to U. S. ports as in any way altering the conclusion that an
organization which selects a cruise ship as the site for its
convention almost invariably does so primarily for the personal
benefit of those attending the convention.
Second, the proposed
~eportinc requirements
are not a meaningful safeguard against abuse
since they are not linked to any additional
substantive restricti"ns
such as those contained
in the 1976 statute.

has

2647

previously

is quite similar to

allowing a deduction for expenses of
attending a convention aboard a cruise ship would permit taxpayers to
~se the tax system to subsidize what is primarily
This
a vacation.
&ould only lead to increased
cynicism about the overall fairness of
Our tax system
which in turn could result in increased levels of
To

summarize,

th'nk

noncompliance.

Treasury
on

budget

estimates

receipts.

that this bill

would

have a

negligible

effect

3064

Extension of the Exclusion from Gross Income
on the Cancellation of Certain Student Loans
a provision
S. 3064 would extend for an additional four years
1976. This
the
of
Act
Reform
Tax
the
2117
of
in section
of
portion of
any
cancellation
the
statute excludes from gross income
of the
provision
a
to
pursuant
was
a student loan if the discharge
of
the
indebtedness
the
of
loan agreement under which all or part
for
a
certain
works
individual
the
if
individual would be discharged
period of time in certain professions in certain geographical areas or
It is our understanding that this
for certain classes of employers.

contained

provision has primarily assisted public hospitals
of programs to train nurses.

in the establishment

The exclusion for cancelled student loans is similar (although
not identical) to the temporary exclusion from gross income for
National Research Service Awards ("NRSAs") received by individuals
pursuant to the National Research Service Awards Act of 1974. The
temporary exclusion for NRSAs was extended by the Tax Equity and
Fiscal. Responsibility Act of 1982 (TEFRA) through December 31, 1983.

In general, scholarships and fellowships grants are excluded from
gross income under section 117 of the Internal Revenue Code. While
the cancellation of a student loan is not a scholarship or fellowship
grant in form, a reasonable argument can be made that it should be
treated as such since the same result could be achieved by making a
grant to the borrower in an amount equal to the indebtedness to be
forgiven. As with NRSAs, the question then becomes whether the
conditions on the cancellation of indebtedness are primarily for the
benefit of the lender (in which case the cancellation or grant is more
properly treated as taxable compensation than a scholarship or

fellowship).

The Treasury

Department

believes that this question

is best

in the context of a comprehensive review of the entire area
of scholarships and fellowships.
Since the Treasury is currently
engaged in such a study, we do not oppose a temporary extension of the
exclusion from gross income for these student loan cancellations.
We
b e 1'ieve, however,
that a four-year extension is unnecessarily long and
suggest that the exclusion be extended only to loan cancellations
occurring be. ore January 1, 1984. In this way, this exclusion would
expire at the same time as the NRSA exclusion, allowing these arid
other similar programs to be considered and dealt with in a
comprehensive manner.
answered

Treasury

estimates

that the bill

would

reduce budget

less than S5 million per year for fiscal years 1983-88.
I will be happy to answer your questions.

receipts

of the Treasury

ppporiment

D.C. ~ Telephone 566-2041

Washington,

RELEASE

FOR IMMEDIATE

13, 1982

December

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

$5, 801 million of 13-week bills and for $5, 807 million of
both to be issued on December 16, 1982, were accepted today.

for

Tenders

26~eek

bills,

OF ACCEPTED
COMPETITIVE BIDS:

13-week

RANGE

maturin

Price
97. 985

High

97c975
97 ' 979

Low

Average

at the
at the

Tenders
Tenders

low
low

bills

17 1983
Discount
Investment
Rate
Rate 1/

maturi

March

7. 971X
8. 011X
7. 995X

8. 25X
8. 29X
8. 27X

Price
95. 862
95. 840
95.852

price for the 13-week bills
price for the 26-week bills

were
were

26-week bills
June 16 1
Investment
Discount
Rate
Rate 1/

8. 185X
8. 229%
8. 205X2/

8. 66X
8. 70X
8. 68X

allotted 79X.
allotted 52X.

TENDERS RECEIVED AND ACCEPTED

(In
Received

Location
Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St ~ Louis
Minneapolis
Kansas City
Dallas
San

Treasury
TOTALS

Competitive
Noncompetitive

Public

Federal Reserve
Foreign Official

Institutions
TOTALS

ted

30, 145
5, 151,055
30, 70%
43, 650
33, 335

~dcce ted

Received

120
$79,
12, 676, 990

34, 320

5, 259, 420

846, 730

37, 280
21, 555
43, 990

66, 755
64, 930
38, 995
28, 525
1, 024, 325
54, 030
14, 630
36, 070
14, 480
792, 610

184 645

$14, 399, 880

$5, 800, 970

: $15, 076, 105

$5, 807, 480

$12, 021, 425

$3, 422, 515

792 025
$12, 813, 450

7925025
$4, 214, 540

: $12, 605, 380
587 525
: $13, 192, 905

$38336, 755
587, 525
$3, 924, 280

1,445, 030

1, 445, 030

1, 425, 000

141 400

458 200

$14, 399, 880

$5, 800, 970

458, 200
: $15, 076, 105

21, 555

Francisco

Subtotal,

36, 145
12, 049, 880
32, 180
104, 730
38, 355
35, 230
928, 140
57, 310
24, 890
40, 090

Thousands

~dcce

34, 870

131,540
48, 310

9, 890

coupon-issue yield.
1/ Equivalent
the maximum
2/ The four-week average for calculating
on money market certificates is 8. 269X.

16, 755

21, 430

23, 995
25, 425
100, 325
35, 030

8, 430

35, 915
9, 480
52, 310

$5, 807, 480

interest rate payable

apartment

of the Treasury

Washington,

D.C. ~ Telephone 566-204

Remarks By
Donald T. Regan

Secretary of the Treasury
Before the

U. S. Savings

Bonds Volunteer

State Department
December 8, 1982

Settin

A New

I am delighted to be
friends from the business
surprised at such a large
going on. I thought most
lunch.

Course For Savin s

here today and see so many of my good
community.
Actually, I'm a little
turnout with all the corporate takeovers
of you would stay home to guard the store.

I'm reminded of a story about two top executives who met over
One mentioned
that a colleague had passed away.
"Good Lord,

Committee

have?"

" his friend said.

"Oh not too much,
assembly corporation and
worth going after.

"That's t'errible.

What

did

said the other. "Just a small machine
three ailing subsidiaries.
Nothing really

We meet this year under much better circumstances
than we did
in 1981. Inflation is down and interest rates are down.
Thanks
in large measure to your help, we now offer savers the best Savings
Bond ever -- one with a market-based,
variable yield.

Now,

savings rising,
Program.

Bond

to turn around and personal
healthier climate for the Savings

with the economy beginning
we

see

a much

Inflation that soared to 12. 4 percent in 1980 has been reduced
to 4. 9 percent for the first ten months of this year. The prime
interest rate that hit a peak of 21. 5 percent just before the
At 11.0 to
inauguration has been lowered by nearly one-half.
it's
in
six
months.
twenty
the
lowest
11.5 percent,
also begun to control the growth in federal spending.
In fiscal year 1980,
From 1961 to 1980, it grew nearly six-fold.
In FY 1982 the spending
the growth rate hit a record 17.4 percent.
We expect further
growth rate was down to less than 11 percent.
progress this year.
for sound monetary
We also have in place the foundation
controls. Best of all, the President has kept his word to the
American taxpayer by restoring incentives for saving and investment
to the private sector resources that have been
and by returning
We

have

increasingly siphoned off by the Federal government.
The Administration
is striving for an economic recovery that
will re-establish American prosperity and ensure future economic
growth.
Unfortunately,
you don't turn an ailing three trillion
dollar economy around overnight.
But neither do you throw up your
hands or accept the political equivalent
of treading water. We
have successfully
set in motion a series of long-range measures
that are replenishing the capital pool and dusting off old and
neglected words like profit and incentive.
Now that the course of economic growth has been set, the
Savings Bonds Program will have an important role to play.
Today
people are more in the mood to save. The 5. 8 percent of disposable
income that they set aside for savings in 1980 has grown to 7. 0
percent since our tax cuts and savings programs have gone into effect
Savings Bonds have long made an important contribution to the
Treasury's debt management efforts. Today, with cost-effective
management
more important than ever, added sales of bonds will help
reduce the cost of the nation's debt, while helping to lessen
pressure for high rates of interest in the market.
Bonds are cost-effective:
they pay less interest
the new market-based rates -- than marketable Treasury
they are held more than twice as long as other portions

-- even at
issues, and
of the debt.

the reduction in interest expense and the additional
that the Savings Bond offers all Americans benefit.

With

stability

In addition, reducing the number of marketable securities the
has to offer means less pressure on market interest rates
from the market.
and less chance of crowding out private borrowers
that
With the large deficits we are seeing, there is a possibility
Treasury borrowing will slow the private investment that is needed
to provide sustained economic growth.
Increased Savings Bonds sales, spreading out the debt to people
involved in the credit markets, will take
who are not otherwise
some of the heat off.
Treasury

and
more

In short, selling more Savings
for the entire economy. That's
of them.
And

Bonds
why

good for your companies
need your help to sell

that does not even take into account the positive effects
saving for the people who buy bonds.

of increased

Through your efforts in your companies, and the efforts of
other members of your campaign team in your industry or area,
of people save more.
you can help thousands
Through the years, the Payroll Savings Plan has proven to be
the best way, and the easiest way, for people to buy bonds.
Some
80 percent of all bond sales are through payroll savings.
Ease

of purchase, convenience,
payroll plan.

and

stability are the hallmarks

of the

Offering payroll savings in your companies, and volunteering
to convince others to do the same, are the keys to the success of
the bond program.

interest rates with a $25 minimum available
-- now that's a good deall
volunteers like you don't support the bond program;

Market-based
through

But

payroll

savings

don't have strong campaigns in your industries and areas;
and if you don't educate your own employees and hold strong payroll
campaigns in your own companies -- if you don't do all these things,
bond sales will not keep pace with the nation's
financing needs
you

John Dixon, Chairman and President
of what personal leadership
Payroll Savings accomplishment.
one example

of E-Systems, Inc. , is but
can mean to a company's

don't expect every company to have 99 percent
Now I certainly
participation, although it sure would be nice. But I do look for
innovative campaigns in your own
you to lead strong, hard-hitting,
And I look to you to encourage executives in your area
companies.
or industry to do the same.
Personal leadership is the key. Be involved as much as
I know that Jim Robinson, Chai=sian
possible in your own campaign.
and Chief Executive Officer of American Express, will be a great
example to follow.

of the 1983 committee, I know you plan t
a part of a large number of campaign kickoffs; leading campaign
efforts at American Express and giving Savings Bonds national
Jim, as Chairman

will, I

be a great national spokesman.
the U. S. Savings Bonds Volunteer Committee
your leadership,
give the nation what it needs -- the best possible national
Savings campaign we can have for 1983.

exposure.

You

Savings

know,

help individuals

Bonds cannot

and America

Under

will
Payroll

without

the

of your entire committee to spread the word, "Take another
efforts
look. " Bonds have a lot to offer, but your fellow CEOs have to
shed their past impressions
and discover what a good product we now
have. Then they will give the program full cooperation in their
companies.

effort

must be one of our priorities for this
to CEO, you are the Bond Program's costeffective ambassadors to the business world. And it is through
that the program's most important selling
your work as ambassadors

year.

This education
By

talking

CEO

will be done.

President Reagan has called on all Americans to volunteer to
I am proud to note that this spirit
help their fellow citizens.
of voluntarism has long been the driving force behind the bond
The partnership
represented by this committee -- between
program.
the government and the .business community -- is a prime example of
what can be accomplished when people of good will work together
for the good of all Americans.
The new bond program has the firm endorsement
of President
Jim Robinson signed him up as the first participant under
Reagan.
the market-based formula during a visit in the Oval Office on
October 27. The new bond also has an overwhelmingly
positive
In 1983, we will see the public's interest
response from the press.
in bonds raised to the highest level in years.
We

could hardly

start the 1983

campaign

from a

better position.

I look forward to working with Jim Robinson and each of you
in the coming year to capitalize on our good start and put the
In many ways,
Savings Bonds Program back on the road to success.

your committee's
Good

will do.

success

success.

America's

luck to each of you, and thank you for everythi. g you

&pygment

of the Treasury

Washington,

D.c. ~ Teiephone 588-244

STATEMENT BY R. T. MCNAMAR
DEPUTY SECRETARY OF THE TREASURY
ON

LOCAL CONTENT LEGISLATION
WASHINGTON,
D. C.
DECEMBER
1982

The
world
the

local content bill is the worst thing for the U. S. and
economy since Smoot-Hawley.
It may even beat it in

perniciousness.

leadership of the House must understand the
deteriorating world trade situation and strained financial system
that they are threatening to undermine by the local content bill.
Just as Smoot-Hawley led to the retaliatory trade legislation of
the '30s that induced and deepened the world depression, so too
this legislation could be the catalyst for retaliatory and
short-sighted trade legislation throughout the world that will
destroy the multi. lateral trading system and lead to the collapse
of the financia1 system it supports.
Tip O' Neill must decide
The Democratic

whether he wants to have his name remembered along with
Smoot-Hawley as the cause of a worldwide depression and the loss
of jobs and depravation
would cause.
This bill won't create
will increase inflation, raise interest rates, and
jobs,
will create.
ultimately cost more jobs than its sponsors say
It is a jobs destroying bill for the average American, not a jobs

creating one.

that the U. S. and the world are now running
serious risk of entering into a tragic, debilitating trade war.
than commit the error of passing
Ne must face that risk rather
ill-conceived legislation like this by which a great nation like
ours would take the unprecedented
step of taking away its world
leadership at the very time that it is most needed.
A local content
Local content is wrong in principle.
requirement creates a select group of suppliers and workers that
No matter how
are protected against import competition.
~igh-cost they become, the government, by law, forces producers
We

all

know

to use them.

Local content

legislation has profound negative implications

for the U. ST economy.

inflationary tax transfer from those who
purchase automobiles to those protected by the local content
It. is a hidden

requirement.

threatens U. S. exports, which will fall due either to
retaliation or because foreigners will have less income to spend
on U. S. goods.
U. S. auto manufacturers'
efforts to regain competitiveness
be hurt. by the requirement to use U. S. inputs, no matter how
expensive.
Local content will thus create an industry
at great cost to us all.

on the economy

It is

which

a drag

giant step backward f rom the goal o f healthy
industries, competitive worldwide, which are crucial to our
economic well-being.
J

I share the widespread concern about unemployment in the
auto sector and the economy in general, but local content
legislation is not the way to respond to these problems. And
potential job gain in the auto sector (and that is in no way
certain), most certainly threatens jobs in t4e export sector.
could have a situation where more jobs are lost than gained.
We should
macro-economic

continue to pursue the Administration's
policies instead.

pe|iartment of the Treasury ~ Washington,
FOR RELEASE AT

4:00 P. M.

D.C. ~ Telephone 566-2040

December

14, 1982

TREASURY'S WEEKLY BILL OFFERING

of the Treasury, by this public notice,
for two series of Treasury bills totaling
approximately $11, 600 million, to be issued December 23, 1982.
This offering will provide $1, 425 million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $10, 182 million, including $1, 025 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2, 691 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
The Department

invites tenders

91 -day bills (to maturity date) for approximately $5, 800
million, representing an additional amount of bills dated
March 25, 1982,
and to mature March 24, 1983
(CUSIP
No. 912794 CA 0), currently outstanding
in the amount of $10, 967
million, the additional and original bills to be freely
interchangeable.

182-day

bills for

December 23, 1982,
No. 912794 CY 8)

approximately
and

to mature

$5, 800 million,
June 23, 1983

to be dated
(CUSIP

Both series of bills will be issued for cash and in exchange
for Treasur y bills maturing December 23, 1982. Tenders from
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will be accepted at the
Addiweighted average prices of accepted competitive tenders.
tional amounts of the bills may be issued to Federal Reserve Banks,
monetary authorities, to
as agents for foreign and international
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
Both series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $10,000
on the records either of the
and in any higher $5, 000 multiple,
Federal Reserve Banks and Branches, or of the Department of the
Treasury.

R-1066

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,
December 20, 1982.
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 .
Each tender must be for a minimum of $10, 000 . Tenders over
$10,000 must be in multiples of $S, OOO. Xn the case of competitive tenders the price offered must be expressed on the basis of
100, with three decimals, e .g . , 97 .920 . 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
if the names of the
may submit tenders for account of customers,
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 as of 12:30 p .m . Eastern
time on the day of 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 .
will be made on all accepted tenders for the
A cash adjustment
difference between the par payment submitted and the actual
issue price as determined in the auction .
.

deposit need accompany

tenders

from incorporated

banks

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
funds
on December 23, 1982,
in cash or other immediately-available
or in Treasury bills maturing December 23, 1982. 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.

amount

the excess gain

Department
Nos. 26-76 and

any

Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

fder

fina. nCing bank.

Ct. l

WASHINGTON,

FOR IMMEDIATE

D.C.

20220

RELEASE

December

FEDERAL FINANCING

Bank
month

BANK

14, 1982

ACTIVITY

Francis X. Cavanaugh, Secretary, Federal Financing
(FFB), announced the following activity for the
o f September 1982.

of obligations issued, sold, or guarother Federal agencies on September 30, 1982
totaled $124. 4 billion, an increase of $1.7 billion
over the August 31 level. FFB increased holdings of
agency debt issues by $0. 4 billion, holdings of agency
guaranteed debt by $0. 7 billion and holdings of agency
assets purchased by $0. 7 billion. A total of 284 disanteed

FFB holdings
by

bursements

the month.

were made during

Attached to this release are tables presenting
loan activity and new FFB commitments to lend
during September and a table summarizing
FFB holdings
FFB

as of September

30, 1982.

R-1067

FEDERAL FINANCING

SEPTEMBER

BANK

1982 ACTIVITY

OF ADVANCE

sem

TEN%CSEE

annal )

AVIRORITY

Note 4263

9/24
9/24
9/30

10,000, 000.00
210,000, 000.00
140,000, 000.00
100,000, 000.00
225, 000, 000.00

11/19/82
11/19/82
9/30/12
1/7/83

8.953%
8.647%
8.477%
7.592%
11.945%
8.085%

Note %43
Note %44

9/1
9/1

363,000, 000.00
253, 000, 000.00

9/1/92
9/1/92

12.935%
12.785%

Note
Note
Note
Note

%259

9/3
9/10
9/17

4260
4261
4262

Power Bond 1982-D

8 240, 000, 000.00

9/24/82

ll/19/82

12.732% qtr.
12.587% qtr.

CREDIT UNION ADMINISTRATION

NATICNAL

Central Li
Note
Note
Note
Note
Note
Note
Note
Note
Note

o r than
senimnnual )

idi

Facili

4107
4108
4109

8.816%
8.666%
8.755%
8.402%
8.322%
8.244%
7 ' 687%
8.194%
7.929%

9/30

140, 694, 600.00

12/31/82

7.929%

30, 000, 000.00
365, 000, 000.00
30, 000, 000.00
50, 000, 000.00

9/21/02
9/30/97
9/30/92
9/30/02

12.415%

1,435, 086.22

various

11.949%

240, 000, 000.00

9/30/12

11.915%

2/16/12
4/30/11
3/16/90
12/31/93
9/22/90
4/25/94
2/16/12
12/22/10
6/15/12
7/15/11

12.729%
12.743%
12.539%
12.686%
12.563%
12.562%
12 ' 379'%
12 ' 397'%
12.375%
12.404%

9/13
9/17
9/20
9/21
9/23

4110
%111

4112
4113
4114

UNITED STATES

9/30

4, 005, 800.00
736, 000.00
240, 000.00

10/4/82
12/9/82
12/13/82
12/16/82
12/20/82
12/20/82
12/22/82
12/27/82
12/29/82

9/2
9/10

%106

9/28

RAIDS

2, 500, 000.00

5, 000, 000.00
9,969,000.00
2, 260, 400.00
13,500, 000.00
4, 705, 095.00

ASSOCIATION

Note 431

FARMERS HOME ADMINISTRATION

Certificates of Beneficial

Ownershi

9/21
9/30
9/30
9/30
DEPARIMEÃZ

OF HEALTH

Health

intenance

Block

%25

RURAL

6 HUMAN

11.895%
11.925%
11.795%

SERVICES

n ization

Notes

9/27

ELECIRI FICATICW ACMINISHRTICN

Certificate of Beneficial

Ownershi

9/30

DEPARIMENI'

OF DEFENSE

Israel 13

Greece 14
Jordan 7
Korea 15
Greece 13
Honduras

Israel 13

Turkey 11

Egypt 2

- EOREI(K

MILITARY SALES

9/1
9/1
9/3

3i790, 477.92
301,524.00

9/3
9/3
9/7
9/7
9/7
9/7
9/7

li840, 675.00
le659 932.00
476, 000.00
10,445, 939.32
157,176.58
9,452, 869.23
297,756.49

9r225i495 56

12.800% ann.
12.249% ann.
12.281% ann.
12.143% ann.

FEDERAL FINANCING

Page 3

BANK

of 8

SEPTBRER 1982 ACTIVITY
AKXWl'
OF ADVANCE

SESII1-

DEPA~ENT OF DEFENSE

annual
FOREIGN NILITARY SAIZS

Ecuador 4
Ecuador 5

9/7

9/7
9/8
9/9
9/9
9/10
9/10
9/13
9/13
9/13
9/15
9/16
9/16
9/16
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17

Bot~na 1

ll
ll

Turkey

Israel 13

Turkey

Israel 8

Jordan 7
Nomcco 9
Israel 8
Egypt 3
Turkey 9
Turkey 12

Greece 13
Thailand 8
'Ihailand 9
Tunisia 9
'I%a iland 3
'lhailand 7
Oman

Greece 14
Korea 15
Israel 13
Ecuador 5
Indonesia 7
Israel 8
Israel 13
Turkey 9
'Ihailand
Thailand

9/20
9/20
9/20

9/21
9/21
9/21
9/22
9/22
9/22
9/22
9/23
9/23
9/23
9/23
9/23
9/24

Sanalia 2
Thailand 9
Indonesia 7
Israel 8
Turkey 11
Sanalia 2
Spain 4

Slain 5
Greece 13
Jordan 7

Israel 13

9/24
9/27
9/27
9/27
9/28
9/29
9/29

Egypt 3
Jordan 7
Homcco 9
Israel 8

Israel 13

Korea 15
Peru 7
DEPAPI'HEN1'

9/30

than

semi annual)

(Cant'd)

10,398.65
105,927.35
105,928 ' 38
852, 192.00
6, 874, 629.46
23, 543.22
2, 254, 268.88
3, 117,035.20
575, 900.79
1,420, 152.75
1,000, 000.00
13,977, 500.00
2, 608, 664.00
100,769.60
3, 652, 478.30
176,143.00
1,625, 723.18
1,154, 288.33
2, 217.95
52, 263.99
9,482, 758.00
570, 392.00
10,645, 712.01
5, 615,668.00
422, 373.73
479, 924.64
1,329, 117.35
44, 685, 590.30
445, 450.12
8 ' 646g556 79
8, 676.83
62, 262. 00
1,318,454.98
318,438.00
355, 168.35
1,000, 000.00
298, 079.00
499, 066.00
381,720.00
339,410.00
1,354, 276.00
85, 922. 77
5, 849, 136.58
1,519,065.09
45, 290.00
13,920.00
23, 000, 000.00
6, 216, 772. 70
7, 379, 340.04
1,204, 605.33
8

7/25/87
5/25/88
1/15/87
12/22/10
2/16/12
2/16/12

9/1/09
6/15/12
3/16/90
3/31/94
9/1/09
6/15/12
6/22/92

5/5/11
9/22/90
8/10/90
9/15/93
10/1/88
9/20/84
8/25/86
5/25/90
4/30/11
12/31/93
2/16/12
5/25/88
3/20/90
9/1/09
2/16/12
6/22/92
6/15/12
8/25/86
9/20/85

5/16/11
9/15/93
3/20/90
9/1/09
12/22/10

5/16/11
4/25/90

6/15/91
9/22/90
3/16/90
2/16/12
6/15/12
3/16/90
3/31/94

11.988%
12.135%
11.969%

12.448%
12.429%
12.482%
12.502%
12.677%
12.611%
12.787%
12.535%
12.521%
12.697%
12.538%
12.561%
12.655%
12.705'%
12.454%

11.744%

12.233%
12.555%
12.511%
12.674%
12.496%
12.439%
12.542%
12.468%
12.424%
12.564%
12.356%
12.058%

11.832%

12.110%
12.275%
12.128%
12.133%
12.061%
12.057%
12.035%
12.076'%
12.051%

11.940%

11' 915%

12.034%
12.070%
12.192%

9/1/09
2/16/12
12/31/93
2/15/88

11.987%
11.857%
11.934%
11.685%

1/1/02
7/1/02
1/1/02
7/1/02
1/3/83
1/3/83

13.412%
13.407%
13.337%
13.333%
10.405%

9/1/85
9/1/88

12.039%
12.902%
12.521%
12.521%

OF ENERGY

thetic Fuels Guarantees —Nonnuclear Act
Great Plains

Gasification Assoc.

%28b

9/7
9/7

429a
429b

9/13
9/13

%30

9/20
9/27

428a

431

15,000, 000.00
20, 000, 000.00
79, 000, 000.00
48, 000, 000.00
11,500, 000.00
6~000y000 00

9.115%

DEPAFll%ZT OF HCUSVG a URBAN DEVELOPMEÃZ

Devel

Ccymunit

Gary, IN

Detmit,

Sacrananto,
Ogden,

nt Block Grant Guarantees

9/1
9/1
9/1
9/1

984, 666.67

3,626, 487.00

389, 442. 20
502, 202. 86

'9/1/87

9/1/87

12.401% ann.

13.318'%

ann,

12.913% ann.
12.913% ann.

FINANCE

FEDERAL

BANK

1982 ACTIVITY

SEPTFMIER

INIKRESI'

ANXNT

OF AIMrrNCE

RATE

annal)
nt Block Grant Guaxantees

Devel

Crxsnuni

Hialeah,

9/10
9/10
9/15
9/15
9/20

Inuisville,
Detroit, MI

Washingtan County,
Owensboro, KY
Lawrence, Mess.

ann.

16s910r025 48

9/15/88
9/15/86
9/1/83
1/1/83
10/lg83
12/1/83

11.095%
8.365%
11.855%
10.675%

10 ~ 960% ann.

ll/1/91

—12.351%

12.732% ann.

8, 200, 000.00

10/1/92

12.554%

12.948% ann.

14,349,000.00
1,113,000.00
1,400, 000.00
4, 367,000.00
185,000 F 00
54, 935,000.00
9,000, 000.00

9/1/84
9/1/84
9/2/84
9/1/84
9/1/84
9/1/84
12/31/09
12/31/14
12/31/14
12/31/15
12/31/15
12/31/15
12/31/14
12/31/13
9/2/84
12/31/13
12/31/15
12/31/15
12/31/14
12/31/14
12/31/14

12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.619%
12.588%
12.588%
12.582%

11.937% qtr.
11.937% atr
11.937% gtr.
11.937% qtr.
11' 937% qtr.
11.937% qtr.

li500, 000.00

29, 750.81
100,000.00
126,000.00
463, 000.00

12.390%
12.110%

12.774%
12.477%

ann.
ann.
11.403% ann.

12 ~ 206% ann.

9/10

73, 259, 885.55

11/1/20

AERCtRVITCS AND SPACE MPIINISTRATICFt

Canpany

9/20

EIZCTRIFICATICK ADMINISTRATICFt

Oglethorpe

Electric Corp. F150 9/1

Tex-Ia Electric Coop. F208
S. Mississippi Electric 4171
Saluda River Electric 4186
*Cornbelt Power Caap. %55
Oglethoxpe Electric Corp. %74

Electric 422
Electric F126
Electric 4126
Electric 4126
Electric F126
'Western Fanrers Electric 4126
Western Farmexs Electric F126
Western Farrrers Electric $126
~Ar)kansas Electric Coop. 4142
Utestern Fanrers Electric 0126
"Western Faxmers Electric 4133
Western Fanrers Electric 4133
Western Farmers Electric 4133
Western Farners Electric 4133
Western Farmers Electric 4133
Western Fanrers Electric 0133
Western Faxners Electric 464
Western Faxners Electric 464
Western Farmers
Western Farners
Western Farmers
'Western Farmers
Western Farmers

Enrpire Telephone
Westexn Faxners

Co. 443

Electric 464
'Western Farmers Electric K4
Western Farners Electric 464

Western Farmers Electr, F64
Western Faxners Electric 464
Bxazos Electric Coap. %108
Bxazas Electric Coop. F144
Soyland Power Coop. Ol05
wayland Power Coop. 4165
San Miguel Elecx.ric Coop. 0110
N. E. Mismuri Electric 4217
"Bxcrokville Tele. Co. 053
'United Fewer Assoc. f122
United Power Assoc. 4122
Allegheny Electr:.c Coop. 4175

Deseret GaT $211
who-ne Power 0114
)4ebash Valley Pomr Assoc. 0101
)snbash Valley Power Assoc. 0104
Basin Electric Power 0137
N. Michigan Electric Coap. 4101
N. Michigan Electric Coap. 4101
maturity

11.656%

ll/30/82

Notes

Space Canmrxrications
RURAL

11.335%
8.666%

12/1/83

100,000.00

9/24

Sale 025
NATIONAL

(Cont'd)
6 12,500, 00

Philadelphia Auth. for Ind. Dev. 9/30
Hialeah, FL
9/30

Public Housi

othex' than
srsni-annual)

extension

9/1
9/1
9/1
9/1
9/1
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/2
9/3
9/3
9/4
9/4
9/6
9/7
9/7
9/8
9/10
9/10
9/10
9/10
9/10
9/10
9/10
9/10
9/10

.
.

348, 000 00
300, 000 00
370, 000.00
5,000, 000.00
10,900, 000.00
1,222, 000.00
1,000, 000 00
3,324, 000 00
189,000.00
16,900, 000.00
23, 500, 00I).00
26, 300,000.00
18,652, 000 00
15,572, 000.00
14,125,000.00

.
.

3,161,000.00
400, 000.00

16,000.00
675, 000 (K
280, 000.00
400, 000.00
1,500, 000.00
100,000 00

.
.
.

2, 831,000.00
2, 888, 000 00
2, 739,000.00
9,661,000 00
5, 600, 000.00
1,893,000.00
866, 000.00
7, 500, 000.00
330,000 00
6, 136,000.00
32, 490, 000.00
267, 000.00
1,805, 000.00
5, 055, 000.00
30, 000, 000 00
100,000.00
2, 841,000.00

12/31/13
12/31/13
12/31/15
12/31/16
12/31/13
12/31/15
12/31/15
12/31/12
12/31/15
9/3/84
9/3/84
9/4/84
9/4/84
9/6/85
9/7/84

12/31/10
12/31/12
9/10/84
9/30/84
9/30/84
12/31/14
9/10/84
9/10/84
9/10/84
9/10/84
9/10/84

12 582%

12.582%
12.588%
12.594%
12.125%
12.594%
12.582%
12.582%
12.588%
12.588%
12.588%
12.594%
12.594%
12 ' 582%
12.576%
12.594%

12.582%
12.582%
12.602%
12.582%
12.075%
12.075%

11.815%
11.815%
12.035%
11.815%

12.347%
12.381%

12.426%
12.396%
12.396%
12.390%
12.390%
12.390%
12.396%
12.402%

11.947%

12.402%
12.390%
12.390%
12 ' 396%
12.396%
12.396%
12.402%
12.402%
12.390%
12.384%
12.402%
12.390%
12 ' 390%
12.410%
12.390%

11.898%
11.898%
11.645%

11' 645%
11' 859%

qtx

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
gtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

gtr.
qtr.
qtr.
qtr.
gtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtx

11.645% qtr.

11.995%

12.162% qtr.
12.195% qtr.
11.820% qtr.

11.995%
11.995%
11.995%
11.995%
11.995%

11' 840% qtr.
12.212% qtr.
11.820% qtr.
11.820% qtr.
11.820% qtr.
11.820% qtr.
11.820% qtr.

12.015%
12.015%
12.397%

11.840% qtr

FEDERAL FINANCIMi

Page 5

BANK

1982 ACI'IVI'

SEPTEMBER

INIEREST

AMXlNT

RATE

ADVANCE

sem

annal).
RURAL ELECTRIFICATION

ACMINISTRATION

Gulf Telephone Co. 450
~ Michigan
Electric 4101
Wabash Valley Power 0206
E. Kentucky Power Coop. 8188
«Cajun Electric Power Coop. 876
E. Kentucky Power Coop. 8140

9/12
9/13
9/13
9/13
9/14
9/14
Chugach Electric Assoc. 8204
9/14
N. Hampshire Electric 4192
9/15
Brazas Electric Pc»er 8108
9/15
E. Kentucky Power 873
9/15
Wolverine Electric Coop. 8100
9/15
Brazos Electric Power 1230
9/15
N. Michigan Electric Coop. 8101 9/15
«Plains Electric GaT 8158
9/15
Kansas Electric Power 8216
9/16
«Associated Electric Coop. 8132 9/16
Cairyland Power
854
9/17
«Saninole Electric Coop. 8141
9/19
«S. Mississippi Electric 83
9/19
Big Rivers Electric 891
9/20
«Big Rivers Electric 858
9/20

9/20

9/20
9/20
9/20
9/21
9/21
9/21
9/22
9/22
9/22

9/22
Big Rivers Electric 891
9/22
«Central Elect. Pawer Coop. 8131 9/22
*San Miguel Electric Coop. 8110 9/22
Big Rivers Electric 8136
9/22
Southern Illinois Pawer 438
9/23
«Colorado Ute Electric 896
9/24
Pawell Telephone Co. 841
9/24
Associated Electric Coop. f132 9/24
*Corn Belt Power Coap. 8166
9/25
*Central Electric Power 8131
9/27
*Cooperative Pawer Assoc. 4130 9/28
*Cooperative Pawer Assoc. 870
9/28
*Sugar Land Telephone Co. 469
9/28
«Cooperative Power Assoc. 85
9/28
Glacier State Tele. Co. 8181
9/28
*S. Mississippi Electric 43
9/29
9/29
N. (hrolina Electric 4185
Eastern leam LaP Coop. 8184
9/29
Tex-ia Electric Coop. 8208
9/29
«S. Illinois Power Coop. 838
9/29
9/29
Basic Electric Power 888
«E. Kentucky Pawer Coop. 8140
9/29
*S. Mississippi Electric 490
9/29
Basin Electric Power Coop. 887 9/30
Wabash Valley Power Assoc. 8104 9/30

Big Rivers Electric 4179
Electric Assoc. 48
Basin Electric Power 487
Wabash Valley Power 8206
San Miguel Electric Coop. Oll0

«Colorado

Electric 8192
Illinois Pawer 138
Electric 8192
New Hampshire
Big Rivers Electric Coap. 091
«Big Rivers Electric Coop. 891
Plains Electric GaT 8158
«Southern Illinois Power 838
New

Hampshire

*Southern

"maturity extension

INIE REST
RATE

other than
semimnnual)

(Cont'd)
8 305, 000.00
77, 000.00

Sayland Power Coop. 8226
«Big Rivers Electric 865
Associated Electric Coop. 0132
Southern Illinois Power 838
Big Rivers Electric 8179
Big Rivers Electric 8143
Seminole Electric Coop. 4141
Big Rivers Electric 865
«Big Rivers Electric 8143
Central Ic»a Power Coop. 8169
*Big Rivers Electric 858

of 8

9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30

95,000.00

8, 126,000.00

50, 000, 000.00
600, 000.00
1,806, 000.00
1,188,000.00
504, 000.00
500, 000.00
58, 736,000.00
6,000, 000.00
75, 063,000.00
7, 280, 000.00
5, 450, 000.00
31,000, 000.00
1,486, 000.00
2, 536, 000.00
2, 550, 000.00
1,829, 000.00
3, 827, 000.00
13,332,000.00
12,000.00
10,000, 000.00
69, 000.00
18,442, 000.00
229, 000.00
20, 326, 000.00
26, 000.00
10,000.00
3,332, 000.00
353,000.00
2, 804, 000.00
250, 000.00
8, 000, 000.00
329, 000.00
499, 000.00
2, 868, 000.00
1,158,000.00
17,253, 000.00
2, 900, 000.00
75, 000.00
6, 022, 000.00
6, 978, 000.00
li411, 000.00
4, 000, 000.00
3,133,000.00
5, 000.00
26, 305, 000.00
1,420, 000.00
3, 160,000.00
2, 015,000.00
105,000.00
1,400, 000.00
495, 000.00
487, 256. 00
8, 704, 000.00
9, 862, 000.00
7, 254, 000.00
835, 000.00
506, 000.00
5, 600, 000.00
1,425, 000.00
200, 000.00
1,425, 000.00
1,091,000.00
2, 758, 000.00
12, 326, 000.00
3,540, 000.00
.

9/12/84
9/13/84
9/13/84
9/13/84
12/31/13
9/14/84
12/31/16
12/31/16
9/15/84
9/15/84
9/15/85
9/15/84
9/15/85
12/31/14
9/16/84
9/16/84
9/17/84
9/19/84
12/31/09
9/20/85
9/20/85
9/20/84
9/20/85
9/20/84
12/31/16
9/21/84
9/21/84
9/21/84
9/22/84
9/22/84
12/31/16
9/22/84
9/22/84
9/22/84
9/22/85
9/22/84

12/31/16
9/24/85

12/31/16
9/24/84
9/25/84
9/27/84

12/31/13
12/31/13
9/28/84

12/31/13
12/31/16
9/26/85
9/29/84

12/31/16
9/29/84
9/29/85
9/29/85
12/31/14
9/29/85
9/30/84
9/30/84
9/30/84
12/31/11
9/30/84
9/30/84
9/30/84
12/31/16
9/30/84
12/31/16
9/30/84
9/30/84
12/31/16
12/31/10

12.185%
12.185%
12.185%
12.185%
12.463%
12.055%
12.435%
12.406%
12.005%
12.005%
12.245%
12.005%
12.245%
12.420%
12.285%
12.285%
12.265%
12.085%
12.022%
12.315%
12.315%
12.085%
12.315%
12.805%
12 ' 308%
12.105%
12.105%
12.105%

11.805%
11.805%
11.998%
11.8058
11.805%
11.805%
12.045%
11.805%
11.986%
11.955%
11.888%
11.625%
11.775%
11.775%
11.955%
11' 955%
11.815%
11.955%
11.957%
11.785%
11.545%
11.870%
11.545%
11.785%
11.'785%
11.864%
11.785%
11.505%
11.505%
11.505%
11.871%
11' 505%
11.5058
11.505%
11.899%
11.505%
11.899%
11.505%
11.505%
11.899%
11.864%

gtr.
qtr.
qtr.
qtr.
qtr.
11.879% qtr.
12.247% qtr.
12.219% qtr.
11.830% gtr.
11.830% qtr.
12.063% qtr.
11.830% qtr.
12.063% qtr.
12 ' 233% gtr.
12 ' 102% gtr.
12.102% qtr.
12.083% gtr.
11.908% qtr.
12.193% qtr.
12.131% qtr.
12.131% qtr.
11.908% qtr.
12.131% qtr.
11.908% qtr.
12.124% qtr.
11.927% qtr.
11.927% qtr.
11.927% gtr.
11.636% qtr.
11.6368 qtr.
11.823% gtr.
11.636% qtr.
11.636% gtr.
11.636% qtr.
11.869% qtr.
11.636% qtr.
11.812% qtr.
11.781% qtr.
11.716% qtr.
11.461% qtr.
11.607% gtr.
11.607% qtr.
11.781% qtr.
11.781% qtr.
11.645% qtr.
11.781% qtr.
11.783% qtr.
11.616% qtr.
11.383% qtr.
11.699% qtr.
11.383% qtr.
11.616% qtr.
11.616% qtr.
11.693% qtr.
11.616% qtr.
11' 344% qtr.
11.344% qtr.
11.344% gtr.
11.700% qtr.
11.344% qtr.
11.344% qtr.
11.344% qtr.
11.7278 qtr.
11.344% qtr.
11.727% qtr.
11.344% qtr.
11.344% qtr.
11.727% qtr.
11.693% gtr.
12.005%
12.005%
12.005%
12.005%
12.275%

FEDERAL FINANCIM'

BANK

SEETM3ER 1982 ACTIVITT
OF AD(ANCE

sem ~

annal)
RURAL ELECTRIFICATION

MNINISTRATICN

Electric Coop. 493
Electric Coop. 4175
S. Illinois Power Coop. 838
Saluda River Electric Coop 8186
«Allegheny Electric Coop. 893
Tri-State GaT 8177
S. Nississippi Electric 8171

«Allegheny
Allegheny

9/30
9/30
9/30
9/30
9/30
9/30
9/30

5, 000, 000.00
10,661,000.00
3, 100,000.00
8, 892, 000.00
4, 584, 000.00
lc045g000. 00

12, 225, 000.00

9/30/85
9/30/84
9/30/84
9/30/84
9/30/85
9/15/89
10/1/84

11.7158
11.5058
11.5058
11.505%
11.7158
11.915%
11.505%

9/1/85
9/1/85
9/1/85
9/1/87
9/1/87
9/1/87
9/1/87
9/1/87
9/1/89
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92
9/1/92

11.995%
11.995%
11.995%

Debentures

Capital Co.

Advent

Capital Resources Co.
Clintcn Capital Corp.
Retail Capital Corp.
Rust Capital, Ltd.
Shared Ventures, Inc.
Vermont Investment Capital, Inc.
Western Financial (hp. Corp.

9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/29

State

Debentures

Developers

Equity Cap. Corp.
Equilease Cap. Corp.
Control Data Capital Corp.
Developers Equity Cap. Corp.
Equilease Capital Corp.
Eslo Capital Corp.
West Coast Venture Cap.
West Coast Venture Cap.

Capital Co.
Eslo Capital Corp.
Banco Capital Corp.
Invesat Capital Corp.
Intercapo, Inc.
Questech Capital Corp.
Bando-NcGlocklin Inv. Co. , Inc.
Edwards

Bay Venture Gmup
California Cap. Investors,
Chpital Marketing Corp.

a Local Devel

Ltd.

nt Can

Central Avenue Betterment Assoc.
Bedco Develops nt Corp.
St. Louis Loll Dev. Co.
San Diego County Local Dev. Corp.
Central Vermont Ec. Dev. Corp.
Iaec Business Gmwth Co.
Sm. Bus. Dev. Corp.
San Diego County Local Dev. Corp.
San Diego County Local Dev. Corp.
Atlanta Local Dev. Corp.
Colobus Citywide Dev. Corp.
Providence Ind. Dev. Corp.
Calexico Ind. Dev. Corp.
Charleston Citywide L.D.C ~
S. Shore Econcxnic Dev. Corp.
Netmpolitan Gmwth a Dev. Corp.
Ocean State Bus. Dev. Auth. , Inc.
Birmingham Citywide L.D.C.
Texas Certified Dev. Co. , Inc.
Madison Dev. Corp.
San Diego County Loc. Dev. Corp.
Greater Salt Lake Bus. District
Phoenix Local Dev. Corp.
Evergreen Cawanity Dev. Assoc.
San Diego County Loc. Dev. Corp.
Texas Certified Dev. Co. , Inc.
New Orleans Citywide Dev. Corp.
Long Beach local Dev. Corp.

~wealth

naturity

extension

(Cont'd)

SNALL BUSINESS MÃINISTRATICN

Snail Business Investment

semimnnual)

9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8
9/8

6,000,000.00

200, 000.00
1,500,000.00
2, 000, 000.00
200, 000.00
1,500, 000.00
250, 000.00
1,500, 000.00

900,000.00
600, 000.00
250, 000.00
1,000, 000.00
500, 000.00
1,500, 000.00
2, 000, 000.00
1,500, 000.00
1,000, 000.00
1J000g000 ~ 00
1,000,000.00
900, 000.00

900,000.00
500, 000.00
3,000, 000.00
500, 000.00
125,000.00
860, 000.00

38, 000.00
45, 000.00
84, 000 F 00
106,000.00
110,000.00
122,000.00
136,000.00
183,000.00
315,000.00
456, 000.00
74, 000.00
75, 000.00
77, 000.00

101,000 00
114,000.00
120,000.00
145,000.00
197,000.00
378,000.00
500, 000.00
32, 000.00
49, 000.00
118,000.00
198,000.00
298, 000.00
378,000.00
398,000.00
500,000.00

9/1/97
9/1/97
9/1/97
9/1/97
9/1/97
9/1/97
9/1/97
9/1/97
9/1/97
9/1/97
9/1/02
9/1/02
9/1/02
9/1/02
9/1/02
9/1/02
9/1/02
9/1/02
9/1/02
9/1/02
9/1/07
9/1/07
9/1/07
9/1/07
9/1/07
9/1/07
9/1/07
9/1/07

12.075%
12.075%
12.075%
12.075%
12.075%
12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.115%

12 115%

12.115%
12.115%
12.115%
12.115%
12.115%
12.115%
12.500%
12.500%
12 ' 500'%
12.500%
12.500%
12.500%
12.500%
12.500%
12.500%
12.5008
12.441%
12.441%
12.441%
12.441%
12.441%
12.441%
12.441%
12.441%
12.441%
12.441%
12.368%
12.368%
12.368%
12.368%
12.368%
12.368%
12.368%
12, 368%

11.548%
11.344%
11.344%
11.344%
11.548%
11.743%
11.344%

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

FEDERAL FINANCIlC

SEPTEMBER

1982

Page 7

BANK

ACTIVITIES

FINAL

INTEREST

MATURITY

RATE

slatuannual)

Seven

States

Ene

of 8

INIKREST
RATE

other than
semi-annual)

ration

Note A-82-12

9/30

8 436g327, 218.07

FEDERAL FINANCING

September

12/30/82

7.834%

BANK

1982 Ccnmlitments

Lebanon

Gabon
Honduras

Jordan
Malaysia
Niger

Philippines
Portugal

Sri lanka
Spain
iland
Tunisia

Yenen Arab Republic
Za

ire

Cincinnati,

2, 600, 000.00
10,000, 000 .00
4, 900, 000.00
10,000, 000.00
10,000, 000.00
2, 000, 000.00

50, 000, 000.00
45, 000, 000.00
2, 000, 000.00
125,000, 000.00
74, 700, 000.00
10,000, 000.00
10,000, 000.00
7, 500, 000.00
2, 000, 000.00

COD

7/10/84
9/20/84
5/22/84
6/12/84
8/15/84
8/12/87
5/10/84
6/15/84
6/15/84
9/14/84
7/10/84
5/4/84
6/1/84
9/15/84

HUD

12/1/83

IX)D
DOD

IDD
DOD
DOD

IOD
DOD
DOD

IOD
COD
DOD
DOD

IXID

1/15/88
9/20/94
11/22/90
7/25/90
8/20/89
10/15/90
5/15/91
6/15/92
6/5/94
9/15/92
7/10/94
5/5/92
6/1/94
9/15/94
12/1/03

FEDERAL FINANCING

Page 8

BANK HOLDINGS

(in millions)
Se tember 30,

Pmmam

On-B

Debt

Tennessee Valley Authority
Export-Import Bank
NCUA~ntral Liquidity Facility

Of f"B

Facilities

GovernnantWuaranteed

Notes
General Services Ahninistration
DOIWuam Power Authority
DOI-Virg in Islands
Co.
NASA-Space Ccsnnunioations
Rural Electrif ication Admin.
SBA~11 Business Investment Cos.
SBA-State/Local Development Cos.
'IVA-Seven States Energy Corp.
Housing

may

425.0

4, 915.0

145.7

53, 311.0
129.6
145.7

58.1

2, 883.7
58.8

&7.0

240. 0

528 ' 4
W. 3

11,308.8
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127.1

2, 288.2
700.0

1.4

14.6
M. 7

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8

282. 5

117.0
33.5
1,624 ' 3

112.5
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1,551.0

36.0
29.5

36.0
29 ' 5
749.6
15,916.1

124, 357.3

70.2

122,624.6

4.5

340.0
42.7

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4

120.0

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5.3
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57 ' 5

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25.1

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OO8.2

420. 5

122.8
177.0

Act

19.6

36.6

757.8
16,281.5
712.0
48. 4
1,258.0
855.4

53,736.0

420. 5

Rail Svcs. Act
RRRR

'ITEMS n

1gures

28.8

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340.0

Plains)

i ties

Caanun

~itic V,
~NA'JR

1,411.0
1,544.6

0
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11,435.8
5, 000.0
36.6
-0-

Assn.

Dev. Block Grant

DHU~nnunity

DOI Emergency

235.0
125.0
20.8

Loans

DOD-Foreign Military Sales
DEd. -Student Loan Narketing
K)E-Geothermal Loans
DOE-Hybrid Vehicles
IX(E-Non-Nuclear Act (Great

DVP-Amtrak

1,221.0

21.5
3,123.7

Overseas Private Investment Corp.
Rural Electrif ication Admin. -CE)
Small Business Administration

12,050.0
13,828.9
109.3

1,221.0

131.0

CHHS-Nedical

IMJ~ew

194.9

Adninistration
intenance Org.

Hane

HSK-Health

DHUD-Publ

12, 285.0
13,953.9
130.1

Debt

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U. S. Railway Associaticm
Farnmrs

of 8

1,732.6

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pepartment

of the Treasury

~ Washington,

D.C. ~ Telephone 566-204

The attached draft papers are scheduled to be discussed
at the December 14 meeting of the National Productivitv
Ahrisory Committee.

~r ni
+~

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 2022D

December

COUlCSELOI% TO THE SCCNCTARY

FOR THE NATIONAL

MEMORANDUM

2, 1982

PRODUCTIVITY ADVISORY COMMITTEE

B. PORTER+gP

FROM:

ROGER

SUB JECT:

The National Productivity Advisory
Committee Meeting on December 14

The National Productivity Advisory Committee will meet
on December 14, 1982 at 10:00 a.m. in Room 4121 of the Department of the Treasury in Washington, D. C. The full Committee
will meet from 10:00 a.m. to 12:00 noon and from 1:00 p. m. to
3:00 p. m. Lunch will be served in Room 2049 at 12&00.

has been allocated for the report of each of
subcommittees.
A copy of the papers and
of the subcommittees is attached for your
recommendations
These papers cover the following
review before the meeting.
One hour

the respective

issues:

Subcommittee

on Ca

ital

Tax Reform

Subcommittee

Investment

to Increase Productivity

on Human

Resources

Health Care Costs and Productivity

Employee-Management-Government

Subcommittee

on the Role

Government

Forums

in the

Econom

the Clean Air Act to
Increase Manufacturing Productivity

Reforming

Well Pay

Non-immigrant

Visa Requirements

have not yet received the papers for the Subcommittee
". Research, Development and Technological Innovation, but
anticipate ones on a National Productivity Medal, Computer

Software Patent Protection, and University Fellowships
for Engineering. We will circulate these papers as soon
as they are received.

Please let me know as soon as possible whether you
will attend the meeting on December 14. Zf you are unable
to attend, I would appreciate you providing in writing any
comments you might have on these papers so that we can make
them available to the Committee.
Attachments

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 202K

~gy~~%

December

TO THR SECIICTMY

MEMORANDUM

FOR THE NATIONAL

2, 1982

PRODUCTIVITY ADVISORY COMMITTEE

FROM:

ROGER

SUBJECT:

The Subcommittee

PORTER

Capital Investment

The Subcommittee on Capital Investment has considered
several aspects of tax reform and their impact on capital
formation and improving productivity.
As a result of their
review of these issues, the Subcommittee is proposing the
elimination of double taxation of corporate income and dividends,
substantially reducing marginal tax rates and providing an
improved and simplified incentive for investment.

Attached for your review is a Statement of the Subcommittee
that it will propose for adoption at the December 14 meeting
of the National Productivity Advisory Committee. In addition,
I am also attaching a copy of the summary of the flat-. rate
tax proposals of Messrs. Robert E. Hall and Alvin Rabushka,
a recent article by William E. Simon on the flat-rate tax,
and the testimony of Treasury Assistant Secretary Chapoton
on approaches to a flat-rate tax system.
Attachments

of the

Statement

National

Subcommittee

Productivity

Tax Reform

prom

the standpoint

several important
include eliminating

substantially

on Capital

Advisory

Investment

CcmmLittee

to Increase Productivity
of

improving

productivity,

there are

reforms needed in the federal tax system.

These

the double taxation of corporate income and

tax rates imposed on individuals
so that lower tax rates are imposed on a broader concept of
income. All income should be taxed just once at rates not
exceeding some low fixed rate. Purther, the tax system should
provide a single comprehensive investment incentive in the form
of immediate expensing of all investment expenditures.
This
incentive should replace the existing investment tax credit
and depreciation provisions of the personal and corporate income
taxes.
these
A detailed tax reform proposal that accomplishes
important

reducing marginal

goals has been

made by

Robert Hall and Alvin Rabushka

this proposal, all income would
be taxed at the same low rate of 19 percent.
By eliminating
and other sources of leakage in the tax system,
many deductions
a lower rate of tax (19 percent in their estimate) would raise
enough revenue to close the federal deficit by fiscal year 1985,
The
assuming immediate enactment and no transition exceptions.
Hall-Rabushka plan replaces the corporate income tax and certain
parts of the personal income tax with a comprehensive business
of Stanford University.

Under

withholding

tax

and so achieves

a particularly

simple and

practi-

cal solution to the problem of eliminating the double taxation
of corporate income. Though the Subcommittee does not endorse
every feature of the Hall-Rabushka plan, and in particular would
call for certain modifications to ease the transition to the new
tax system, we feel that their plan is a most promising proposal
to bring badly-needed tax reform and merits extensive study and
public debate.
Eliminating

high tax

is essential to restore

rates

adequate

on individuals

productivity

and businesses

growth.

Paced

with 46 percent tax rates on corporate income and up to 50 per-

cent on individual

income,

and a combined

tax rate on business

that can be as high as 70 percent, prospective entrepreneurs divert their efforts into tax shelters instead
of the creation of new businesses. Reducing high marginal tax
rates and eliminating double taxation of corporate income are
essential to stimulating productivity growth and should receive
high priority in a general program to spur productivity.
and personal

income

Sinple 'Xnc"-e;ax vith Iov Marginal

Rates

Robert R. Eall

ALvin Rabushka

Institution, Stan ord Vniversity
Stan ord, California 94305

Hoover

1982

Revised September
A

of th's material trill appear in

e presentation

more comple

Tax, Simple Tax, Plat Tax, to be published

by McGrav-Hill

early 1483.

Form 1

mrs

i)tdivtt5wl Comi)ottssii5Nt Tax

Mmmm

... ........... ......

1 Camper»scones mponso ay employer, . .
wepe incan». rnsinpn0 pen»one perp or»sey ay employer .
0 Tote( sorrarsnseten pine t pa» sne 2)
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Tas (tptsotsne5)
Tas nstnnero ay employer
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Qross ier»rs» earn sores.
aaonmtre swts

[$)

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10
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4witteee Tax

ting

IPICOL W4

tp) Wepee. S»eneL »la per»rene perS ta erreeeyeeL
(o) plot»ses ot ospnsl erasonrem. slnrtsNeL»lo )snit
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10

Low

recent

Despite

tax system

American

simplification

f ill ing
credits,

progress

reform.

ratesg

Lowering

a disgrace,

remains

and

in dire need of

fs inordinately

lengthy.

of tax codes, complicated by hundreds of
and
Many
exemptions,
special provisions.
taxpayers require expensive professional help to fill out
their tax returns correctly.
Each act of the Congress
further complicates the system. PoLitical promises of real
s impl if ication and ref orm of the tax system remain
unf ulf illed.
The tax system consists chiefly of the personal income
tax, the corporate income tax, and the payroll tax for
income tax has steeply
social security.
The personal
progressive rates, rising to a maximum marginal rate of 50
percent under the new tax law. The income base to which
these progressive rates are applied has steadily eroded
a wide variety of exclusions,
over the years through
volumes

and

constitutes

no more

The personal

income

first

when

taxed

to the point where
than half of total national
tax discourages

earned

interest.

Even worse,

corporate

sector

profits,
are paid.

current

are

again

and

growing

system

exemptions

deductions,

and

again

savings.
when

now

income.

Income

savings

is
earn

to savings put into the
twice, once as corporate

the returns
taxed

at Wa-

household

level

when

chorus of criticism contends

attenuates

individual

incentives

dividends

that the

to work,

~2~

invest.
For many taxpayers, saving a dollar 'in
taxes is worth tvice as much as earning another dollar in

save and

income.

to the

Prior

about 3 percent

comprising

federaL

"avenues,

were largely

collected

century,

twentieth

GNP,

of the Sixteenth
Amendment
in 1913 and the payroll tax in the 1930s, federal
.revenues
have
to consume 22 percent of GNP.
grown
Escalating inflation in the 1970s pushed growing numbers of
taxpayers into high tax brackets that twenty years ago vere
meant only for the very rich.
Costly side effects have
begun to surface.
Revenue
Internal
with
research,
Scholarly
aLong
Service reports, reveals «idespread evidence of tax evasion
or
and other forms of household
dividend,
on interest,
Tax shelters are now a commonplace
professional income.
'feature of the financial landscape.
Estimates of the
underground
economy range from several tens of billions to
several hundred
billion dollars.
In the eighteenth
fram

duties.

customs

century,

customs

Nith

the adoption

duties exceeding

into a nation of smugglers.
50 percent

from

tax,

the corporate
converting
investments

the personal
and 14

Americans

for

productive

economic

the

Today, marginal
income

tax,

tax rates of

46 percent

fram

tax 'are
channeling their

percent from the payroll

into tax avoiders

into tax shelters.

contempt

100 percent made England

lav,

activity.

and

The current

simultaneously

system

fosters

discouraging

w3w

is it

so difficult

to reform the tax system? Moat
scholars, lawmakers and practitioners routinely claim that
i t is poli tically inf eas ible to simplify and reform
radically the tax system. Talk of simplification is a sign
of unrealism. Congress would, it is alleged, never abolish
Why

the

exemptions

paymeats,

char i table

costs, or

remove

for

deductions

and

contr ibutions,
the many benefits

interest

mortgage

excess medical

care

credits enjoyed by
low-income
households
and a bevy of special
interest
groups.
The American demand for justice means that the
rich should pay higher taxes.
As a result
of these

beliefs,

in the tax code are invariably

changes

represent slight
personal income tax.
sense

interest

growing

incremental

to the corporate

modifications

and

the

public

and

or
in

for drastic reform in the tax system.
As a
contribution to the debate and discussion on this important
subject, we propose a simple income tax based on low
marginal
rates to replace the entire current system of
separate tax rate schedules on corporate and individual
income.
The new tax would be a low, flat rate applied to
Congress

all taxpayers,
income.

the

would

present

revenue
and

excluding

be applied

system,

thus

to a

which

The simple

caused

all

types of

larger tax base than
genera ting similar amounts of

as the current high-rate

deductions.

creep,

the very poor, and to
much

system with

flat rate
inflation

its

would

pushing

exemptions

end

bracket

people

into

higher

the penalty

(' the
and

tax brackets.
current law . imposes

higher

and

«ould largely minimise

on t«o-earner

households

penalty')
It «ould be stable, predictable,
cease further proliferation of ~ variety of tax credits
marriage

to attain social goals.
Most
restore the incentives to «ork, save
used

promoting
Our

growth

proposal

and higher

does

not

standards

include

impor

tant,

and

invest&

«ould

thereby

of living.
reform

of the social

security payroll tax and the retirement
benefits it
f inances, though re f orm is long overdue.
The social
security tax cannot be discussed separately from benefits,
and «e «ould be taken too far from our basic subject of tax
reform to go into the massive changes in social security
needed to put the system on a sound footing.
/

Sasic Principles of the Simple

The simple

income

tax rests on four basic principles:

All income should be taxed only once, as close as

possible to

its source.

All types of income should

poorest households should pay
Tax returns for both households

The

at the

be taxed

same

rate.

low

Zacxme Tax

should

be simple

enough

fit

no income

businesses

and

on a

tax.
or

postcard

one page.

and

personal

income

tax.

compensation

the replacement

propose

corporations,

taxes

of the existing corporate

with

has already

tax includes the earnings
businesses,
farms,
unincorporated

The business

rental income.
'not permit a deduction for interest
other payments to the owners of the
all income that individuals receive

professionals,

tax and

business

and

been taxed, and should

tax does
dividends, or

The business

payments,

business.

As a resu3.

from business

activity

not be taxed again.

The

for capital gains. The business tax is like a
withholding
tax; it means that the tax authorities do not
dividends, capital
have to track down all the interest,
same

holds

m)~
and

gains,

Compensation

to insure
compensation tax.

that

because

income,

and again

assuming

simple

under

the personal

tax.

that

the same

flows

tax system

pay

the

present
income

the corporate

collect the

same

generates,

system

as occur

require a standard

would

for business

80 percent

and

first

revenue

amount

income

set of personal

families

poorest

taxed

income

under

personal

would have a

the

public.

of household income not
therefore propose a new

the present

for compensation

50 percent

by the

laws, tax rates can be as high as

our existing

Under

tax

The new compensation

allowances

tax

tax.

tax to replace

compensation

received

income

the only element

the business

taxed under

tax.

bus iness

other

today,

the

rate of only 19

percent.
The Susiness Tax

tax would rationalise the present
of federal tax provisions for business income.
business

The new

hodge-podge

Xt would

reduce

some types

deductions,

current

the high-marginal

income from

Xt would

tax shelters.

rates currently

capital.

also

end

Sy eliminating

the subsidies

paid on

interest

embodied

of 19 percent would
replace the current range of tax rates that stretch from
actual subsidy of highly leveraged tax shelters with large
interest deductions to rates as high as 81 percent imposed
A

uniform

raCe

&7M

corporate stockholders.
The new business tax applies equally to all forms of
business corporate, partnership,
professional, f arm, and
rentals and royalties.
The base for the tax is gross

on income earned

—

less

revenue

compensation

recovery

self-employed

for investment
for depreciation,

are

owners

permitted.

provided

they

report

in plant and

intereste
Howevers

salary in any

pay themselves

may

and

deducted

deductions

payments

choose,

allowance
No

services and
In addition, a capital

goods

to employees.

paid

equipment.

purchases

or
the

amount

they

the compensation

tax

form.
The business

tax return

page, even for a multibillion
what

like:

look

would

fit

easily on a single
dollar corporation.
Sere is

would

HALL~SUSHKA SiMPUFIED FLAT RAT% TAX FORM

~ ~.

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Tae

Gross

~ I ~ OO ~ 0 ~ 0 ~ \ ~ 0 ~ 0 ~ 0 ~ ~

revenue

from

sales

does

not include

earnings

the

receive fram
these businesses

b~siness

may

(provided
from

its

its ownership of other businesses
file their own tax returns) or

of securities.

ownership

These

already been taxed in other businesses.
include

sales of used plant

and equipment.

foi tax purposes.
In place of the hodge-podge
the
current
tax system,

first-year

straightforward
investment,

the

Businesses are

both

writeoff

capital recovery is

complicated

depreciation

the

use

all

business

plant and equipment.
a great simplification over
used

and

new

propose

deductions

and

Zt also eliminates

credits in present tax law.

accounts

incentives

of investment
we

have

Cross revenue does

to maintain inventory or depreciation

not required

First-year

earnings

investment

the present

historical cost is not
The
rapid enough to of fact the ef fects of inflation.
first-year system avoids all distortions of inflation.
In 1981, the net revenue of O. S. business was 81179
billion.
Under the new business
tax, capital recovery
allowances
would
have been $349 billion,
leaving net
taxable business income at $830 billion. k tax rate of 19
percent wo'uld have yielded $158 billion, nearly triple the
revenue from the -actual corporate income tax in 19BR of $57
billion.
The extra revenue, despite the much lower tax
rate, comes fram (1) the much eider tax base, including
problem

that depreciation

unincorporated

its source.

business,

based on

and

(2) taxing business

income

~9~

tax system, all business income would
be taxed only once, at" its source.
Household receipts of
Under

the simple

interest,

dividends,

income.

Though

and

wealthy

capital gains
households

would

after-tax

large
is important to

might

receive

of these types of income, it
understand
that the taxes on this income have already been
paid. The recipient household itself should not pay any
more tax on business income.
Taxing business income at its
source has an important practical benefit.
Under the
present personal income tax, large amounts of interest and
dividend income escape taxation through outright evasion
and tax avoidance.
Apparently
people find it easy to
amounts

these types of income when filling out personal
income tax returns.
Under our business tax, the only way
dividends,
interest, and other earnings of capital could

overlook

escape taxation would be for the busine s to

fail to file

tax return, which is easier to detect and punish.
Capital gains on rental property, plant, and equipment
are taxed under the busLness tax. The purchase price is
deducted at the time of purchase, and the sale price is
taxed at the time of the sale. These provisions are most
I

for real estate, where they will eliminate the
current abuses in which low capital gains tax rates create
Every
an incentive for artificial turnover of property.
owner of rental real estate would be required to fill out
important

the simple business

tax return.

Capital gains in the overall value of a successful firm

are also taxed under the
taxed again

consider
The value

at the

business

new

level.

household

the case of the

tax

common

of its stock in the

and should

To see

not be

this point,

stock of a corporation.

market

is the capitalisation

Because the camera of the stock
of its future earnings.
receive the earnings after . the corporation has paid the
business tax, that tax depresses the stock s market value.
%hen the market learns that future earnings are likely to
be higher than previously thought, the stock rises in value
and

its

owners

materialise
taxed.
correspondingly
earnings

of the

stock

capital
household

would

taxation

comprehensive

gains

capital

receive

should

the

gains.
future,

To tax the immediate
be

double

of business
be

excluded

taxation.
income
from

When

the high

they

viD

capital gains
Thus

xi th

at the source,
taxation at the

level.

In order

impose

the appropriate

tax on banks

and

of business, it is necessary to
separate the value of the service the bank provides to its
customers from the interest the bank pays to the customer.
the other, so the
Today, most banks net "one against
customer gets free services in exchange for lending the
bank funds at sero or belce market interest rates. Because
the business tax is imposed on the value of the product
sold by a business [the~rvices provided by a bank, for
example), but does not allow a deduction for interest paid
out, it would not be permissable -for a bank to report the
certain

other

types

mQ~

net receipts
must

its

add

customers

in the difference

depositors

be permitted

full

and the

earn elsewhere.

that

its

from

As a

its sales.

from

their

it
pays

interest rate they could

general matter,

borrow

its

the interest

between

market

Instead,

businesses
customers

would

and

not

pretend

of sales was only the net charge after
deducting interest
this violates the basic principle that
interest payments are never deductible.
Susinesses like
banks could continue to carry on their relations with their
customers in any way they chose, but for tax purposes, the
full value of their services wouLd be reported as their
the value

—

sales.
One

other potentiaL

source of abuse of the business

—the

tax

of business
assets to personal use. There is nothing new about this
problem —
under today s income tax, one can buy a car for
business
at the end of the year, take the
purposes
investment credit, and then convert the car to personal use
at the beginning of the ~ext year. Qnder the proposed
business tax, conversion to personal use would be counted
as a sale, and the mar ket value of the asset would be
included in the revenue of the firm. Auditors would check
that the assets on the books of the firm were actually used
by the firm and not for the personal use of the owners.
tirst-year vriteoff of investment auld create large tax
losses in the startup years for almost all businesses and
occasional large tax losses even for established businesses
would

need

monitored

conversion

mQ~

significant investments.
The business tax
provides unilfmited
carry forvard of tax Losses so that
they reduce taxes in future, profitable years.
turther,
the balances carried forvard earn interest at the aarket

chen they made

rate.

13Tax

The Compensation

Most

in the United

income

States is compensation

for
be taxed at the level

of the

that compensation
individual
or married couple.

defined

as cash wages,

workers

from

work.

propose

employers.

fringe benefits

salaries
Pension

paid by employers

and

Compensation

pensions

received

contributions

and

are not counted

other

as part

of compensation.
To limit the tax bu den of poor families, we propose a
Taxes mv. '. f be 19 percent of
set of personal allowances.
The
allowances.
compensation
in excess of personal
proposed allowances for 1982 are
$6200

Married Couple

Single

3800

Single head of household

5600

750

Each dependent

Except for the personal
kind would be permitted,

including

for the compensation
would look like this:

The tax return

postcard.

of any
interest deductions.

allowances,

no deductions

tax would

fit

on a

14-

about $1503

salaries,

1981, sages,

1981

billion.

mould

have

private

and

pensions

estimate that personal

been

$481 billion,

vere

allowances

leaving

taxable

compensation

of $1022 billion.

tax revenues

would

the personal

tax in 1981 yielded about $289 billion.
revenue from the compensation tax is less than

The required
from

the

At a

have been $194

rate of 19 percent,

billion.

By comparison,

income

personal

income

tax

replaces

because

the

tax covers part of the tax base of the current
personal tax. The reasons that a Icw rate of 19 percent
yields revenue reasonably close to that obtained from the
current tax system ares
fl) the business tax includes
currently untaxed f ringes in its base,
(2) the current
business

income

other

tax
forms

fails to

tax

of business

f ully
income

dividends,
because

interest, and
of widespread

~15evasion

and

avoidance,

f3) the current

and

tax alloyrs

of deductions not included in our proposal, the most
is)I)ortant of vhich is the deduction of state and local
taxes.

number

HALLAULBUSHKA

Form 1

SINPUFIED FLATMATE TAX FORM

a)4II1fl4Iual CofnyeneaClon

Tax

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- - "- -.
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2 To)sf o«nperweson rs r poo one .. . . .
. ....
~ Paean aowees
fa) Q 44200 lor rn«rico yony )orner
Nf) Q 42400 for einyfs
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fyggong soow«wso lor rgoeno~

t Tfsef p«oonef sooawem

foie 4ilwkpooffor $754)
o fsssoos N.

T~~Det~aal7.
ffrrs

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~
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11 Tes rare lone 4 mee One r0. 4freeaief
12 Ilsfsne rare fsns f0fsos «re 4. Ssowmwf

..
12

16
Aspects of the Nimple Tax

Xnternational

principle

favor the straightforward

applies only to the domestic operations
whether

of domestic, foreign, or

revenue

from

the

value

reported

sales of products

sold within

the U. S. plus

other inputs

and

purchased

to the U. S. are allowable

in the V. S. or imported

for the business

line as deductions

tax.

on the

physical

is the simple rule that determines
or sale is included in taxable revenue

in the V. S.

yresence
a'

whether

Only the

mixed ownership.

of pr oducts as they are expor ted is to be
on the top line of the business tax form.
Only

the costs of labor, materials,
second

that the U. S. tax
of all businesses,

purchase

cost.

or allowable
To see

how

the

business

tax

would

apply

to foreign

trade, consider first an importer selling its wares within
the V. S. Its costs would include the actual amount it paid
for its imports, valued, -as they entered the U. S. this

—

would

generally

be the actual

of their origin.

country

Its

amount

revenue

paid for them in the.
would

be the actual

sales in the U. S. Second,
consider
an
exporter
to foreigners
selling products
produced in the V. S. Xts costs are all of the inputs and
receipts

compensation
amount

obtained

from

paid

in the U. S., and

its

received from sales to foreigners,

firm did not add

to the product after

revenue

is the

provided

that the

departed

the U. S.

~17~

Third,

consider

f irm

that

to Mexico for
assembly, and brought back the final product for sale in
the V. S. The value of the parts as they left the V.Swould count as part of the revenue of the firN, and the
value of the assembled product as it entered the V. S. would
be an expense.

costs of its

sent

parts

to deduct the

The firm would not be allowed

Mexican assembly

plant.

of taxing only domestic activities,
the Q. S. tax system would mesh neatly with the tax systems
of our ma)or trading partners.
Ii every nation used the
Under

the principLe

tax

simple

and

followed

the world

throughout

Because the principle
with

adopt

value

the

be taxed

would

added, taxes,

all

principle,

once and only

already in use in the

makes

income

sense

many

once.

nations

for the V. S. to

as well.

By the same

principle,

the compensation

tax applies

of everyone working within the V. S., whether
or not they are Americans, but does not apply to the
foreign earnings of Americans.
location of businesses
Choices about the international
and employment
are influenced by differences in tax rates.
The Q. S. , with the low aarginal rate of 19 percent, would
be much the most attractive location among major industrial
Although the
nations from the point of view of taxation.
the earnings

tax does not tax the overseas earnings od American
workers and businesses, there is no reason to fear a mass
the
the contrary,
of economic activity.
exodus
On
simple

1S-

f avorabla
business

tax

climate

from everywhere

the

Q.S. would

in the world.

draw

new

19
the Sudget rith a Simple Tax

Salancing

federal spending can be held to the level proposed by
the President in his budget for the 1983 fiscal year, or if
any increases can be financed by user fees or earmarked
taxes, then the 19 percent tax rata would balance the
budget

1985.

Even

is at

spending

the high level projected

Sudget Office s baseline

Congressional

budget,

of 19 percent wou'd bring the federal deficit
billion by 1987.

in the

a tax rate
down

to $75

s spending proposals, the tax rates
necessary to balance the budget starting in PY 83 would be
2l percent in that year, 20 percent in 1984, and 19 percent
the President

Under

in 1985.

the higher

Under

tax r ates

CEO

necessary

baseline

to balance

spending

the

projections,

budge

would

the
23

percent in 1983 and 1984, 22 percent in 1985, 21 percent in

percent in 1987.
of the simple tax would bring
adoption
Immediate
moderate deficits during the current recession, but would

1986,

and 20

commit

provided

the nation
spending

to a balanced budget within three years,

kept

at reasonable levels.

for the simple tax is gross national product
In arriving
less indirect business taxes and investment.
at the conclusions just stated, we used projections of GNP
The base

20the

Ifrom

President

base

the

approximated

detailed calculations
The

faa

as 79 percent

the

CBO.

of RIP, based

for 1980.

tax allows

simple

and

budget

each

individual

taxpaying

These allowances
to deduct a personal allowance.
are indexed according to the cost of living from the
proposals for 1981. The total allowance for a husband,
wife, and two children in 1983 would be $8355.
family

Our

estimates

of total allowances

were

derived

from our

for 1981 by assuming one percent annual growth in
the number of taxpayers and rates of increase of the cost

estimate

of living

from

the President

budget

and

from

the

CSO

baseline pro)ections.

replaces the peraeal and coiporate
taxes, but not the rest of the federal tax system (of which
The

simple

social

tax

far the most
important part).
Our computations
take a profection of
total federal spending less a profection of revenue from
the other taxes.
If the simple tax yields exactly this
amount of revenue, it would just balan' the budget.
The computations
take account of tbe influence of past
deficits on current spending through the interest on the
national debt.
Ne used the pro$ectisns
of the Treasury
bill interest rate underlying the President s budget and
the CSO pro$ections in order to track the effect of a
reduced national debt on interest expense.
lfe do not attempt to 'take account of 'Che inf lucnce of tax
the

security

payroll

tax

21
reform

-total

economic

activity

of federal revenue,
effects could be substantial.
Details of the future budgetary
simple tax appear in Appendix 2.

augmen'tation

and

though

the corresponding
ve

think

implications

these

of the

~22~

of the

The Future

Economy under

outset, the simple

At the

the Simple Xmcme Tax

income

tax, with

common

flat

rates of 19 percent on' business income and compensation,
vould raise revenue ecual to about 12 percent of RtP, the
of corporate and personal
same as the current combination
income

taxes.

raised

are

tax system

allowances

The personal
from

year

under

to year

our proposed

in line

with

inflation, which would tend to hold its revenue constant as
a fraction of GNP (the nev lav provides for this kind of
indexation starting in 1985)

The

switch

from

the

corporate

current

personal

and

taxes to the simple income tax would have some mild
Sriefly, the
transitional effects on the U. S. economy.
elimination of depreciation deductions for business would
income

to the

be costly

owners

of existing plant

equipment,

offset by the reduction in the
We do not
of the earnings; of capital assets.

but this would

taxation

largely

think any special compensation

of the simple tax

Adoption

Rates

and

would

f all

a lover

paying

tax on the

investment

boom

would

because

immediately

rate of interest

require

interest.
set off by the

loss.
lover interest rates.

is necessary for

when
Tn

the

investors

would

they vere no longer

the

med'um

favorable

run,

the

tax treatment
rates partvay

of capital formation might bring interest
back to their .earlier level.
Xn the long run, interest

23~

rates would
Pr ices of

bonds

announced.

None

decline

as capital

rise as
of these effects

proceeded.

accumulation

soon

would

the

large,

tax

was

and mone

to call for any corrective action by the government.
Compared
to the gigantic capital losses inflicted on
bondholders
and rising taxes over the past
by inflation
decade, and the corresponding
capital gains accruing to
homeowners
over the same period, neither of which has been
offset by any government policy, the effects of the simple
tax in the opposite direction are mild.
Though our system will stabilise revenue as a fraction
of GNP, it will probably produce more revenue than the
Low
existing programs.
needs to maintain
government
marginal tax rates will draw economic activities from the
seems

into the formal market, where they are
recorded as part of GNP. Businesses and individuals will
of
about the tax consequences
spend less time worrying

underground

their
higher
revenue

economy

actions

will

and

incomes.

instead

concentrate

these

needs of the federal

grounds,

government

believe

earning

that

the

could be met with

tax rates as low as 16 or 17 percent, rather than the 19
percent needed to reproduce current revenue at current

levels of

GNP.

period, cuts in marginal tax rates have
coincided with episodes of vigorous economic growth and
Moreover, those
reduced inflation in the United States.
Over the postwar

nations

with

lower

marginal

tax rates have achieved

the

24highest

economic

growth

over the past decade.

is not

The growth

for the
increased income it would bring to the American public, but
it would also moderate and eventually eliminate the federal

stimulated

budget

tax reform

only

favorable

deficit.

benefits of tax reform are not purely economic. The
complexities of the federal tax system foster contempt for
government and make petty criminals out of a large fraction
low marginal
of the population.
A simplif ied tax with
rates would help restore confidence in government and would
The

support

the basic honesty of the American people.

~25m

Appendix

Income

f lcm'

and

tax yields

Following are the relevant numbers from the U. S. National Income
and Product Accounts for 1981. All data are in billions of

current dollars.

Gross domestic productl

2868

Federal indirect business
Imputed

items3

Wages,

salaries,

tax

129
and pensions4

1503

Investment

349
I

Taxable business
Revenue

income6

830

tax at

from the business

158

19%

Taxable compensation
Revenue

1022

tax at

from compensation

194

19%

Total tax revenue
Actual personal

352
income

Actual corporate

income

tax

289

tax

Total actual tax revenue

348

Notes:

1Economic

ort of the President

January

1982, Table B-8

ERP, Table B-76

Survey

Accounts,
p. 77
4

of Current Business,

National

Income and Product

1976-1979, Special Supplement,

ERP, Table

July 1981, Table

8.8,

B-21 plus our estimate of private pensions

Business investment is estimated as total investment in
equipment, nonresidential
structures, and farm investment, plus
20 percent of investment Mn residential structures, ERP, Table
B-15. The remaining 80 percent of residential structures are
cwner-occupied and. not deductible under the business tax.
Gross domestic product

sages, salaries

and

less federal indirect business taxes,

pensions,

imputed

items, and investment

267
Nagesr

salaries,

less personal allowances
8
Estimated as 75 percent o! the revenue for fiscal year 1981 and
25 percent of the revenue for fiscal year 1982& ~RRP Table $-19
9Same
as personal income tax.
and pensions

~27~

Appendix

Revenue

Table 1 presents

assumptions
budget

deficit pro)ectioas

and

our computations

and spending

based on the economic
in the President s February

proposals

Table 1
82

2922 3159 3522 3881 4257

Tax base

2314 2502 2789 3074 3372

Allowances

481 S35 580 620 655
1833 1967 2210 2454 2717
1790 1933 2149 2393 2651

Tax. inc.
Txoinc ~ giY
Rev. PaC tax

347

Rate, sm rv
Rate, 0 def

19F 4

at
Def. at
Rev.

The

fiscal
revenue,
simple

19%
19%

first

calendar

345

370

407

450

17 2 17 ' 0 17 0
21 F 2 20 0 19' 0
408

455

504

four lines compute the level of taxable income on a
year basis. The fifth line gives taxable income on a

year

basis.

into an estimate of required
taxable income gives the necessary tax rate under the
When

divided

tax.

The next

administration

line, labeled

Rev. PtC

tax,

gives the

s estimates of the revenue from the personal and
corporate income taxes, including the effects of ERTA and the

28modifications

proposed

by Che

president

in February.

The

line

"Rate, sm-rv, gives the rate under the simple
tax necessary to yield the same revenue as the personal and
corporate income taxes. Note that the rate declines from
around 19 percent in 1981 to 17 percent in later years, as the
major personal tax reductions of 1982 and 1983 go into effect.
The next line, labeled
Rate, 0 def, gives Che simple tax
below, labeled

rate necessary to eliminate the deficit starting in FY 1983.
Though this rate starts above 21 percent, it falls to 19
percent by 1985. Again, Chese computations take account of the
favorable effect on interest costs of lower deficits in earlier
years.
The last line shows the projected size of the federal
deficit if the simple tax were adopted starting in Hf $3 at a
constant rate of 19 percent. The deficit is manageable in all
years and essentially disappears in. 1985.
Table 2 presents similar computations for the CBO s baseline
budget projections.

Table 2

2922 3140 3515 3882 4259 4659 $083
Tax base

2314 2487 2784 3075 3373 3690 4026

Allowances

481 535

Tax. inc.
Tx. inc. , FY
Rev. PaC. tax

Rate,

581 627 676

726

777

1833 1952 2203 2448 2697 2964 3249
1790 1922 2140 2387 2635 2897 3178
347

350

354

378

407

. 14 .8

15.8 15 4 14 9
23.4 22. 5 21.7 20. 9

18 ~ 2 16 5

Rate, 0 def
Def. at 19%

431 469

101 102

20 F 2

of 'this table is the same as that of Table 1, except
that it covers two additional years. The Administration and
the CSO are pro)ecting GNP at about the same level through
1985, though the Adminstration foresees higher levels of real
growth and lower rates of inflation.
Allowances grow more
rapidly under the CBO projection as a consequence.
The simple tax rates necessary to raise the same revenue as
the personal and corporate income taxes fall to even lower
levels below 15 percent under the CBO s assumptions, because
the Administration
s revenue enhancements are not included in
the baseline. On the other hand, the tax rate necessary to
The format

—

in FX 83,

balance the budget starting

shown

in the next-to-last

line in the table, is about a point higher because the CSO
projects significantly higher federal spending than does the
Administration.

last line of Table

that with higher spending and
weaker real growth, the simple tax at a fixed rate of 19
percent does not eliminate the federal deficit even by 1987.
However, it does bring it well below $100 billion, as against
'The

the

CBO

2 shows

s pro)ection of nearly $250 billion.

Sources
Bud

et of the

February

United

States

Government

Fiscal Tear 1983

1982

Office, Baseline Sud et Pro ections for
Fiscal Years 1983-1987 A Re ort to the Senate and House
Congressional

Committees

Budget

on the Sud

—

et Part II

February

1982

~31
Questions

have

spent

a good

and

answering

flat tax

deal of time presenting
questions

be f ore

shows,

testifying
assembled

About the Simple Tax

and Answers

prof essional
before Congress.

a number

those discussions

and

lay

on radio

audiences,

talk
and

this section, ve have
of the questions that have recurred in

together

Zn .

aspects
best explained in the

with our answers.

of the simple flat tax are perhaps
question-and-answer

about

the simple

Many

form.

Deductions

charitable deductions?
cauld be allowed under the
A:
No char itable deductions
Ne".'.4Io not believe that current
tax
simple income tax.
incentives are a major part of the motivation to make
and
other
to community,
religious,
contributions
A
organisations who qualify for deductions at present.
large volume of contributions are made by people who cannot
because they do not itemise
deduct , the contributions
Q:

What about

deductions.
abused

Deductibility

by wealthy

taxpayers

&rill save more by blocking

of contributions
to avoid taxes.
the tax-avoiding

widely

net, you
tricks of the
On

wealthy

than

deductions

vill lose

You

your

from

own

from

for organisations
raising funds depends on tax deductibility
intrinsic merit of their activities.
What would

happen

to the restaurant

is little

There

contributions.

merit -in public subsidy

of tax

the elimination

success in

whose

rather than the

industryT

of the
restaurant industry, there is no reason to expect that the
Leither the
simple tax would reduce restaurant patronage.
existing tax system nor the simple tax gives business an
rather than
incentive
to spend money at restaurants

Though

business

meals

are an important

else. All reasonable

anywhere

either tax system.

meals,

are deductible

under

limited

amount

of restaurant

spending

abuse of the current

employees.
with

system

lower

marginal

would

be alleviated

rates.

arise

may

untaxed

system by providing

This problem

including

business expenses,

restaurant
A

element

to
a tax

income

under

the other

from

hand,

tax system brings businesses out of the underground
at
economy and into the market, taxed econcmy, spending
Neither ef feet
restaurants vill be slightly increased.
The restaurant
industry also stands to
should be large.
gain from the incentive effects of lower taxation of many
the

new

of its employees.
Q

Shouldn

the

tax

system

families with high medical costsV

provide

some

relief to

~33
A:

the entire U. S. population

Virtually

medical

insurance,

welfare.

Medicare,

The medical

tax

income

deduction
medical

covered by

benefits through
the current personal

under
many

abuses,

pools and other

swimming

now

or medical

deduction

source

including
improvements

home

the
as

tee families cauld suffer, and the
ma)ority auld gain, by closing off this

expenses.

overwhelming

source of abuse.
Shy

simple
A:

is there

no deduction

for moving

costs in the

tax?

Moving

costs are

onLy one

of costs incurred

hundreds

to earn an income.
It is inconsistent Co permit deduction of moving costs shen costs of
commuting,
purchase of special clothing, and other employment costs cannot be deducted.
Many moves are undertaken
for reasons unrelated to earning a higher income and so
should not escape taxation.
The deduction
for moving
expenses is one of a number of tax provisions abused by y
small minority of taxpayers at the expense of the great
majority. It should be eliminated.
by

taxpayers

0: I

in order

a salaried

employee.

Sce

mould

I treat

unreim-

for this
deduction on the simple individual eapensation tax form.
A: Deduction of so-called business expenses of salaried
employees is a ma)or loophole in the current tax system.
bursed

business

expenses?

There

room

It is

widely

to subsidise

abused

teachers, trips to conventions,
which . special
incentives
are
business

expenses

ought

case they are deductible
The cur rent

adoption

income

expenses.

to save a

and

for

Genuine

in which

tax.

deductions

for certain

rant children to remain orphans

dollars in government

few

activities

by employers,

the business

tax grants

Do you

other

travel

inappropriate.

to be borne
under

mummer

revenue?

of adoption expenses is a good example of a
well-intentioned
complication of the tax system with little
Lawer-income
families can t take the
practical impact.
deduction in many cases, and even if they could, it would
have little importance because their marginal tax rates are
not very high.
All the benefits of the deduction go to

Deduction

prosperous

families

«ho

not

need

help

from

the

slightly to the financial attraction
of adoption, the government only further increases the
demand for adoptable babQs, which already far exceeds the

government.

By adding

supply+

to the housing market as a result of
ending the deduction for-eortage interestT
A: The simple tax would end the deduction for interest of
all kinds, not )ust mortgage interest,
Xt mould not
Qc

What would

happen

discriminate

against housing. Sowever, improvements in the
of business investment would tend to draw wealth

taxation

out of housing

into plant

and

reduce housing

e than

few

percent,

of the investment

duration

equipment,

which

might

effect would not be
and would last only for the
boom set off by the new tax

values temporarily.
I

mor

and

The

In the longer run, the outlook for housing values
would be improved as overall economic activity increased in
system.

to the tax.

response

would

the

are in so

much

How

who

flat tax affect

the savings

and

loans,

trouble today?

all

owners

shouldn

of long-term debt, savings and loans
would
receive a benefit from the lower interest rates
brought
The market value of their
by the flat tax.
would rise as interest
mortgages
rates felly improving
their currently depressed net worth. Because t?. s interest
the savings and loans would pay on their borrowing would
fall, their operating deficits would decline.
A:

Why

tax the capital gain from the sale of

a house?

capital gains are rarely taxed undec the current
sys tem, because of the rollover provision, forgiveness of
capital gains for th'e elderly, and the steppi~q up of the
bas is for cap i tal gains at the time of inher i tance.
We
believe that the taxation of housing is properly ceded to
These

36-

local

governments

under

the federal system.

Local property

taxes capture part of the value of the services of a house.
A capital
gain occurs when the market valuation of the
services rises. These gains arise from after-tax income,
gust as capital

after-tax income.
Hence
amount to double taxation.

from
would

The only way

of business arise
taxation of capital gains

gains from the ownership

can afford

house

today

I get for the interest on my
to sell my house if I can no

the large

tax deduction

mortgage.

longer

have

Non

the

take

deduc'tion?
Don
much

lower

overlook

the benefits

tax rate.

Suppose

«ill receive

you
you

and

your

fram

earn

husband

$60, 000 per year and pay 818,000 in mortgage interest.
Tour tax in 1981 would be $11,553, after taking account of
the large deduction for interest.
Under the simple tax,
you would not be able to take the deduction-your
tax «ould

of 855, 000~ or $10,450.
a thousand dollars ahead, even

be 19 percent
than

take the deduction.

longer

before,
have

you can

been

certainly

extremely

though

you could

afford

aggressive

Tou come out more

it
in

you

can

afford your house

now.

However,

you

of
little tax in spite

taking

advantage

interest deductions, so you are paying
of a large income, you «il1-come out behind «ith the simple

tax.

~37M

to install solar heating in
the current
tax law offers a credit
plan

house and know

for this energy
conservation investment.
Will Z still receive this tax
credit under the simple tax2 Zf not, ron t this discourage
conservation and make us wasteful of energy?
A: Tike all the complications of the existing tax system,
the residential
energy credit would disappear with the
advent of the simple flat tax.
The energy credit makes
little economic sense it puts the taxpayers money into
elaborate installations which are at or below the margin of
economic e f f iciency.
With all forms of energy except

—

natural
way

gas already

decontrolled,

later

1980s,

and gas

face

on the

without

any

right
special

Since your plan removes the tax incentives

now

offered

the

homeowners

incentives for solar energy investments
tax gimmicks.

decontrol
the

won t
this
historic structures,
accelerate the destruction of many buildings that belong to
our national
heritage and should be saved for future
generations to enjoys
A: For every genuinely important historical ouilding saved
dosens or perhaps even hundreds of
by the tax incentives,

for

preservation

buildings

are subsidised

kept by their owners

that are not important

or would be

depreciation for
histor ical structures is a terr ibly inef f icient way to
accomplish the goal of preservation
most of its effect is
anyway.

Accelerated

—

38-

to create yet another tax shelter. Direct appropriation
local government funds .for saving individual buildings
far superior as a social policy for preservation.
Q:

Doesn

the simple tax encourage

speculation

in land by

first-year writeoff for land purchases2
The sellers of land have to count their proceeds as
taxable income& this offsets the deduction granted to the
purchaser.
Prices of undeveloped nonresidential land may
rise a little, but with a 10 percent tax rate, this effect
granting

should

be very

small.

the simple tax because

transactions

are included in
is very difficult to separate the

Land

value of land from the value of buildings

local governments
in the taxation of bonds2

How

be affected by the change

would

Local governments

tax-free

status

competing

bonds

tax, local

it.

relations

Xntergovernmental

derive

a small advantage

from

the

of their bonds and the taxation of all
in the current system.
Under the simple

government

other bonds would

bonds

would

remain

untaxed,

also provide tax-free interest,

but

all

because

of business would be taxed at the source.
The immediate
impact of the simple tax would lower the
borrowing costs of other;borrowers
to the levels paid by
local governments.
Xn the ensuing
investment
boom, as
the earnings

-39interest rates rose, local borrowing costs would gradually
rise. The slightly adverse ef feet on local governments
would -be confined to a few years, and would not be large.
Zn the longer run, local governments
would face no higher
interest rates and would benefit in many other ways fram
the improved performance of the U. S. economy. .
such other

about

What

and

sales taxes?

What

taxes as state, county, excise,
would happen
to them under the

simple income tax?
Ac

Although

would

prefer

besides the federal government
same

principle

our

proposal

as the simple

to federal

that other government
switch to taxes based
income

action.

tax,
The

have

only

units
on the

limited

important

of our proposal for other taxes is the
elimination
of the deduction for other taxes under the
federal personal income tax.
Because this deduction is
important
families, who benefit
only for higher-income
enormously free lower marginal tax rates, we do not believe
that the elimination of deduction will have any harmful
implication

effects.
the simple income tax affect state taxes
where the tax returns are linked to the federal tax system?
Qc

How

would

Because the

the same revenue

the

linkage

federal taxes would raise approximately
as the old taxes, a state that retained

new

would

continue

to receive

about

the

same

40revenue

as well.
\

How

Aze state
tax treat governments
Ioes the federal government
taxed'

does the simple

local activities
tax itself'P
A:
State and local governments pay no taxes themselves,
tax on their
but their employees
pay the ccmlensation
and pensions.
Similarly, the federal
wages, salaries,
and

does not tax

government

compensation

itself,

its

but

employees

pay the

tax.

Retirement

are existing IRA and leough
treated under the simple tax'

How

IRA

and

%cough

accounts

have

accounts

retirement

provided

benefits to a
type that the

fraction of taxpayers of the same
Under
the
simple tax would provide to all taxpayers.
simple tax, they would Se treated exactly as under the
current system, except that the tax rate would usually be
When the accounts begin to pay retirement
much lower.
benefits, those benefits would be taxed as compensation.
Xt would no longer be necessary to impose a minimum age for
limited

the

payment

accounts

XRA

its.

SaMers

of XIa

and

Keough

their accounts at any
tax at that time. For the

elect to liquMate

could

time, and'pay

future,

of benef

the compensation
and

Eeough

accounts «ouM

not be necessary,

41
because

r a ther

of interest
the personal level

the taxation
than

savings

would

the same advantage

have

at the business
make any form of

income

INAs

and %coughs

have

today+

policy is
Shat
excluded f rom current taxation under today s lav.
vill happen to the life insurance industry and the value of
when taxation of all interest is eliminated?
my insurance
Cc

Interest

on the savings

life

insurance

far as you are concerned, the tax benefits you are
there vill be no taxes on the
en5oying will continue
interest you are earning. turthermore, when your insurance
pays off, you vill not have to pay income tax on the
interest component, as you do under current lav. As far as
the industry
is concerned, taxation of its interest
earnings and deduction of its interest payments vill end.
Only its actual insurance premiums vill count as income,
not the saving that goes vith some types of insurance, and
only its payoff for death and other insured events vill

—

count as business

expenses.

Susiness and The Rich
Qs

Isn

the simple tax a windfall

Taxation

deductions
On

would

of families

with

be dramatically

the other

hand,

to the rich?
high

incomes

reduced

under

and

fev

the simple

taxes paid by those vho take

42-

of the

advantage

taxes through. .tax shelters

postponing

rise a great deal.

wi11

to the

scope for reducing

unlimited

am~oat

hard

concentrated

workers
on avoiding

The simple
and

other gimmicks

and

tax «ould be a «indfall

loss

to those

«ho

have

tax.

Is the

simple

tax progressive)

The

simple

tax

is progressive

that
families with higher incomes pay a larger fraction of their
incomes in taxes. Families with incomes below the personal
a'lowance 'evel pay no tax at all.
The proportion
of
income

paid

h'ghest

the

sense

rises to close to 19 percent for the
Proportions of income paid as tax are

in tax

income.

Income

10 000
XS F 000

20 F 000

14.1

30g000
40~000

50, 000
Does business

pay

16 ~ 1

its fair

share of taxes under

the simple

tax'P
Ac

Only people

income

from

business

fram employment.

taxed

pay'

taxes

The simple

sources

Under

'tax

designed

so that

taxed at the same rate as income

the current

system,

some

business

income

at excessive rates because of the double taxation of

corporate

even subsidized

Isn

Other

business

through. tax

shelters.

dividends.

income

is 1+htly taxed or

the tax unfair because rich people can live

off interest

capital gains income and thereby pay no taxes?
A: Not at all. In effect, the simple tax puts the equivalent of
a withholding tax on interest and capital gains. The business tax
applies to business income before it is paid out as interest, or
if it is retained in the business and generates capital gains for
stockholders.
The interest, dividends, and capital gains received
by the rich have already been taxed under the business tax. The
rich cannot escape the tax.
and

part of the tax on capital be shifted onto consumers in
the form of higher prices rather than being paid by the owners of
the capital? Isn t this unfair relative to the compensation tax,
which will not be shifted?
A: Yes. There is a fundamental difference between capital, which
Won

a produced

input

input,

to the economy.

investment,

—the

and

labor,

Secause

which

is a

permits

the simple tax puts no tax on

primary,

unproduced

first-year writeoff of
the marginal addition to

tax benefit of the writeoff in the first year gust
the taxes that will be paid from its productivity
counterbalances
For this reason, the tax is not actually shifted
in the future.
forward. On the other hand& all of the growth in the revenue from
the simple tax comes from growth in the size and real incomes of
It is not an issue of equity but rather of economic
workers.

capital

reality that all taxes bear
simple

tax embodies the. right incentives

income

form

t it

Isn

on labor

fundamentally

income.

The

for people to save labor

capital.
air not to tax capital

gains

received

individuals?

Capital gains are taxed under the simple tax. Capital gains
from the sale of a business property
an office or an apartment
building, or a house held for investment purposes would be taxed

—

under

the business

tax,

plant, equipment,
business.
Capital

which

treats the proceeds

buildings

and

taxable

sale of
income
for the
other financial
from the

stocks, bonds, and
instruments
arise from the capitalisation of after-tax incameg it
would be double taxation to tax the capital gain as well.
Capital
gains on owner-occupied houses arise fram the capitalisation of
rental values which are heavily taxed by state and local
governmentsg
again, it would be double taxation for the federal
government to tax the capital gain as «ell.
Q:
and

gains

Shy does the simple

the compensation

tax collect the business tax from the firm
tax from the «orker? Nouldn t it be more

to collect

consistent

both

from

the

f irm

both

from

the

individual?
As

The nation

interest

and

s experience in trying to collect

dividends

from

individuals

has been dismal.

taxes on
One

of the Clat-rate simple tax is that it permits
collection of taxes en business income at the source,

the huge advantages

airtight

income

45
where

is easiest.

enforcement

the other

requiring

hand,

to f ill out the coapensation form is necessary to
provide the benefits of the personal allowance to each taxpayer.
individuals

The tax withholding

system

already

in operation

be adapted

would

to permit the collection of most of the compensation tax from the
employer, so that taxpayers would not be faced with a large single
tax payment at the end of the year.
The Business Tax

What

would

happen

capital investments
A:

lower

would

rates

tax

—reduced

depreciation

unused

made under

These deductions

much

to the

deductions

from

the old tax system?

simply

the

make

)ost.

In the

first place,

deductions

much

less

of capital completely
offsets the decline in the value of the deductions because of
lower tax rates. In the .second place, the existing combination of
an investment credit taken at the time of purchase and accelerated
depreciation for tax purposes means that most plant and equipment
has already received most of the tax benefitsg eliminating
the
remaining
depr eci ation would not impose an Lmpor tant bur den on
important

taxation of the earnings

business.
Q:

a travelling

travel expenses.
the simple tax?

All self-employed

salesman.
do not

earn commissions

receive a salary.

individuals

wi11

file

How

and pay my own
would

the business

I fill

out

tax form,

46they 'can

where

deduct

business

expenses.

of the personal allowance;
a salary of at least, say, $6200 if
amount

form.

business

Xsn

Income

its

explain

how

an individual

income.

The income

taxes the

same income

and again

when

combined

tax

rate

confiscatory,

Q:
As

what

its

system

even though

taxes income

twice.

source?

the

tax system sometimes
corporation receives it
The
the stockholders.
s income is almost
taxes are at rates of

The current

twice, once when the
is paid as dividends to
on

allowance.

s command over resources. Only people
of a corporation is gust the income of

the stockholders.

owners,

the current

income no matter

income

around

you

expenses and receive the personal

Please

have

to take

will vant to pay yourself
Report this
you are married.
along with your rife s earnings on your compensation tax
In this way, you will be able to deduct your legitimate

advantage

In order

stockholder

the two separate

percent.

are tax losses for- individuals and businesses treated'P
Remember that the self-employed
fill out the business tax form
How

gust as a large corporation

does.

Susiness losses can be carried

limit to offset future profits. There is no such
thing as a tax loss under the compensation tax. Tou can t reduce
your compensation tax by generating business losses.
forward

without

Mould

a company going bankrupt

get a tax refund in proportion

No.

tax vould never

The simple

Iowevex t a bankrupt

could

company

to taxpayers.

payments

make

be acquired

by another

f irm,

which would

the tax

assume

loss.

pay so much

Some companies

interest today that requiring

them

to pay the business tax {which does not permit the deduction of
interest) would make them operate at a loss. Is this appropriate2
As
This is an aspect of the transition
to the simple tax.
Corporations
and homeowners
with large amounts of debt vill
suffer, gust as those vith large holdings of bonds or mortgages
will gain. For two reasons, the problem vill not be too serious.
First, the dramatic reduction in the tax rate to 10 pexcent will
more than offset the increase in taxes from the loss of interest
deductions in most cases.
Second, most corporate debt can be
called and reissued at lower rates as soon as the simple tax goes
into effect.

a firm

equipment,

and

its

increase

ploved
hence

value

all of its

back

paid

forever

business

without

receive the wapitalised

stockholders

into plant

income

tax, couldn

paying

taxes2

and

the

Nouldn

firm

the

value of the firm as untaxed

capital gains2
A:

Sooner

or latex,

profitable

opportunities

its

instead

owners

believe

this,

stockholders

the
and

f irm vill

out of suf f iciently

vill start paying
it all back. If

of plowing
the stock would

would

run

not believe

have

out

its

income

the market didn

value,

because

the

that they were ever going to get

48anything.

on any

imposed

value

will

market

The

that the tax will be
the stockholders, so the market
be the capitalised value after

always

returns .earned by

of the firm vill always

know

taxes.
Q:

Son

businesses

constantly

buy and

sell

equipment

in order to

of the immediate writeoff?
A: There is nothing to be gained from extra purchases and sales.
The proceeds of a sale of equipment must be reported as income,
and offset the tax benefits of a subsequent purchase.
take advantage

Xs
rental activities?
rental income part of individual compensation or business income?
Mould individuals
have to file both business and individual
tax
Sow.

forms
Ac

are individuals

they had both kinds of income?

Renting

business

taxed on their

is definitely

a business

activity

and would

call for a

Rental receipts are taxed as business

tax form.

incomeg

of a rental unit qualifies

for first-year writeoff.
Because there are no complicated depreciation computations, very
little effort «ould be required to fill out the business tax Corm
Cor a rental unit.
but purchase

its employees with subsidised lunches,
exercise facilities, company cars, and the like, how are

Xf a company

physical

provides

these treated under the simple tax?
As

Fringe

business

benefits

tax.

cannot

Of the

firm

be deducted

s expenditures

as expenses

under

for the purpose

the

i9attracting
vorker

and

compensation

reported

only those paid directly

vorkers,

keeping

and

for

the

tax are deductible

purposes

for the

the

to the

individual

company.

investor, I currently find that percentage depletion is
better than cost depletion or my oil veils. Shat vill happen to
depletion under the simple flat tax?
A: Depletion vill disappear as a special complication of the tax
law. Instead, first-year vriteoff vill apply to all purchases of
Q:

As an

oil prooerty

0: I
my

involved

company

simple

and

all

development

costs.

in a highly leveraged

others

tax because ve von

investment

company.

be forced out of business

be able

Non

by the

to deduct interest expenses

any more?

It is

expenses.

true that you vill no longer be able Co deduct interest
But it is likely that your borrcwing is linked to

interest rates.
so, the decline in interest rates upon
the adoption of the simple tax «ill offset the loss of the

market

forget that the income from your company
vill be taxed at only 19 percent. Try filling out the business
tax return to see vhat vill happen to your total tax payment.
deduction.

Also, don

tax ccnrer the fringe benefits of government
organisations?
aalu non-profit
Yes. They are required to file the business return
A!
par ticular vay that exempts all of their Lnccae except vhat is
Qc

Does the simple

50paid to their employees
avoids

activities

distortion
which

as fringes.

In this

ways

the simple tax

favor of government and non-prof it
arise if they alone could pay untaxed

would

fringes.
Q:

How

will the simple tax affect the value of the U. S. dollar in

the foreign exchange markets
Ac

The

tax treatment

will be essentially

exports of goods and services
the same under the simple tax as under the

of imports

and

existing income tax, so there will be no change in the value of
The lower interest rates that will
the dollar on that account.
accompany tax reform may bring a temporary decline in the value of
the dollar, which will stimulate U. S. exports and discourage
imports.
The Ceapensation

With the

Your simple
my

employer

Tax

current

income

tax doesn

t .tax

to deduct

tax,

fringe benefits aren

taxed.

fringes either, but it does not permit
to my fringe
What will happen
them.

benefits under the simple" tax'
A: Your fringe benefits are one of the features that attracted
vou to your gob, and your employer will not want to cut them
The simple tax
without compensating
you in some other way.
'I

fringe benefits created by the
present income tax, so you can expect that your employer will
offer you reduced fringes in exchange for higher pay, which you
eliminates

the distortion

toward

can use

the benefits yourself or for any other purpose.

buy

teenage

a patt-time

has taken

daughter

gob and

vill

earn

Can she use the personal allowance of
year.
$3800 to avoid paying tax? Will I lose my dependent s allowance
of $750 for her'P

$1000 this

about

to the personal allowance&
'Xou vill
including
your
daughter.
retain the dependent s
allowance as long as you provide more than half her total support
over the year.
All

{}:

benefits

and

under

happen

member

The

housing

of the

allowances

armed

from

receive

you

not

taxed

the Treasury

a business

in
the

under

Just like a private employer,
pay

forces, I get to exclude certain
What vill
pay for tax purposes.

the simple tax?

benefits

—are

entitled

are

taxpayers

kind

—for

individual

example,

compensation

the Defense Department

tax

on the value

military

tax.

will have to

of those benefits.

benefits vill pe taxed under the individual compensation
tax. The government vill have to make a modest increase in these
benefits in order to offset the 19 percent tax you vill have to

Your cash

start
Q:

paying

on them.

an American

abroad.

income

earned

~ imple

flat tax?

All

income

citisen
Sow

earned

$75, 000 exclusion for
vill this income be treated under the'
and now en$oy a

from

work

performed

abroad,

from

located abroad,

enterprises

vill

income

The

be taxed by the country vhere you earn

flat tax

simple

care expenses. Non
care of their children

Such

it.

the credit

thereby
elderly dependents,
on welfare, reduce their participation

their dependence
in the labor force, and cost
increasing

save from

would

tax.

for child and
this force people to stay home to

eliminates

dependent

take

excladed from the simple

its

and

more money

to the

that

government

elimination?

of the complications in the tax system, the child
care credit fails to focus its benefits in an area of particular
social need.
In ef fect, it lowers the taxes of a signif icant
-. raction
of all taxpayers families with two earners and one or
more children.
It is available at all income levels. Sigher tax
r ates are required to f inance this lover ing of the amount of
taxes. Peatures like the child care credit are antithetical to
the flat-tax philosophy, which favors a broad tax with the lowest
tax rate.
Me think
that the special problems of helping poor
fami lies vi th child care and other responsibili ties should be
attacked specifically vithin the velfare system, not with the
scatter gun of the tax system. The simple flat tax provides
plenty of revenue for a generous velfare program.
A:

many

—

t it

Xsn

Workman

worker.

unfair to start taxing vorkman s compensationV

s compensation

is disabled

been taxed, so

on the

makes payments

)ob.

The vages

to replace vages
themselves

stands' to reason that the replacement

when

vould

have

should

-S3
Failing to tax workman s compensation would create an
inappropriate incentive. . for workers to remain off the fob after a
period of disability.
taxed.

for the
blind and the elderly? %hat makes you rant to lay higher taxes on
these two especially unfortunate groups in our society?
A: Many of the elderly and a few of the blind are quite well off.
It raises everybody s tax rate inappropriately to provide extra
exemptions to every elderly and blind individual.
It makes sense
to concentrate policies with respect to the incomes of the elderly
in the social security system-the value of the current extra
Q-

does the simple tax elimtinate

Why

is tr ivial

exemption

received
should

be concentrated

Non-profit

Row

its
blind, e f for ts

to the social security

compared

the typical

the extra exemptions

older

person.

For the

benef

in welfare agencies, not in the tax system.

Organisations
does the simple. tax

treat non-profit organisations

that pay dividends?
They are exempt fran the business

cooperatives
Aa

pay the inpividual

must

their dividends
cannot

benef

compensation

are untaxed.
from

the

tax, but their employees
tax. As under present law,

Note that non-profit

investment

incentive

organizations

of f irst-year

writeoff either
Q:

Shat about non-business

entities

such as

trusts, estates, or

charitable organisations
A: Any actual business
the business tax form.

tax.

compensation

including
owned

churches

by one

and

schools'

of these entities aust file

Their employees

must

pay the individual

they are not taxed.

Otherwise,

that a
conventional personal trust, which holds stocks and bonds, deals
entirely in after-tax income and there is no reason for the tax
system to pay attention to it.
Note

Inheritance
Qc

What about

the inheritance

do not believe

t it

Wouldn

including

comprehensive

tax is necessary under a
taxation of income.

a goo& idea

to broaden

that an inheritance

system with watertight

. 0:

tax'

gifts, life

insurance

proceeds,

tax base by
inheritances,
and so
the

forth'P

No.

broadening

represent

base

for the simple

tax is carefully

chosen

efficient economic incentives.
Further
to the listed items would be double taxation. Oifts
the transfer of income that has already been taxed and

the

provide

there

The

most

no reason

to tax

again.

Life insurance proceeds are a

mixture of interest

business
income

earnings, which have already been taxed by the
tax, and return of premiums, which again were paid from

already

taxed.

Inheritances

are gust a special

form

SS-

social benefits

Economic and

The

into

its

investment

first-year

universal

the

savings

and

spending

and businessesV

uniform

improved,

provided

tax change

the simple

of individuals

patterns
A:

will

Sow

writeoff

incentive

savings

and

sill

channel

capital

of tax rates across
taxpayers will prevent the widespread abuse of tax shelters which
d iver t savings
Dramatic
from their ef f icient des tinations.
reductions in marginal tax rates vill stimulate investment and
work effort, and draw ac'tivities out of the underground
economy
and into the more efficient market economy.

much

How

uses.

most productive

time

and

only the two postcard

Equalization

vill re

money

returns

save by having

in place of form 1040 and

fill

out

all its

schedules'
A:

The Treasury

over 600 million
would

hours

be eliminated

sounds

raise taxes
we actually
defects?

It is

that, businesses

f illing

out returns

tax.
million hours is

by the simple

that 600

$6 per hour,

estimates

and
g

almost

worth

better

off

overburdened

with

value of

$3.6 billion.

American

the present

spend

all of this

At a conservative

like the simple flat tax is gust

on the already

the public

a clever ploy

taxpayer.

system,

with

Aren

all its

true that many people s taxes vill rise a little right
after the tax reform. Rut cpickly everyone will benefit from the

56increased

activity

economy

that

. incentives

improvement

participants

in our economy.

the

wi11

accompany

" facing

the

most

dramatic

critical

years, ve foresee a
nine percent increase in real incomes on account of the simple
tax, a'most double its immediate tax increase for any income
Within

seven

group.

Bow

will the simple tax help the American

The

most

obvious

and

best-documented

economy

effect

to grM
comes

from

incentives.
Nitb lower tax rates,
the take-home pay fram extra work-longer hours, more weeks per
year, or a second )ob will rise. For the most productive and
highly-paiR workers, taxed today at rates up to 50 percent, the
improvement
in work incentives will be especially dramatic when
the'r tax rate falls to 19 percent.
More subtle, but equally
important sources of growth will come from the vast improvement in
the incen ives for entrepreneurial
activity. Today s tax system
puts tax rates as high as 60 or even 70 percent on the rewards to
successful innovation, thanks to the cascading of the corporate
and personal income taxes. With the taxes rationalised
by the new
business tax, at the low rate of 19 percent, bright people will be
attracted to innovation and away from the tax-sheltered activities
favored by the current tax system.
Finally, the simple tax
provides stronger incentives for capital formation, an important
source of growth in the longer run.
workers

response

improved

—

Removal Notice
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Citation Information
Document Type: Article

Number of Pages Removed: 3

Author(s): William E. Simon
Title:

"What a Flat-Rate Income Tax Would Mean to You"

Date:

1982

Journal:

Reader's Digest

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

apartment

of the Treasury

For Release
at
Expect

O
0

~ Washinlton,

O.C. ~ tefeyhone I$6-Qt

Delve

0 aeneas

STLTRMRST OF

SOSORMLR JOSS Ee CShPOTON
1$SZSTAST SECRETART OF Tm TSRASQRT FOR ThX POZIZCT
REFORE Tm SESAME FZERlCE
EE

September

2S, 19S2

Nr. Chairman and Naibexs of this CclaaLtteea
Z aa yleased to be here today to 4iscuss sale fralaes of
reference for evaluating flat-tax ayyroaches to refoaalLsy the
incone tax systole
The Federal iaccaae tax is widely yereeived to be complicated
and uaf air
11thoQQh nany of the provisions in the current lav
were eaacted to proaete wortknALile social and econealc pals, oae
result has beea that individuals or faaLlies of octal neaas nay
pay quite different amounts of tax, Cependiay oa how they eam or
use their iaccsos e '1lso r taxpayers ia very unocp41 econcxLLc
circchstaaces Mf pay the sane alÃluat of tax despite the apparent
progressivity provided by a structure of marginal tax rates
preseatly raayinq fraa 12 to 50 yereent
This complex and uaeven
tax systaa has led to excessive ylannilny aad rearrange@ of
business affairs primarily for tax purposes.
Zt also has led to
a yaat deal of taxpayer uncerhLiaty, aaxiety aad Cisieayet for
the tax lax. Taxyayers went less cceplicated tax provinces
along with mre uniform tax treatment and lou tax rates.
The iaccee tax has also been a serious imyedislent to private
cayital foraatioa aad to individual efforts to work aad save.
'Baroegbout the 1970'sg high iaflation caused the systNRtie
overstatement of investment iacome aad pushed mre sad mrs
taxpayers into high marginal tax brackets. The result was to
reduce households
reward for saving and raise the cost of
business iavestJMt ~

R-969

to enact
Za 1981, Congress united rith this Administration
the Sconcsaic Iecovezy Tax Act of 1981 (ERMA). This Act provided
a much needed reduction in marginal tax rates and a vital
acceleration of coat recovery allowances. The khainiatration
eontinuea to be committed, to the elimination of the tax barriers
to capital fozmation, and any discussion of mafor tax reform must
continue to concentrate on reducing marginal rates and removing

barriers to saving an4 investment

Even rith the dramatic marginal rate reductions in RRTA,
however
rhat continuea to upset the man in the street ia hia
conviction that hia neighbor rho is fust as rell-off paya less

tax than he does. turtheraere, he ia concerned that the fellow
in the big house on the hill paya still less than either he oz
hia neighbor ia paying.
This concern reflects the ecemen perception that moat
tazyayexa in the broa4 middle inde classes have few
oyyortunitiea to take advantage of special taz concessions
because they receive their inc~a in the form of fully taxed
rages. They ate not poor enough to receive inccae in the farm ef
untaxed government services and untaxed tzanafet paymenta.
Tet,
neithez are they affluent enough to gamble on high-risk,
Low taxed investments
or to elect to receive significant amounts
of compensation in the foxm of noncash or defezred benefits.
Xn part, the complaint that the middle class has no
tax preferences ia overstated. The middle-class rorket 4oea
enfoy special taz concessions associated rith home ownership and
These concessions are often overlooked,
~mployer-paid benefits.
possibly because they are ridely available and axe not usually
the teault of sophisticated tax planning
It ia also true
however, that our complex tax rules enable acsae high-inccae
taxpayers more than others to make uae of special exclusions,
deductions, and credits, or to take advantage of lower rates of
tax that apply to certain souzcea or certain uses of income.
Natever inecee grexy benefits, there are many cases in
which income is treated in different rays for tax puzpoaes.
Pot examples
Compensation ia fully taxeR if it ia in the fozm of
cash rages, but left untaxed if it ia in the form
of fringe benefits such as employer contxibutiona to
health plans or the personal consumption elements of
~myloyee

business

expenses i

Capital inccee may be taze4 at high rates if it is in
the fozm af 4ividenda from eoryorate stock because both
the corporation incclie tax an4 the individual inccee tax
apyliea, m 4t may be taxed at a aero tate if it is in
the form of tazMzempt bond interest ox' 5 t may even bo
taxeS at negative rates on certain sheltered invest-

ments. The tax may apply only to a fraction of the zeal
inclxse frcxs capital gains or, vhen inflation is greater
than the gain. a tax vill be assesse4 on vhat is really
a loss»

Incaae spent on mst goods and services is highly
taxed vhile inccI!e spent on selected goods an4 sezvices
such as haae enezgy saving devices, ovne~cupied
housing in general, an4 scil ae4ical expenses is
sheltezed frcis tax
ClcTent interest in a tlat rate tax reflects a groving
concern about the ccxaplexity of the tax lav and the related
Ln«pality of treatment under the lav as in the examples )ust
given. There is also a concern ovez our sharply progressive
rate structuze. Marginal rates under the personal incaae tax
vill range fma ll pezcent to 50 percent in 19S4. Taking into
account the corporate tax ~ marginal rates on %Re inccxie can
range froa ll percent to 73 percent.

. The tvo elements, our sharply progressive tax rates and the
lack of uniform treataent of incaas in the tax base, are 4istinct
but intezrelated characteristics of'ouz incaae tax. A single tax
rate aight, foz' example, be applied to our current tax base.
leaving intact all of the exclusions, deductions and credits,
along vith the current exemption for taxpayer and dependentsA single rate of about 19 percent on the curzsnt individual
tax
base vould raise the same amount of revenue that auld be raised
inaee tax at the rates scheduled for
by the pzesent'individual

1984.
In addition, theze is a separate levy on corporations.
tax rate veze substantially reduced.
If46the top individual
a
percent rate on corporations vould create too great a
4isparity between individuals and corporations. A single
corporate rate of about 20 percent, together vith a single
individual rate of 20 percent. vould produce the same total
-revenue vith no expansion of the bases.
Collapsing the tax rates vithout broadening the base to aaks
mre uniform auld simplify the tax scaevhat and elizLinats the
it
At the same time. however,
disincentive of high aarginal rates
any single-rate tax vould inevitably result in a ma)or redistribution of tax burden fee high-incae to low- ana middle-inccae
families.
broaden the
Most flat tax proposals vould substantially
tax base ~ A tax system dos igned to treat taxpayers consistent 1y
according to a vell&efined tax base, vith no nazrov exceptions,
vill be referred to as a uniform tax throughout the testimony.
The tezm uniform
vill be used to connote broad-based taxation
xegardIess of the stzuctuzs of rates. For example, a uniform
income tax could be defined vith no exclusions, credits, or
deductions
except those necessary to me4$urs inccRo f vith

integration of the corporate and individual taxesg an4 «ith a
single marginal rate ~ Under such a unifozR inccsle tax, «ith a
taxpayer exemption of $3, 000 per )oint return ($2, 000 for single
returns) and $1 000 exenption per dependent (i+co $5r000 for a
fasLily of Cour), a single !1st rate ot about 16 percent «ould be
A unifoaa
~ufficient to produce the current levels of revenues.
tax on consuned inccMr ioee ~ . a uniform incus tax «ith
deductions Cor al I savings o muld rcpiize a sU ghtly higher
single rate of about 17 percent
even «ith a single rate the basic ezeIaptions mell cause
average tax rates to be scmewlmt progressive across Lncaae
classes. As sho«n in Table 1 attached to this stateaent,
average tax rates mu14 vazy froa 5 percent for taxpayers below
$5, 000 of incaae to nearly 16 percent at the highest iicaae
levels. Table 1 also shows that a substantial redistribution o!
the tax burden mull occur, despite base broadening and the basic
ezeaption, as a result of replacing graduated tax rates by a
Those «ith over $50, 000 of incaae muld pay about
single rate
$32 billion less, to be aa4e up by those «ith less than $50, 000
y

inccsw

Nore progressivity and less re4istribution
of the taz burden
across incus classes mu14 ocaar if larger basic exemptions were
allowed. For ezaaple. a unifona inceae taz «ith basic ezeIIption
~
levels that axe double those of the previous exaayle,
$10, 000 instea4 of $5, 000 for a family of four, «oul4 rayxire a
taz rats of about 20 percent and «ould produce the 4istribution
~bown in Table 2. The increased exeaption muld result in less
tax than present law for those in the $0-$5. 000 inecee class an4
significantly less redistribution of taz bur4en from high-income
groups to the lower- and aLddle inccee classes. Still, about $22
billion of tax reduction mull go to those above $50, 000 of
incise, «ld. le $27 billion of additional tax «ould be paid by
those in the $5. 000-$50, 000 incan range.
Seas have suggested a "pure' flat-rate tax that has a
broad uniform taz base and a single tax rate, but penaits no
~zaaptions for the tazpayer or dependents.
Ta the absence of
personal exemptions. the single zate for a uniform income taz
mull be lowered to .about 13 percent on the unifoaa inn' taz
base and to about 14 percent on the unifora consuaed inccae
base. The elimination of the basic exemptions mul4 result
in a strictly proportional tax, not a progressive tax, further
increasing the tax burden for low-inccIae tazpayers. As shown in
Table-3, a single-rate unifona LnccsLe tax «ith no ezaaption muld
result in a tax reduction of about $40 billion for taxpayers
above $50, 000 of incaae, aatched by a sixLilar tax increase for
those below $30, 000 of incaae. (Those in the $30-50, 000 class
«ould roughly break even, on the average. ) Even though the total
tax revenue muld be the same, about 77 percent of tazpayers
auld experience a tax increase under this type of flat tax.

i. .

«3«

Jhy broad-base4 option rLth a single rate auld involve a
redistrQnztion of inccise. Zf a tlat-rate tax is
designed to raise the same zevenue as present lax. every 4ollar
of tax reduction for one taxpayer must mean ~ dollar of increase
for ecae other taxpayers. Neg discussioas of broader base or
flatter tax rates lead one to conclude that tax bur4ens vill fall
for practically evzones That simp' is not She cases Tax
burdens fall shen a choice is also made to cut taxes in general,
as in the EconeLLc Recovery Tax bee of 19$1.
~ignificant

Instead of using a single tax rate, a uniform tax structure
coul4 be designe4 to contain a 1oer set of progressive tax rates
that auld apply to several broad brackets. Por example,
approximately the same degree of progressivity as in curzent lav
could be retained by a tax on the uniform inccime base with three
rates 10 pezcent on the first $19,500& 25 percent fern $19.500
to $75.000' and 39 percent over 075, 000e These inccae brackets
are for )oint returns and for incceie in excess of a $3, 000
exemption yer return plus a $1,000 exemption for each 4ependent(See Table
) jLlthough the tax bur4en vithin each class auld
be roughly the same as under yresent lan, much redistribution of
harcsas aiahla alassea roaM srlll eases heeaose ar hase
area a aalsora aaa saraeaara alah hseorassire rates
hsoaaaaMr.
is to raise the same revenues as our current system, aust
if it scime
cause
persons to have a fax increase if others have a tax
decrease. About 55 percent of taxpayers @auld experience a tax

increase in this example.
Zn the follceing sections of this testhaoay,
the criteria by
which a tax system should be fudged are presented and, then, two
uniform tax structures which might be frameerks for flat tax
reform are descz'ibe4
The first of these Oe is a unifoaa ineae
taX s

The uniform

incaae tax net only provides

for uniform tax

of vages, salaries, and interest incie and eliminates
credits, and exemptions. but it also
many special deductions,
provi4es for uniform treatment of yersonal inecae earned through
treatment

businesses
One cannot discuss eliminating
personal deductions
or taxing certain fringe benefits for rage earnez's vithout also
~xamining tax shelters and business expense deductions.
Zn
addition, there remain severe cases of overtaxation of business
income, such as the tax on purely inflationazT gains and the
true uniform inccae tax must
double taxation of dividends.
deal with all of these issues. tlat tax prcposals that do not
deal with inccae fram businesses do not provide uniform tax
treatment of all inccae.

The second general tax structure described is a uniform tax
on consumed incus. That tax is identical t~ the unifora incaie
tax except that a deduction is allayed for all net savings. The
tax on consumed inccmLe has many advantages, especially its
greater simplicity and encouragement of saving.

Ouz current tax structure contains elements of an income taz
concept and a conseaed-incaae tax concept~ Indeed, many chaayes
~nacted in our tax laws over the past 4ecades have meed us
closer to one concept or the other. while scca have been
consistent with a ccwmaon path to both. Still othez' changes,
primarily those put into the Tax Chde to affect social policy and
to influence behavior, have been clear ~ements away from both
concepts of taxation. Sefore we can evaluate furthe~ changes tc
the system, however+ we need to examine saae fundamental tax

p les

pz'

CRITERIA FOR %%ZsUATZSO TAX Ski

TZMS

%ay framework for future tax reform shou14 be chosen only
aftez careful evaluation of four cxiteriaa equity, distribution
of tax burdens, efficiency, and simpl. icity. Same charges, it
vill be seen, can be consistent with all these criteria. Many
changes, however, require a balance@ of these yels. For
instance we may need to approximate uniformity, at some sacrifice
of fairness oz' efficiency by adopting simple rules when. exact
accountieg rules are difficult to design ox use

The S

Standard

equity considerations dcNLLnate the discussion of
changes in the personal income tax. First, what is
the appropriate tax base2 Secon4, how does the tax system treat
in4ividuals who are considered to be in equal circcaatances2 Da
they bear the same burden of tax, or do they hav ~ different tax
burdens 4ue to other considerations2
Suppose two families are
identical in every respect except that one spends mre on housing
and the other mre on food. Zf they pay different amounts of
tax, and if mar)(et pzices 4o not fully adjust to equalixe their
tax burdens. then the tax system is said to violate the standard
Two

fundamental

of horisontal equity.
Although mst discussions of fairness

have made caaparisons
based on inccae. many observers since the taws of Thcaas Sobhes
(1588-1679) and John Stuart hi. ll (1806-1823) have also consid~red consumed incus to be a proper base for taxation.
A tax oa
consumed income wouid tax indivi4uals according to what they take
from society rather than what they earn an4 sake available to
On the other. han4, aa incaae tax is favored by those who believe
that income whether for savihlg or consumption
is the better
measure of ability to pay. Tax equity therefore implies that
those who consme equal amounts bear equal tax bur4ens un4er a
tax on consumed inccee, or that those with equal inccees bear
equal tax buxdens under an inccae tax.

it.

Oiatribution

Tax buzdens

Ohifona treatmsent of all inccmie or conamapticn would
result in substantial hase broadeaieg free current lav. Base
hxoadening, bcwever, does not 4ictate the answer to the separate
and 4iatinet cyaestion of hov taxea aught be allcwe4 to vary hy
inccmie or consumption class. If the tax base vere broadened.
aarginal rates could he lcwere4 in every bracket vitheut
affecting the overall distribution of the tax burden by ineoae
class. 'She net. result would be a flatter rate aehe4ule, hut no
the
~
~ffeet cn the existing progressivity of the tax systesL,
extent to which average tax rates increase with inccae.
Soae persons also believe that the 4istrihution of tax
huzdens ahou14 he different than that provided by our current tax
system. The extent of any increase or decrease in progressivity
ia, however. essentially a value gudcmisent and less ob)ective
in nature than other criteria such as borixontal epaity, effiOne can broaden the tax hase, flatten tax
ciency an4 ai3aplicity
rates and still haprove the efficiency ot the ecceemy vithout
ehaayiny the exiatkcug distribution of tax burdens.
The Standard ot EconcsLLe Rffici, en
Since a given amount of tax revenue ean be raised
in any nusLber of ways, the tax ayatse should be desired to
Businesses an4
IsinisLLse its adverse ef facts on the eeoncxsy
househo14$ should be allcwel to aeke the heat, uae' of the
resources at their disposal with the aLnhiuis of intrusion of tax
considerations.
This would leal to an eeonciay that operates acre
~fficientlyt thereby raising productivity, eeoncxaic g~rtJa, and
the standard of livia' for all Anericans.
Sfficiency in. taxation is based on the notion of ef ficiency
In mat eireeastanees, aarket prices reflect
in the marketplace.
the relative values of products to buyers and the coats an4
alternative opportunities of sellers. Our aarket systsma baaed
on such prices allocatea labor, capital an4 atarial resources to
their higheat-valued (mat efficient) uses.
Taxea reduce the efficiency of the private sector because
they interfere with the price signals of the aarket. The price
paid by a buyer (a eonaeaer, eeyl~r, or investor) vill exceed
the price received. by a seller. As a result. scae transactions
vill not take place, produchug losses in efficiency for the
~concigy. Because of the tax. the resources that auld have been
traded either vill not be put to a productive use or vill be
snifted to a lear taxel but liss yroductive use.

i. .

Ray realistic tax system unavoidably distorts soae market
signals and thereby distorts decisions on hoer much to work,
when and what to consume, when and how to save, how much to
invest an4 in what types of capital. Nven a ccepletely uniform
ineaae tax will affect individual choices between work and
leisure, an4 between consuming now or saving for future
k tax on all consumed inane 4oes not discourage
consumption
saving as 4oes an incc%4 tax' but both types of taxes will
encourage leisure at the expense of work.
Nd. le a disto3 tion of the choice between work an4 leisure .is
inherent in both a tax on all inccwae and a tax on all consigned
incense it remains. important to ainimise distortions that result
from differential tazation among goods or particular activities.
can be eliminated in either type of
Many of these differentials
tax or even in a hybrid tax such as we have today. k lack of
unifozmity of the taz bur4en aeag alternative uses of capital/
such as we have in our current system, so 4istorts the allocation of resources that it can make financial successes out of
projects that are less pro4uctive, an4 losers out of underta)cLags
that wou14 otherwise be winners. Choices amng investment
pro jects, financial arrangements, and production aet)mds are
biased toward Chose tha't are tax~favoredo
Se result is a waste
of resources.
Sigh marginal tax rates amplify the price distortions caused
the taz system. both those inherent even in unifozm tazes,
1 e the disincentive to work, and those resulting from lack of
unifozmity in the taz treatment of similar activities.
The
higher the rates. the greater the penalty on fully-taxeR
-activities and the greater the value of taz preferences. Za
addition, legal tax avoidance and illegal tax evasion e.a axe

rewarding

with high than with low

rates.

Sharply graduated rates introduce further 4istortions by
encouraging individuals to change the timing of transactions from
year to year or to arrange for taxable income and 4eductions to
be traded between higher- and lower-taxed individuals.
The cost

to the economy caaes, again, from exaggerating the relative worth
of certain activities that the taxpayer woul4 otherwise find
unprofitahla

For the act part, both equity and efficiency consi4erations
favor uniformity of tax treatment, whichever tax base is chosen.
Taz provisions that pe~lize or favor a particular product or
production method will "zarely improve either the efficiency or
fairness of the system. Uniformity of tax treatment may not
always be consistent wit6 simplicity, however.
The S

licit

S tandard

Simplicity in the tax system is desirable in order to
the costs of complying with the taz laws the costs
of record-keeping, calculating, reporting, and planning.
Unnecessary complexity erodes taxpayer respect for, an4 voluntary

minimize

—

ccsipliance withe the W. %e cosiplexity of the present let and
accaapanying regulations result in aach time an4 talent being
4evoted to understand~ the %hx Cckte in an attemspt to si!LfJLLxe

tax

payiments

Sisiplitying the tax structure cannot be the sole or even the
yel of tax policy, honver. masher the desire for a
less ccsiplicated systsa aust be balanced against the oftenconflictiny desires for a fairer tax system and for one that
interferes less 16th the %r3ciois of the ecouonye h!L extremely
simple tax systea auld also be extremely unfair and extremely
CcIEinant

vasteful.

Discussions of tax ccsmplexity often center on the tax
return, the mst visible aanifestation of the problea. Zt is
inryortant, hoover, to consi4er the issue mre broadly and to
Cistincpdsh asia three sources of caiplexitye
(1) ceaputations on the tax focal (2) the probleaa of aeasurincg the tax
baser and (3) tax planar@.
utin taxes is Rat mr@ Qatnk ot as the primary source
C
of ccsip esty
x
q out the foaa 1040 aakes aany of us feel
that n're back in school and that jipril 15th is the Cate of the
final exarch in Sath lllich of the infochstion on the for% is
necessary for full. reportiny of receipts free various sources,
tor asking appropriate 4istinctions between receipts" and
ineaae, and for enforcement of the lax. Other lines that
contribute to the coeplexity result from special tax rules that
provide a variety of exclusions, adfustaents, deductions, and
credits. Still another set of lines is devoted to alternative
procedures for Ceteris the tax bill.

the neaber of lines on the tax return without
the underlying lack of unifornity in deteaILininq
the tax base could not substantially sisiplify the systaa.
A shale return auld not produce a style tax if tea volumes
of Tax Code and three volumes of reyalations vere still recpxired
to define the fov Lihes ~
meducinq

reaedying

the tax base can require coeplicated rules,
Since an
s to ~ ne accurately and consistently.
accurate definition of the tax base is fundamental to a-uniform
tax on either inccae or consuawd inccae, the rules to define the
RRployees lglul(
base for either uniform ibad uould not be simple
of inc(me receipts and necessary
still need to keepandrecords
financial institutions vould still be
costs' esiployers
required to report infomation sheet emuployees and clients; and
businesses still uould have to keep and report complete accounts.
wherever possible, bovever, the costs snd uncertILinties of
eaapliance vith these rules should be kept to a aixximua.

if it

Neasurin

to reduce taxes is an important source of complexity
that receives too little attention. Ieeauae of the uneven treattazpayers
ment of different buc similar kin4a of tranaactionsi
often go Co great lengths to qualify for the mro favoted taz
treatment, such aa vhen partnerahipa of professionals have
incorporated to take advantage of favorable pension provisions.
devoting aeo attention to
Zaveatozs will seek tax shelters,
the intricacies of the Tax Code Chan to the merits of the
pro)ecto ~ These activiCies have high costa in professional fees
tax a4miniatration, an4 inefficiency in the use of scarce
capital. With a uniform tax. there vou14 he little reason to
~catch for Cax-favozed activftiea.
The advantages of unifozzLity tor efficiency and fairneaa do
The tax computation process
not alvays earzy over to simplicity.
may be aceovhat easier hut the standard tax fozm still vould not
fit on a postcard that could be zead vithout a magnifying glass.
Measuring the tax hase vould be simpler in aces respects,
~specially under a eonseaed Snccae taz. hut not in all. The
ma)or simplification vould probably caae fram reducing the
efforts needed to reazzange business affaizs to aiahaise
Caz ation ~
pzhaarily

thifozziity in tax treatment vould require consistent
of a clearly defined taz base. As ve learned long
ago, it ia not enough to 4eclare inccae, or coasted incaae.
or paytolls to be the hase foz a tax. Accounting rules must be
speeifiedt records must be keptt and repotta vill he required;
The kinds of rules and records needed for measuring inccee vill
KRovhat dif feront than Chose required for measuring conslsled
inccee. even though there are many caamon elements ~ The
differences aze important enough Co )ustify describing separately
the requirements foz a unifozm tax on total inccee and those for
a unifozzL tax on consumed inecae
measurement

The Unifona

Income Tax

The Cence
of Xncome. Lance many ceeeonplace verde. a
on of
precise def
ia more complicated than, everyday
usage suggests.
The mat correct 4efinition vhen discussing
taxes is the total amount that contributes to a family'a
Dividends and
consumption in a year or adds to ita not vorth.
vages are clearly incaae, for example because %host receipts can
be spent for consumption or used to aequizo assets. Zncroaaea in
veate4 pension rights or increases in the value of a portfolio
aro lees obvious cases. Sut these are also income if they add to
real net vorth. Sy contrast, borrowing is a receipt of aah that
ia not incane. If the ptoceeds are used to buy aaaeta, Chere f.s
no increase in nec vorcht if they are consume4, nec vorth ia
y

reduced by the amount borroved.

There sre 4ifficult gray areas ia nyylyhay the definition
of inc«ac that are a constant source of disyute in tat Leyisla

Por exemple, e busiaess lunch is
tion and administration.
partly e business ezpense sad partly aa oeRiaary coasmptioa
expenditure.
Zn a uniform inccae tax, the coasmytioa yazd
should be included ia the iaccme of the employee (or the
self~10/ed) not excluded fzcm inde The r
og portion
should not be taxeR. Determining the right Ieoyortions in
various situations is extremely difficult
trulp uniform inccsie tax uould roguire accounting for
every last dollar of Lnccae, aet of necessary costs. The full
measurement of incoae maid iaclude st least the follcwhag itemss
0 lf4ge snd eel~ receipts g aet of access~ empl~e
~

expenses

Replacer contributions to yeasioa,
sad other
plans.

waylayer

retire

insurgence

contributioas

profit-shar~,

for health, life, oz other

Isrnings on a11 reserve funds (such as yension reserves)
hel4 for futuze yayaeat of employees' benefits

o
o

Ieceiyts of proprietorships,

o
o

aet of business ezpenses.
incc«e.
A partner' ~ allocable. shaze of partnership
Rent and loyalty iaccae, net of expenses.
ill divMead sad interest receipts.
Tzansfer yayaeats.

1acludimy

Social security sad railrosd retiz«Neat benefitsg
Dhempl~paent

Veterans'

—Norkers'
o

pa~ts

beaef its r
compensation

AX, SSI,
o

ccmpensation
snd

othe' disability

aad other general

~s,

income-

relief yapaents.

aet of capital losses.
Totsl capital
ad)usted for inflation.
Setaiaed corporate earnings, allocated to shareholders.
housing-related

costs.

12
Taxation of all inde does not imply the eamplete
elis4aation of deductions. Any necessazy costs of eazahsy income
This includes 4eduction of interest as a
must be 4eductible
cost associated with debt-financed assets. Auctions for extraordinary medical costs, casualty losses, state/local taxes, and
chazitable contributions all may be defended on grounds that they
The basic
4o not represent personal consumption expendituzes.
principle of uniform incane taxation is chat deductions not be
allowed to 4iscrhainate by source of inccae or accor4ing to
consuzlpcion choices ~
Careful consi4eration of the list of items in a uniform
incaae base rill explain how that base differs from the present
inccae tax. Nome ~antitatfve 4ifferences are indicated in
Table 5. This table canpares the 4istribution of taxpayers by
Ad)usted Oross ZnccmLe (AOX) class, a custaaazy measure of
taxpayers' inches, with the distribution by the broader, uniform
inccee definition
tor each uniform income class. Table S shows
the percentage of taxpayers in each AOZ class. For example, for
those with $15, 000-$20, 000 of unifozmly measured incaae, slightly
more than half (51.21 percent) also have $15, 000-$20, 000 of AOZ.
For most of the remaining taxpayers, AOZ understates incaae. Of
those with $1S.000-$20. 000 of uniform
about 29 percent
are in the $10, 000-$1S,000 class, as measured by AOZg and another
12 percent have less than $10, 000 of AOX. Rae tendency for AOX
to un4ezstate uniformly measured incaae appears at every inccae
level, and this tendency to understate genez'ally increases as
inccae increases.

in~,

a useful st4!Hard tor measuring the
an4 for evaluating an income tax
system. tull measurement of incaae 4oes, however, present a
number of formidable practical problems that must be considered
if a tax on unifozm incaae is to be considered as a model for tax
QRifozm inccmle

distribution

of tax

bur4ens

reforms

of full Lnccee measurement
receipts. In legal jargon, they are not realised.
Shen shares
appreciate or pension rights increase, ineaae has accrued, but
full current measurwent woul4 r«yd. re annual estimates of their
values without a market transaction to confizm them. The practical alternative that has generally been fallowed is to wait for a
recognition event
a sale, exchange, or 4istxibution —
before
counting the incceae, but this provides the familiar opportunity
foz tax deferral. A postponement of tax is, in effect, an inccae
tax pre ference o
Inflation Ad ustment. Zn a period of inflation, apparent
apprec at on o assets may provide na ineae at all. This is
true where the appreciation in value is 5ust enough to maintain
a family's real wealth. Any aoaller appreciation is really a
loss. Thus, if the $100 used to purchase a share of stock
10 years ago is equivalent to $200 at today's prices, no real
inccee has been obtained unless sale of the stock brings more
than $200- Accurate incaae measurement repaires inflation
Xncome

Accruabs.

RHK

ma)or problem

a4fustient foz' any retuxne or costi Chat accrues over Sore Chan
a year
This mell aeaa indexiny the basis for all capital
assets and the face aanInts of all los/ C~ Cebte a torIsidable
Cask

eleeent of inccae aeasurssIent that has
the years is depreciation accountiny.
loss in real value of assets is a
a loss of net mrth. Coaeeptually,
be value4 in each year ~ and an
be provided for basis. Aa a
practical Imattex historic practice is to use Che faILLliar
forIsulas vith an estimated useful life for each broad class
of assets. Znflation adjustment, IIhile widely recognised as
necessary, is not univez'sally oz' consistently practiced even
foz' purposes of business Cecisionaaking.
Nevertheless, accurate
estiIaates Of depreciation, adfusted foz inflation, mul4 be
necessary foz' a uniform incus Cax ~
Znt
tice. One iImylication of the inccae 4efinition is
Chat us ess
cene ultimately belongs to families (and single
individuals), not to the business entities. Znczeases in
corporate net mrth, for examyle, belch to the shareholders and
are pal of their inccmes. Siailaxly, Cistxibuted earIaimys are
inccee only to the shareholder, not also to the corporation. k
uniform inccae tax muld tax all corporate eaxnfngs according to
the circuastances of each corporate sharehol4er, but only once.
Thus, a uniform inccae tax muld repave the inteyation of the
corporation and individual taxes.
inccee. Naay
Other
ctical considerations in tax
features of Che pz'esen't
cue Cax
luding some that az' ~
derided as Loopholes, are reactions to the inherent difficulties
of incaae oeasureaent. The yartial exclusion of capital gains.
ACRS, and LZPO inventory accountiny axe, at least in part,
responses to the otherIIise intolerable overstatchent of inccsle
Cuxfdhc) periods of inflation
Under any pzactical ineae tax, eaae kinds of incoae that
are difficult to measure muld have to be excluded or approxiaated. These inclu4e the value of eaployer contributions to
group insuxancet the value of cerCain services. such as checkup
accounts, that mu14 be taxable if paid out in cashI and especially, the net rental value of eeer~cIIpied hIxaes. Indeed.
mst taxyayers I'll refuse to believe that they 4srive incIae
frosL their oIe hcIses. The national incus accounts recocphxs
this source of incaae by estiIaacimy (or iIsputinq) the amount
that hclseoltllexs earn and autcHatically spend bJJ(' renting to
theaselves. N serious prcposals for taxiny inccae have included.
this item directly, although acae other countries have tried to
do so. Some sez'ious base-bzoadeahug yroyosals mu14 disallov the
deduction for mrtyage interest, bcwever, as a ny of includinq a
portion of the gross return from oIIner-occIzpied housing.
De

reciation.

been mst txo
Zt is repaired

eaaae over
because Che
necessary business expense
each yhysical asset should
inflation adfustsIent shoul4

—

Some family expenses that Co not, strictly speaking, reduce
jneaae are nonetheless vilely recognized aa equitable ad)uatments
to an income tax base. tev muld argue, for example, about the
4eduetion of catastrophic medical expenses. Xt ia also vilely
recognized that scxie allcwance ahoul4 he made for family aiza and
that axe minhaal level of tax-free inccae should he allowed
alike to evezy family of a given aine.

Zo suIIIary
a practical u!LLfozm inde tax vith no real
compromises, hut with minimal recognition of measurement
yroblama, mull necessarily involve considerable complexity,
alcaic with some approximations and saae exclusions.
Zt would

also retain some ot the present personal 4eduetiona at least
those for certain interest expenses, employee business exyenaes,
investment ezpenaea and extraordinary medical coats. Thus, acme
lack of unifoxmity ia inevitable.
Some recent yroyoaala, such aa the one by Senator Iradley and
4presentative Oephar4t, attempt to move towaxd
a more uniform
incaae tax hase. But no yropoaals have really attempted to solve
the fundamental problems of defining real investment incaee
Curing inflation.
Indeed, the Iradl~ephardt
proposal would
make the taz less unifoxm in a aa)or vay by taxing fully the
ncmLinal increase in the value ot capital assets, even though tor
any taxpayer, the gains from an asset may be larlely, or
entirely, the result of intlation
Zn a44ition, acme ot the real
gains are increaaea in corporate share values that reflect inccae
already taxed to corporations.
The Sradle~ephardt
proyosal
also haa not addressed the other 4ifficult problems of measuring
business inccee or integrating the corporate tax. Another area
of contzoversy ia personal deductions
The SradleyMphardt
hill
muld continue to allcw certain of these deductionar but they
would not allcw them uniformly for all taxpayers.
tor taxpayers
above $40, 000 of taxable income on a )oint return, a portion ot
the deduction ia effectively 4eni«R. Zf these deductiona axe
necessary to assure that those of equal means are treated
equally, one must aak vhy they ahoul4 not be Sally allowed at
every inccee level.
with moat people'a conception of equity
Those vith equal
incomes, regardless of the sources or uses, muld pay approximately the same tax. Sa one could escape tax by choosing
particular employers or occupations an4 by making particular
inveatmenta ~

After base broadening haa been achieved, and tax rates have
been lowered in all classes,
vould also be possible to a45uat
the tax rate schedules to make them more procpessive or less.
Z
vant to riiterate, hcwever. that the 4~ca of progressivity is
not a consequence of the base broadening.
Znstead,
ahoul4 be
viewed aa an independent decision to change the existing distribution of taz burdens.
Unlike present lav, hcwever, whatever
rata structure ~ i, ~ chosen under a uniform tax muld accurately

portray the distribution

of tax.

Ifficien Considerations. Oaifozm taxation
r~e
tax sto ons rm the marketplace.
under current lmi
many

of ines mould
tor example.

of ma frin e benefits from taxable
ation encourages uorkezs to choose more fringe
e ts
they uould if all forms of cceqensation
mre taxed equally. The tax exclusion for employer»paid
medical insurance is a ma)or contributor to the
ever»consumption
of health services and to the
continuiihg rapi4 rise in health care costs.
preferential tax treatment amon industries distorts
nvestment
ec s ouse for examples the capital gains
treatment for livestock or the expense@ of mining costs
alll& those in4ustries to attract investors in pro)ects
that yield laver pre tax retuxns than those in other
The exclusion

industries.
The s
te
rate QlccRe tax distorts econ4LLc
decisions. Iy imposing a double tax on dividends, the
corporate inane tax encourages firms to issue debt
rather than equity, and to retain earnings rather than
to pay out dividends. Zt also favors the unincorporated
business over the corporation, and it favors industries
-typically chazacterise4 by no~xporate enterprises
(principally a~icultuxe, housing, and services)
relative to industries loainated by corporations.
Accelerated cost recove
and the investment tax credit
ve r Qc
~ excessive tax Qr en on 1&estment
~quipment and machines, but the inmaae tax continues to
fall heavily on investments in structures and
inventories
This 4Hf erential distorts choices 0f
production methods and raises the relative tax burden on
activities and industries that naturally require aero
higher»taxed

of the heavily taxed capital.

OhifoxsLLty %luld reduce the expense and

ef fort involved

tax platuhag and allcw markets to choose the most productive uses
of available capital. Zt mull encourage employers to pay
canpensation in the form that is valuable to their
cash to consume or save as they uish. All of these represent
yahoos in economic efficiency.
k great disadvantage of the inccae tax is its built-in
bias against saving. %ae income tax discourages saving by
reducinq the rate ot return to the saver belier the market return
derived from investing in capital.
taxpayer Who ~ul4 be
villing to postpone consumption to obtain a 10 percent return,
thereby ma)hag resources available for capital formation, may not
be rilling to make the same sacrifice for a 4 percent return,
after-tax. %his is wt a douhle tax on sashes as aaae have
asserted: it is a single tax on capital inccee. Iut this

~ker~ld

single tax has the inevitable consequence of re4ucing the reward
f r defying co~etio and, th~,
by a+i g less s vtng
the future growth and
available for investment
productivity of the eccecssy.
A uniform inemo tax would be simpler in some
Si licit
present law, but it cannot be really simple. tor
respects
~xampleg businesses with capital expenditures must account for
Are accurate depreciation rules are likely to be
depreciation.
more complicated and contentious.
This is especially true in a
period of inflation, which also ccmplicates the valuing of
inventories and the proper calculation ot capital gains an4
1osses e
Aaather illustration is fringe benefits of eaployees.
These axe often close substitutes for cash wages. When they are
excluded from the tax base, they provide a convenient means for
avoiding tax and, thus, contribute to the perception of unfairness. Iut many fringe benefits, like the personal use of company
cars, are difficult to distinguish from properly exclu4able
business expenses, an4 many others, like employer-pai4 group
insurance, are not easily value4 for each employee.
OeRuctions and ad)useaents to the inceae of employees also
complicate the measurement of the tax base but many of these are
necessary to reflect differences in ability to pay. Novtng
costs, employee business expenses, interest expenses, and extraordinary medical expenses may be examples. A, tax system that
allows too few ad)ustments of this type can be just as unfair(though perhaps simpler) as one with too many exclusionsNeither a uniform tax on all incaae nor on consaaed inccae
would end the ecaplexity of measuring income.
Nore uniform
treatment would, however, simplify tax practice by reducing the
number and importance of the fine distinctions
needed to i4entify
tax-favored activities.
The computation of tax liability can be complicated under
present law by incaae averaging, the alternative miniaen tax. and
options of filing status, and by various tax credits, ocae of
which have complicated liaitations.
k ~re uniform definition of
the tax base and a flatter rate schedule would reduce many o!
these complexities.
Za general, a mre uniform income tax
presents 4ifficult policy tra4eoffs in the area of simplification- The aero we attempt to make the inaae tax uniform in
every particulax, the mre complicate4 the rules asst beccee.
The are rough-and-ready
rules, the are opportunities are
created for otherwise unpro4uctive tax avclidance and the %Ore
inepities are created.

Q~s

Transition Considerations.
Tnaaediate implementation
of a
uniform tax structure wou
cause significant changes in the
value of individuals'
assets and after-tax incomes. Such changes
auld create windfall gains for sees individuals an4 unfair
'

in~

10$$0$ for othe?s ~ Those clLangos in wealth and after-tax
can bo Lsodoxatod by transition rules, such as phasing-in
provisions of a now lawe grandfathering
an4 delaying off ective

4ates

Transition rules for a Qnifozm inccwo tax should insure that
once under tho prior systeIL
and a second the under the now tax law, Conversely, a taz
chango Should not result in acme inc~ never being subject to
tor instance, the Ozclusion Of Social security benefits and
the 40 percent exclusion of long-teria capital gains coul4 still
apply to accrued. but Qnroalixody incM0 prior to tho effective
date of tho now law o Benefits Cr real gains accrued after tho
~ ffective date, however, should be fully sub)ect to tax
Transition rules can also rodQce tho
and wealth
redistribution resulting fraa changes in relative tax rates.
The value of assets that currently receive favorable taz
troatzLont
Such as state and local govormaent bonds ~ would
fall as deaand for those assets 4eclined under a Qniforli taz
Zadividuals who had aade specific investaents
~tructure.
because of favorablo tax txeatlsmLt auld suf fox 10$$0$ ~
Orandfathering
existing tax treatment for the life of the asset
or as long as the owner retained control, or delaying the
effective date, would reduce the present value of the loss on

inc~0 is not sub)oct to tax twice

in~

tax- favored assets.
The design of transition rules Shoul4 weigh the advantages
of increased efficiency and shaplicity of a unifozIL taz structure
against the wealth and incline effects caused by the change in taz
laws+ Transition rules can r04uco the SLMunt of windfall gains
and losses ~ but only by delaying impleaentation
and increasing
the complexity associated with the now tax systas. Grandfathering assets purchased under prior law could involve delays
in impleaontation of the now taw for up to 30 years on long-lived
assets
Alternatively, delaying the effective 4ate of the new
law could Shorten the transition period while reducing the
present value of the windfall gain or loss. Daring tho
transition period, the inccme tax base would be lower than the
ulthnats base. which wou14 necessitate higher temporary tax rates
for a given lovel of revenue.
Qnifora Tax on Consulted Zhccas
Cence t of Consumed Zncomm. Ra alteznativo aodel for tax
orm tax on
0 aaunt of inccae consaaed, rather
refoaa s a
than cn tho aoaunt of ineaao earned. The unifoza tax on consumed
inccee would differ from the unifona inccae tax by excluding net
Saving frasL the tax base.
This alternative aadel for tax refornL does not represent as
radical a departure froa current law as it Nght seen. Za aaay
ways, the current rules applying to Saving are ILuch clo'ser to
those repaired under a taz on consmed inccae than to rules

necessary under a uniform inde tax. In particular, two
important sources of saving for many families homeownership
an4 retirement saving are taxed almost the same way under
current law as they uould be taxed under a consumed incene tax
with a deduction for saving. Sfailazly, the adoption of the
Accelerated Cost Recovery System in ERTA moved the tax treatment
of business investments in machinery an4 ayaiyeeat much closer to
the treatment required under a consumed incaae tax. Provisions
in the tax law that allow expensing of certain capital investments, such as mining exploration and development expenses,
and rules that permit mst costs of research and develoyaeat to
be expensed rather than capitaliaed are also consistent with a

—

consumed

ineae base.
issue of whether inccae

consumed or incaae earned is the
base for a tax system has been debated for any year ~
by tax theorists and social philosophers ~ Some prominent twenty
eth centuxy econcaLsts, including Professor Irving tisher of Tale
University an4 Professor Nicholas Kaldor of Cambri4ge University,
have advocated ocae form of tax on personal consumption as a
substitute for the personal incaae tax. The idea of taxing
personal consumption rather than incus has gained increasing
favor and was given favorable consi4eration in the Treasury
Degereaent study, Slue rints tee Sasic Tax Refona, released in
e Report o
e Mea e Commission in the
January, 1977, and
United Khagdom in 197S

The

appropriate

Under the consumed inccee tax, the taxpayer vould include
in his tax base all forms of current Nnetary incus, the current
consumption value of all fringe benefits supplie4 by employers,
and the proceeds of all borrowing, in excess of loan repayaents.
The taxpayer would be allowed to deduct from the tax base all
purchases, in excess of sales, of incca~arning assets, and all
deposits. in excess of withdrawals in interest bearing accounts.
Accrued interest
earnings from ownership of corporate shares
increases in the value of pension an4 life insurance reserves,
and other increases in the value of asset holdings would not be
~ubject to tax until pai4 out or withdraw
for consumption.
ks a simple example, a family with $20, 000 of wages out of
which $4, 000 is saved ~aid be taxed on $16, 000. not on $20, 000
as under a uniform inccae tax. On the other hand, if the family
spent ~re than it earned say $25, 000 by borrowing or dipping
into its savings account for the extra. $5, 000, it auld be taxed
on the $25, 000 of consumption.
Since total consumption in the
economy is less than ineeeo, tax rates uould need to be higher to

—

generate the same QRlunt Of Revenues

The tax on consmae4 inccme auld be similar in many ways to
the uniform incaae tax and would involve many of the same basebroadening steps, as em~ared with current law. Bach taxpayer
would continue to file an annual tax return that auld be similar
to the current Pen 1%0, though sceewhat simpler. All forms of
employee caapeasation (except for employer contributions
to
pension plans) and all personal deductions (except for interest
deductions) woul4 be treated the same as un4er the uniform income

tax.

Wages and salaries {net of necessary eaployee expenses),
the value of «Iployez-provide4 fringe benefits, and transfer
Personal deductions
payaents would be include4 in the tax base
other than interest 4eductions and 4$4uctions necessary to
$0asuze ability to pay, ouch as a deduction for catastrophic
ae4ical expenses, would be eliminate4. There woul4 be no tax
credits, except for the foreign tax credit. The 4100 dividend
exclusion, the provisions exeaLptiIIg fram tax certain fons of
interest inccee. such as inccae from All Savers certificates, and
the exclusion frca tax of 50 percent of recognised capital gains
auld all be eliILLnated under both the unifozm inaae tax and the
unifozm tax on consume4 inc«We.
Because only individuals consume, there would be no separate
corporate tax nor any need to integrate personal and corporate
earnings. Taxable income of an individual would include
distributions from corporations and individuals' sales of
corporate shazes. Zn effect, corporate incaae would be taxed
Ietained
when it found its way into individual
consumption.
~azILLngs would receive no tax advantage over dividends, so
A
attributing retentions to stocIcholders would be unnecessazy.
tax on consumed inccae would, however, encourage corporations,
particularly closely-held corporations, to buy consumption for
their «nployees, permitting the workers to evade taxes unless
fringe benefit zules were tightly drawn and applie4.

The sapor differences between the two tax systems involve
4ifferences in the treatment of saving and borrowing. Under the
tax on consumed incaae, 4eductions woul4 be allowed for all
purchases of corporate shares, corporate and governwwent bonds,
shazes of mutual funds and other financial instruments, assets
used in a trade or business. and deposits in interest-bearing
accounts. Any cash receipts fr«a such assets. either in the form
of distributed earnings. return of investment, or realised gains,
would be sub)ect to tax- 4iNLilarly, the proceeds of all borzowing would be included in the tax base, while both interest
payaents ind repayaent of loan principal woul4 be deductible.

%e inclusion of net loan proceeds in the tax base is
particularly important. Otherwise, taxpayers coul4 reduce their
tax by taking a deduction for the portion of assets acquized from
borrowed funds, even though the ccmbinatian of borrowing and
puzchase of assets does not add to net saving ~
price of

The purchase

consumer

assets, such as

owne~ccupied baaes. autaaobiles, and furniture would not
be deductible in the same way as business investments.
While
business assets yiel4 inccae in the form of interest, dividends,
or capital gains consumer assets produce inct55e in the form o f
services~the use of the bouse or caz e For invescMot in
business and consumez assets to be treated the same would require
an estimate of the annual value of the services that the house or
the car or the furniture provides
an estimate of their rental
value. Since this woul4 be extremely difficult to accomplish and
a method that is approximately
for the taxpayer to understand
~

fn preseat n?ue terms, would be used instead. Qador
individuals would neither include loaa proceeds for
these purchases fa fa~e, nor would they be able to deduct loan
rope@sents. Za addftfoa. the tax liability for withdrawals fxcm
savings accounts use4 to finance purchases of housing and
autcRobf les Right be sprea4 out over a period of years ~ These
special provisions woul4 aller the tax liability arisiag trai
consumption of the services of houses, autcxaobiles, aad other
major coasumer durables to be spread mre evenly over the useful
life of the asset, rather thaa being assessed all at once at the
time of acquisftfoa.
The tax oa coasume4 fnccae wou14 recyafre scxie different, but
not moro complicated, reportfIIg aad record-keepiag information
than the uniform faccae tax. Taxpayers would aced to report both
purchases an4 sales of all capital assets, but there voul4 bo no
aced to maintain records for assets purchased ia previous years,
because the entire sales proceeds, not just the gaia, would bo
subject to tax upon sale The tora 1099 sent, by banks aad other
depository institutions to report taxable interest to iadivi4uals

epafvalent,

this

method,

vould be altered slightly.
Zastead of reportiag annual interest
Set
frcii accounts, Wtm 1099 would report aet withdrawals.
withdrawals vou14 be computed by a44iag together the beginning ef
year balance aad interest received aad thea subtracting the ead
of year balaace. tor example, ff additions to savings accounts
exceeded iaterest earnings vfthdrava from the accounts, the
individual woul4 be able to claim a deduction.
There woul4 also

aced to be an accountiag for all loaas received. but thoro would
be ao need to divide loan repspaeats betvoea principal aad
interest, since all loan repayaeats voul4 be deductible.
~Su~it

uniform

tax cn

consumed

faccINe would have

saio

of the same equity benefits, ccsapared to current lav, as would
a uniform tax oa all inccxae. Two ia4ividuals with the same
coasted incciao would pay the ssmo tax, regardless of the source
of funds used for consumptioa or the types of coasumer goods

current lav allows tax advantages for
inccee in certain forms. such as transfer
payments and tax-exempt Riage benefits, or vho spend fnccIBe on
certaia goods and services, such as home iasulation expeadituros
purchased.
indivi4uals
cpaalifyfag

Zn contrast,
who receive

for resideatial

energy

credits

Eowover. under the uniform tax oa consumed faccmLe, two
indivi4uals with the same total inc&me sLfght pay very different
amounts of tax, dependiag on hcw much each in4ivi4ual saved. To
take an extras example, consider a very frugal person earaiag
$100.000 a year who saves $90, 000 a 4 consumes oaly $10, 000.
Older a coasted faeae tax, ash i person would pay the same
taxes as a person vho earned only $10.000, but consumed all of
hfs earnings. A uniform income tax would tax the person earring
$100, 000 more than the person eazniag oaly $10.000.

This example might lead many persons to conclude that a
uniform income tax is fairer than a unif ozm tax on cons1%04
more taxes.
income because the pezson earning more shou14
% alternative example, however, often lea4s topaythe opposite

conclusion. Consider the heir of the frugal person Who earns
only $10.000 but cons~s $90, 000 a year by selling part
of his inheritance each year. Under a unifozm incane tax, this
wealthy person with a very high standax4 of living wi11 pay the
same tax as a poorer person earning and spending 410, 000 a yeaz ~
%he consumed inccxwe tax, however, places a heaviez tax bur4en on
the pezson spen4ing $100, 000 a year even though that person eazns
only $10, 000.
Thus, ccIIpared to a uniform inccme tax, the consumed
inccIae tax falls less heavily on the person who lives frugally
and aceaulates wealth and are heavily on the person who lives
well by selling ~alth. %he uniform inccaIe tax has the opposite
effect in that
places a higher tax burden on the person who
ace3mulates wealth than on the person who spends

it.

The above examples do not clearly demonstrate whether or not
a consumed inccee tax is less eyaitable than a uniform tax on all
inccIIe. There is, however, a furthez' issue. Za many cases
wealth is not spent by later generations but/ indeed is
increased from genezation to generation.
Under the consumed
inccIae tax. such permanently growing estates would never be
sub]ect to inccae taxation. Zf this is a matter of concern, an
estate tax can be designed as a complement to the consumed inccee
tax to limit the tax free aceaulation of wealth over
many generations.
Under a unifozm income tax, or even under our current tax
system. an estate tax imposes a true 4ouble tax on wealth,
because accumulations of wealth are taxed as inccxae is saved.
One's attitude toward an estate tax might be much different under
a consumed inde tax as there would be no double tax on wealth.
Ih chat case ~ scwse ~ght be Aire willing to use an estate tax to
provide a single tax on the transfer of very large estates.
Distribution of tax burdens. L uniform tax on consaaed
inccae would allow personal exemptions for taxpayers and could
tax the rHRining consumed inccRe in excess of exemptions at
~ithez' a single rate or with a graduated structur ~ involving
tax on consumed inccIIe is not
several rate bracketsinhezently more or less favozable to high-incaae households
than a uniform inaee tax, even though low inccxIe households
genezally consume a larger fraction of their inc@ac than highMer either uniform tax system, the
inccee households.
4istribution of the tax burden among taxpayers with different
abilities to pay could be altere4 by changing the basic exemption
level and the rate structure.
~

k Qnifozm tax on consumed inde auld also
tfficien
have many o the same benefits in reproved economic efficiency
lhuRer either form of
os would a uniform tax on all inde
uniform taxation, the tax system wou14 no longer bias choices
among investment projects, aethods of finance, and 4ifferent
consumption goods. Ioth tax systems auld be neutral among
neutral between 4obt
different typos of capital invostmonts
and non corporate
corpoz'ato
botwoon
neutral
and olplity finance t
forms of enterprise, and neutzal between constr goods and
services generally and certain goods and sorvicesp OQch as
aodical insurance, that receive tax benefits under current law.
k further advantage of a tax on consumo4 inccglo is that,
unlike the uniform inccae tax, . woul4 not cause a disincentive
Since saving is exempted from
Cor saving and capital formation.
the tax base, all consumption auld bo taxed when it occuzs,
whether finance4 Crom the proceeds of current earnings or from
the proceeds of 'accumulated savings. Zn contrast, under a
uniform income tax, consumption made possible by past saving is:
eases betars is secure, ubea sbs taeme ts assess. tbe presses
salus at esses esa be lseerea by motet sbs ahstap at eaasuapstsa
forward. either by reducing saving or by increasing borrowing.
inecme tax, a tax on consumed incaae
CCLLLpared to a uniform
saving rate, lea4ing to
higher
in
a
result
woul4 probably
increased capital formation, a higher growth rate in the short
run. and a permanently higher level of output in the long run.

Ecwever, the exclusion of savings free the tax base also
aeans that a tax on consaiod inecae auld require slightly highs!'
tax rates to raise the same revenue as a uniform tax on
all inccae. higher tax rates would inczease the disincentive
to work to obtain current consumption goo4S an4 woul4 worsen
the distortions from any preferences that might rmain in the
tax system. Treasury's estimates indicate that the rate
4ifferential would not be large, so that the iLmpact of the
4ifferential woul4 a1so be small.

I lici
ozm

~
k tax on consLsaed incaae woul4 be much simpler
incaae tax, oven though scee new reporting
would be added. The main shnplicity advantage of
the tax on consumed incaae is that it avoi4S many of the severe
problems in aoasuzing the tax base that are encountere4 under a
unifoaa tax on all incaae. The main simplification benefit fraa
is
taxing inccRo only when consaN4 rather than when oaznedt value
that there would bo no need to account for changes in thowould be
of assets between two different tax yeazs. Thus, there
no need for complex rules for depreciation accoanting, no need to
adfust the aeasuroment of capital incaie for inflation, and no
need for complex rules to allocate corporate retained earnings
amng shareholders and to allocate accumulations of pension fund
hll purchases
and life insurance reserves among policyholdez's.

than a un
reyairsments

%23m

of productive assets auld be iIIIediatelf 4eductible in the ~ax
yurchase4. Chere auld be no separate tax on the inde of
corporations, only a tax on 4istributions few corporations to
Qdividuals and on sales of corporate shares
Since all assets
mnald be purchased eath yre-tax 4ollars, the entire sales
proceeds, not only the gaia,
be subject to tax-

~14

One version of a flat tax that
tax on consmeR incus is S. 2147+
introduce4 hy Senator DeCoacicd.
S. 2147 is base4 on the flat
tax proposal developed hy Iobert Eall and Alvin Rabushha of the
Soccer Znstitution.
Index S. 21I7, there mall be a single rate
tax on eeyloyee cmyensation and on business cash floe. Corporations an4 non-corporate business entities meld be taxeR on
total revenues less purchases of assets, ncges, and yechases of
tercet
yxkls an4 services Ace other fiaaa. Dividends an4
pageants auld not be deductible in caiputinq the business tax,
nor uould they be includible in the inaae of the reciyient.
S ~ 2147 vouldi in effects taz R)st of the cons%504 incus of
individuals, other than consumption frca ages, at the enterprise
level. the single tax rate makes it yossible to use cash flov of
business enterprises as a proxy for the cash flov of oeers and
creditors of business firms
Such a simplifyiay device could not
be used in any system Wth Iraduated rates or individual exemptions that apply to conscription out of yast savage as mell as to
current age inccae.

Other Cons
tes a
approx

ion Taxes.

orm

Aaother +ay of taxiny consumIMon is to collect the entire
tax from business fians, either in the form of a retail sales tax
retail
or as a tax on value added at each stage of yro4uction.
~ales taz or a value-added tax. if sufficiently general, coul4 be
desig004 to have the 84IM total taz base as the ~fox% tax on
consumed incaae. Scwever. any tax on business sales could not
adequately ta3cs account of variations in individuals'
ability to
pay. Sy its very nature, such a tax could not maintain the
overall progressivity of the current incaae taz and could not,
provide basic personal exemptions for lov-tneeme households.
Zn constrast, the u'nifozm tax on consumed incaae enald achieve
the major benefits of a sales tac simplicity and improveR
necessarilp redistributing the taz
savings incentives~ithout
burden free high-inccae to lminccae families.

—

Aa in the case of the uniform
Transition Considerations.
inccae taz, movement tcwar a uniform taz on consaaed ineae
of malth
would involve siyaificant chaeges in the distribution
Wansition
and inceee that could be limited by transition rules.
rules for a uniform tax on consumed inccee are especially
important to ensure that inaae does not escape tazation or is
not subject to tax tarLce. Older persons could be subject to tax
twice if their consumption during retirement 4epends on realth
acceaulated out of after-tax incaae. Treating all existing
tax-paidg Scwoverg auld result in incus
chealth as if it

from certain assets escaping taxation completely since many
~xisting assets have been purchased with pre tax 4ollars. This
of indivi4ual retireaent and Keogh
is true, for example,received
under gualifie4 yension or profitaccounts. benefits
sharing plans, and untaxed acaxnulations, such as unrealixed
capital gains or accrual of Q.fe insurance reserves.

Transition rules to a uniform coasted-in~ tax would
r«pairs the same tradeoffs between eyaity, efficiency, and
simplicitg as transition rules to a uniform income tax ~ For
instance, designation of existing wealth as tax-paM assets
would not require measuring existing wealth, but it woul4 allow
ecae consumption to escape taxation completely
ZdentHying snd
measuring assets according to whether Chg were establish«R out
of pre tax or after-tax inccee woul4 be ekainistratively
4ifficult. Delaying the implementation of the consumed income
tax would repairs higher taxes on conseaytion 4uring the
transition period and would reduce the yresent value of
efficiency gains from the imposed tax system.
- Sy-and-large, a uniform tax bas«R on conseaal
S
income
~ consMerable appeal as a model for tax reform.
It
woul4 allow for important simplifications
in the taxation of the
return to savings an4 woul4 reaeve the disincentive to saving
yresent under both current law and a uniform income tax.
however, a tax on consumed inccee would be considered inecpxftable
by acee because it would allow wealth to be accumulated tax-free.
Zt would also recpire higher tax rates to raise the same revenue
than would a uniform incaae tax, although el&Enation of many
4«Ructions, exclusions, and cre4its could enable the tax rates tc
be lower than current law tax rates.
CCNICZ1JSZCN

There are, Chen, two models for evaluating flat-tax
proposals, the ineaae tax an4 the consumed-inecaae tax. The
current Tax Code is a hybrM of the two structures that also
contains a substantial number of provisions inconsistent with
both. Zn fact, it is impossible to say whether current law is
closer to a uniform incaae tax or to a uniform tax on consum«R
inc c%0 ~
N4+Y recent changes in the tax laws and aaay proposed
x'ef orms have been consistent wi th one or boch of che uniform
structures. There have .been recent actions partially to Sarther

in 197$ to tax a portion of
a good example
kay such change is
in line with both concepts of uniformity.
There have also been actions to encourage saving for special
purposes, such as the expansion of the availability an4 uses of
IRAa and Keoghs. These aeve the tax law closer to a consum«R~xpand Che
unemplayaent

tax base

The mme

compensation

inccae tax and further away tree a unifozm inccae tax. The
jsportant accelerated cost recovery provisions enacted in the
mconcxaic Recovery Tax Act of 19Sl again meed our tax structure
towar4$ a tax on cons~ed incaae.
There have been other changes in the law to require better
aatchiny of inccae an4 related 4e4uctions. Such reforms are
consistent only with an inecee tax. Recent tax law changes
dealing with ccepleted contract accountiny, capitalixation of
construction perio4 interest and taxes related to real property,
and the cut back of 4eductions for mineral exploration costs and
intangible driLLhug and develcqeent costs all represent shifts
toward a uniform inccse tax e
Not all the recent zevisions in the tax laws have been
consis'tent Id th the two $04els hNlover
provisions such as
expansion of the general interest exclusion, the exclusion ot
interest on 411 Savezs certificates, credits for
exploration, research and develayaeat, and earned incame all
lNuld appeaz in neithez of the two structures ~
hay future changes in the structure of our taxes should be

en~

based on a clear understanding of uniform structures.
Anyone.
addressinq fundamental tax refozm needs to have a uniform
fraseerk in aLad. Host proposals touted as basic tax refoa!
are incoaplete and contain features avtny in exactly the wrong
dizection. This aLsdirection is not for lack of Lofty objectives- Rather,
appears to result free lack of a uniform
fraaework that will repairs aakiaq very tcegh, unpopular
4ecisions along with the easy ones.

The Treasury RpartSOnt is ccNltinQfJRJ its study of these
and will be happy to share additional results with the
Concpess as they beccxie available.

issues

Total LdabQiey md Aerage Too Rate! Onder ~ Ittifora Ittme Tao
tieh a 83,000 Deduction ter Return for Jojttt Recess (42, 000 Sittgla Ratcrna)
cad e 81,000 mtaoptioa ter Dependant aad %der Preoeae her

0981 Leeela)

e
t

4000)

Loaa chan 0

t Tax ttndae ~ ttaif om
t
t
eas mich ~
t
16.27 arcent tax rata t
, percent ef
Percent ef
t iicoae
Aaatltt
mkf om

Tao ttndar 1984 lett

Ikllioaa
83,507

ercant)

!
t

eillioea

t percentage
change
t
froe
t

peacoat

0, 0!

coos

aillioaa)
8 3s507

lav

percent)

~100.02

1S 775

2.9X

$39080

5, 0

ls305

73.5

8, 200

5sO

15,402

9,4

7, 202

47. 4

14, 611

7.2

22s563

11.2

7, 952

54.4

lS ~

19,7S4

9.4

25, 792

12.2

6,038

30. 6

48s208

57, 444

13.0

9, 236

19.2

76,339

10.9
13.0

80, 574

13.7

4, 235

5.5

100

47, 068

18.1

37,557

14.5

9, 5Q

20. 2

100

200

23, 874

25.5

14,282

15.3

9 ' 592

25, 223

33.6

lle908

13)315

S~a, SSS

944

0 ~

200 and over

9~26$, S S

tt. SS

Ottica of thE Sacratar7 of tha Troaae?7
Office of Tao Aaalyaia

Zttclssdaa

tha attribtttabla

chare of ehe corporatien

ittcoea

taz.

&0.2

~52 4

0.01
ceaSabEz SL

9999

Table 2
Toeal LfaNliey aa6 krcrc$o Tea Raeoc eador a Ihifoea Imcmo Tac
etch a $6, 000 Deducehm ter Rctera for Joice Rcecrcc ($4, 000 $itLglo Raecrac)
~ak a $2, 000 Ramptioa Por Ooyealoat aak eaLor Procoae Lee

(1941 Xarolc)

1' g

I
I Taa acier a mifoaa
Caa %PCCh a
C
Perccat of 20e00 ereoct eax rate
~itch
torcoat of
Sacme
Jaeeat
mif orm

Tas micr 1984

acct

$000)

$3,507

immit

fmc~

Loco thea 0

t ?crcectag

So 4o

06
56

! 9rccect
f
t
a

ahccge

roc

1av

6 mi115oac

ercect)

$3~507

«1,00.01

«1~423

«40, 2

25 ~ I

1,775

2 92

$,200

So0

«15

14s 611

14,2$1

9 1

1,054
3,670

19~754

9,4

23,594

SI844

4$, 20$

Syol04

13 0

$, 896

«50

76,339

13 0

$5, 801

14.6

9,463

12.4

100

47I06$

1$1

42~668

W, 400

9.3

100

«200

23~ $74

25+5

16,930

1$il

&,944

29 ~ 1

25, 223

S3 6

l4, 4$1

19.3

10,742

200 cad oror

$~264,

$264, 473

Office of ehc Secretary of thc Trcaccry
Office of Taa Analycic

Xaclclcc chc aetrQNtchla

oharo

of tho corporacioa jshc~ taa.

0.01

Scpeeeber 27, 198

Total LiabGSCp aed Leera$e TM Ratee Qadee ~ Qeifot%

at h4a

CL941

Tax

ader

Tsc~

Leeela)

t Taa cadet ~ eELLf e!R
. tax eath a
t
c 13.48 erceet tax race
carcoat ot
' terat ot
eaif oea
' mirza
asamt

TaÃ

Lee

1944 lan g/

heaat

Chee8e

I Pert eLlta6

($000

Laae

!hie 0

fe tax

$11110ILI

EXCERPT

S $1llfJRLS

0, 02

seas

83,507

pERMSC)

RillflhlS)

8 3e507

ahau8e

lei
sPCII~RC

lOO. I5

1,775

2.9%

87, 853

12i9

6, 078

342.4

5 ~

4, 200

5+0

20, 382

12, 4

12,171

148.5

14' 611

25~283

12.5

10,672

73.0

19~ 754

9, 4

26o863

12.7

71109

36' 0

48, 208

56, 705

-12.9

8,497

17.6

76,339

100

47, 068

33o475

~13e593

28.9

100 ~ 200

23o874

12o255

~11m 619

~8.7

200 aad ewer

25s223

15o251

60.5

13.0

33.6

9, 972

13.1
13.3

826Fii3

11K,551
Office of che Secretary of the
Office of Tax keel@cia
1/ Zaclidee the attribetable

75, 644

Treachery

chare of tha car@erotica Cacoae tax.

O. R

Seyceaber 24, 19SZ

Total LiahQie7 anil Avara8e TSR Rates Qh4er a Qsfforn Incone Tax
Utch a $3o000 Damnation ter Reenen foe Joint Neenrne Q2o000 Sfnjie $aenens)
an6 ~ $1,000 Eamyeion ter lapea4eae aaL Qsler treeene Lav

8981 Levels)

Tax osier 1984 lav Jl
c

a vniforn
a pro$rcesive
tax race sche4slle 2/
tereene of

Tan valor

ean vich

tarcaae of gI
mifoen

iaouae

ancona
t

(4000)

niliions

t
(percent

t tercencego

nnifoen

nillions

inc~

percent

Chsnee

free
tresenc
lsv
t
c

nillions)

percent

Lese chan 0

$3o507

OoOX

$3,50'7

2.92

$2o$93

1,266

1$,904

10.9

45o 091

10.2

3, 117

W. 6

76o339

13o0

80,169

13 7

3o430

5.0

47, 068

1$.1

47o568

18.3

500

25 5

25, 069

26. 8

lo195

33 6

26ol56

33.5

934

So200

5 0

9,467

14, 611

7.2

14,56$

19o 754

48o208

30 ~

50 ~ 100
100 ~ 200

25, 223

s~zs, sss

ssss, sss

Tnclnoaae

eho aetrQnatable

share of eha

4326

cortorat~ i

2/ for boint reenrns the nar4inai Car rates are 10 percent
25 percent froa A9 500 Co 475 000 and 39 percent
s jnSIe retnenes Che brachet v&ths aee half tha ]oint

~the first

$19,500

5.0
3.7
Q, OX

Septenber,

Office of che Secretary of che Teeaenry
Office af Tan Analysis
1/

5.4
7.2
9.0

200 mal over

6.6

3,1

19&

Table 5

Percentage

Diatrlbutlon
by treaent

Adjueted
green

inc cue

c1eee
($000)

Lena
chan

5-10

s
s

10-1S

0.15

0. 11

44. 34

95.31

49.54

16.77

10
15

3,09
0, 45

45, 13

4.49
3,74

2, 56

0.14

4.53

0, 19

1.14

100

3,00

0.05
0.0l

lN-

0067

2N~ 5N

0.12

10
15

500 an4 over

Total

15-20

ONO

20 30

30-50

50-100

1.01

0, 15

24, 52

0.04
4.44
7.91

1 15

0.04

3.54
0.43
0.56
0.17

44.29

29.0$

5.67

OA4

4.33

51.21

20.75

1.21

1,56

66.56

0.36

6.22
0.99

0.04

O. OS

0, 10

0.01

Office of the Secretary of
Office of Tar lnalyeia
+Lore than O. N5 percent,

lN-2Ns 2N SNs

100.00

Che Treaeury

100.00

0.04
0.24

0,01

0002

26, 71

0.02
0.14
0.24
0.40
0.13
0.96

500
and

s
s

total

0,02

0,07

4, 54

69,40

32.30

0,46

0.27
0.01

1,57

64, 74

0.03

Ioo. 00

1N000

0.16

0.09

OAi
33046

0001

14.54
11041

0.01

4,64

00 ll

0003

11059

40.96

0.99

0,07

2.46

1,05

57041

49A9

2007

0047

0.02

0.42
0.02

44.61

43Ai

0.54

54, 26

0.09
0.01

100.00 100.00

100.00

O. OS

100.0O

ove

0.30

lucre Clara

lforn Incone Clean

27.95

Leer than 0

of Ieturna in Ibslforn ancona CLaaaeao

La» A4Juated Groaa

100.00

Septenbar

942

DEPARTMENT OF THE TREASURY
WASHINOTON. DA'. SC20
COWCSElClll

TNR MCRCTARY

MEMORANDUM

Decmaber

FOR THE NATIONAL

2, 1982

PRODUCTIVITY ADVISORY COIINITTEE

FROM:

ROGER

SUBJECT:

The Subcommittee

POINTER

/gjP
on

Human

Resources

Attached for your review and consideration is the
Subcommittee on Human Resources paper and recommendations
on Health Care Costs and Productivity.
The Committee did not
have time to discuss these recoamendations
at the October 1
meeting and decided to postpone consideration until December 14.
At the October 1 meeting of the ComaLt. ttee, the Subcommittee
Resources also presented a series of recoaaaendations
for expanding the use of bipartite and tripartite employeemanagement-government
committees and cooperative councils. In
on Human

recommended that the Committee discuss further at
December 14 meeting the idea of a national employee-management-government
forum to consider public and private sector
issues concerning productivity, product quality and the quality
of working
A copy of the Subcommittee's
paper containing
this proposal (recommendation 05) is attached.

addition,

its

life.

Attachments

Iiealth Care Costa and teeluctivi

Factual iettin
expenditures ia the gaited Itates zose fzcsL g, O
rcent of Cross Rational product ga 1965 to 9 $ percent
19$1~ or 41g225 pez person) oz QQ aifg5$ate og +$6 ~ $

chealth

billions. ~

~~e

Rising health care Ixpendituzes are aot
to the Iaite4
States ~ Other vestezn industrialige4 countzies J~ve Igperfence4
aimilaz or greater iaczeases in recent gears.
one thir4 of personal health care geyments cere aade
out of pocket, ccanpared vith tvo-thirds in &50.

Zn 19SO ~

public programs pai4 40 perceat an4 private health iasurance
ai4 27 perceat. of the aaron's pezsonal health care hill
19$0o

gospital care expenditures continue to claim the largest Share
of the health eaze 4ollar, aceouatiny for 10 pezeeat of total
health care expenditures ia 19$0. thysieian services and
nursing home care aceounte4 for 19 percent aaC S.i pezeent,
respectively.
Medicare and the Federal/state cost of Sedieai4 inerease4 at
an average of 16 perceat per year hetnen 1975 and 19$0 and
21 pezcent in 19$1 alone. Total costs pre in this peg, od
fzcm 30.!-billions to 72. 5 billions.
Ouziny the 1970's the number of professionally active physicians
per 1D, 000 population inerease4 30 percent. The number is
pzo)ected to increase aaothez 34 percent between 19$0 an4 2000.
The medical care cceponent 'of the Consigner Price Zadex rose
2.44 townes in the perio4 1970 $1 ccmIIared to a rise of 2.N
Xa the year 19$0 $1 ~ the
times in all items of the index
aodical eaze component rose 12.5 percent compared to $.9 per
cent for all items in tbe index.
of caze and access
The problems of health care costs,
to health care aze inseparable aa4 mhou14 he considere4 together
since zeductions ia health care costs free limitations oa access
or reductions in quality aze not appropriate. ltith aeeess to
aedical caze an4 quality uadisLiaishe4, the concern is to provide
health eaze at lemur costs or aoze for the aaaa costs an
improveiaent in pro4uctivity.
jcee of the increased expenditures on health care have pgerQe4 .
Iiynifieant Qapzoveseats ia the ~1ity ot life for scaae
people and ah increase in pzoCuetive services of the labor fores.
These improvements cceplieate the appraisal of health care
expenditures and the measurement of productivity enhancement.

~ity

Recmenen4ations

Local an4 state health care
partacu ar y
e
a rapi4 yr
a54 state 'health caSe ooalitf ons
of hospitals, physicians g Qisurers ~

ooalittons
There has been
past several gears, of loca1
rise4 in vaQTisg confi~ations
business jlL!Qr an4 other

camaunity groups or local or Itate governments.
These eoalitions
have provi4e4 a useful forma M which to a44ress health ease
oosts an4 associate4 qaestions 4a the local Netting. %here
appear to he approxhaately 110 much coalitions at varying Itages
of development. The hest of them have been eoncerne4 vith con
Itraints on hospital he4$, etklisation review, outpatient an4
~ h
Sp 4f ~
cm the prohlesLs an4 opportunities
of th» commanity or itatei

la~,

Sa~,

a».

At the present stage of ILational Iieatth care policy te4eral
an4 state governments ehoul4 encouraie the development an4 operation

of these health care ooaiitions& CacluCing the parties Iote4 @hover
t
to hamulate& to prescribe or to
hut shou14 avoi4 any at
these
tiatives. These health
care ooalitions
private
take over
an
for
systematic Cialegoe,
opportunXty
at this stage provi4e
at times Itith governments i an4 RelCSN an4 interpretation of Cata
relevant to aeasures essential to construe costs Kth Cue concern
for ~1ity an4 for access particularly with aneaylcysLent an4
re4uctions tn federal programs.
R. Anti-trust.

to
ti
ltt~
respect to the activities of

The yeernment
~

has a responsibility
1h

trust Xavs thst RLy arise With
coalitions 4esiyae4 to constrain the increase in health
costs through shariny information on utilisation, programscareto
constrain expansion M he4$ vhere they are excessive, an4 the.
like. The government ahou14 cork vtth the lea4ers of the
prov14er associations ~ insuterst business an4 labor orcani~
sations to Cevelop some Ieneral tui4eLines of acceptable
activities to constrain costs.
Su4 etin ~ Xa aspect to tastitutional oarer
there is a vz e an grove. ng consensus that cost reimbursement ahou14
vith the institutions
he replace4 hy prospective reimbursement/
Sharing gains an4 losses from the prospective hu4iet. The ycnternaent shoul4 promptly a4opt these proce4ures for ae4icare an4
Ohcougaie the general a40ptfon of prospective hu4yeting

pros

ctjve

problems
gt is lika4se generally ay@eel that Were are special
to
hospitals
that Iee4 attention in applyini prospective hu4yetiny eRucation
attache4 to ae4ical centers on account of the costs of
of ae4ical personnel an4 the costs of eeseazch.

vo~4 he est helPf~
to have more experuaenta on
co lect'~ harg jiaiagg QQ4
aanagemeat policies La the ahsence of orgg~fsationg ++ aces
to encourage choices among workers, ag Iris of ~rkegs, II
to health Ogre henefitsi {These Qgzgggemaats Ire often esQe4
cafeteria plans ea4 ygyvf 4e that ~rkers recei~ 4irectly jgg4s
aot expea4e4 on health
4~

ReaXth Care

Senefit Choices.

pare. ) %here ere ccmPleq issues of
e4verse selectioa an4 avoi4aace of has jc heaZ~
care aee4s get
shou14 he carefully a48zesse4 4a any plan 4esfea
gygislatioa
man4atiag sPecific 4etails is to he avoi4e4. Noseover& St Ss
vjtal to follow ep aa4 to appraise these experiences.

1 ee-Mana ement

ratioa

~tin&in ~

%bile there vill alvays Re fasts oa Mich labor and sana%
gent disagree, expezieace has sheen that iaczeased dialNue
~nd cooperation can he achieved hy mluntaiy geans to eIAanceroductivity, quality of Izoduct, and quality of rork life N
th th» private aad public sectors.
Increased coopezatim oan occur ia gany rays, hut oae ray
Iroven by experience to he successful Ss through the formation
of labormana emeat ccnnmittees~ These cammittees have led to
construct ve pro em solvtay, increased Iroductivity aad
improved quality of rozking life, as a cmsapaence of the early
rays ia vhich humaa factors affect the concerns of labor and

ganayemeat.

Xn enterprises rith labor cegaaisatioas, such ooeaittees have
operated in a role Cefiied Sn a collective agreement+ or
entirely outside the agreement. . Connnittees have also successfully opezated ia iastitutions vithout collective hazwaiainI

ccNLittees have focused 05 a 4l~NK topicy ouch as safetyg
retraining, or quality iInproveInent.
Others have been
ccncerned vith a broader aIen4a eacampassiny any issues affectjag re 1atioaships g pzoductivity ~ oz quality of rorkiaQ lif 0 o
Iuch committees have also vozked & the public sector, at the
agency, communityy state oz national level~ aad have also
been create4 in federal g state an4 local 5uzisdictioas
5. The philosophy of zeduciay advezsazial relations mad czeatiay
also applies to relationships
a more cooperati'ie relationship
between the private and public sectors. Xeyravemeats aze
~, needed
zelaticeships through
in labor~ayement~ovezament
similar ccgnmittees. ks President Reagan has said ~ ?loth business and ycnreznmeat vill have to leaza to lay. aside o14
hoitilities aad ~assume a aev spirit of mopezatioa an4 ahazed
zespoasibility.
C. The
tential Qapact ea productivity and qual' of such
ttees has been mderestisLated, hut as ouz aateraatioaal
oanpetitors have ahcwn& increased cooperatioa among labor ~
IcNhe

ganageaent,

and Ioverament

can he fccmLdable.

Conclusion
The Sub-eeenNLittee
Lay together aembezs

hz~

believes that ccnmnittees and councils
and gaaayement& and ia scwne instances

of labor

government as vela,
~ality and
tated and assiste4.

~lity

together toward &&proved productivityr
of mrkini Kfe ahou14 he Nncouraled facili
work

Iacaanendstiohs
The Sub ccNIIILLttee Reccsillonds Chst fs the private
aanayement, and government acplore various rays

Colether aore cooperatively
and

councils.

Iector %Shor ~
of ~kinl

throelh the use of oaishttees
e

Opportunities exist at the matiana1, .Nectoral ~ kmRustxye
state, cceaaunity, firm, and aperatini aait level

Ie M sectors or localities of the aation confronted hy serious
structural a4)ustments, agencies of government sh 4& as
of policy, recommend, and as appzporiateg assist as
'aa matter
catalyst ka the 4evelopment of oontinuiny labormanayement
ccmNLtttees to hrinQ together private sector $?Oups to seek
long-term adaptation and solutions to structural problems
The form of the coMittees may he bipartite saith a Seutral
chair, or tripartite vith ycnrernment participation as aggircpxiate. Such ccea6ttees should he entirely voluntary
The Departlaent of Xahor and the tedera1 Mediation and Concili
ation Service should continue to provide services which
public
facilitate cooperative caamittees in both private and
information
conferences
include
~
sectors. Such services might
services~ publications, creation of networks, 4ata collectiong
and research

vhere private parties have had mo systematic
& scee sectors
research or development to enhance their Qsteznational
campetitiveness, it is appropriate for yoveaunent to encourage
orianisation

the formation of )oint ccemittees to assist fn the
of long-term research an4 4evelcieant.
D

Pit t 0

to
to provide matchiny financial support for a limited period
of
pro5ects
Some
sector
pilot
private
~
the
that raise4 hy
this nature have already proven euccessfulg End shou14 hc
eacouraled and provi4ed limited assistance.
The Sub-cammittee pregeses for 4iscussion that the eoimmittee
recomnand the creation of mechanisms for continuiny CCaloyuk;
.to seek .to 4evelop a
between lahor~ayeaent~varnmant
related
to productivityt guality,
issues
on
consensus
greater
life.
mrkinl
and quality of
Xt fs aecomenende4 that the private sector have its eva
National labor-maeyement forum. Jn addition, yoverniaent at
the federal, state and local levels shou14 form a aisLilar
body and mechanisms he create4 for liakinl
~ensensus-seekiny
sectors.
and
private
public
the

!j~
Ol

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220

December

MEMORANDUM

FOR THE NATIONAL

PRODUCTIVITY ADVISORY COMMITTEE

PROM s

ROGER

SUBJECT

The Subcommittee

in the

2, 1982

PORTER

Economy

an the Role

Government

The Subcommittee on the Role of Government in the Economy
has revised its recommendations concerning further amendments
to the Clean Air Act requirements for controlling stationary
emis 8 ions pursuant to the di s cus sion o f the Committee at ts
October 1 meeting and a subsequent meeting of those Committee
members that indicated their interest in working with Paul
W. MacAvoy, the Subcommittee
chairman, on this issue. The
revised background paper and recommendations are attached for
your review and consideration.

and background on initiating a well pay
for Federal employees also are attached. You will
recall that Governor Alexander had discussed the Tennessee
experience with changing the incentive system for sick leave
absenteeism and subsequently the Office of Personnel Management
provided the Committee with additional information on this issue.
As a result of discussions with ather Committee members we have
assembled additional background material to complem'ent the

Recommendations

system

Subcommittee's

paper.

States -Bepartment of Cammerce Travel and
Administration
has asked the National Productivity
Tourism
Advisory Committee to review and provide a recommendation an
its concern about the impact of the non-immigrant visa requireThe United

ments on U. S. hotel and airline productivity.
They believe
that the current requirement imposes an unnecessary barrier to
travel to the United States that dampens demand for hotel and
airline resources currently in oversupply. Although the
Subcommittee on the Role of Government in the Economy has not
yet reviewed the attached paper, the Subcammittee chairman has
agreed to my providing you a copy at this time in the event the
Committee should decide to discuss
on December 14.

Attachments

Nsmorandumc

Toe

November

30, 1912

National

Productivity

Advisory

Paul N. NacLvoy, Clmixaan
Cub-Ccea4ttee on the Role

Pzcma

RRPORH OF

TSE CLEhS

Caaaittee

Ooveznment

the Saneay

AZR ACT TO INCR%!SE IQSUFACXURZNG

In the past the National Productivity Advisory Caaafttee has aade
proposals concerning the control of autcaotive eaissions. The present
proposal addresses the 4if f iculties associated with tbe control of
stationary
source emissions and its negative impact on national
pzo4uctivity growth. The Ceaafttae's zeccmaendations to 0» President
should be the following:

(1) Ambient stan4ar4s shou14 be set in keeping with realistic
average tisNe periods 0, e per/hour or per!year standards) ~
Epidemiological studies used to set these standaeh should be
reviewed.
{2)

1 priaary

goal of a revised air pollution contzol system
elimination of regulatory decisice~ing on
requirements
QQCT,
NYCT,
1AER)
and
the
against nsw plant construction (NSPS).

shou14 be the

technological
discriaination

{3) The standard setting provisions for secondazy national
ambient aiz quality standazds OVALS) should include specific
consi4eration of economic an4 social effects as «ell as «ny

ef facts In the process of detezmilLQlg
ef facts, the standard setting shou14

health

social

regional

and

allow
for
appropriate o

state

econoELL

account

and

for

state differences in impact and should
deviations
fzca national
stan4ards
where
by

initiative, the proposed
of I/7/$2, is a large step
in the 4irection of a mre flexible approach to air pollution
control, and should be endozse4 by the Committee.

{1)

The

Rmissions

EPA's present
zsfaca
Trading Policy Statement

should espand the present Trading Policy Statement
into a full Tradeable Discharge Permit 89P) system foz
estrous ceides abc) and volatile organic compounds {largely
by4rocarbons)

(5)

CPA

The uhninistration
of the Clean kiz Act bas seriously aeduced
productivity growth during the past 4eca4e, and «ill continue to 4o so
unless the S'l a4cpts a sore efficient approach to eaLssions reduction.
Instead of continuing its current
standards an4 plans strategy, the

page 2

can improve aiz quality ~re efficiently hy instituting a systssl of
transferable 4ischarge pezmits CSPs) ~ Chile such a mew program «ould
improve efficiency and thus sdd to productivity
hy «orking «ithunn tbe
existing regulatory framework, 5.t «auld avoid drastic initial changes
that colLL4 cchezwise disrupt current industzy ocRtzol offorts

SPA

(1) Rnbient stag{Lards shou14 he set in keeping «ith realistic
sverage time periods
e. per75cx~ -~r~mtandards);-'Spidemiological studies used to set these staihdazds sbolkll he
reviewed.

(i.

Aabient Air Quality

The National

levels for local concentrations

Standards

tNLLQS)

of six pollutants.

set permissible

«ere
the
stu4ies
1960' s
The EPA incozporated
these stu4ies into their criteria
documents an4 a4ded a significant aaron of safety «hich resulted in
There is
standards more stringent than those originally re~nded.
a fair amount of discretionary judgment involved in interpreting the
scientific 4ata and determining «hat constitutes an adequate safety
factor. Nance, there is reason to believe that the standar4s are sore
~tringent than they need he to protect human health and «elfare.

based

primarily

Sritish epidemiological

The standards
performed Sn

for setting the NAQS is lengthy and eamplex. This
scientific research, assemhlance of a task force,
4raf ts and rewrites, ccaenittee reviews, public aeetings,
There are serious 4ifficulties
and man4atory revision.
implementation,
in the analysis of the quantitative and qualitative 4ata. Consequently,
a review of the standard setting process is in order in addition to a
review of the current standazds in view of more recent D S oxperience
The process

process
several

includes

primary goal of a zevised air pollution control system
of zegulatozy decision~aking on
he the elimination
requirements
QACl, REACT, IAER) and the
technological

{2)

should

discrimination

against

new

plant construction

OOPS)

To attain the current NAQS, state and fedazal agencies prceulgate
a wide range of standards applicable to aost sources in an azea. The
standards and plans strategy for meeting air quality goals seriously
han4icaps productivity grcaCh.

(a) The SPA sets New Source porf ozmsnce StRRldLrds (NSPS)
«hich limit new sources to the equivalent of the emissions
control technology,
from the hest available
except in
nonattainment
areas «here they require the «xtresely strict
emissions rates. Farther g Cbe
JAKRg or lowest achievable
aiz pollutants OIERRPS) ~ and
EPA sets limits on basar4ous
of significant
classi fies regions for the prevention
-.

deterioration
4h)

The

program.

states, «orking

frcm pollution

4ispersion

models,

translate NAQS into emissions limitations for each type of
plant in given regions of tbe state. The stan4ards applied to
existing plants allow pollution in excess of the strict NSPS.

Once the RPA has approve4 ~ state's implementation
plan QZP), each
plant must cosply «Sth Sts applicable stmMzds. Na)oz ccsaitments to
~xtzemely expensive control e~paent are made, as the standards are
ccmpXSed «Sth, forcing plants to reduce eaissions «itbout regard for tbe
relative costs Sn different plants of tbe reduction in pollution at Mch
p)ant.
%cause the most ceztain «ay of satisfying
eaissions
re~ements involves installing RP1 recommended technology+ the
have fozced eapensive
regulations
capital aguiiaent on iaiustzy,
preventing investment in more productive areas which could have occurred
had the agency allied alteznative strategies.
churning lm sulfur coal
as a substitute foz acruhbers an4 allerlng plants to occasionally shut
dc' as an alteznative to conthmsees controls exeeylify the lou cost
strategies available ender ~ less rigid system.
turtl»r g strict
standards for
sources (NSPS) have delayed an4 reduced tbe incentive
for firms to replace ol4 plants «Sth aev technology.

Several studies have measured the national decline in productivity
due to this zegulation.
Xdvard Dennison has shorn that the pollution
abatement programs have 4ecreased the zate of gzovth pez unit of
by 08 to 12 percentage points per annum through most of the 1970's.
recent report hy Rhert Raveman set the eff ect of envtrcaeental

oust

regulation
at eight to helve percent of tbe decl'» of labor
productivity since 1971. Similarly, ~ Szookings Institution paper by
Robert Cran4all pointed to ~ sharper 4ecline in industries zequized to
install emissions control technology than others' be expects an even
more pronounced antigrovth effect in the 1980's. Civen the lag Sn the
effects of reduced Snvestmentg tbe current 4eca4e could «ell experience
an even greater 4ecline in productivity gzarth 4ue to these regulations.

costs of

«Sth tbe primary standaz4s in tbe present
increased since the Act's promulgation
in 1970.
of Environmental Quality's estimates of air pollution
These figures consi4ez the
expenditures clearly depict this phenceenon.
operation, maintenance, and annual capital costs necessitated by the
have normally incurred.
amended Clean Air lct beyond shat industry
In terms of 1980 dollarsr the CEQ's 4ata ahcw ~ 311.9 percent increase
Sn these incremental - cost estimates g Czce $3.06 billion Sn 1973 to
$13.84 billion in 1979. The CE{}'s pro)ected'estimates pre4ict a 37.74
percent inczease free 1979 to 1988. The CEQ admits that theiz projected
fSguzes may be un4erestimated depending on tbe extent of future
the ef fects of current
Snclude
These projections
regulation.
regulation, thus they a4dress the aim to attain tbe primary WOQs hut
fail to considez the secondary NM4S. These productivity losses and
large expen4itures have not been a necessary burden teerds achieving
Much of this cost coul4 have been avoi4e4 at
air quality improvements.
the same level of air qaality as has been achieve!. %4 the aiz polity
Sugcovements ~ as impressive ss they have besnow have ccso mostly free
fuel svitching, not frca tbe State Xaplemen&tion plans' equipment
regulations
The

system have
The Council

complying

greatly

old

that secondary national ambient air
standar4s be set to protect public «elfaze. The level selected
for such standards 4oes mot reflect any consideration of benefits an4
The Clean Air Act new re@aires

quality

page

costs of attaining that set stan4ard. The
also seyhres that each
state submit a plan to the Rnvtronmental Protection 7iyeney to obtain
this seccedary stan4ar4 in a seasonable time an4 as acgeCitiously as
practicable. Out given operations ender the M in recent years, it bas
become clear that many adverse relfare effects can foDo« from setting
osscting secondary standardse Tbe kind of structure of the Act requires
standards

productivity

that «hen attained cause econaaLe losses an4 4eclines
in excess of any lainor) health gains.

In view of the continuing process of setting air Qoslity stoRl4Lrds ~
the econemic implications
associated rith attainment of secondary
stan4ards aust be taken into aeccnmt.
Ceeondary stu4ards are aot
related to potential severe impairment of human health by definition.
It is important that the overall impact of a national stan4ar4 as
1n econcahc
opposed to regional or state standan4 also be determined.
teat should be incorporated at acae point in the secondary standard
develc%mont

and atta$33ment

Neeaeendation

process.

for secondary national
standar4$ should be amen4ed in the Clean
Air Act to require consideration
of economic an4 social
effects as «ell as any health effects. Chile these eeoncsLLc
effects are perhaps SNplicit in the present legislationt they
are not taken account of in a systematic fashion un4er present
EPA- operations ~
In the process of determining eccoMlic and
social ef feets, the stan4ard setting should account for
regional and state by state differences in impact. This «ou14
he lone by making explicit in the law that suhnational impacts
be given suf f ieient eonsi4eration to allow 4$viations from
national stan4ar4$ «here appropriate.
(3) The standard
ambient air quality

(4)

The

Rmissions

setting 3wrovisions

initiative
the propose4
of 4/7/S2, is a large step
tladble approach to air pollution

SPA $ present
Ref ccrc
Tra4ing Policy Ntatement

in the direction of a more
control, an4 shou14 be~ozsed by the CesmLittee.

In attempting to make the system of regulation more efficient, KPA
issued a Proposed Rmissions Trading Policy Statement to allow
limited trading between sources& so as in turn to allow construction of
new plants in non-attainment
areas and eapansices of old plants. The
Statement, «hile an important step forward does not go far enough in
solving major problems rith the current regulations.
has

The Statement invited states to establish tzading systems. Secause
have considerable
latitude in 4esigning their programs,
indeed in 4eeiding «hether even to participate
4 policy
the prop
«ould result in a patchwork of different state systesi rith no clear
mals ional
policy e further f the scope of tra4ing severely limits the
options open to participating sources «hich aust still meet harsh IARR

the states

stan4ards in non-attainment areas and satisfy caeylex criteria to trade
@heir emissions reduction credits gas) ~ ~spite these drawbacks,

a step fn
@missions Tradiny Policy Statement represents
direction «hieh deserves the CcauLLttee'a ilpport.

gabe

aught

Onfortunately, some of the an't significant aspects of tbe preliosed
Statement have been obstructed hy the acute. The 1MCO va. SPA (1974)
4eeiaion prohibited tbe use of trading to eeet or Nvpid Sev Source
Performance Standar4s OOPS), and so zedueticla in eaisaions fram ol4
planta cannot he use4 for ai4iny the cenatru~ Of Ne«plants.
This

limits

for pro4uctivity enhancing trading.
regulatory refcem, the hubble popeye
ia in serious legal danger. The hubble aDo«s all the sources ia
a plant to he conai4ered aa a single scaitco and permits least cost
alterations in control «nothin a plant, an4 under special cirnmtancea
hetveen plants.
5 key provision of the Statement t an4 ~ vitally
i@portent provision for any reform of the regulations, extended tbe use
of the hubble from attaQeent to mon-attainment
areas so plant
extensions «ould not have to fall under the strict Sar Source Ievie«
procedure. This action «aa struck do«n on 4/17/42 in NRDC vs. So@such
District of Columbia Circuit Court.
If appeals prove
hy the
unsuccessful, the Admhhstration
should seek approval of the hubble
policy in Congress.
seriously

Another

of the

the

potential

mmt important

The EPA currently rayaires contimoua control equipment eo a plant
in 100% compliance during all cperatiny perio4a. Many facilities ean
he in eceplianee up to 98% of all operating perio4s «ith less eapenaive
non-continuous
control aguipment.
To obtain the sutra ineremnt, the
EPA haa ordered installation
of costly eysfyaant «ithout ccesideriny
This is a potentially
other approaches, such as sehe4uled shuts«ns.
serious «sate of resources and needs to he reetifie4. 1 hiD pen4iny
in Congress «ould a Do« areas un4er the Prevention of Significant
control aa hey aa
Deterioration (PSD) program to aDo«non-ccetinuous
the artra emissices 4o not emceed certain minimum levels. Support of
the hill ia strongly urged aa an important step to increase investment
productivity in manufacturing.

(5)

EPA

should expand the present Tradiny Policy Statement
Tradeable &5.achatge Permit gDP) system for

into a full

nitrous

oxidea

hy4roearbona)

(NOx) and volatile organic ecuyounds
(largely
based upon the details contained in this report.

Chile the above steps represent important reforms toward regulatory

efficiency, ~ market approach to reduciny pollution «ould alla«sources

to achieve requf red emisaions levels «ithout so severely bssperiny
k TDP system «ou14 aDo«high coat emittera to re4uce
productivity.
their control costa hy trading «ith lo«er cost emitters an4 «ould
eliaLnate the 4isincentive to huild ue«planta resulting faum the
differences het«een SIP and SSPS emisaioma levels.
The Disc

e Permit 6 stems

Me transferable 4iseharye permit tVDP) «ould consist of attract
rights to emit a specific pollutant an4 a specific amount lusuaDy tons)
of pollutant per year «ith a 4aily limitatice. Permits can he traded

page

In ocee
region without restrictim.
among plants .M a specified
(NC) and nitrous oxides (NOx)
pollutants, particularly hydrocarbons
ccepanies mould be allcwed to tra4e permits for cash «fthin the Alr
Quality Control Region (AQCR). tor partinalates and sulfur oxides, the
trading regions have to be amaDez to prevent violation of the RAQS at
The smaller regions asy mot
any aonitoring locations (or hot spots"
&

Seen im this
contain enough buyers and sellers Co mmke ~ aarket.
instance, however, the TOP system has the a%vantage 5f setting emission
limits to be met not by specific aguipaent zeyairements but by tuel
eritching and various types of equiyaent, whichever fs cheaper.

eeu14 4istribute permits fzee of charge to all
Plan (SIP)
upon in-compliance State Implementation
Nev plants «ould
and New Source Performance Standard
(NSPS) 1evels.
receive permits allying emissions in excess of current NSPS stmHards&
hcwever, as ~ result of government purchase of these permits fan the
existing planta (so as to prevent any increases in total emissions).
of the permits mould prove. 4e a scans for
Puzchase and retirement
achieving permanent Omissions reductions ~
The

government

existing plants based

whose effects are not
A TOP system works best with pollutants
source specific, bat regional t7LQCR). Such pollutants allov for trading
between many sources vithin the AQCR and result in a more efficient
Volatile organic compounds (hydrocarbons) and nitrous oxi4es
market.
(NOx) fulfill these criteria and recent reseazch suggests sulfur axi4es
(SOx) may more nazrcarly fulfill them. The initial markets vould inclu4e
only VOC and NOx pending further study on SOx. Should evi4ence vazrant
acid rain precursozs (long-term NOx and SOx) we14 be controDed
through an enlazge4 TOP market consisting of KPA regions, which are best
suited to the dispersed effects of acid rain.

it,

aust avoid
a program of TDPs, a4ministrators
In initiating
vhich
have
old plants
respcnded
to present state
penalizing
State
jeplementation
It auld be assumed
plan standards.
Plans (SIPs)
Xeplementation
for emissions 1evels accessary to
attain National hmbient J4r Quality Stsn4ar4s (NlAQS). Thus old plants
vill be issued permits vhich alias them to emit at levels in ccmpliance
vith these SIPs. Existing emissions inventozies ccmpiled by the states
vill speed this process. Plants uhich have shut Ccarn or permanently
reduce4 operations auld have any excess permits retire4 at the end of
the first year. Plants built subject to NSPS standar4s mould receive
permits base4 on those eaLssions levels. 'This first stage distributes
permits based on compliance vith current Jam, and shen trading begins,
allovs the plants themselves to meek cost re4ucing re allocations of
pollution abatement among exfs%Xng sources.

~ide

artificial incentive to substitute old technology
resulting frca such harsher zestricticas on emissions frea ad
sources, mar plants mould over time receive additional permits. These
additional permits oou14 be met at various levels, but for exemple cou14
achieve eaae reduction of eaLssions belch
regula. re that md plants
for

To re4ress the

mar

page 7

permitted old plant levels, but not tozce tbe most acpensive aev control
technology available on the plant
This provision roo14 remedy tbe
current system vhere new plants bear the heavy burden for ze4ucing
pollution shen o14er, less productive facilities can ze4uce pollution
less expensively. To prevent this system fern alleging an increase im
pollution as new plants receive peraits& the goveziaent mould purchase
TDPs in the mark eC to di stribute to bov sources ~ Thus ~ despite tbe

in the region

mould remain

ln a4dition

uncaged, so

eaLss5. ceo could not increase.

those seeking zeductions of pollution loads could buy
the aazket. Since the Clean kix Act aims
at the attainment of National Aabient Air Quality Standards, a permit
retirement program vould vozk tabard achievmenc of a regional pollution
load belch maximum levels required by the NMQS. Wy purchasing and
retiring the cheapest permits, the government could reduce pollution
most cost effectively, encourage trading of idle penaitsf an'4 foster an
active market. Purchase and retirement mould also provide a direct mey
for environmental groups to improve air quality similar to tbe purchase
of vildezness areas by other consezvationists.
Areas mith the lcwest
ambient air quality could receive first priority in the goverisient
purchase and retirement program.
~

TDPs and then remove them from

set up, industzy mould equate the marginal cost of
control to the cost of the permits. Those plants Mch can
reduce emissions most cheaply mould take control steps, awhile those
~ources for vhich pollution abatement is most 4ifficult mould purchase
permits. This result ensures that the nation meets its clean air goals
It the same time, the current bias in favor of old
most efficiently.
R fact& TDPs provide an incentive to
technology mould he eliminated.
invest in net technology, since firms Mch replace ol4 plants vith
cleaner, new facilities vi11 achieve gains through 0» sale of their
surplus permits.
With the market

pollution

vill provi4e environmental groups eath the opportunity
cleanez air, and &ll result in an aecarate marginal
achieve
to directly
cost of pollution abatement, allekng for rational environmental
Further, if the government desires to reduce pollution beyond
planning.
may purchase an4 retire TDPs.
the permitted initial levels,
A TDF

market

The Transferable Discharge Permit system provides a cost effective
method for the re4uction of emissions to the levels required by the
SRlQS ~ This permit sys'Cam offers a superior alternative to the current
stan4ards and plans method of administering the Clem air AeC.

Receaaendation

1~ Current sick-leave coapensation rules for tederal
aaployees should be aaended to eliiinate the co pensation paid
for the first 4ay of any federal eaployee absence attributed
to nonschedule4 sick-leave.
I

Savings resulting from this change in the sick-leave
compensation syst«I should be redistributed annually to tederal
eaployees in the fora of additional caaparability pay.

1lternative)y&

bonuses to «aployees
during the year.

these savings should be used to pay
who have used only limited sick leave

Discussion

tederal government general schedule employees accrue
thirteen days of paid sick-leave each year at a rate of
four hours per fourteen day pay period. %is sick-leave aay be
accuaulated eithout liait and used at retireaent to extend togae
in service for purposes of calculating retireaent benefits.
Accumulated sick-leave also provides disability incoae

protection.
annual-leave (vacation) accrues at a rate of four to eight
hours per fourteen day pay period 4epending upon length of Nervice in the Federal Government. Use o! annual leave& however ~
is subject to a supervisor's approval and need not be granted
Rnual leave ras intended also to cover nonupon request.
vacation personal needs such as funerals, auto licensing or
holiday shopping.
Iovever ~ aany eaployees are concerned that

such leave uses& if i4entifie4, «ill not be eonsi4ere4 «orthy
of unscheduled leave, and thus, annual-leave «ill aot be

granted. N a result the «mployee attributes the absence to
sickness and takes sick-leave. This reduces the «aployee'a
reserve of sick-leave and identifies the «ntire thirteen Say
annual sich-leave accrual as available for personal ese
Federal «mployee sick-leave statistics prepare4 by the
Office of Personnel Management also shov that some Fe4eral
«mployees use sich-leave to emtend «eekends an4 holidays.
Onanticipated absenteeism is disruptive to the «orh «nvir
onment and impedes the productivity of remaining «mployees.
Imployees «ho are 01 shou14 not be at «ork& but aisuse of
sich-leave is a 4rag on Fe4eral productivity that should be
eliminated.

The Subcommittee believes that an incentive ad)ustment for
Federal «mployee sick-leave that promotes «orh attendance&
reduces sich-leave abuse and revards «mployees «ho have not
misused their sick-leave benefits vill promote higher Federal
believes that such
Xn addition, the Subcommittee
productivity.
a system should be neutral «ith regard to Federal outlays. The

Dollar
proposed recommendation «ould have these benfits
savings generated from not paying for the first day of any
sick-leave vill be returned to «mployees, «hether to all or
only to those «ith lov or no use of sich leave. Lover
sich leave use al so «ill benef it «mployees in prov i4ing a
better reserve against «Itended illness. Over time the
government also say be able to re4uee its aanpover
requirements.

S1'AS SICK LL d POLICIN
P

hCCo LIMIT

Caiiiornia

e hrs/mo.

None

{12 days/yr. )

SEPhRhTION

PhYMPF

PhY POR OINSED

POLICY

ShSIS

ht retirement,
can use to
extend serv-

None

Statute

ht retirement&
can use up to
165-days to
extend service
times or can use
value to pay for

None

Statutes Sub-

ice time.

Nnr York

k3 days/yr.

200 days

ject to

union

negotiation.

health insurance.

I hrs/m.

None

days/so.
i(151/ldays/yr.
)

None

(12 days/yr. f

Virginia

None, except

dies, estate is
paid for one™
half, to a maximum of 336 hrs.
hfter 5 yrs& at
separation paid
for up to 1/1 ~
not to exceed
02500& or at re-

None

Statute

None

Statute

None

Statute and
reyolations

tirement can use
to extend service
time.

Nary1and

1 1/i days/mo.
{15 days/yr. )

None

ht retirement&
can use to extend service
time.

STATE SICK-LEAVE POLICIES

STATS

Pennsyivania

ACCltWVLL

RATE

Varies with years
in service&

ACC

LINIT

200 days

PAY-OFF

At retirements
paid for 30%,

PAY FOR ONUSED

At retirement,

day/mo.

can use to
extend service

(12 days/yr. )

POLICY BASIS

None

Onion Negotia-

None

Praaulyated

tions

a maximum of 60
days.

average employeec
15.6 days/yr.

Iliinois

SEPARATION

Rule

time.

December

hrs. ll days)

each year,

None

Paid for 1/2 ~

are credited
for use in the
coming year.

Nhen used,
90% of

rate.

Can

At end

each years
can convert
accrued to

Statute

cash, at
50%

rate.

pay

base

carry-

over unused
year to-year.

hrs, /2 seeks
{13 days/yr. )

t'1orida

eeoryia

10 hrs. /Ne.
(15 days/yr. )

After 10 yrs. ~

None

Statute for
paywfft Reje
lations

None

Statute

paid for 1/4

90 days'

Can have
more rein-

stated.

emp.

7/1/82

have

before
and

at least

120 days for-

feited

leave& can

use to extend
service time.

%R~kT

DCENTZ%

RAIS

JÃ0 TREIR
kPPLICASILXTT TO

TR! MCRAL N)&RlCIC

SoSo OFHCE Of VRRSOSEL RLÃidRIIUC

the eick Xeaee pIrogrm fer fo4ereX myXogeoa

for 13 4aya ef oick leave ecch year
~ ccne1 ef mnaa4 oick

en4 Chere

~ Ieaereea eae.

fo ao

ltelt ee

w o yretectien agaieat 1eegwen

II'eri4ea

emapXoyeoie

CXXeeoa.

eyatm can cXoo fsntte abaca, hmeer, en4 there haa hoen concern that

~apleyeea aheoo She oyotea, priaatiXp heceooe the a@ates
Cncentivea

er 4iaincenti~a to eXiaineto

for te4eraX

Ca@roper eoe

Xeeka

oatficient

of dck leer@. Ie e

4raft report,

mick Leave

hdaiatotretien

Sae4e4 ~ yrepere4!a i%$0, the OanercX kccomittag Office fecn4

that etck- leave

meara

IapXepeeos

ma teo hLgh, eopocieXXp

1esve Co fscresento ot 3 4$fo er 1eoa
eentreX the

est ef dek 1eeres eepaire4

%eighter

%ha

sate ef fatemttteet dck

rec~e4e4

oovorcX 4iaiscenti%0a

eaaX1

m4icaX maas, tighter aaaageeent

ef eick lese, eal certain 1egtaletim
hcreante et dek bee.

eectreX ever tha eoe

the esa

IostreXo ea4 Wetter

eIeameo

to Ieotrict

the ether approach eo 1Cattiag dck Reeve eoage A thresh en facaetive yngrm.

Ihio hechgtoch4 ~per

~ento

Aa eeeeept of

~al yeihlic wctoro, 4teceaeeo a

easel yap eayertaeat

~evereX alteractive Cacecttre eppreeclaa
IeoereX 5a4teetiea

et the eeet eal Iahu

ter me 5a
Ca

w we4

the pRLTcte

Q teaaeooee, eel
Cho

mrk~o

eeggeato

te4ereX eecter, eath e

that aL4%t he esyecte4.

Coa

of Nell&

Iayleyee Ihseateeisa has aloaya boca ~ costly mtter for oapleg+rs.
~aylegees ere abseac

as'

~apleyer

asc

ac preai~ recesi

ovoid Nore

or hare oaistiag mlegees

workers

i% ~ Cine of

Circ

hadgecs and shrinking

Ssportent AIC oapIIFJoe absesteotsa be %iaiaised+

orgsaisscions, aaaal 1eee or +cation

~dvaace

the «ec

be scbedaled

tbe eapleyee to be sere that tbe orgsaisatioa' ~ opereciocN are sot

disrapce4.

ea4aIW

sock, yeeloetivttg otcea oafters, aa4 tbe

hare to hire additional

~rk ~reise
oork forces

fry

4nnael leave credits asy

absences for personal

tbe tiaa off Sf

reuoas, hat

it ie mot

CIL

a~tines ie

theory aeperrtsors

coed

to eever msebed&ed

caa refose to gnat

properly ocbedaXed.

healt~sced reuoas
to aSaiaise oacb mscbedaled absences, met eaylogers attest to
a safe end bea?thy mA place oo that mrkMeted +aries and @loess

the great aa5oricy of mecbedalod eheeaces ere for

Ia order
maintain

~o aoc interfere rLch attendance.

Pretentim hselcb eeuares oacb as ee4ical

iasmence and oay?eye~aid eedica? oaeainstieas also help to cat 4oon m sick

4eee

ewe

jlXaess

2Cocedaral controls

~ oach as repairing

documentation

+a~ oc

are another Cayorteat pert of the effort to emcrol nick lwve me.

3a addition to the 4irect efforts ea4

~trois

fmoeattvee

Seato ytogrm

'ig tbe eayleger, aery

ytogrms here Caooatieeo Nsr Ae eayIepee to heep his sick
Saeva

aick

le~

at ~ atajaa.

ark hest she Oey ee @ac et ths basic taiga ot the Iick
the cay~ gor
sick leave yregraa that leae set
itself.

the

troa

first

of oa Ms!bed%led oheeaeei tor

4ey

mskiag casual

IEesiag sick leave
aaata1 health

of tiae off

&e of
%y

Chat

tahiag ~

hy Xebelliag

Nocogaiae the Need

for

~ch

caa sad

~ XCstted Isobar of pereoael 4eye

to take ea occasioieX

~tel

health

tbe leave category os ooaethiag other thea sick

leave, cats 4esc oa the perceptioa thee oX1 sick leave
oocb ~ parpose

the eerioas, Cf abort lived, CXXIees

hy flrovidiag

aXXovs the oaployee

Necessary&

off, ~,practice oddly baca ae

Oey

Ca edveuee, Nad

that occers ~eapectedlyy

off ~ hot

Iaelly

falls hstoeea the fall~edged meatioa,

ohoald he achedaled

off. Wis

Nick leave Vbea Ct Ca Not

Oose ergeataatioae

4eys

oaHlpley Ctecoereges QIQ4oyees

available for

$050 orgsoisstioas

have eXeo Catrodaced otck Xoave Caceative pleas

oeperiapoeed

oa the heeic program os

oick leave.

Sech

that ore

a my of meoeregtag tbe jodicioas eee

efforts are pertieulerly

Curtest

Ca yrogreas

of-'

@bose basic

4esigcs are old end etthoat peeper otmctereX Caceatives for proper eick lean
Cato oerioae political
ace, aad Share otraightfonard rodeeiga efforts

asst he nletod to the peogrea's basic
Ce a part,
design, sad to tbe overall pereoaae1 aaaageaeat ytogrm of Ihtcb Ct
~ad ore ILL%oat Cafiaite Ca their
or eaioa opposttioa.

Sech Caceattves

~tyo

Public end private Sector
maployees

I aabsr

licetioas ot Nell p

of public oegeateatieas Iaoeive, e4er Caoeative plass,

cash payaeate tor eased Nick Xoave.

Ia Oelaies %to, tor

amabile,

city

Oe
eyloyoee receive oash yayaeate ter eaoe4 deb Bene Nt Oe ea4
44th yey period each year Cf they have ecol five or Ieoar Oega ef their
f

eee~iletod Iick 1oeve 4erimg the yaat. %he Oeweamelth

ot Ttsgiaia

for mase4 nick leave eyes

~ovt4os 100 percent reiaheromeat
~f ~Xepnenti Xichfasn

aeries

tetminaCCoa

S yereeti

$0 percent en4 Roatana

Where

me other dahlia eayXeporo she a11eo a conversion ef mnoe4 Iich

leave

to vacation cre4it, at

~ick leave for

1 4ay of vacation t!ma. 1a Iotroit,

are eltgtble for a
4ayo.

at@, oey

ooee echaame

bonne

i kyo

ot eaee4

%tahitian, eaylopeeo

mcatien once they here acciaalate4 f0 nick

Satat Peteroberg, ?Xeri4a, city eayloyoes rho noe no sich Xeave

~erteg tbe year are eoar4e4 3 extra vacation 4ays; those abo use only
ono

sick 4ay an aear4e4 2

ears

vacation 4ays; an4 those she eoe enly 2

sick 4ays are allove4 one entre vacation lay.

Aivate eaylopero

ese.

~ick leave

ef leave for

have

aloe 4eveloye4 inoantive oysteas aise4 at eerMag

%so XIartneXX Cseyoration

every too consecutive months

gtves

ito

eaylepeeo oae fnXX 4ay

et perfect atten4ance, to

4ering tbo soatb ianeSately folleetag tbs en4 of the towpath
Other private

yerio4.
~aployeeo
praises.

%ho have

sector

Qrtect

aaNXoyero have

Mth

ehfcb

ean st% cash

creSt

gn4icionoly,

per pear an4

ae an encoaragaent

their sick leave

yai4 for a certain prtion ot their aceaslate4 ease4

eick leave craBt &en they retire

ot the rk4e earfety of sick

Ir leave

tho aayany.

en4 aannaX leave yXaae

wel

yehlic

~n4 Ieivate mployero, as' tbe prohamy et4er satiety et mchylaee factors
Iftect 1eave ~~@go of Aan~~tg gpss of ocMpat5lllnog otc~

tbe Seeing Coayany, eligible eaylopeeo are oiear4e4 ey to IO hears of

~ick leave

Secaaoe

atten4ence

institete4 lotteries

atton4ance for tbs ptece4tsg

he taken

643

WVN

ef theee

Seee of the positive reeulte

. %aay

WeXX

efforte

have hoon!

to eee ca Caoeattve to astag cieh toeve caly

eaployeee begin

ohea a reel aeo4 crieeei

%are ie c

ehaage tn tbe yteveleac ccticn4e that Ntet leave

er Xoet eoayletely.

meet he aee4

~ Snbecicncioa of

cannel oc ~reonel leave for nick leave soenlte

4$ ~yihg for leave cC

0 cbeepor sate thea Lf Che leave A he14

to co@aration or retirement.
Oa

tbe other hen4

there have boca

c~ yeeQms

ettb

WaIl ye@

Qene:

abort~era cffecte Vhtle they are tbe foene

Soae yXaao have ealy

of ccteacion
k plea aay reear4 tbe

haMtneX goo4 Cttea4er hat

feil to

roach

the ehreaie abeentoe.

Se eyetea
43LCen4e4

of rovar4e aay yten sore coetly thea tbe yroblea

to eliaiaete.

Soae eapxeyeee cea he eo wger

co@ even

if ill,

tor the incentive thee they erne to

tberAy calendering

their eea health ca4 the

health of their feXXor mAere.
' C".

Olo

rCcb

+r$04fcel literetnre A

cict leave

4meeacive

tlLLX

gaae.

of the yarttcnler orgeakaetton'a
~54 Sick leave cyec~y

its

ot Srttclee cheat tbe

oRpcriencee

Otthoat m Ca4eytb ealerecen4ing,

of ~locket
hoeever,

@toom, tte caaa
the sktlce 4t ate oec4pecieag

erereXX yereanaeX aanageaeat

$$Mgeneat f4IDoeopbyy

~a4 3chor. aeaageaeat relations, St Ce iaiyosaible to ~eretca4 fary ehg a
~icalcr QXos 4 Saeaeeey ot ~cher Ct 005 he opflie4 4$ another oggeak
oTeatsetiea 0 Snaovative
TtMeg, cato4 otthoat $%ger4 to Canoe tocCorny

oocceeefnX tsc3nLi~ 4ca he 8%Other'0

~~ivo

gimaLLCILe

rience of Tenneeeee

Qe State of %aneceee
bae ha4

coin

lSall

Lae eayerieace4 onccoee «tth n

ia effect eince

leal

yXaa

Paly X%$1.

ie oaey oiailar Co tbe te4eral
00TerQsoct eo 1ccrlQX e34 carffo&r ratee saba ~ Rttle 4iffereat between
the too eyetene, bat Cn hecic oirnctnre @beg ere ~te oinilar
Mer
the

'Tenneeeee

nnzne1 nn4

ee11 pay oyetm,

eicb leave etractnre

Xeee 4nring a aelen4ar

eho aeee no oidr,

nn eayloyoe

~ar receive 0240 each. A mylegee Iho esca
lace receives 0120. Sere are so )ounces for

tao Aye oc Bee nf nick
oicb leave ace in oaceee of
I

too Aye+

firet 6 800th! of Wll JEST ~ %5!leeeee ERporioace4 ~ 4ecreeee
fn total lena eee4. iltboagh there ms nn Cncreeee Cn mnna1 lena ot
!1$,000 hera, there me ~ larger 4ecreeee Cn nice lorn ot Qi, 000 hoara,
for n set gain ot QI, 000 eraGaQe orb boore.
Sarong tbo

%at mc eeet

mexpecte4

~10)MS Ibo

~f&4 for tbe hen%eeoc

Tenneeeee experience me tbe

fenneeeee Le4

, ++i

amber of myleyeee

ection of

Cn @be

little or m
to Cscroaie Q 33K.

who

ye@

aee4

eicb
En

league

«aber of

~cte4

before the Cnati-

eyaetion, Ae saber

gaccaeee4

Q !NC.

abe State

utiaetee that there efXl be a mt 1en~m eainge,

@cay eayXegeee

eahetitnto4

seto

Chan

%en eLth tbe mentictyete4

either mAo4

mnne1

& the

tbe

nrpeaee

nt tbeee benaeec

%ecanoe

legs gbaa Keg etbaroiee eeaN here, or

mme

for eicb Secre ~

~cb the

eaylayee La4 ba14 the lease

State yai4 off et

mt&

e Xeear

1nft State oeteCea.

officials secogaise Ast

Tennessee -State
Co osporCRpose

Cts generosity,

1i¹it
eo

central M ~ otch

~rt
718$

M effort

Ast,

torftes abase. L mn etreightforsar4

Nell

effort

fer.
of the Tennessee

oeal4 have heea politically

overall they ere yXeese4 etth the Iesalts

Na4

licebilit
ko

probably

eMr, leave accraal m4 acemuletiea

4Lfficalt,
pay

Incentive-Cfpo

~ ~ ~e

tlsn to the fe4erai Soveranent

¹ote4 above, the Tennessee sick ea4 aunsel 1esve @roger is stroctarslly

~te

siailer to the fe4eral Oovermeat'ei

to 4esign

end

tapleaent a

1C eeaM

certainly he passible

ei¹Qer ylaa tor the fe4eral Novetmut.

gabe

speck!Lc

festnres eoi14, ef coarse, have to hs a4epte4 to the Merel eitastiea.

Se tennessee

y4n, for en~le, gravies N40 Q ¹o sCO, leave Cs ¹ee4
fa ~ yam. bahts is aboet fonr lays' py for a State eagegee ¹skiag the
oalary

-average

¹aluas ebont 50 percent
hove

sore, ao the

Oeaas eight have

te4erel eayloyee

he Cncreeee4

siailar incentive alee tor 1e4erel eayIeyaes.

~
fee-~

~t effect I%aaesse~gpe

Capossible to yre4iet

have «a

fe4ersl sich leave en4 mnnel Leave ese.

ese patterns

as'

4iffermt hetseea

above

@ho enn14

~fy ter the

yap

y?sa

ae14

IkeIL leave

~tiene4

Tennessee

tkt¹4e «f te4erel

Oeaas yrevaC

'eayXopaes

mboet

If f+aessee

As ¹IRlltt 4f Stets

ospl~s
%e

m eighMel4 aNerestt¹ste.

teear4 Chair gobs

affect the spirit 5¹ ehtch tbey

%aaaeseee aa4 She F@4erel Oevermeato

s osa fE'e4ict!sa

E5ffermt thea the ettita4es
eeaLC

Sa average

aboat 013,500 per year.

It the

@reseat Ci¹e

as'

~le@see tesar4 Astra, aa4 shia

aypaeaeh each

m g¹esativa

yXaa

~ ample

of ths federal So&taros ot ml stilton

porccnt

4eFs of leave ~ year.

for

a average

bones

QNS

(50 percent

& the

are

t00 percent

ear I aGXton

le than

to &3 4aFs to lea~F
&

the

t5 yerccnt
atck leave to %acX4tF
e Dttle over half ef

i atatlar

ths State's so&force of 35,000 ysalDted for a bones
msn

ued

Tennessee had eayectod ~

for a bones, bet the actoaX tncrcaee

eeM

~J0, phoae

then yai4 bg hnnoesee)

nceber of employees acing Xtttle eneggh

fron federal caployees

amplogoes

ahte group held Oeir @cage

~annal cost could be 02i0 atl&on.

crease

Off~

cohen bF the Osneral ieceeaeiag

response

at a cost ot appeoat-

boncees

aetelF 0300 atlBon.
StcamLeave Incentive tlans for tossfble Qo tion
JXternsttve Site

the tederal

Covarsase

eall

In a44$tfon to ths

so or

QtLSQE1

yaF

leave ooe over a apecLfked +ried ot

aaaber of atrnctnral

changes

that cocld bs

yrogran that scold oncoercge eyloFees

4' onch

bg&nnesse~

ca&capt coed

made Cn

etc'

cash

bsmns

tis~here

for

are a

the tederal etch leave
leave mre godictoosXF.

change mould yrobabXF be rtgorocsly opposed bg eeyloFoes, ego

eoal4 oce the change

get eaother tahmeeF

yam of bel~oayarabQttF

toy ot oevcrcX

~ceatve

yeF Increases

bala, Sere ed@ have
~ HACNWE,
W IW I ~M
~ I
I
the sich Seae
Qe eeyentoor'o eesyonsibQfekes Nor the aaaagmat
In e44fetea to the atrnctmaX changes 4escaSed

pNgr&o

Chango

tbe mome of mnnal leave m4 sick leave Irante4 to enIIioyeea.

e conI4 increase tbe meant ef

aannaI learn that sn eayleyee earns, m4

te4ece sick leave by ~ larger meant~

The

totaI momt of leave oarne4 oach

$0ar so%14 thna be leaa than the corrent mocnt of embine4 snnna1 m4 sick

tor enanple,
13 4aya ot
change

an ony?oyee eath leaa than three years' nervtce Nor earns
annuaX

te,

tbia

leave aa4 1$ 4aya of sick leave sacb year.

aay,

4aya

In other respects tbe leave syaten
CLLSnt'ce4 eccIRQlation

ennoe4 anneal

protection

of sick lee&

(at leaa

enceed tbe cap!oyee's

Mar tbia

ae14

eeetinne

a 'Ianisw

On4

leave. Se non14 probably

yXen

of sick

snnna1 leave an4 5 4aya

Qn to

ita

le~.

oerrent fashion:

snnnaX

carryover of

ytori4e none sort of Sncme

fall py) for haaltbeelate4

than

eon14

absences that

sick leave balance~

approach, sick 1eere accenulation

eaa14 be aucb alooer than at

present, oo «yioyeea aa14 hve sn hcentive to eve ea sech as paaible

~a protection against

1~era

flXneaeee.

2e Icy-back of RNse4 sick loots
'~

Tbe Tennease

acing sick

IleQ goy pan pfohQea

lean,

s 004eat

financial noenr4 for Sot

bet aIXon eayioyeea to lacy occrne4 sick leave tor

fntere ese. 4 bey back arrengeaent eaaL4 ytovt4e n Ireater financial
eesar4 for me~so ot sick lnsoe,

'metis

fashion

lent

eeaM eliainate aay Reeve ee4eme4

frm the 08plogee 0 Oalmwo

Rnse4 Nick Xeea em he ew4 aa
amenity ayen

entirs~ti

%lets sre ~

sertee ere4tt

~bar of %8FCO

eeapntieg

Soth%aaesse m4 the Palernl

Xe~.

. 00T~ect
eelatively

+zRft thic

little

Ihic +PPeacb

meow

Caceative

hae

yggccigee

mice, yetttaalarly early fa m

~syXoyee'a career, ches rettreaeat ta too far off to
Caae4iate eeamLiag.

haoe my

kor the eapleyee Ao 4eec mot yXaa ea a

fall career SIL the Moral hneraaeat, it
rahe at aD.
kt tiIe of retiraeat or eeyatatioa

hae Ne Cmcaative

h4eral aentee, «oee4

Nick leave eoal4 be eaebe4 Im, yrebaMy ae erne tractioa

vere.

the fraction ~ul4 here to be eet at ~ level that, tom

She OoTorcecct a Qorepoctivo

baleacee the coat of tbo

agatnct tbe yro4cctivity gaia

fry

th eagoyae'e at 4poiat e
yai4 t!me

~id'

%e be~acb

of tbe mcee4 meeat,

at sac fractiec
oeaiaa yercecaage

~ bey%act ealy

«s balaace,

aboaM be

eeoc

that tbe myloyee eoaM aot 1eaee LLaeclf

eath ao yrotectioa aiaiaat a

Xo~eri Qhecei

e a eoaM yea1t

tbe eaployee hea alrea4y aceaclete4 one

meilegeea eea14

m mal4 eHakaata Wet m

Noo

~timee eo wza meeal leave ea

. ~wa~eatbaa~ie4aaSer

eea14 be aee4

Sn all aorta of chert,

heo eo efek

they 4e

ale-

1e~eeri illmeec.

say $0 @aye, ee a yeetectia agaiaat

aick 1ear» iy yeteeaal leave aa4 aa Caeme aaCatmasce

Qsker Chic epproach,

aa amea

raX~ of fslly-

otf.

of face valoe

me@lace

bo~ck

re4cce4 abeeateeica, aa4 Ceca

Oaiee4 eick leare eocl4 be beembt back aaacaQy

ef tace

+aa

laic.

~, oat ~L14,

~al~ th t

meche4cle4 abeeaeee, facle4igg brief

heaXt~eleted aboeaeee.

~ar to

the aeat, ao mp1eyoea me14 m4eebte4Xy sea

~are . -Xt the amber

%areeaal 4ags eee14 sot he earrio4

jf eaaeaX

leave mre

yeroeaaX 4aya

yerooaal

ma aet relatives Ser,

Oat S

~ ~.

te4aee4, ~raoaeX twre me soaM

alight'

he Xeoo thea

aXX

~r trea e

carrot /Serif aerage

Stcam

Ia or4er to ptotect okplofeeo ogeiaet ling

eath

4'+ ~

Still

relate4 ablseaceo

Cora health

(they could ao longer hove eniiaite4 eicos &ave heleaeen), m eeu14 have

short

aad lcmg-tera

4' er too of
get full

illness eeaM he at m

ye@ throegh

yey

liait,

~abatiteted

for myai4 or partially

4y m»e4

aey aisle mathe.

one- or

tray

pli4 for thoee Apl

abeeacee

yereoaaX

etl1

Ia a44itioa

have sexy

little

go/aire a Ms edsisiotrsti&

orbero'

~e ceeX4 he

Qyai

for

~timely leag,
4iecre

het %00M Ciocchsrege the

absences, Seeable the employee alight sot get
'Chio

greater 4egree of protection to see
yrogrea,

thereafter, ep to seae

yey

%ate approach mould yreC4e mesoaable yceeectiea

~RFoidoble heelt~eloced

first

the

or half ye@; the eaylepee eosX4

4', Chen sa4aee4

the 30th

fixed eater

tienary

eagle,

4ieability protection yXeae. tor

~each

%NLM

eayXegees Vbo,

aeeoaolece4

pFIRQo

ealer

leen.

Che

ee14,

s Hach

earreat
heeever,

aet'%p oot %XChe the ea2roat Office 4f

Ceepcaeetioa Psogreao

Replace earreat sich league propre etth ICaite4

aict

%eave Na4

4aeme miateaeaee yXaa

4~4pol 0 Iegialattvo
eetir~t eyetm. fait ef that yaeyeeaX

Seaator Stoveao 4f Llaeha haa

'ptopOaal

!he Te4eral

eeeX4 ee4oeima aha sack

Leave yeagraa Ca

a earner

NCMLar

Chat 4eaecihe4

mt'

So $04aaiNL

altaaaattva

mech ohp14yae mu14

Start Sech pear skth

Qfch 1osvee

tool

%luse4

40 She scRc
Oa

I 4eys

~t be eerrio4

mlLL4

ot
oler

Quare

the So%eath eoasecutive

Af of e hes?O~alete4

ebseaceo illness oa4 ecci4eat Casureace +yaeats ma14
begiao

4Eployee mul4

eeoc

start et 100 ~reset of

that roaM eeeataelky be re4eee4 to

yes

eeet ia eccor4eace eith e eche4ale relete4 te leagth of
~antes.
the

eeailaQe sick 1eare ma14 he ase4 to eever

Any

first aix

Sere

eeasecutive 4eys of ebseaee.

mul4 be

tion et
5Lts erreagueat

Q aaths ef short%en 4isebQity protec-

yerceat of ye@.

ma14 4iscosrege

cued

asc of sick Dere because the tetel

mont of rory ehortWra lorn te oe eacll

ea4 because the eeyXeyee mu14 be

osiig op ere4$ts that sight be aee4e4 4ariag the first

oim 4eys

of ~ Sager

Ibseacee

lese tor lm

Peevf4e beaus eaaael
Oa eoa14

etch Reeve

great eageyees extra aaaasl Reeve ere4it es ~ raaar4 ter esiag

%is

sick leere

eea14 Cehe eeyore? togae!

I haee4 dck 1eee

eoa14 be eeheage4 tor

Ce aeeer4saee eath arne yee4etermiae4

4' ef maaal
meme.
QXeyae

Ckea

leave

abdal

Ice

~
elk
~

t'oraa1e, oey

ter each teer Aye et

malt ysAemy mat a

satata

aaael

~eisa

mase4

%hat %he

sich geese be1eaee Ie ~ featoe

~eiast lee~arm t11mee

little

~l3aployee Ao eeoc ao

etc'

Sa a

yae eee14

Se Niece erne hoaaa aaaaal leaves for miag eely
too leyc' sick leave
Niece a

little lees

bwusc

m eayleyee eeaL4 he

ttae.

%hie hcace lease

to he tahoe etthta ~ tiae4 yerio4 ef cCae.

eou14 ieve

The eaployee'a

aick leave accuaulatioa eeal4 aot he re4ece4.

fhio arraogescot coc14 oacoccage j%4iciolN 'aee 4f ciclf

hocus aaocate are yeoyerly

~tca4poiat

te that aaeeal Reve aaat

mateo

eet.
'he

'Oac a4vaatage

acbe4cle4

OIL

MNvo

the oacheoge

aaaagcacat'a

e0vcace eo that epmtioae

are set 4ieruyteb
Cocclccioc
Xo

197$,

it mc

aentce mc
ytogrm,

Iaa4

eetfaate4 that the ererage aich Reeve eeege

I.S 4aye

Cay

of a re4ectioa ef etch leave osage,

the bcaetice

lace etch

I,000 ataff

ealt.

league

aigciticaat.

~ar,

~le 4itticalt

Xf each fe4eral eayXoyee eoe4

the Cacreaee4 tiIIe ea the job eea14 eysa1

tiara. kt ea ~rage te4eral cela~ of 021,700, tt eeabl eeet

QN aQifoa to

yap the

ea1criec of the e44ittoael mylageec that theee

Ioci4iag

repNecato

oNTllhgc

the te4eral

a paar. %ere te clearly oem ter Capreecaeat Sa the

to quantity, are 1ihely to
eac

~eclat

fsptoo~ta

%&Her

hy?eyae egcaiaatiaaa eaa he eapocto4 to rCgocaaaly eypee

ee4actiaa Ca the

foaiti~

of 1eeoa er

spp20ach Mfteecate4

seqctcee ehetmtial

fe4eral

ocher 4iataemttoe

if ~aaaaeee'a
eeCXepa

'IIall

appeeachaci

ti!fi-

ey
%he

M the other

aal yeoee ELtticalt Meet yaelkme,

Item for Consi4eration by the
National Productivity Mvisory Ccmaittee
ISSUE

and Nationality Act requires every foreign
national (except of Cana4a and the bahamas and Sritish nationals
resident in Sermuda, the Cayman Islan4s an4 the Turks and [%icos
Islands) to obtain a visa in or4er to enter the Qnited States as
a tourist
Research performed by and for the Ccemerce Department's former
Vnited States Travel Service indicates that the anticipation of
difficult entry procedures and/or difficulty in obtaining a
visa inhibits foreign nationals from visiting the Vnited States
as tourists. Stu4ies conducted in 1977 in five ma)or tourism
markets show that an average of 13.6f of potential tourists to
the Q. S. anticipated they auld encounter 4ifficult entry
procedures if they visited this country. Studies conducted in
the same year in nine other countries showed that an average of
10% of actual visitors to the V. S. felt that they had encountered
difficult entry procedures or difficulty in obtaining a V.S. visa
The number of visitors reporting such difficulty ranged free a
high of 25% for French visitors to a low of 1% for visitors from
the Netherlands.
Each potential Q. S. visitor deterred by visa requirements from
traveling to the Q. S. represents a loss in revenue of more than
$650 to the V. S. tourism in4ustry.
especially those
Q. S. air carriers operating internationally,
at
approximately
are
operating
only
Atlantic,
North
the
flying
hotels
are
experiencing
Q.
S.
only
lkeestic
factors.
load
60%

The Immigration

about 70% occupancy.

Unlike merchandise services air transportation and hote1
accommodations cannot be stored in inventory for future useg
they are consgg~d
their mse os 'productive assets is lost unlessehich
they are
on
on
the
night
or
during the flight

—

offered.
To the extent that the nonimmigrant visa requirement deters
Qnited States, it
foreign aationals from traveling to the
prevents V. S. international carriers and the domestic Q S.
lodging

industry

from achieving

increased productivity.

DISCUSSION

«estern European. countries eliminated the aonimaigrant visa
for American and other tourists in the post Norld Mar
II era. Despite this fact, the Onited States bas not
reciprocated even though the over«helming ma5ority of visitors
applying for admission to the O. S. from these countries qualify
for entry. In a number of countries, particularly those «hich
represent ma5or markets and «here there are several thousand
persons applying for visas during a short time span, the visa
application process inconveniences the potential visitor and
creates negative publicity, frustration and ill vill.
Visa «aiver legislation has been introduced into every Congress
since 1967, but has yet to be enacted. This year, the Senate
Most

requirement

passed an omnibus immigration reform package (S. 2222) containing
provisions «hich mull authorise the Secretary of State and the
Attorney general to «aive the visa requirement for nationals of
three year period. The
up to eight countries for an experimental
«aiver «ould apply to visitors intending to stay for no longer
than 90 days in the U. S. and «ho are in possession of a
non-refundable airline ticket.

acted on a similar bill (R.R. 5514). For the
to be enacted this session, the Souse «ill have to
vote favorably on the immigration reform bill during the lame
duck session after the November elections.
Enactment of visa «aiver legislation «ould undoubtedly increase
the receipts of the more than 1 million establishments «hich
Sased on a survey of its
comprise the V. S. travel industry.
offices «orldwide, American Express estimates that more than
400, 000 additional foreign visitors and $300 million in
additional expenditures «ould be realised annually if such
legislation «ere in effect. Increases of that magnitude «ould
airlines «ith paying passengers
not
ll) fill seats of Q. S.—
air
and «ould help to increase Q. S. carrier
pressurised
gust
load factors and revenue passenger miles& (2) increase occupancy
rates of V. S. hotels and motelsg l3) create 7, 000 additional gobs
for the V. S. labor force and contribute to greater productivity
of this country's human resources.
The legislation has the support of the Departments of State and
Commerce, the Office of Management and Budget and the Justice
Department's Immigration and Naturalisation Service. Passage
«ould pose no national security or immigration problems, and
«ould permit the State Department to make sore productive use of
its o«n personnel resourcesc consular personnel could be
concentrated in countries in «hich there is a significant visa
fraud rate
aot in those countries «hose citisens observe our
immigration la«s.
The Souse has not

legislation

—

PROPOSED ACTIONS

The National

productivity A8visory Cceanittee should uzge the
Iouse to take iaunediate action to enact S.R. %Sled an4 shoul4 urge
both houses of Congress to aeet in conference ceeaittee to work
out a Ritually-acceptable
coaprasLise bill of
CSli.

I.I.

If this legislation is not enacted
sill have to be reintroduced in the during
next

the current sessioni it
session. Another yeart
or possibly tm years, and approxiaately 4300 aillion in export
earnings vill be lost by the Vnited States and the V. S. travel
industry.

Department

of the Treasury
For Immediate
December

U. S

Washington,

Release

D.C. ~ Telephone 566-204'~

Contact:

14, 1982

DEPARTMENT OF THE TREASURY AWARDS
AMERICAN ARTS GOLD MEDALLIONS TO

John

CONTRACT

ARON

Doom

(202) 376-0548

TO MARKET

& COMPANY

of the United States Angela M. (Bay) Buchanan
that the U. S. Mint has awarded a two-year
contract for the purchase and marketing of American Arts Gold
Medallions to J. Aron & Company, a member of the Goldman Sachs
Group, and one of the world's leading precious medals dealers.
New York-based J. Aron won the exclusive distributorship
after
a competitive procurement process.
The American Arts Gold Medallion Act, Public Law 95-630,
established a five-year program under which the United States
Treasurer

today announced

would

produce

individuals

and

sell

gold medallions

in the American Arts.

commemorating

outstanding

Aron & Company plans to begin marketing the American
Arts Gold Medallions in early 1983. Further information will
be announced in mid-January.
0

R-1068

Oepartment

of the Treasury

FOR IMMEDIATE

Tues ay, Dece

washington,

O.C. ~ Telephone 566-204%

RELEASE

er 14, 1982

"FRIENDS

DON

'T LET FRIENDS DRIVE

DRUNK"

The Department of Treasury today endorsed
an extensive radio and billboard campaign to discourage
drunk driving, conducted by the Licensed Beverage Information

Council,

a consortium of ten alcohol beverage industry
The public service billboard project will be
conducted in cooperation with the Outdoor Advertising

associations'
Association

of America

In making

the announcement,

John M. Walker,

Jr. ,

Assistant Treasury Secretary for Enforcement and Operations,
stated "drunk driving is America's number one highway killer.
It claims more than 25, 000 lives each year. Thus, the
two-year total equals the number of Americans killed in
the entire Vietnam War. "

"I am pleased that the industry is playing a leadership
role in responding to this critical drunk driving problem
and that it is doing so without a mandate or regulation by
the Federal Government.
This is a real and substantive
contribution by the private sector consistent with the
President's program of greater participation by the private
sector in addressing our nation's problems, " he added.
"I

applaud the efforts in this campaign to educate the
public to the concept that 'Friends Don't Let Friends Drive
Drunk' through radio public service announcements
and 3, 000
billboards that will reach millions of Americans beginning
with this 1982 holiday season and continuing in 1983, "
Walker

said.

Director Stephen Higgins also commended the
spearheading of the campaign to stop
"The industry has shown exceptional
to
awareness of its responsibility
and
a
strong
judgment
the consumer in expending its time, effort, and money into
the campaign to make all drivers aware of their duty +o
drink and drive responsibly, " Higgins added.
The Treasury Department,
through its Bureau of Alcohol,
Tobacco and Firearms, has fostered and encouraged an industrywide public education campaign, undertaken voluntarily
since
].979 by the LBIC, on such timely alcohol abuse problems as
drinking and pregnancy, alcoholism as a treatable illness,
and drunk driving.
Acting

ATF

liquor industry's
drunken driving.

R-1069

.
,

Department

of the Treasury

FOR RELEASE AT

~ Washington,

4:00 P. M.

TREASURY ANNOUNCES

O.C. ~ Telephone 566-2041
December

14, 1982

BOND OFFERINGS TOTALING $7g500
OF BEARER SECURITIES FOR NEW NOTE ISSUES

NOTE AND

MILLION AND ELIMINATION

The Treasury will raise about $7, 500 million of new cash
issuing $4, 500 million of 7-year notes and $3, 000 million of
20-year 1-month bonds. Additional amounts of the new securities
may be issued to Federal Reserve Banks as agents for foreign

and

international

authorities
tenders.

monetary

accepted competitive

at the average prices of

7-year note will be available only in book-entry and
registered forms. The Tax Equity and Fiscal Responsibility Act
of 1982 prohibits issues of Treasury notes in bearer form after
December 31, 1982. Treasury bond issues in bearer form were
discontinued in September 1982.
The

Bearer securities will remain available through maturity for
all note issues prior to January 1983 as well as for bonds issued

before September

1982.

Details about the new securities are given in the attached
"highlights" of the offerings and in the official offering circulars.
Attachment
oOo

R-l070

~URY

HIGHLIGHTS OF
OFFERINGS 'ZO THE PUBLIC
OF. 7-YEAR NOTES AND 20-YEAR 1-MONTH BONDS

K) BE ISSUED

4, 1983

JANUARY

14, 1982

December
Amount

Of fered:

. ..

. $4, 500 million

public. . . . . . . . . .
Description of Security:
Term and type of security. . . . . .
Series and CUSIP designation. .
To the

date.
Ca ll date. . . . . .
Interest rate
~

. . . . . . . .. . . . .

yield. . . . . . . . . . . . . . .
or discount. . . . . . . . . . . .
Interest payment dates. . . . . . . . .

Terms of
Method

.....

Sale:
of sale.

Competitive

15, 1990

provision

To be determined

Investment

available.

February

denomination

January

Series C-1990

Premium

Minimum

(CUSIP No. 912827 PA 4)

20-year l~onth bonds
Bonds of 2003
(CUSIP No. 912810 DC

7-year notes

Maturity

$3, 000 million

based on

the average of accepted bids
To be determined at auction
Vo be determined
after auction
July 15 and January 15 (first
payment on July 15, 1983)
$1,000

Yield Auction
Must be expressed as an

tenders

yield, with two
decimals, e.g. , 7.10%
Accepted in full at the
average price up to $1,000, 000
annual

Noncompetitive

tenders.

. . . . . . . . . . ...

Accrued interest payable
by investor
Payment by non-institutional

investors.

. . . .. . . . . ~. . . None
. . . . . . . . . . . . . . . . . .. . . . . . . . Full

Key

Dates:

Deadline

for receipt of

payment

to be submitted

Settlement date

(

f inal

. . . . . . . . . . . . Acceptable
tenders. . . . Tuesday, Decor
~

provision

based on
the average of accepted bids
To be determined at auction
'Xb be determined
after auction
To be determined

August 15 and February 15 (first
payment on August 15, 1983)

$1,000
Yield Auction

as an

Must be expressed

annual

yield, with

decimals,

two

e.g. , 7.10%

Accepted in full
average price up

at the

to $1,000, 000

1:30 p.m. ,

Full payment
with tender

to be submitted

Acceptable
21@

1982,

EST

Wednesday, December
by 1:30 p.m. , EST

22, 1982,

payment

institutions)
or Federal funds. . . . .
cash
a)
b) readily collectible check.

due from

None

with tender

Deposit guarantee by
designated institutions.

15, 2003

January 4, 1983
Friday, December 31, 1982

Tuesday,

January 4, 1983
Friday, December 31, 1982

Tuesday,

Department

of the Treasury

~ Washington,

D.C. ~ Telephone 566-204~

December 14, 1982
For Immediate Release
DR.

MA'NUEL JOHNSON
CONFIRMED AS
ASSISTANT SECRETARY OF THE TREASURY
FOR ECONOMIC POLICY

The U. S. Senate has confirmed

the nomination of Dr. Manuel
Secretary of the Treasury for Economic
Policy. Dr. Johnson's was nominated by President Reagan on July
23, 1982 and was confirmed by the Senate on December 10, 1982.
Prior to his appointment as Assistant Secretary, Mr. Johnson
served as Deputy Assistant Secretary of the Treasury for Economic

Johnson as Assistant

Policy.

As Assistant Secretary for Economic Policy, Dr. Johnson is
responsible for advising the Secretary and other senior Treasury
officials of current and prospective economic developments and
assists in developing economic policies. The Assistant Secretary
is responsible for analyzing domestic and international economic
issues as well as developments in the financial markets.

Dr. Johnson will participate with the Secretary in the
Cabinet Council on Economic Affairs (CCEA). He will work closely
with officials of the Office of Management and Budget, the
Council of Economic Advisers, and other Government agencies on
tax and budget policy.

Before serving as Deputy Assistant Secretary, Dr. Johnson
associate professor of economics in the graduate school at
George Mason University and an adjunct scholar of the Heritage
Dr. Johnson was educated at Troy State University
Foundation.
(B.S. , Economics), and Florida State University (M. S. and Ph. D. ,
Economics).

was an

He was

R-1071

born February

10, 1949 in Troy, Alabama.

of the Treasury e Washington, D.t.

Department

Telephone 566-2041

For Release U on Deliver
Expected at 10 a. m. EST
December 15, 1982

STATEMENT OF
THE HONORABLE JOHN E. CHAPOTON
ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE FINANCE COMMITTEE

Mr. Chairman

and Members

of the Committee:

pleased to have the opportunity to present the
views of the Treasury Department on S. 2985, which would make
legal enforceability a prerequisite to the accrual of gross
income represented by "debts" due and owing to a taxpayer at
the end of the taxable year. Treasury is strongly opposed to

S. 2985.

Descri tion of

2985

Under current law, an accrual method taxpayer must
include an amount in gross income when all the events have
occurred which fix the right to receive such income and the
with reasonable accuracy.
amount thereof can be determined
equal to a .debt
S. 2985 provides generally that an amount
income where the
from
deducted
shall not be included in or
and until the
unless
law
state
under
debt is not enforceable
for taxable
effective
be
would
The
provision
paid.
is
debt
1964.
December
31,
after
beginning
years

S. 2985 would reverse retroactively a recent decision of
Circuit Court of Appeals which held that a gambling
casino operating in Nevada must accrue winnings from
customers who gamble on credit at the time the receivables
arise, despite the fact that gambling debts are not
the Ninth

1072

Flamin o Resort, Inc. v.
enforceable under Nevada law.
82). * T e taxpayer
United States, 664 F. 2d 1387 (9t Car.
in that case argued, as do the proponents of S. 2985, that
because the casinos cannot legally enforce collection of
their receivables their right to this income is not fixed.
The taxpayer's position, therefore, was that the income
represented by the receivables should not be accrued until

is paid.

The Ninth Circuit Court of Appeals, in rejecting the
taxpayer's argument, stated that legal enforceability is
relevant in determining whether all the events have occurred
which fix the right to receive income.
However, the court
found that the lack of legal enforceability was not
determinative of whether this test was met under the facts of
the case before it. The court noted that the absence of
legal enforceability did not seem to affect collection of the
casino's outstanding receivables.
Indeed, the collection
rate was guite high. There was no evidence that legal
enforceability would have increased the collection rate.

Discussion

Generally, under current law, taxpayers that do not
maintain inventories may elect to compute taxable income
under the cash or accrual method of accounting.
Under the
cash method of accounting, income is reported for tax
purposes in the taxable year in which it is actually or
constructively received. Deductions are taken into account
in the taxable year in which payment is actually made. Under
the accrual method of accounting, income is reported when all
the events have occurred which fix the. right to receive such
income and the amount thereof can be determined with
reasonable accuracy. Similarly, an expense is deductible for
the taxable year in which all the events have occurred which
determine the fact of the liability and the amount thereof
can be determined with reasonable accuracy.
The effect of S. 2985 would be to put gambling casinos
on the cash method of accounting for income while permitting
them to continue to accrue current deductions
for expenses
related to that income. This treatment would give the
casinos the best of both worlds: they would be able to defer

the reporting

currently.

income while taking related deductions
do not think that the casinos have

*In a case which presented

virtually

Court has held that such receivables
Desert Palace, Inc. v. Commissioner,
The

Desert Palace case

Circuit.

is currently

identical

facts,

the Tax

were not accruable.
72 T. C. 1033 (1979).
on appeal to the Ninth

demonstrated
that such special tr'eatment would be justified.
All accrual method taxpayers that extend credit to customers
in the ordinary course of business face the risk that income
accrued at the end of a taxable year will not be received ~
Current law permits a taxpayer to account for this risk by
establishing a reserve for bad debts and deducting a
reasonable addition to its reserve each year. If, because of
the lack. of legal enforceability or some other reason, a
casino determines that some of its receivables will not be
collected, it can obtain appropriate relief through
establishing such a reserve and reducing accrued income with
bad debt deduction.
The fact that the receivables
of casinos are not legally enforceable does not provide a
basis for granting them better treatment than other accrual
method taxpayers.
Indeed, from the facts presented in the
Plamin o Resort case, the collection rate may be higher for
casinos t an for many other businesses.

a current

The Treasury Department believes that the decision in
the Plamin o Resort case correctly interprets current law and
that it should not be overturned.
The decisidn is consistent
with other cases in which taxpayers have been required to
accrue income from obligations that were not legally
enforceable. Por instance, income from usurious loans has
been held to be accruable despite the lack of legal
Barker v. Na ruder, 95 P. 2d 122 (D. C. Cir.
enforceability.
1938). S. 2985 would reverse this longstanding decision.
Similarly, income from executory contracts has been held to
be accruable even though collection was not legally
enforceable until performance had occurred. Travis v.
Commissioner, 406 P. 2d 987 (6th Cir. 1969). Enactment of S.

intended beneficiaries of S. 2985 are the Nevada casinos, the
principle on which the bill is based would cover many other
types of taxpayers and transactions.
disagree with the assertion that the accrual
We strongly
of an obligation should depend upon the enforceability of the
obligation under local law. Basic principles of equity
require that similarly situated taxpayers be taxed similarly.
Since other accrual method taxpayers are required to accrue
income that ultimately may not be collected, it would give an
unfair preference to gambling casinos to permit them to defer
The bad debt reserve
the income from their receivables.
deduction allowed to all accrual method taxpayers under
current law is a more than adequate means of taking the risk
of nonpayment into account in computing income from
receivables.
any rule that would make the tax consequences
from
a
transaction dependent upon the law of the
resulting
is consummated would create numerous
state in which
practical and administrative problems. In cases involving
taxpayers who have transacted business in a number of states,

Moreover,

the examining agent would have to be familiar with the law in
each of those states to determine the taxpayer's proper tax
liability. Additional administrative problems would be
caused by the provision in S. 2985 which would apply this
incorrect principle retroactively as far back as 1965.
Conclusion
The Treasury Department is strongly opposed to S. 2985.
rule that would be enacted by the bill is directly
contrary to the general rule of accrual method tax accounting
in accruing
which disregards risks of future nonpayment
This would give preferential
income from receivables.
treatment to a narrow class of taxpayers over other accrual
method taxpayers.
Ne believe that the bad debt reserve
deduction provided by current- law is adequate to account for
the possibxlity that income from receivables ultimately may
not be paid. Moreover, S. 2985 would create administrative
problems and would establish a principle which, if enacted,
far beyond the narrow
would affect taxpayers and transactions
intended
benefit.
it
is
to
group
The

would

be happy to answer

your

questions.

Ipartment of the Treasury
FOR IMMEDIATE

Washington,

D.C. ~ Telephone 566-204f

RELEASE

December

RESULTS OF AUCTION

15, 1982

OF 2-YEAR NOTES

The Department of the Treasury has accepted $7, 004
million of
$13, 660 million of tenders received from the public for the 2-year
notes, Series Z-1984, auctioned today. The notes will be issued
December 3l, 1982, and mature December 31, 1984.
The

interest rate

on the

notes will be 9-3/8%.

The

range of accepted competitive bids, and the corresponding prices
the 9-3/8~
interest rate are as follows:
Bids
Prices
Lowest yield
9. 42%
99. 920
9. 50%
99. 777
Highest yield
99. 848
9. 46%
Average yield

Tenders

at the

high yield were

allotted

TENDERS RECEIVED AND ACCEPTED

Location
Boston
New

York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury
To ta 1 s

$7, 004
of noncompetitive
from the public.
The

Received
64, 715
10, 752, 780
48, 995
243, 135
92, 175
91, 380
1, 055, 665
205, 015
51, 135

101, 460

24, 060
925, 140
4, 055
$13, 659, 710

(In Thousands)
$

Accepted
62, 415
5, 406, 620
41, 595
196, 775
85, 200
82, 500
498, 205
137, 055

49, 175
98, 000
24, 060

318, 220
4, 055
$7, 003, 875

million of accepted tenders includes $1, 423 million
tenders and $5, 581 million of competitive tenders

In addition to the $7, 004 million of tenders accepted in the
auction process, $280 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
An additional
$600 million of tenders was also
monetary authorities.
the
average
at
Government
accounts and Federal
from
price
accepted
for
their
Banks
own
account
in
for maturing securities.
exchange
Reserve
R-1073

of the Treasury

plpartment

washington,

D.C. ~ Telephone 666-2041
Contact:

FOR IMMEDIATE

December

Roy G. Hale

(202) 566-2843

RELEASE

16, 1982
POSTPONEMENT IN DECISION TO CONSTRUCT
SATELLITE FACILITY TO PRODUCE CURRENCY

TREASURY ANNOUNCES

Treasurer

o f the Uni ted S tates Ange

REMOTE

(Bay) Buchanan

that the Department of the Treasury has
indefinitely a decision to construct a satellite

today announced
postponed

facility in the
production

western

United

of currency during

will provide time to evaluate

States suitable for expanded
an emergency.

the

The postponement

satellite facility for

the

of Engraving and Printing as part of overall contingency
planning for the Treasury Department and other agencies of
Bureau

government.

-1074

iepartmeni of ihe Treasury ~ Washincyion. D.C. ~ Telephone 566-2041
12:00

FOR RELEASE AT

NOON

TREASURY ' S 52-WEEK

December

17, 1982

BILL OFFERING

The Department of the Treasury, by this public notice,
invites tenders for approximately $7, 000 million of 364-day
Treasury bills to be dated December 30, 1982, and to mature
December 29, 1983 (CUSIP No. 912794 DG 6 ). This issue will
provide about $1, 750 million new cash for the Treasury, as the
maturing 52-week bill was originally issued in the amount of
$5, 260 million.

bills will be issued for cash and in exchange for
Treasury bills maturing December 30 1982.
In addition to the
maturing 52-week bills, there are $9, 642 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition
of this latter amount will be announced next week.
Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold $ 1, 639 million, and Federal
Reserve Banks for their own account hold $3, 238 million of the
These amounts represent the combined holdings of
maturing bills
Tenders from
such accounts for the three issues of maturing bills'
The

and as agents for foreign and
international monetary authorities will be accepted at the weighted
Additional amounts
average price of accepted competitive tenders.
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. For purposes of
determining such additional amounts, foreign and international
million
monetary authorities are considered to hold $360
52-week
issue.
of the original
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount
This series of bills will be
will be payable without interest.
issued entirely in book-entry form in a minimum amount of $lp, ppp
on the records either of the
and in any higher $5, 000 multiple,
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, Thursday,
Form PD 4632-1 should be used to submit
December 23, 1982.
bills
maintained on the book-entry records of
to
be
for
tenders
of
the
Treasury.
Department

Federal Reserve Banks for themselves

R-1075

of $10, 000 . Tenders over
In the case of competitive
tenders, the price offered must be expressed on the basis of 100,
with three decimals, e .g . , 97 .920 . Fractions may not be used .
Each tender must be for a minimum
must be in multiples of $5, 000

$10,000

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
if the names of the
may submit tenders for account of customers,
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
.

such position is in excess of $200 million . This
information should reflect positions held as of 12:30 p .m . Eastern
time on the day of the auction . Such positions would include bills

being offered

acquired

through

transactions

"when

Dealers,

issued" trading,
who

make

primary

and

futures

markets

and

forward

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

of the bills applied for
for bills to be maintained on
must
the book-entry records of the Department of the Treasury . A cash
adjustment will be made on all accepted tenders for the difference
betwee'n the par payment submitted and the actual issue price as
determined in the auction.
Payment for the full par amount
accompany all tenders submitted

tenders from incorporated banks
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
for must accompany
2 percent of the par amount of the bills applied
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
No

and

deposit need accompany

trust

tenders

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 December 30, 1982, in cash or other immediately-available
f unds
or in Treasury bills maturing December 30, 1982.
Cash adjustments

will be

made

bills accepted

for differences
-in exchange

the par value of the maturing
the issue price of the new bills.

between

and

Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed of.
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
is determined by multiplying such discount by a fraction, the
~~~merator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
treated as short-term capital gains
Under

amount

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.

epattment of the Treasury
FOR IMMEDIATE

Washinyion. D.C.

Telephone 566-2041

December

RELEASE

20, 1982

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $5, 800 million
26-week bills, both to be issued

98.036
98. 001
98.014

Low

Average
a/ Excepting

Tenders
Tenders

26-week bills
June 23, 1983
maturing
Investment
Discount
Rate 1/
Rate
Price

13-week bills
March 24, 1983
maturing
Investment
Discount
Price
Rate 1/
Rate

OF ACCEPTED
COMPETITIVE BIDS:

RANGE

High

of 13-week bills and for $5, 802 million of
on December 23, 1982, were accepted today.

7. 770%
7.908%
7. 857/

tender of $600, 000.

at the
at the

low
low

8.04%
8. 18%
8. 13%

95. 931 a/ 8.049%
8. 51%
8. 58%
95. 895 8. 120%
95. 903 8. 104% 2/ 8. 57%

price for the 13-week bills
price for the 26-week bills

were
were

allotted 33%.
allotted 73%.

TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Received
180
10, 140, 580
22, 610

Location

$40,

Boston
New York

Philadelphia

70, 840
24, 775
29, 285
899, 190
44, 155
16,020

Cleveland
Richmond

Atlanta
Chicago

St.

Louis
Minneapolis

33, 620
13, 855

City

Kansas

Dallas
San

773, 585
183,570
$12, 292, 265

Francisco

Treasury
TOTALS

Type

Competitive
Noncompetitive

Subtotal, Public

Federal Reserve
Foreign Official

Institutions
TOTALS

on money

R-1076

market

60, 245
43, 025
33, 165
18, 610
761, 390
18, 220
15, 660
29, 295

24, 775
29, 285

539, 190
42, 155
16, 020
33, 620
13, 855
133,585
183, 570
$5, 800, 315

9, 920
1,014, 000

160, 810
$12, 691, 850

Accepted
24, 415
235
536,
4,

60, 245

22, 025

33, 165
18, 610
236, 390
15, 220
13, 910
29, 295

9, 920
642, 250
160, 810
$5, 802, 490

$10, 112,270
701, 340
$10, 813,610
1, 386, 955

$3, 620, 320

$10, 299, 070

701 340
$4, 321, 660

465 180
$10, 764, 250

1, 386, 955

1, 385, 000

$3, 409, 710
465, 180
$3, 874, 890
1, 385, 000

91 700

542 600

542, 600

$12, 292, 265

$5, 800, 315

$12, 691, 850

$5, 802, 490

coupon-issue yield.
average for calculating
four-week
The

]/ Equivalent

Received
59, 415
10, 468, 095

Accepted
40, 180
$
4, 681, 630
22, 610
39, 840

the

certificates is 8. 268%.

maximum

interest rate payable

FOR IMMEDIATE

The Treasury

RELEASE DECEMBER

announced

20' 1982

today that the 2-1/2 year

yield curve rate for the five business days ending
December 20, 1982, averaged
9 70 t rounded to the nearest
f ive basis points. Ceiling rates based on this rate will be

Treasury

effect

January

from Tuesday,

December

21, 1982 through

Monday,

3, 1983.

Detailed

rules as to the use of this rate in establishing

certificates

the ceiling rates for small saver

were published

in the Federal Register on July 17, 1981.
Small saver

ceiling rates

and

related information

available

from the DIDC on a recorded

The phone

number

telephone

message.

is (202)566-3734.

Approved,

Francis X. Cavanaugh, Director
Office of Government Finance
a

Market Analysis

Ipartlnent of the Treasury ~ Washington, D.C.

REMARKS

BY THE HONORABLE

JOHN

ASSISTANT SECRETARY (ENFORCEMENT

M. WALKER,
AND

Telephone 566-2041

JR.

OPERATIONS)

TO THE

DEFENSE DEPARTMENT

POSSE COMITATUS CONFERENCE
DEFENSE UNIVERSITY
FORT McNAIR, VIRGINIA

AT THE NATIONAL

TUESDAYS

DECEMBER 7g

1982

Thank you, Jim.
I am glad to have this opportunity
to speak to you for a few minutes and honored to be on the
platform with Paula Hawkins, who is doing so much in the
Senate to support this Administration's
battle against drug
I was sorry to miss the panel yesterday but
trafficking'
know that I had a good pinch-hitter
in my Deputy Bob Powis,
who explained
to you in some detail what we do in Treasury
in Enforcement and Operations and how we are engaged with
the enemy in the war against drug trafficking and violent

cr1me

The reason I could not be here was that I was attending
the funeral of Ariel Rios, an ATF agent, who fell in action
last week in South Florida during a raid against drug and
firearms traffickers.
Yesterday, as the eulogies were being
given in a beautiful mountain village in Puerto Rico and the
three-gun salute was being fired, I was reminded of the
ceremonies I have attended at Arlington National Cemetery
in honor of those in uniform who have given their lives for
their country. For in every respect, I felt that Ariel Rios
was a true war hero who, no less than the military men who
serve our country, was responding to the call of General
MacArthur at West Point many years ago when he reminded the
cadets of their allegiance to "duty, honor, and country. "

Yesterday,

ability of
trafficking.

Bob Powis made
military involvement

of Treasury's

referring
operations which
He was

clear to you the indispensin the war against drug
to the interdiction phase
is military in nature.

in the wars that our nation has fought and that are
in this famous war college, we in the drug interdiction business are dealing with a foreign enemy. All of
the cocaine and heroin, and most of the marijuana, reaches
our shores illegally from abroad.
Our theatre of operations
has been South Florida but is being expanded to include
other parts of the country.
As

examined

R-1077

The enemy

is sophisticated.

know

drug

trafficker

organizations have their own intelligence networks that
make use of modern technology.
We are aware that these

enemy intelligence
networks monitor our law enforcement
and interdiction
communications
and have been able to
determine the timing and scope of government enforcement

operations.

is fully armed. The traffic in machineguns
as semithe drug trade, whether manufactured
automatic weapons and then converted, or stolen from military
installations, is a national problem. These machineguns are
being used to arm the enemy.
The enemy

to support

The enemy is well financed.
Estimates of national
drug revenue range between $50 to $80 billion.
Money-laundering
investigations have uncovered as much as
$240 million through a single bank account; just recently
we discovered
laundering operations of $80 million and

illicit

$100 million.

Without military support, we at Treasury are eng'aging
the enemy with both hands tied behind our back, for we are
missing valuable intelligence as well as vital equipment.
There is no reason to give the enemy this advantage.

trafficking today is corroding our society. It
the lives of millions of young people, rendering them
unfit to lead productive lives or to serve their country;
it places billions of untaxed dollars into the hands of
organized crime; it corrupts the criminal justice system at
the Federal and State levels; and it spawns violent crime an
an epidemic scale.
It is estimated that more than fifty
percent of violent crime is related to drug trafficking as
drug abusers rob, steal, and even kill to find the money to
buy drugs.
Drug

wrecks

The President has drawn the line against drug traff icking.
has made a declaration of war.
It is the duty of all of us,
civilian and military alike, to respond to our Commander in

Chief and to see that this war is won.
Thank

you very much.

Department of the Treasury

Washington,

.~y

D.C. ~ L+Telephone 566-204~
TRINA

STATEMENT OP THE HONORABLE DONALD T
SECRETARY OF THE TREASURY

ilY,

REGAN

before the

HOUSE

BANKING i FINANCE

AND

URBAN

Washington,

December

International

Debt

Situation

D. C.

AFFAIRS COMMITTEE

21, 1982

and

Increase in

IMF

Resources

of the Committee:
I am pleased to meet with you today to discuss the international debt situation and current negotiations on an increase
in the resources of the International Monetary Fund. The world
Mr. Chairman

and members

faces extremely difficult economic and financial problems,
essentially without precedent in the postwar period. Mismanagement of these problems would have serious adverse effects on
the United States economy -- on our recovery and on our ability
to create needed new jobs. Orderly resolution will minimize the
potential risks for our citizens. I would like to review the
situation, the broad strategy for dealing with current problems
and, given the

critical role for

the

IMF

in this approach,

the

status of international discussions on increasing IMF resources.
Answers to the specific questions in your letter of invitation
are appended to my statement.
International
The

Financ

present

ial

troubled

Develo ments.

state of the

world

economy

has

its

inflation pressures in the late 1960's, the
twin oil shocks of the 1970's and policy responses that

roots in emerging
attempted

to avoid adjustment

new

economic

realities.

The appropriate

the

economic response

oil price increases

counter inflationary

resource reallocation

and

was monetary

pressure,

the reduced real consumption

problems

emerging

new

competitive

possibilities

and

fiscal restraint to

for real adjustment

and

to reflect

and

conditions

large

by the

implied

and

transfer of income and wealth to OPEC. Instead, many governments tried to maintain real incomes at levels prevailing prior
to the price increases and preserve employment in uncompetitive
industries by transfers.
Reluctance to pay for these transfers
and subsidies by increased taxation led to debt. -financed
increases in government outlays, with monetization of the
resulting deficits producing faster monetary growth in turn.
The results were higher inflation, slower real growth, and
rising government sector deficits relative to GNP (primarily
from enlarged transfer payments)
In addition
and of central
importance in today's debt situation -- oil importing countries

—

experienced
borrowixg

unprecedented

current

account.

deficits

and

external

requirements.

of the needed current account financing was provided
through private markets, largely by commercial banks.
CommerMost

cial

banks served

OPEC and

borrowing

siderably

larger,

as the risk-taking

countriesand

intermediaries

The growth

the financing

between

of lending

smoother,

than

was

many

con-

obser-

possible; but the corollary has been the
debt.
rapid growth of international
In addition, the liquidity provided by the growth of
international lending tended to postpone adjustment of domestic
economies and helped maintain consumption at inflated levels.
vers had thought

Continued

borrowing

encouraged

by the

belief

part of debtors

on the

was

that inflation

erode their debt burden.

would

increase

The

official --

was

countries.

about $500

—5

by these

countries

to Latin America)
went

both private

on the non-OpEC
LDC

and

developing

debt was

times the level of their debt in 1973.

countries

reached

in 1977, rose to $22 billion

billion

lending

the end of 1981, total non-OpEC

billion

industrialized

in international

heavily concentrated

Net new borrowing

went

of adjustment

and postponement

from banks

cyclical

low

in 1978 (of which

and $42

to Latin America).

in the major

of $11 billion
$13 billion

billion in 1981 (of
By June

which

$33

1982, the stock of

debt owed to the private Western banks by non-OPEC developing

totaled around $265 billion, of which $168 billion
was owed by countries in Latin America.
In recent months, financial markets have begun to recognize
that the inflationary environment of the 1970's is changing

countries

fundamentally.

Markets

are beginning

to believe that the world

is in a disinflationary period that will continue for
Inflation expectations are undergoing dramatic
some time.
loan portfolios that were
Lenders are re-evaluating
change.
established under quite different expectations about future
inflation. Levels of debt previously expected to decline in
real terms -- and therefore to remain manageable relative to
growing nominal export receipts under conditions of high inflaeconomy

tion

face of

are
weak

now

seen to be high

in real terms

and

export prices and slow world economic

large in the
growth.

-4-

Int. crest rates

though

down

recently in nominal terms

are

in real terms because of

seen to be high and more burdensome

inflation. On the other hand, the strong
possibility that. real interest. rates will eventually be reduced
is a positive factor in the outlook.
The re-evaluation that is going on is an inevitable result
of the collision between ongoing inflationary behavior and
monetary policy that no longer provides sufficient money to
finance continued high inflation.
In general, national monetary
policies
authorities are demonstrating that anti-inflationary
will not be reversed at the first signs of slow growth or higher
The world economy is in the midst of an unavoidunemployment.
lower expected

period which will continue

able adjustment

abate and the public's

expectations

has in the

past.

In this atmosphere
tone in bank lending

of shifting

expectations,

is cautious.

and

with major

The problems

corporate borrowers

strong and well-known

Previously

and Europe

America

or solvency crises until this year.

liquidity

of individual

ization.

now

private companies

require debt restructuring

Major sovereign

borrowers,

beginning

then Mexi o and Brazil have faced liquidity

shortages:

exchange

Yugoslavia,

servicing
growth

the overall

did not develop overnight'
of them were foreseen in 1981, but did not reach the stage

sovereign
Many

ceases to be based

behavior

that inflation will persist into the future

on the presumption

until inflationary

Poland,

debt-

industry.

and a

Internationally,

and

rational-

with Argentina,

problems

host of other countries

Zaire, the Sudan

in North

and

foreign

including

also have problems

rescheduling

has become a

Accordingly,

country

exposure

banks
and

are taking a harder

transfer risk,

look at lending,

and the

strength

of the

other banks they deal with. They are increasing their loan loss
provisions, and expect to be involved in debt restructurings
with many of their sovereign borrowers.
The major

debt problem

international

tend to view the basic

banks

as one of liquidity

rather than solvency.

the key causes to be faulty domestic

policies

and

LDC

They

see

the weak

of the world economy. Most would assume there is a
negligible risk of permanent default by major sovereign borrowers,
and that corrective domestic policies, coupled with world

performance

recovery,

economic

will restore credit-worthiness

questions

credits
ments

LDCs

uncertainities are in the delays
of confidence and credit-worthiness,
and

over the longer term.
in reestablishment

of the

The major

about the adequacy
from the banking

availability

of new
to provide support as adjust-

and continued

community

take place.
With

the dec line in inflation

establishment

and

of economic adjustment

interest rates,

programs

and

the

in key borrowing

countries, the rate of increase in demand for new bank lending
is not expected to be as high as in previous years. But some
The essence of the problem
net new lending will be required.
is to assure that conditions are established that will reconcile
the necessary prudence in lending with the need for continued
financ ing while these adjustments

take

effect.

States Interests

United

The world

ably

economy

since

interdependent

in international
national

has become highly
World War

-- and
II, with

international

a strong

growth

increase in inter-

trade and an extraordinary

financing.

often uncomfort-

trade vas the single most

part of the world economy in the decade of the 1970s.
Our own stake in the health of the world economy has grown
rapidly as well. U. S. exports in the latter part of the decade
Merchandise
grew twice as fast as the growth of world trade.
dynamic

exports as a share of U. S. gross national
between
By

1970 and 1979 and

now

product

account for 8 percent

for

the end of the decade, exports accounted

acres of U. S. agricultural

of our total agricultural

doubled

production

production.

—or
One

one

roughly

of U. S.

GNP.

in three
40 percent

out of every eight

sector produced for export; and nearly
20 percent of our total production of goods was exportedImports have also risen rapidly, to the point that something
like 20 percent of our consumption is supplied by imports, and
imports form an integral part of the U. S. production process.
In the financial area, U. S.-owned banks account for about.
one-third of total international bank lending to final borrowers.
International bank claims outstanding, after eliminating double
counting from inter-bank transactions, total about $1 trillion,
jobs in the manufacturing

while UPS. banks'

claims on foreign borrowers

billion as of

1982. Most U. s. bank lending

tomers

mid

in the developed

country

vere around
involves

area, but about one-fourth

$349

cusgoes

to Latin America. These figures are indicative of the share of
risk borne by U. S. banks, and are roughly proportional to the
U S. share
of GNP in the OECD area.
~

The

links between trade

and banking

are obvious

Moreover,

ability to finance domestic activity clearly benefits
from a sound, profitable international
lending business .
Mr. Chairman, as this discussion has indicated, the United
States economy is strongly tied to developments abroad. We have
very solid self -interests in assuring that the debt and financial
In order to identify specific
situation is smoothly handled.
U. S. interests, I would like to discuss briefly a hypothetical
case where the United States and major foreign governments follow a "hands-of f" approach to debt problems, effectively allowing them to follow their course without official support.
From what we ' ve seen in the last few months, private
lenders have become extremely hesitant to extend new loans to

LDCs

banks

back until
new

with sizeable

saddled

the borrowers

debts

encouraged

domestic policies aimed at reducing

the sake of discussion,

a "hands-of

lenders

are holding

by the IMF

—undertake

Private

borrowing

f" attitude

needs

For

by the U. S. and

others would most likely result in a cessation of new private
What would that mean for the borlending to LDCs in general
rovers, for the world economy, for the United States, and for
~

our

citizens
LDC

jn 1981.

borrowers
We

received about $45 billion in

new bank

expect this year they will borrow somethi

loans

year, if leaders pulled back sharply in
the absence of any interest or action on the part of the major
industrial countries, this lending could decline towards zero.

$20-25 billion.

that there is

Assuming

$5-10 billion,

private lending next year, say
face a decline of $35-40 billion in

some new

LDCs would

loans over the 1981-83 period.

Trade and current

def ic its would have to be reduced accordingly
lower level of external
What

would

First,

industrial

cuts in

LDC

in lending

the adjustment

countries.
imports, industrial

against

match

the

new

financing.

such a reduction

the world as a whole?

account

As a

LDCs imply

would

largely

of unavoidable

consequence

country

come

for

exports ~ould be

directly reduced by $35-40 billion. This would represent a
direct loss of 0. 3 to 0. 5 percent of GNP in the industrial
countries; secondary effects could double that loss to some
0. 6 to 1.0 percent of their GNP. At the early stage of global
recovery we' re likely to be in next year, a drop of this magnitude from lost exports could abort the gradual rebuilding of
consumer and investor confidence needed for a sustained recovery.
For the United States, the effects would be broadly similar.
Growth would be about 1 percent less than we' re expecting, and
our trade defic it would grow very rapidly due to the loss of $12
billion or so in exports to LDCs. Lost jobs in vital export
sectors would compound our recovery ef forts.
The American c itizen has the right to ask why he and his
government
With high

need

to be concerned

unemployment

home,

with debt problems
why

should

abroad.

assisting other

countries,

rather than, say, reducing taxes or increasing
spending domestically?
Why should
he care what happens to the
international financial system?

to look at this guestion is to ask what the implications are for workers in Providence, Pascoag or Woonsocket if
One way

foreign borrowers

sufficient assistance to
adjust in an orderly way. What if they are late in making
interest payments to banks, or can't pay princ ipal, and loans
become non-performing
or are written off as a loss?
If interest payments are more than 90 days late, the banks
stop accruing them on their books, they suffer reduced profits and
bear the costs of continued funding of the loan. Provisions may
have to be made for loss, and as loans are actually written off,
the c api tal of the bank is reduc ed.
This in turn reduces the banks' capital/asset
ratio, which
forces banks to curtail lending to individual borrowers and
lowers the overall total they can lend. The reduction in the
banks can lend will

amounts

banks'

do not receive

reduced

ability to

includes

language

make

the purchase

finance the operations

I
talking

make

which

of municipal

bonds which

very

clear,

where

ability to

Mr. Chairman,

than

corporations.

10 percent

Well over

of the total

number

1, 500
of

the

in everyday

help to

individual

lend could also

that

are not

here just about the big money center banks and the

multinational
more

So will

investments,

Reduced

work and

want

on the economy.

of the communities

live.
raise interest rates.

Americans

impact

U. S. banks,
U. S. banks,

or
have

loaned money to Latin America

alone.

in-size

They range

over $100 billion in assets to about $100 million.

are located in virtually
Congressional
any

district,

every

size in the country.

Those loans,

exports, exports that resulted

financed
investment

every

every community
among

other things,

in jobs, housing

or created throughout

being maintained

Those banks

state, in virtually

in virtually

and

from

and

the United

States.

the foreign borrowers

are not able to service those

loans, not only will U. S. banks not be able to continue

lending

curtail their lending in the
United States. Let me illustrate this point as graphically as
I can. A sound, well-run U. S. bank of $10 billion in assets
not all that large today -- might have capital of $600 million.
It is required by the regulators to maintain the ratio of at
least $6 in capital to every $100 in assets. What happens if
10%, or $60 million, of its capital is eroded through foreign
loan losses? It must contract its lending by $1 billion.
Now
realistically, the regulators will not force it to contract
they will have to severely

abroad,

immediately,

until

but they will force

its capital

can be

to restrict

its

growth

rebuilt.

result in either event is $1 billion in loans
that can't be made in that community -- 20, 000 home mortgages
at $50, 000 each that can't be financed, or 10, 000 lines of
The net

credit to local businesses

at $100, 000 each that can't be

extended.
And

negative

of course, this reduction

effects

on financing

in lending

also will have

of exports, imports,

domestic

investment

the United States, be

-- it

banks

The impact

the economic system as a whole.

reduction

in economic activity,

Higher

with

around

will not only be on the

affect the individual

will negatively

states

and

tourist facilities,

in shipping,

or manufacturing.

farming,

cities

in individual

and production

as well as
and a

unemployment

all

they entail for

state and Federal budgets would be a further result.
of this is in the interest of the U. S. citizen.

city,

None

to the question why the United States should participate in efforts to manage and resolve current international
financial problems is that our efforts are primarily in defense
of the average American and his own economic interests. The purpose is to protect his job and his income. If the U. S. is to
The answer

prosper,

it is

funds

and insurance

vitally important

U. S.

to adjust

Strate

and

and the

U. S. strategy

we work

companies'

that our large

seas should remain healthy
helped

be reduced

of the companies

the strength

pension

is to

unemployment

and new

for

and

jobs created,

in which our

invest is to be maintained,
and growing

and, when in economic

customers

difficulty,

overbe

recover.

role of the

IMF

to deal with current strains on the international financial system contains five key elements.
If
these operate as they should, there is no need for a potential
Indeed, there is good probability
crisis to be unmanageable.
for a steady and sustained, albeit gradual, improvement, both
jn the basic, underlying situation as well as in the reestablishment

of conf idence.

-l 2-.
t

T'hese key' elements

structed palliatives.
the international

First,

are not new, nor are they hastily con-

monetary

and

countries

effective, domestic adjustment
The necessary

between

effort to

remedy

must be

orderly,

efforts

the debt.
but,

concerned.

by each country

external payments

countries.

But experience

is likely to be

nation of the following

experiencing

system.

will vary from country to country since

adjustments

the causes of a country's

differ

financial

the crux of any lasting

of less-developed

problems

they go to the foundations

Rather,

shows

found

uncontrolled

debt problems:

large f iscal def ic its, inflationary

difficulties usually
that

in a country

government

growth,

money

some combi-

expenditures,

inef f ic ient

state enterprises, subsidized or protected private enterprises,
distorted prices, rigid exchange rates, and interest rate restrictions

which

discourage

location of investment

private

savings

and

contribute

misal-

expenditures.

surprisingly, the economic adjustments necessary to
restore a country's foreign borrowing capac ity are also necessary
Not

to restore the conditions

for stable

and

strong domestic

economic

I do not want to underestimate the short-run
political dif f iculties of making the necessary

growth.

However,

economic

and

adjustments.

is readiness to provide offic ial
financ ing on a transitional basis where that is needed to permit
orderly adjustment to take place. The international
institution best able to provide offic ial support within the context of
The second

key element

-13domestic economic adjustment is the IMF. In this connection,
the IMF plays a number of key roles. The staff of the IMF
closely with member governments in order to help identify
the causes of their economic problems and to identify the appropriate economic policy adjustments.
The IMF also stands ready
to provide temporary financial support to those countries
willing and able to undertake the necessary economic policy
measures to get out of their external financial problems.
The
IMF cannot force a member country to adopt an economic program.
However, when committing its resources, the IMF has a special
responsibility to assure itself that the economic adjustment program a country is following will restore domestic and external
health, and that the economic adjustment program will lead to
trade and financial transfewer restrictions on international
actions.
Other forms of official financing can also provide increased
direct assistance that can make a significant remedial contribuworks

tion to troubled LDC debtors, as well as serving the commercial
and financial interests of the lending country.
However, neither IMF nor other official credit, in themselves, will be be sufficient to provide the required finance

liquidity to support the adjustment necessary to redress the
debtor country.
Additional
economy of a major industrializing
liquidity and trade finance must be forthcoming.
Thus, a third key element is commercial bank financing.
The role of the commercial banks overshadows that pf a]] other
At the end of l98l, total non-OPEC LDC debt
lenders combined.
and

-14F

totaled about $500 billion, of which 8255 billion (5l percent)
was to private banks.
During the first half of l982, the
proportion

of debt to the

ial

commerc

banking

system

inc reased

further.
In the second half of 1982, U. S. regional

to limit or reduce exposure.

banks have sought

they are successful,

strain

they place a greater

that are commited

to the international

countries,

the borrowing

This increases

extent

To the

disproportionate

official

lenders

f inancial system,

and on

resources of the larger banks and

on the

burden.

and

foreign

and some

faced with a severe adjustment

already

precipitate,

the risk of

restrictive,

politically destabilizing adjustment, rather
than a more gradual, albeit still painful, process that we consider essential.
A cessation of commercial
bank lending is not in the
interest of the lending banks themselves.
In some cases, it

and

potentially

still

could push weak, but otherwise

rescheduling.

large

small

non-productive

and

non-foreign

must

be aware

to reduce exposure during

process that is underway.

the adjustment

Thus continued
by the banks

earning,

exchange

of the dangers should they attempt

package

that have played a part in the international
that enabled LDC borrowers to run up debt, some of it.

and

lending

All those commerc

viable, borrowers into
ial banking institutions

though

reduced

are a necessary component

required

to support

orderly

flows of

new

'Financing

of the overall f inane ing

economic

adjustment.

fourth element

in potential

-15is the official will

emergencies.

As demonstrated

and

capacity to act
some

recent cases,

in limited instances when the stability of the system is at
stake, there may be a need for immediate and suf f icient ad hoc
liquidity support which can be made available to countries
while they negotiate

with the IMF, formulate

adjustment

programs,

out orderly financing programs with their creditors,
begin the process of program implementation.
work

and

Central banks, working cooperatively among themselves and
with the Bank for International
Settlements, at times supplemented by U. S. Treasury resources, can provide short-term

financial
adequate

out an

assurance
IMF

Let
zation

assistance,

Fund

situation.

under

appropriate

of repayment,

adjustment

conditions

and with

until the borrower can

work

program.

the role of the Treasury's Exchange Stabiliin the context of the current international economic
The ESF was established in 1934, to enable the
mention

Treasury

to act

exchange

markets.

when

necessary

to stabilize international

The ESF has been used many

times over the

years, both to finance U. ST operations in the exchange markets
and to provide short-term financing to other countries.
Its
provisions have been modified by the Congress from time to

to reflect the evolution of the international monetary
system, including recognition of the shift to floating exchange
rates and the central role of the ZMF in providing official
time

balance of payments

financing.

In the present context, a need for short-term
support

banks have become con-

has arisen where commercial

cerned about their exposure

liquidity

in key borrowing

countries

and

to pr@cipitously curtail lending. The immediate
consequence is to make the borrowers ' financing problems worse.
For the longer-term, the economic adjustments undertaken in
connection with an IMF program will strengthen the countries '
ability to service debt, and such adjustment programs are a
major factor in restoring banks ' confidence and willingness to
continue lending.
But there is inevitably a lag between the
time major liquidity problems arise, domestic programs are

have acted

formulated,

begins.

agreement

It is

reached with the IMF, and implementation

this period that uncertainty
actions are perhaps greatest.

disruptive

The ESF

during

in conjunction

and the monetary

authorities

is available to play
ment

These

and

financing

of other major countries

role during this critical

stability while
are developed

programs

credit operations

risk of

with the Federal Reserve

a supporting

period, to help maintain

and

adjustput in place.

medium-term
and

the ESF are short-term

well-secured,

interest-earning

central role,

and

and supportive

are an entirely

appropriate

in nature,

of the IMF's
U. S. contribution

to maintenance of international financial stability.
By their nature, these are short-term ad hoc solutions,
the major Central

of providing

Banks and Finance

the necessary

Ministries

but.

must be capable

"bridge" finance needed in these

-17I think there is room for

situations.
and mechanisms
and whether
work

for identifying

our arrangements

review of whether

emerging

problem

for providing

as smoothly as they should or could

cases are adequate
financing

emergency

our data

have raised these

of the Finance Ministers and
Central Bank Governors of major countries, and we will be
doing more work in this area.
The fifth key element is a set of economic policies in the
countries that will produce economic growth
major industrialized
and a counter to the risks of inward-looking
protectionism.
questions

What

a recent meeting

during

is currently

consumer

in the world economy

mi'ssing

confidence.

Investment

as capacity utilization

tions about the global

remains

spending

economy become commonplace.

unemployment,

savings'
adopted

postpone

At the current

a "wait and

tively can lead to
The world

consumption

juncture,

see" approach
an immobilized

economy

who,

predic-

This lack

fearing the possibility

in favor of rebuilding

many

and

being postponed

low, and gloom and doom

of confidence spreads to consumers
of

is business

economic players

a decision which

have

collec-

world economy.

fundamentally

poised for a sustained

inflation rates in most major countries have receded;
nominal interest rates have f allen sharply; inventory rundowns
are largely complete. But most. international observers do not,
foresee the source of growth that wi l l re igni te i nves tment and
consumption decisions.
Solid, observable U. S. recovery is one critical ingredient
A second ingredient
to
missing for world economic expansion.
recovery:

-18credible growth in the industrial

establishing

the hands of European

Japanese policy

and

economies

officials.

is in

What

the

States, Europe, and Japan can do to help promote credible
growth in their domestic economies will be of major importance
to each other and to the developing countries, whose current
adjustment. problems can be eased by an expansion of exports to
United

the industrialized

economies.

situation

that must be
Governments may succumb too quickly to political
borne in mind.
pressures to stimulate their economies further via excessive
There are dangers

or fiscal expansion.

monetary

place

pressure

upward

shift at, this stag@ could
interest rates, discourage the downward
A

major

rates critical to investment-led
suggest a return to the stop-go policies of the

in real interest

movement

growth,

in the current

and

seventies.

such an expansion

spending,

government

would

were attempted

reverse important

via increased
gains in reducing

of governments in domestic economies.
In addition, rising protectionist pressures in the United
States and elsewhere pose a real threat to global recovery.
the involvement

Signs already

exist that other

tionist trade

measures

competitive

industries

in an attempt
and

are turning

governments

to preserve

over the next year.

could react to trade measures

jn a futile attempt

trade policies.

jobs in non-

to reduce imports and/or increase

exports; there is a real danger of spreading
measures

to protec-

protectionist,

Far too quickly,
by imposing

their

governments
own

restrictions,

to offset the efforts of other countries'

-19~

anti-proAs the world ' s largest trader, the United
tectionist policies
States carries a major respons ibi li ty to lead the world away
from a possible trade war. The clearest and strongest signal
for other countries would be for the United States to renounce
protectionist pressures at home and to preserve its essentially
free trade policies.
The. only solution

a strong endorsement

.of

The IMF's Role and Resources

to promote a sound financial framework
and is at the center of international

The IMF was founded

for the world

economy

efforts to deal with current
The

resources

of the

balance of payments

IMF

economic and financial

problems.

to provide temporary
in support of the efforts of

are available

financing

to implement the sound economic adjustment programs
needed to restore their external positions to a sustainable
basis. The economic policy conditions associated with use of
IMF resources are designed to ensure that the adjustments
are
internationally responsible and effective and to assure repayment
members

to the

IMF

over the

The IMF
from the

medium

a unique

multilateral

term.

institution,

development

and

banks

set class or

differs fundamentally

or other foreign aid

of lenders or
borrowers in the IMF, no concept of "donor" or "recipient. "
Each member is obligated to provide its currency to the IMF to
finance drawings by other countries facing balance of payments
agencies.

There

needs; and each country
IMF

group

in turn has a right to draw upon the

in case of balance of payments

need.

The U. S.

subscription

-20to

IMF

resources has been used

many

turn the United States has drawn upon INF resources

recently in 1978, for a total equivalent

most

billion, the

second largest

times over the years'

frequently,

to about $6. 5

use of the entire membership.

of large balance of payments financing
needs and growing debt problems has led to a sharp resurgence
in requests for IMF financing.
Since 1980, the use of IMF
The re-emergence

credit has
the

doubled

IMF now

the

amount,

of outstanding

totals about $18 billion.
of the membership,

nearly a quarter

place

and

Some 33
now have

drawings

countries,

INF programs

Any

assessment

of the adequacy of
to be imprecise.

INF

resources over the

for IMF
financing depends importantly on members' balance of payments
financing needs, the availability of alternative sources of
funds, and the willingness and ability of members to implement
Moreover, the amount of resources
IMF policy conditions.
effectively available to the IMF to finance drawings at any
time -- the "liquidity" of the IMF -- depends not only on the
medium

term

size of quotas
composition

bound

and borrowing

The demand

but also on the

arrangements,

of the INF's currency holdings,

whether

the issuers

of those currencies are in a strong enough position to allow
their currencies to be used to provide credit to others, and

that liquid claims

the likelihood
All of these

factors,

of ficial financing
Sub

and thus

needs,

the ability

will be utilized'

of the

IMF

to meet

are subject to rapid change.

ject to this caveat,

present has on

on the IMF

that the

at
the order of $33 billion in resources effectively
we

estimate

IMF

-21-'

available

for lending,

$19 bil.lion in usable currency

i'ncluding

billion in existing credit lines. A
portion of these funds, about $10 billion, is already committed
under existing IMF programs.
Thus, only about $23 billion at
most is available for commitment to new programs, and even this
amount is uncertain for the reasons I just mentioned.
Some $14
billion is virtually certain to be committed in the new future,
including commitments for major programs in Mexico, Argentina,
and Brazil. Given the scope of today's financing problems,
requests for IMF programs by many more countries must be anticipated over the next'year, and it is quite possible that. the IMF's
ability to commit resources to adjustment programs could be
exhausted during the course of 1983.
It is therefore clear that the IMF's liquidity position
will be under serious strain in the near future. Although
the IMF has sufficient resources to meet immediate cash needs,
since actual drawings are phased and tied to performance under
In
agreed programs, there is very little margin of safety.
particular, the Fund ' s abi li ty to conti nue to commit f i nanci ng,
and permit its current holdings to be drawn down to low levels,
and $14

and SDR holdings

depends

be forthcoming

that further

on assurances

importantly

resources will

soon.

IMF must

have adequate

resources

if it is to effec-

tively fulfill its responsibilities for maintaining the sound
f i nanci al system essential for U . S . and global economic recovery.
discussions

that are currently

two main elements

underway

of the IMF's resources:

have been focusing

increase in quotas,

the

IMF

's traditional

permanent.

resource base; and

At U. S.

initiative,

of a special borrowing

establishment

to be available for use by the IMF in
uations posing a serious threat to the international

arrangement,

system.

monetary

The adequacy

relation to the
of payments

sit-

growth

imbalances

IMF

quotas

periodically in
transactions, the size

reviewed

of international
and

financing

needs,

and world

economic

objective of such reviews is to ensure that
the IMF has sufficient resources to meet the official financing
The last increase in
needs of members in normal circumstances'
IMF quot, as became effective in 1980, following several years of
negotiations and legislative consideration, and raised quotas
of about $67 billion.
by about 50 percent to the equivalent
During the present review, which began in 1981, the U .S. has
been seeking an increase that should be sufficient to meet
demands for IMF resources under normal circumstances
over the
Some countries have advocated very major
next few years'
increases -- a doubling or in some cases even a tripling
which we consider excessive and unrealistic.
prospects.

The

to meeting normal requirements for official
balance of payments financing, the IMF also serves as the
In addition

financial

backstop

to have, the
demands that

must have,

and be seen

to deal with the extraordinary financing
arise from time to time. Consequently, the

means

for the system.

23~

States 'proposed earlier 'this year that c'onsideration be
to
given to creation of contingency borrowing arrangements
supplement quotas, which could be called. upon by the IMF in
case of need to deal with very serious balance of payments
financing needs that threaten the stability of the system. We
believe that such arrangements would have important attractions.
-- Since credit lines would be established only with countries with relatively strong reserve and balance of
payments positions, they could be expected to provide
more effectively usable resources than a quota increase
of comparable size. Conseque'ntly, such credit lines
would be a more effective and efficient means of
strengthening the IMF's ability to deal with extraordinary
financial difficulties than a comparable increase in quotas.
Second, by demonstrating that the IMF is positioned to
deal with severe threats, such borrowing arrangements
could provide the confidence to the private markets
that is needed to ensure that capital continues to flow,
thus reducing the risk that problems of one country
will affect others.
Finally, creditors under the arrangement would have an
United

important

voice in decisions on

thus would be assured

that the financing

only in cases of systemic

effective adjustment
pur discussions
months

have indicated

its activation

need and in support

efforts

with other

would

by borrowing

countries

very considerable

and

be used

countries.

in the past several

interest in this concept,

specifically in adapting and expanding the IMF's existing
General Arrang'ements
to Borrow for this purpose.
and

Where We Stand Toda

The Committee

well aware of the major country cases that

hit the headlines in recent, nenths, particularly

have

the Latin

cases of Mexico, Argentina and Brazil and some countries
in Eastern Europe. Together, the three Latin American countries

American

have external

debts outstanding

totaling

some

$195 billion,

billion represents debts to commercial banks in
the industrial countries.
The debt of these three countries alone
represents some 40 percent of the total estimated for all of
the developing country area. Clearly, major financing and
debt. servicing problems in these countries mean major potential
financial system as a whole, with
problems for the international
adverse consequences for the United States and prospects for
recovery. By the same token, progress toward resolution of
which

about $137

problems

in these three cases can provide both an example and a

basis for confidence that the problems
Let

confronting

the system

describe briefly the recent
events in each of these three countries.
as a whole can be managed.

Mexico was confronted

the summer,
U. ST while

its

and requested

commercial

initiated

liquidity bind over
liquidity support. from the

with an extreme
immediate

discussions

with other countries,

banks on a restructuring

the International

Monetary

sive economic adjustment

positively,

first

through

Fund

its debts,

on development

program.

activation

with

and with

of a comprehen-

States responded
of the existing Federal

The United

Reserve swap line with Mexico; by arranging

for the advance

-25payment,

for increased oil deliveries

terms,

on commercial

the Strategic Petroleum

Reserve; and, a few days

joining other industrial

countries

under

its

a series of strong

has announced
The economic

adjustment

program

the aegis of the Bank

for International Settlements in arrangements
billion in short-term credit to Mexico.
Mexico has now completed

later,

for

to provide $1.85

negotiations
adjustment

with the

measures

Mexico has formulated

IMF and

home.

will be

to the IMF Executive Board for formal approval on December
23. Mexico is also nearing completion of discussions with commercial
banks on a program to restructure its public sector debt maturities coming due through the end of 1984, and to provide some
$5 billion -- tied to continued performance under its IMF
program -- in net new commercial bank financing in 1983.
Argentina's financing problems began to emerge around the
presented

time of the Falklands

conflict,

foreign exchange holdings

which

and caused

drained

the country' s

serious complications

for

to the Falklands
conflict and steps toward normalization of its international
financial relations, Argentina also initiated discussions

domestic

economic management.

with the commercial

program.

are

now

and with the IMF on an adjustment

in the Mexican case, both of these discussions

nearing

have completed

banks

With the end

completion.

negotiations

Argentina

and the IMF Management

on an IMF adjustment

program;

this will be brought to the Executive Board for action shortly.
Argentina is also in the final stages of discussions with the

-26cemmere

ial"banks oh a packag'e involving

short-term
bank

bridge f inane ing and provision

$1.5 billion

totaling

financing

with the terms of the

on compliance

Finally, Brazil's difficulties
financing

debt" restructuring,

in the markets

have

of net

new

commercial

in 1983, again dependent
IMF

program.

in obtaining

needed

received considerable

press atten-

tion in recent days. As Brazil's liquidity problems began to
emerge, the United States has extented short-term liquidity
support to help provide breathing space while Brazil formulated
an economic adjustment program and initiated negotiations
with
I

the IMF.

have reached

has

just

agreement

been announced
.on

a program,

that Brazil
and we

and the IMF

expect that this

will be brought

to the Executive Board early next year. Brazil
has also initiated discussions with the commercial banks on its
financing

requirements

and plans

In sum, very substantial

these cases in developing

to acute f inane ing problems

f inane ial system as
responsibly

and

a whole.

courageously

for next year.

progress

cooperative

has been made
and

in each of

constructive

approach

of signif icance to the international
The

countries concerned have ac ted

to develop, with the help of the

dif f icult but necessary economic adjustment programs.
Collectively, these programs are intended to reduce these countries' current account def ic its and net f inane ing requirements
from an estimated $22 billion in 1982 to $12 billion in 1983,
with further reductions planned for 1984. The United States
and other monetary authorities
have provided short-term liquidity
assistance where necessary to permit longer range f inane ing
IMF,

to .be

programs

and adjustment

worked

out.

The IMF has been the

central actor in each case, in developing the spec if ics of the
adjustment programs of the countr y concerned, and wi 1 1 be c harged
both with monitoring the implementation
of those programs and
providing transitional financial support as the programs take
hold. And, of crucial importance, the commercial banks are
demonstrating
their preparedness to provide continued new
f inane ing as these countries work to reduce their def ic its and
external financing requirements in a deliberate, non-disruptive
way.

that are being placed

The demands

resources by these

is critically

that
IMF '

1 46 member

countries

there are

Although

s resources,

the bulk of

Arrangements
b j

so that

agreement

can make

in the

still

I might add, involving

are proceeding

differences

] ] ion.

93 — 110

SDR

of the negotiation

IMF member

well

countries

now

have become

appear

fairly

to support

pere ent, to a

level

new

100 b i 1 1 ion, and an expans ion of the General

to Borrow to
In

reasonably

of view, substantial

quota inc rease in the range of 40 to

toward

promptly

negotiations,

cases, the parameters

Qf SDR 8 5

the course of the next year in the f i rm

negotiations

The

s f inane i al

near future.

reasonably

clear:

we move

IMF '

are unprecedented.

that its resources will be increased

knowledge

some

of the

during

commitments

other countries

important

on an expansion

some

and

on the

dollar terms,

billion for total

total

in the range of

these ranges
new

quotas

and

amount

SDR

15 to

to about

about $17

— 22

billion

-28for 'the"

expanded

GAS. .

The

exact size of 'these arrangements,

the shares of U. S. participation

in each, remain

and

to be negotiated.

finally agreed, it is important to emphasize
that U. S. participation will not, affect net, U. S. budget outlays
or the Federal def ic it.
Detailed discussions on these and related questions are
the amounts

Whatever

being held in the

that

IMF

Executive Board this week.

basis of these discussions

on the

other countries,

the negotiations

early next year, after which

specific legislative

submit,
Conc

are hopeful

consultations

and

will be possible to

with

for completion of

aim

we would

promptly

for your consideration.

proposals

lus ion
In conclusion,

ordinarily

difficult

problems.

But they will not manage

important

but manageable

U. S. economic

is faced

extrainternational financ ial
themselves.
It is cruc ially

the world

Mr. Chairman,

interests

with

U. S. economic

jobs, production and investment -- that those problems
be dealt with in a constructive and orderly way, and the United
States cannot escape playing a leading role in that effort. An
effective strategy is in place, and welcome progress is being

activity,

The IMF is a
strategy will not succeed unattended.
central element of the solution, and it is essential that we

made.

and

The

others act to assure that

perform

that central

conduct

resources

role.

I apprec iate this opportunity
as

has adequate

the negotiations

will be able to have specific

to consult with your Committee

on IMF

resources,

legislative

and hope

proposals

that

for your

shortl'y.

consi'deration

decisive role in the disposition
'

urge your strong

support

later for the legislation

will, of course, have
of this legislation, and I

Thi's Committee

now

for our negotiating approach
will submit to you.

and

~
~ ~
L~

82-18483

L %%JJAW CYAICIOk

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COMMITTEE ON BANKING, FlNANCE AND VRBAN AFFAIRS

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$8%IT IL

Honorable Donald

T. Regan

Secretary of the Treasury
Department of the Treasury
Washington, D. C
Dear Mr. Secretary:
The Federal Financial Institutions Examination CouncU recently published its Country
Exposure Lending Survey, a tabulation of the amounts owned to UW banks by foreign
A comparison of the amounts owned to UW banks with the capital of the
borrowers
banks involved, Indicates that UA banks have exposure kvels in loans to lesser developed
nations which are significant and perhaps higher than prudence ~ould dictate. In addition,
reports regarding the meeting in Frankfurt of the finance ministers of the major industrialiied nationsr indlleate that the Reagan hdminissration may seek changes in the international
monetary system and increase in ernergeney aid. On the basis of this information and
various other repIrrts reaching the Committee, I am crxlvening the Banking, Finance and
Urban Affairs Committee on December 21 and 22, 1982, to conduct hearings on the potential
bank
for problems in the international financial markets, the nature and extent of
involvement, and the adequacy of the supervisory actions of U.S and foreign bank regulatory ageflcies

You are requested to appear before the Committee and testify on December 21 at
in Room 2128 of the Rayburn House Office Building- In your prepared statement,
please address the issues or provide the information rated belowr

10:00 a.m.

For each of the nations around the world which owe significant sums to U.S.
banks, «hat, in brief, are their present levels of total debt, levels of debt owed
to U.S banks, the growth rates of that debt (in absolute terms and relative to
various measures of national economic performance), and the arrangements and
prospects for repayment of the debts owed UW banks

2. h the credit

what
worthiness of any of the borrowing nations in jeopardy? If
actions need to be taken by those naticxls to reestablish their credit standing. If
your recommendations include austerity measuresr how are such actions likely
to impact the economies of the nations involved?

What steps need to be taken by the U.S. ar. d other industrialized nations to
reestablish confidence in international financial markets? What actions are
If the actions under considerunder consideration by the Reagan Administration?
ation include increasing the resources of multilateral lending institutions,

specifically:
a-

What

sue increase does the hdminisrration

judge appropriate?

SELL

co ccrrvrc, Ark

~AUIO

OARCIA, kryo

~OOOOC

AN LCACk IOWA

CYAN LANAI

CAAIICLL NUOOARIL JN Ore
owIN
LAraacc, N.
OAVIO w cvANA, INO.
WNIAAN C IYANOURR WL
N ro
~YAIAcr N.
OAICAk
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WATRNL Tee
VCÃtCL WOOL

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~LAwRO p. wrLIC. CNIo
~IcwAIIT o. QcNIrrcr. cowL

b- -. How much of the increase would require funding by the U.S. and in what
time periods would the funding occur?

If the amount of the funding increase were expended within the U.S. in the
form o4 say& job creating loans and infrastructure rehabilitaticag instead of
hens to foreign nations, what would the impact be on U.S. unemployment,
housing and industrial utilization, and how ~ould that impact compare
with the effects of increasing loans to foreign nations?

What portion of the funding increase could be viewed as a form of "assistance"
to large international banks which have made unwise credit extensions?

If "assistance" is needed to preserve confidence in U-S. international banks, in
what form should that assistance be provided? Should reliance be placed solely
on indirect approaches such as IMF loan increases, or is there merit in giving
consideration to net worth certificate programs like those established for ailing
thrift institutions, which would subject U.S. international banks with problem
loans to rigorous supervisory controls?
In your judgment,

have the international

bank supervisory

and regulatory

practices

of the major industrialized nations encouraged international banks, n any way,
to shift funds or locate their operations so as to minimize regulatory restraints,
superviaion, or taxes? If so, what actions by the ne~ly established Task Group
cm Regulation of Financial Services are under amsideration to address this

problem? In addition, what steps in coordinating international supervision and
support have been taken in the past by the central banks of the major industrialized nations, and what actions are now being contemplated by these iastitutions
to coordinate supervision and support and restore confidence in international
financial markets?
In accordance with Committee rules, you are asked to submit 150 copies of your
written testimony to the Committee office, Room 2129 Rayburn, 20 hours in advance of
your appearance. Please limit your oral testimony to 20 minutes so that all Committee
members may have ample time for questioning. Your entire statement, of course, will be
printed in the record and made available to all members prior to the hearing.

rely,

t er main

a
an

-1:i-':.

Question
~

ANNEX

For each of the nations

around

the world which

present levels of total debt, levels of debt owed to U. S.
banks, the growth rates of that debt (in absolute terms and
relative to various measures of 'national economic performance),
and prospects for repayment of the debts
and the arrangements
owed U. S.

banks.

The data requested are presented, for the 10 largest
non-G-10 country debtors to U. S. banks, in the attached tables.
of the arrangements and prospects for repayment of
An assessment
the debts owed U. S. banks is contained in the body of the testimony
Similar material
and in the responses to the remaining questions.
if
necessary.
on other specific countries can be supplied

Answer:

External Indebtedness
(Ranked by

and Selected Financial Indicators of principal Non G-10 Countries
level of indebtedness to U. S. hanks as of June 30, 1982)

Mexico

Claims

ad'usted

Brazil

First half

1902
in claims (percent)

1980

1981

First half 1902
Claims outstanding:
$ millions
As Percent

of Capital

of all BIS-area

936

2, 436

1,005
1,053

2, 336

786
634

7.2

13.8

3r422

8.9

17.6
12.9

8.4
6.3

25, 220

20 ~ 515

10r749

16.2

6, 874

6, 815
3, 517

38.1

7r 664

14,412

1980

1981

6, 537
33.0
37.6
33.9

11.8

First half 1902 3/
Claims outstanding:
$ millions 4/

1 F866

39.6
38.8
15.7

11,611

Increase in claims (percent)
1979

Spain

Chile

Aus-

PhiliP-

tralia pines

Taiwan

%7PAL

11.4

12.7

31.0

1r 420~

243

2rl45

-51

909
439 1,280
lr20~8 1,837 2, 050
380
675
356

2, 426

-55
626

1,941
1,172

80.8
50.5
16.6

-1.3 61.4

55.9

3$.0
75.1
25.9

9,214
13.9

8r807

6,694 6r075
10.1
9.2

5, 697

5,077
4, 710

6r745 3r655 lr953
6r513 2, 846 2, 475
4, 904 3,505 3, 188

1,647

50.4
29.1

18.8

2.7

4.5

13.3

11.7

43.9

11.2

53.6

6.2

207

8.6

994
778

292
884
443

16,077

661
194

-384

37.8
21.5
15.0

9.1
25.2
10.1

9,054

18 r 299
9,796

18.0

27. 1

3.8

-8.0

24z3
10 5

Sr255

4r447
6.7

102,673
155.1

3,160

806
936

856

lr 190

44, 396
42, 245
42, 860
14,247

7.9

banks 2/

First half 1902 3/

1,961
1,762

918

6/30/82

1979
1980
1981

zinz

4, 453
6, 095

Increase in claims ($ millions)

Argen-

rozzzz

1979
1980
1981

Claims

South

zuela
U. S. banks,

for uarantees

Increase in claims ($ millions)

Increase
1979

Vene-

6/30/82

63,474

7, 039
7, 061
2, 501
21.7
18.2
15.5

5.0

1,897

3r229

228

-313

48. 7

16.9

73.7
39.4

1.0

-1.9

7.8

19.4

55, 218 26, 446 19,594

631
2r618

1,967

819

-15

593

1,030

2, 247

100.9
48. 5
24. 6
W. l

27.7

67. 1
50.9
43.4

33 ' 1
9.5

16.9
17.8
2.7

74.9
2607
9.2

620

22.0

21.0

10.8

36.1
28.2

11.3

22z0
11.2

24r829 23, 794 llr557

12,124

llr023

7r210

Source: Country Exposure Lending Survey. Claims af ter adjustments for guarantees.
Source: Bank for International Settlenmnts, semi-annual maturity analysis. No adjustment for guarantees,
BIS quarterly press release used in lieu of narc ccmprehensive semi-annual analysis, which is not yet availab]e.
position as of 12/31/81 per BIS semi-annual analysis plus change in first half 1982, per BIS quarterly release.

39.8
27. 1
21.6

6.5

255r269

External Indebtedness

and
(Ranked by level

Nexico

Selected Financial Indicators of Principal Non G-10 Countries
of indebtedness tro U. S. banks as of June 30, 1982)

Brazil

Vene-

zuela

Total External Debt
Increase in debt ($ billions)
1979

6.6
11.0
23.7
7.3

19BO

19BL

First half 1982
Increase in debt (percent)
1979
1980
1981
First half 1982
Outstan&]irr&l Debt: June 30, 1982
$

19.5

27.2
46. 1

9.9

79.0

billions

5.0
3.9
7.6
3'0

10.8

7.8

14. 1

4.9

64. 4

6.9
3.6
1.9
2.0
48. 1

16.9

7.8
9.1

28.6

South
Korea

2.6

1.4

3.9
3.1
21+8

9.8
23.6
9.8
34.6

Argen-

tins

4.1
2+8

5.9

1.0

42ol
19.9
35+1

4.4

23.7

Spain

4' 1
5.2

5.0
n. a.

Chile

2. 2
2.8

5.0

1.0

15.6

22 2

17 ' 2

28. 1

14.1
-0.4'

39.6

5.7

44. 0* 18.7

Aus-

Philip-

tta'l !la

pih6s

1.8

2.6

0.2
.9
; 0.7
,

44 ' 5

2.7
-13.8

15e0

Taiwan

1.0
1.0
1.0

3.0
2.0
0.7

22e4

15.6
13.1

noae

n, a,
h. a.
n. a.

11.5
5.0

14.3

4.6

15.8

34.9
55el

0.4

29.8
25.5

5.5

36'.. 9

9.2

321+8

(8 billions)
Gross D&vrr&
1979
1900
1981

itic

Product

134.5
186.3
240. 0

Current Itcc&&&rnt
1979

Deficit

5.5

7.5

19BO

12.9

19BL
Ex

rts of
1979
1980

t~s

and

Services

16.2

24. 9
30.5

19BL

Estimated Int&
1979
1980
1981

rest

nts

(

ross)

3.7
5.4
8.2

206. 6
252. 9
269. 3

49.0
59.7
67.8

60.6
58.2
65.7

10.0
12.4

0.4

4.1

4.0

4.4

11.0

18.0
23. 3

26. 9
5~ 4

7.5

10.3

16.3

19.5

22. 4
24. 1

22.6
27.5

2.2
2.8
4.3

1.5
2.6

3.7

71.5 185.5

20. 5
28 ' 1
32.4

114.0
132.4
149.3

29.5
35.2
39.7

0.5
48
3.9

1.1
52

1.2
20

4e3
2.4

1.6

(0.2)

2e3

(0.5)

47. 3

.'.

53e9

8.9
11.2

18.4
20 ' 6

12.1

1.7

2.3

3.2

5.0

20.6

2. 1
2.6
3' 4

~5Go&xt. ;, services, public and private transfers.
6/ Ali &Lit, i Lor financial year (June). Debt data for public sector (national and
Irr&]i&:,it. s annual rate, full year estimate, or end-year estimate.
Fir. . ;t. &~&r, ir. t&ir 1982, long-tean debt only.
&

Srxtttr't;r

trtt',

rrr1

IttttD

Statistics.

Treasury

st«f f es t ima tes.

" 904.o 2
32.
40. 1 '" 1,071;3
46. 3
1,169'.0

60.3 195.9
68.9 211.1

4. 8

6.1

4.7
6.3
6' 1

16.0
21.8

0.8

0.4
0.4
0.4

1.3

2.0

states).

22eO

1.0

2.0

6.4
8.1
8.6

0.8

1.2
1.6

28/5

18.4

142.8
183.8
204. 6

0.6
0.7

19.2

22. 6
26. 2 !.

1.0

26.8
38'. 1

2: Is the creditworthiness of any of the borrowing
nations in jeopardy? . If so, what actions need to be taken
If
by. . those. , nations to -reestablish. -their credit standing.
include . austerity measures, how are such
your recommendations
actions likely to impact the economies of the nations involved?

Question

countries are encountering serious financial
to undertake economic adjustments that
will reduce their external deficits and borrowing requirements
and restore creditworthiness.
It is up to each country to deterto its
mine what specific measures are needed and appropriate
circumstances.
In general, these are likely to focus on reductions in inflation, curtainment of excessive monetary and
fiscal expansion, restoration of incentives for savings and
investment and a strengthening
of international competitiveness.
in the testimony, such policies are difficult in
As indicated
the short run, but can, if implemented seriously and with needed
transitional support from the international community, provide
the basis for a restoration of growth and financial stability.
Answer:

diffrculties

number of
and need

Question 3: What steps need to be taken by the U. S. and other
nations to. reestablish confidence in international
].ndustrialized
financi. al ma'rkets? What actions are under consideration by the
If the actions under consideration include
Reagan Administration?
increasing the resources of multilateral lending institutions,

specifically:

What

How much

size increase does the Administration
appropriate?

judge

of the increase would require funding by
the U. S. and in what time periods would the funding
occur?

c. If

the amount of the funding increase were expended
within the U. S. in the form of, say, job creating
rehabilitation, instead of
loans and infrastructure
loans to foreign nations, what would the impact be
on U. S. unemployment,
housing, and industrial
utilization, and how would that impact compare with
the effects of increasing loans to foreign nations?

portion of the funding increase could be viewed
as a form of "assistance" to large international
banks which have made unwise credit extensions?

What

describes the U. S. approach to dealing with
My statement
current strains in the international financial system and describes
the central role played by the IMF. International negotiations
but decisions have
on an increase in IMF resources are underway,
not yet been reached on the exact size of the overall increase
it is not possible to
Consequently,
or on country participation.
amount
and
of
a U. S. funding
the
timing
for
provide a figure
request. However, failure of the United States to participate
lead other countries to withhold their financing,
would undoubtedly
which would be a multiple of the potential U. S. share, and resulting in a collapse of the effort to assure that the IMF has adequate
Moreover, a serious
resources to fulfill its responsibilities.
IMF's
to
and
ability
promote
support internathe
impairment of
of
balance
adjustment
would
payments
responsible
tionally
for
with
dealing
current
entire
strategy
problems.
the
jeopardize
the consequences for the United
As indicated in the statement,
States -- in terms of economic--activity, jobs, production and
would be substdhtial.
The objecdomestic financial stability
outlined
in
the statement is to maintain a
approach
tive of the
financial system, which is of critical imsound international
and U. S. economies.
None of the financing
world
the
to
portance
should be viewed as "assistance" for banks,
under consideration
although the success of this effort will provide important
benefits to banks, as it will to U. ST industry, agriculture,
labor and consumers.
Answer:

Question 4: If "assistance" is needed to preserve confidence in
U. S. international. . banks, :-in what foi;m should that assistance
Should reliance be placed solely on indirect
be provided?
approaches such as IMF loan increases, or is there merit, in
giving consideration to net. worth certificate .programs Tike
which would
those established for ailing thrift institutions,
subject U. S. international banks with problem loans to rigorous

supervisory

controls'

I stated in my testimony that. bank loans to non-OPEC LDCs
are over $250 billion, of which the U. S. portion is about $I00
billion. That is a lot of money in terms of overall bank assests
or bank capital. However, we do not see the present, illiquidity
problems in some countries leading to any massive loan losses at
banks which would impair banks' capital or destroy confidence in
the major international
banks.
Answer:

There will be increasing international
losses for U. S. banks.
Those losses will come from loans to private sector companies
abroad. Those companies suffer from many of the operational and
financial problems some of our domestic companies face. However,
banks requiring "assistwe do not perceive the U. S. international
ance. " Those banks ha0'e the capital, reserves, and earning power
to withstand known credit problems.

increase in IMF resources does not provide assistance to banks.
For instance, bank loans in Mexico total about, $60 billion.
The
IMF is lending Mexico $3. 9 billion and the banks are parallelling that effort with an additional $5 billion. Arithmetically,
I
do not see how these amounts assist banks.
As

The IMF lends its resources to those
that are committed to strengthening their domestic economies and balance of payments.
When these commitments
succeed, the
world economic system is strengthened.
This indirectly enhances
the commercial positions of U. S. exporters, investors, and lenders,
The IMF

countries
including

assists countries.

the banks.

Question

1n your judgment, have the international
bank superregulatory practices of the major industralized nations
'encouraged''in'ternational
banks, in any way, to shift funds or locate"
their operations so as to minimize regulatory restraints, supervision,
or taxes? If so, what actions by the newly established Task Group on
Regulation af, Financ'zal Services are under- consideration to address
this problem? In addition, what steps in coordinating international
supervision and support have been taken in the past by the central
banks of the major industralized
nations, and what actions are now
being contemplated by these institutions
to coordinate supervision
and support and restore confidence in international
financial

visory

and

markets?

The international
bank supervisory and regulatory practices
of the major industralized countries have not formally encouraged
international banks to shift funds or locate their operations so as
to minimize regulatory restraints, supervision, or taxes. The banks
have chosen various international
locations,
their home countries' existing banking and tax laws as well reflecting
as the location's
attractiveness as an international financial center. For instance,
all of the major banks in the world are located in New York, Miami,
London, Nassau, Hong Kong, Singapore, Bahrain, and in national financial centers such as Paris, Frankfurt, Milan, etc. The essence of
international banking is to be located geographically in all timezones, ready to do business in all major currencies and with all
major national and multinational
borrowers in the world.

Answer:

Each country

has

the international

its

own

bank supervisory

activities of its

own

arrangements
banks and the

to deal with
local activi-

ties of its foreign banks. For instance, the international activities of U. S. banks are supervised on a global consolidated basis by
U. S. authorities.
This includes supervision of branches, subsidiaries,
and affiliates.
Foreign banks operating in the U. S. are subject to
regular supervision and inspection by state and federal authorities.
In addition to unilateral efforts, bank supervisors have been
their international perspectives and approaches on a
strengthening
multilateral basis. There is a standing committee at the Bank for

Settlements called the Committee on Bank Regulatory
Supervisory Practices which harmonizes and coordinates bank
supervisory efforts among the G-10 countries.
There also is the
EEC Contact Group and the OECD Expert Banking Group which expands
the multilateral
network of bank supervisors.
Similar efforts are
underway in Latin America under the auspices of the Center for Latin
American Monetary Studies.
The bank supervisors
from the Offshore
Banking Centers also meet regularly.
Finally, the work of all these
Conference
groups comes together at biannually at the International

International

and

of Bank Supervisors.

Sank: supervisors,
implementing

'un

programs

process.

i'la ferally

an4

to identify

fneltilaterally, have been
assess risks in the global

and

That risk assessment

has been communicated to
The banks must. increasingly report
their activities . to. . bank supervisors on a global consolidated basis
has been this way in the U. S. since 1973). Global consolidated
reporting encourages the bank to consider their international lending in terms of risk to their consolidated earnings and capital
base. Bank supervisors in all major countries are demanding more

lending

bank management. . 'and

director's.

(it

loan loss reserves against international
portfolios and
the difficult issues of more harmonized disclosure
and capital adequacy policies among the world's largest banks.
adequate

are tackling

The key to all
banks supervise

supervision,

however,

the degree to which

their own affairs. At the prodding of U. S. and
other prudential authorities, we finally see the industry:
a. demanding better data and consultations from borrowers;
b. analyzing and monitoring loans more closely;

establishing
conditionality

pricing loans to more realistically
adequacy concerns; and,

lending

more conservative
on borrowers;

on a more

of financing.

repayment

terms and

address

capital

parallel basis with official sources

Overall, bankers and bank supervisors are addressing the need
to put in place prudential disciplines necessary to reinforce
relationships between banks and their international borrowers.

of the Treasury

Oepartment

For Immediate
December 17,

Washington,

O. C. ~ Telephone 566-2041
Contact: Charles Powers

Release
1

982

Named

566-2041

U. S.

William

Barton

Secret Service

Deputy

Director

The Department of the Treasury today announced the
appointment of William R. Barton, 57, to be Deputy Director
the Secret Service. He has served as Acting Deputy Director
since August 17, 1982.

"William Barton is a 29 year veteran of the Secret Service, "
said John Walker, Treasury Assistant &ecretary
for
and Operations.
"He brings a record of distinguishedEnforcement
leadership
to the management of the Service. "
Mr. Barton joined the Service in February 1953 as a
Agent at the Washington Field Office. The following yearSpecial
was
assigned to the White House Detail where he served for the henext
seven years.
In 1961 he was transferred to the St. Louis Field
Office and, three years later, promoted to Special
Agent in
Charge of the agency's Milwaukee Field Office.

In 1971 he was promoted to Inspector with the Office of
Inspections.
The following year he was appointed Special Agent
in Charge of the Dignitary Protective Division.
In November 1976, Mr. Barton was promoted to
Assistant
Director, Office of Inspection and transferred oneDeputy
year
serve as Deputy Assistant Director, Office of Protective later to
Research. He became Special Agent in Charge of the Los Angeles
Field Office in June 1978 and returned to Headouarters the
following year as Assistant to the Director, Office of Training.
He served in that position
until assuming the duties of Acting

Director.
During his career,

Deputy

Mr. Barton has received special
including the Secretary's Certificate at the
Department of the Treasury's Annual Awards Ceremony in 1975. He
is also the recipient of the &ervice's &pecial Achievement
for recognition of his contributions during the Republican Award
and
Democratic National Conventions, 1972 Elections, and 1973
Presidential Inauguration.

recognition,

Yr. Barton

was born on August 18, 1925, in Detroit, Michigan
graduate of Michigan &tate University.
He is married
to the former Helen A. Wilkes. They have two children.

(egartment of the Treasury
4:00

FOR RELEASE AT

P~M

~ Washinclton,

D.C. ~ Telephone 566-2041
December

21, 1982

TREASURY'S WEEKLY BILL OFFERING

of the Treasury, by this public notice,
two series of Treasury bills totaling
$11, 600 million, to be issued December 30, 1982.

The Department

invites tenders

approximately
This offering

for

will provide $ 1, 950 million of new cash for the
as the maturing bills were originally issued in the
amount of $9, 642 million.
The two series offered are as follows:
91May bills ( to maturity date) for approximately $5, 800
million, representing an additional amount of bills dated
September 30, 1982,
and to mature
March 31, 1983
(CUSIP
No. 912794 CP 7 ), currently outstanding
in the amount of $5, 121
million, the additional and original bills to be freely
interchangeable.
Treasury,

182~ay bills for approximately

December 30, 1982,
(CUSIP No. 912794 CZ 5 )

dated

and

$5, 800 million, to

to mature

June 30, 1983

Both series of bills will be issued for cash and in
exchange for Treasury bills maturing
December 30, 1982.
In
addition to the maturing 13-week and 26-week bills, there are
$5, 260 million of maturing 52-week bills. The disposition of
this latter amount was announced last week. Federal Reserve
Banks, as agents for foreign and international monetary
authorities, currently hold $1, 597 million, and Federal Reserve
Banks for their own account hold $3, 238 million of the maturing
bills. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills.

Tenders from Federal Reserve Banks for themselves and as
agents for 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
monetary
Reserve Banks, as agents for foreign and international
authorities, to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing bills
held by them.
For purposes of determining such additional
monetary authorities are
amounts, foreign and international
considered to hold $1, 237 million of the original 13-week and

issues.

26-week

competiThe bills will be issued on a discount basis unde
their
and
noncompetitive
par amount
bidding, and at maturity
tive
will be
pavable
bills
of
be
without
series
interest.
Both
will
ssued entirely in book-entry form in a m'nimum amount of $'0, 000
and in any higher $5, 000 multiple, on the records either of the
ed er a 1 Reserve Banks and Branches, or of the Depar tment of the
~

easur

~-coco

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,
December 27, 1982.
Form pD 4632-2 (for 26-week serves) 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 .
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 three decimals, e .g . , 97 .920 . 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 as of 12:30 p .m . Eastern
time on the day of 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
Dealers, who make
maturity previously offered as six-month bills
primary markets in Government securities and report dai?y 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.
~

deposit need accompany

tenders from incorporated banks
and recognized dealers
and trust companies and from responsible
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 .
No

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 i and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 30, 1982, in cash or other immediately-available
funds
or in Treasury bills maturing December 30, 1982 ' 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'

Section 454(b) of the Internal Revenue Code, the
of discount at which these bills are sold is considered to
accrue when the bills are sold, redeemed, or otherwise disposed os
Section 1232(a)(4) provides that any gain on the sale or redemption of these bills that does not exceed the ratable share of the
acquisition discount must be included in the Federal income tax
return of the owner as ordinary income. The acquisition discount
is the excess of the stated redemption price over the taxpayer's
basis (cost) for the bill. The ratable share of this discount
Under

amount

the excess gain

Department
Nos. 26-76 and

Debt.

ppartlllent

of the Treasury

FOR IMMEDIATE

Washington,

D.C. ~ Telephone 566-2041

RELEASE

December

RESULTS OF AUCTION

21, 1982

OF 7-YEAR NOTES

The Department of the Treasury has accepted $4, 502 million of
$11, 454 million of tenders received from the public for the 7-year
notes, Series C-1990, auctioned today. The notes will be issued
January 4, l983, and mature January 15, 1990.
The interest rate on the notes will be 10-1/2-o. The range of
accepted competitive bids, and the corresponding prices at the 10-1/24
interest rate are as follows:
Prices
Bids
99. 692
10. 56%
Lowest yield
99. 449
10.61-o
Highest yield
99. 594
10.58~o
Average yield

Tenders

at the

high yield were

allotted

TENDERS RECEIVED AND ACCEPTED

Location
Boston
New

York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury

Totals

25%.

(In Thousands)

Received
24, 048
9, 587, 485
7, 200
27, 515
54, 461
24, 392
761, 521

Accepted
12, 298
635
697,
3,
7, 200
14, 765
13, 461
14, 892
181,021

10, 169
17, 229
14, 191

10, 169
15, 229

54, 247

869, 960

1, 201

$11, 453, 619

52, 247

6, 191
475, 960
1, 201
$4, 502, 269

The $4, 502 million of accepted tenders includes $977
of noncompetitive tenders and $3, 525 million of competitive
from the public.

million
tenders

In addition to the $4, 502 malison of tenders accepted in the
auction process, $330 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international

monetary

R-1081

authorities.

iepartlllent

of the Treasury

FOR IMMEDIATE

Washington,

O.C. ~ Telephone 566-204'I
December

RELEASE

RESULTS OF AUCTION

OF 20-YEAR

1 —MONTH

22, 1982

BONDS

of the Treasury has accepted $3, 006 million of
of tenders received from the public for the 20-year
1-month bonds auctioned today.
The bonds will be issued January 4,
1983, and mature February 15, 2003.
The interest rate on the bonds will be 10-3/4%. The range of
accepted competitive bids, and the corresponding prices at the 10-3/4%
interest rate are as follows:
The Department

$6, 059 million

Lowest yield

Highest

Average

at the

Tenders

10.77%
10.75~o

yield
yield

high yield were

New

York

Philadelphia
Cleveland
Richmond

Atlanta

Chicago
St Louis
Minneapolis
Kansas City
~

Dallas
San Francisco
Treasury

Totals

99. 775
99. 938

allotted

TENDERS RECEIVED AND ACCEPTED

Location
Boston

Prices
100. 348

Bids
10 70'o

Received
9, 735
4, 842, 462

94&.

(In Thousands)
$

Accepted
2, 735

9, 619

2, 620, 242
5, 051
6, 499

34, 313
7, 076
7, 383
7, 062
542, 334

33, 753
7, 076
5, 383
4, 062
182, 854

8, 111

21, 589
16, 700
551, 992

194

$6, 058, 570

13, 529
10, 450
113,792

194

$3, 005, 620

The $3, 006 million of accepted tenders includes $634
million of noncompetitive tenders and $2, 372 million of
petitive tenders from the public.

R-1082

&artrnent of the Treasury
FOR IMMEDIATE

Thursday,

RELEASE

December

CLEMENTS

O. C. ~ Telephone 566-2CI-

Washington,

23, 1982

Robe=
TREASURY CONTACT:
566-2133
PHONE:
(202)

4 i==

RESIGNS AS DIRECTOR OF TREASURY'S BUR:-AV OF
ENGRAVING AND PRINTING

today announced the res.'gnation of
Harry R. Clements, Director of the Bureau of Engraving and
Printing, effective Saturday, January 1, 1983, to return to the
Leuver, Deputy Director, has been
private sector. Robert
designated Acting Director.
The Treasury

Department

Mr. Clements, an aerospace eng'neer, has accepted a position
Technology for Mar in
as Director of Advanced' Manufacturing
He served as Director
Marietta Aerospace at Baltimore, Maryland.
four years.
for
and
Printing
of the Bureau of Engraving

established an enviable
record of high volume and quality production of currency and U. S.
postage stamps while containing costs by instituting productivi:ty
This
and advanced technology in Bureau operations.
improvements
An

outstanding

manager,

Mr. Clements

included modernizing plant and equipment, redesigning and
processes, and imp'ementing automated
streamlining manufacturing
ureau
Under his direction, the
information systems technology.
also initiated several innovations for the benefit of the
numismatic and philatelic communi:ies such as the sale of uncut
Upfront pro its of $340, 003 from
sheets of 41 and 42 currency.
sale of 147, 000 uncut sheets are being used for t'.-. e co".„p' e e
renovation of the visitors' entrance where the long 1'~es o.
tourists wait to begin the tour. The area has bee.-. pa'nted,
d' sp' ays.
carpeted, air conditioned, and fitted with attractive
'~G
linea' . eet, are
han
The displays, covering an area of more
='ocumen ary
historica'
"web
a
press"
and
prov:de
a
of
form
in the
.
'.
-. is
-.
s.
a=:s
and
currency
postage
of
paper
of the printing
country.

first in government to win the
for senior executives.
He has
been regularly cited for professional resourcefulness
in the
condunt of his official duties and has received several awards
for oMstanding performance.
Mr. Clements

was

coveted Presidential

among

the

Rank Award

In recognition of Mr. Clement's exemplary government
service, Treasury Secretary Donald Regan said, "Not only has Mr.
Clemerlts helped make the Bureau of Engraving and Printing the
most east effective security printing establishment
in the world,
but he& has at the same time trained and developed efficient
managers who have risen to assume high level positions of
responoibility at other Treasury bureaus as well as his own. Me
regret. losing Mr. Clements but wish him well as he accepts new
and exj iting challenges
in the private sector. "

of the Treasury

iepartment

FOR IMMEDIATE

Washington,

December

RELEASE

RESULTS OF TREASURY'S

Teaders for $7, 002

to mature
as follows:
and

December

Price

91.839 a/
91.800
91.815

High
Low

Average
a/ Excepting

23, 1982

52-WEEK BILL AUCTION

million of 52-week bills to be issued December 30, 1982,
29, 1983, were accepted today. The details are

COMPETITIVE

OF ACCEPTED

RANGE

D.C. ~ Telephone 566-2045

BIDS:

Discount Rate

Investment Rate
(E uivalent Cou oa-issue Yield) I/

8.071%
8. 110%
8.095X

8. 72%
8. 77X
8. 75%

2 tenders totaling $2, 000, 000
Teaders at the low price were allotted 78%.
TENDERS RECEIVED AND ACCEPTED

(In

Thousands)

Received

Location
Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago
St. Louis
Minneapolis
Kansas City

Dallas
San Francisco
Treasury
TOTALS
~Ty

84, 415

13,838, 505
1, 225
95, 515

~Scca

ted

415
$34,
829, 505

1, 225

44, 525
135, 170
1, 077, 405
65, 620
14, 590
26, 975
12, 135
1,554, 920
27, 880
$16, 978, 880

14, 515
27, 925
1311170
284, 645
26, 620
. 12, 730
16, 975
12, 135
582, 480
27, 880
$7, 002, 220

$15, 424, 295
194, 545
$15, 618, 840
1,000, 000

$5, 447, 635
194, 545
$5, 642, 180
1, 000, 000

360, 040
$16, 978, 880

360, 040
$7, 002, 220

Competitive
Noncompetitive

Subtotal, Public
Federal Reserve
Foreign Official

Institutions
TOTALS

$94, 160 thousand of the bills will be issued
institutions
for new cash.
to foreign official
This requi
1/ The average annual investment yield is 8. 94%.
Certificates
All-Savers
of 6. 26%.
on
yield
investment
annual
A

p-1084

additional

)apartment or the Treasury

washington,

FOR REL'EASE

December

g.c. ~ Telephone 566-204'i

CONTACT:

27, 1982
Treasury

Issues Ninth

DISC Annual

Charles Powers
(202) 566-2041
Report

The Treasury Department today released its ninth Annual
Report on the "Operation and Effect of the Domestic International
The report covers income
Sales Corporation Legislation" (DISC)

tax returns for DISC's with accounting. periods ending between
July 1, 1979 and June 30, 1980, referred to as DISC year 1980.
Highlights

of the report are:

Total U. S. exports in DISC year 1980 are estimated to have
been $6. 2 to $9.4 billion higher than they would have been
This represents an increase of
without the DISC program.
approximately 36 percent over DISC year 1979.

cost to the Treasury is estimated to have been
$1,410 million for DISC year 1980, an increase of 42
percent over DISC year 1979.
The increases in the export effect and revenue cost of DISC
of
reflect the growth in U. S. exports, the growing DISC sharethat
profits
of
DISC
percentage
total exports, and the lardier
could be deferred in DISC year 1980.
number of copies of the ninth DISC Annual Report,
A limited
are available from the Treasury Department, Office of Public
Affairs Room 2315, Washington, D. C. 20220.
The revenue

Department
FOR

of the Treasury

L~DIATE

Washington,

D.C. ~ Telephone 566-2044

'RELEASE

December

27, 1982

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $5, 800 million of 13-week bills and for $5, 801 million of
26-week bills, both to be issued on December 30, 1982, were accepted today.
RANGE

13-week bills
March 31, 1983
BIDS: maturing
Discount
Investment
Price
Rate
Rate 1/
98. 008 a/ 7. 880%
8. 15%

OF ACCEPTED

COMPETITIVE

High
Low

Average

a/ Excepting
b/ Excepting

Tenders
Tenders

:
:

26-week bills
June 30, 1983
maturing
Investment
Discount
Rate 1/
Rate
Price

8. 47%
95. 950 b/ 8.011%
97. 976
8. 54%
8. 007%
8. 29%
95. 916 8.078%
97. 984
7. 975%
8. 25%
95. 930 8.051% 2/ 8. 51%
2 tenders totaling $1, 050, 000.
1 tender of $3, 285, 000.
at the low price for the 13-week bills were allotted 43%.
at the low price for the 26-week bills were allotted 73%.
TENDERS RECEIVED AND ACCEPTED

(In Thousands)
Location
Boston
New

York

Philadelphia
Cleveland
Richmond

Atlanta
Chicago

St.

Louis
Minneapolis
Kansas City
Dallas
San

Francisco

Treasury
TOTALS

Competitive
Noncompetitive

Public
Federal Reserve
Foreign Official

Subtotal,

Institutions
TOTALS

Received
35, 305
9, 640, 010
25, 515
29, 415
22, 330
34, 960
924, 745

41, 555
12, 680
34, 975
27, 480
1, 038, 575
184, 440
$12, 051, 985

$10, 220, 285

664, 110
$10 884. 395
1, 137, 990

29, 600

$12, 051, 985

Accepted
35, 305
$
4, 409, 510
25, 515
29, 415
22, 330
34, 960

Received
82, 035
10, 384, 370

35, 780

465, 745
34, 555
12, 680
34, 975
22, 480
488, 575
184, 440
$5, 800, 485

747, 620
54, 800

205, 000
45, 800

18, 125

16, 375

28, 495
16, 485
1, 034, 870
160, 855
$12, 641, 210

28, 495
16, 485
537, 870
160, 855

11,605

24, 980
41, 190

47, 035
4, 634, 870

11,605
19, 980
41, 190

$5, 801, 340

$4, 068, 785
664, 110
$4, 732, 895
1,037, 990

$10, 231, 560
470, 750
$10, 702, 310
1, 100, 000

$3, 491, 690

29, 600
$5, 800, 485

838, 900
$12, 641, 210

838, 900
$5, 801, 340

1/ Equivalent coupon-issue yield.
2/ The four-week average for calculating the maximum
pn money market certificates is 8. 153%.

R-1086

~Acce Ced

470, 750

$3, 962, 440
1, 000, 000

interest rate payable

llspartnlent

or the Treasury

FOR RELEASE AT

wasliinptoh,

4:00 P. M.

p. o.

Telephone ses-204%

December

28, 1982

TREASURY'S WEEKLY BILL OFFERING

The Department of the. -Treasury-, by this public notice,
invites tenders for two series of Treasury. bills totaling
approximately $11,600 million, to be issued January 6, 1983.
This offering will provide $625 ., million. of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $10, 971 million, including $1, 015 million currently held by
Federal Reserve Banks as agen. ts for foreign an, d international
monetary authorities and $2, 046 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 $5, 800
million, representing an additional amount of bills dated
October 7, 1982,
and to mature
(CUSIP
April 7, 1983
No. 912794 CQ 5), currently outstanding
in the amount of $5, 653
million, the additional and original bills to be freely
.

interchangeable.

182 -day bills for approximately
January 6, 1983,
and to mature
No. 912794

4).

$5, 800 million, to
July 7, 1983

be dated
(CUSIP

Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 6, . 1983.
Tenders from
Federal Reserve Banks for themselves and as agents for foreign
and international
monetary authorities will . be accepted at the
Addiweighted average prices of accepted competitive tenders.
tional 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

bills will

amount

of. maturing bills

held by them.

be issued on a discount basis under competinoncompetitive bidding, and at maturity their par amount
Both series of bills will be
will be payable without interest.
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

tive

The
and

Treasury.
R-1087

Tenders will be rece jved 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,
January 3, 1983.
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

Banking institutions
and dealers who make primary markets in
Government securities and peport daily to the Federal Reserve Bank
of New York their .positions in and borrowings on such securities

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 as of 12:30 p .m . Eastern
time on the day of 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 offeied 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 suPmitting
tenders for customers, must
submit a separate tender for each customer whose net long position
in the bill being offered exceeds $$00 million .

may

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
No

in the auction.

deposit need accompany

tenders

from incorporated

banks

trust companies and from responsible and recognized dealers
in investment securities fot' 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.
and

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 Secretar y of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final. Subject to these
reservations, noncompetitive tenders for each issue for $500, 000
or less without stated price from any one bidder will be accepted
in full at the weighted average price (in three decimals) of
accepted competitive bids for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on January 6, 1983,
in cash or other immediately-available
funds
or in Treasury bills maturing January 6, 1983.
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'

amount

is determined by multiplying such discount by a fraction, the
numerator of which is the number of days the taxpayer held the
bill and the denominator of which is the number of days from the
day following the taxpayer's date of purchase to the maturity of
the bill. If the gain on the sale of a bill exceeds the taxpayer's
ratable portion of the acquisition discount, the excess gain is
capital gain.
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
treated as short-term

any

Federal Reserve Bank or Branch, or from the Bureau of the Public
Debt.

ON~ent

of the Teeasury

FOR uaCZDIATE

Washington. D.C.

RELEASE

Telephone 566-204%

December

16, 1982

RESULTS OF AUCTION OF 4-YEAR NOTES

The Department of the Treasury has accepted $5, 007 million of
$10, 617 million of tenders received from the public
for the 4-year
notes, Series K-1986, auctioned today. The notes will be issued
December 31, 1982, and mature December 31, 1986.
The interest rate on the notes will be 10%. The range of
accepted competitive bids, and the corresponding prices at the 10%
interest rate are as follows:
Bids
Prices

10.00%
10.12%
10.10%

Lowest yield

Highest yield

Average yield

Tenders

at the

Location
Boston
York

Philadelphia

Cleveland
Richmond

Atlanta

Chicago
St. Louis
Minneapolis
Ransas City

Dallas
San Francisco
Treasury

Totals

99.613
99.677

allotted 67%.
ACCEPTED (In Thousands)

high yield were

TENDERS RECEIVED AND

New

100.000

Received
911
$28,
8, 907, 007

Accepted
911
$28,
4, 180,197

21,839
118,708
58 g378
30, 813
731,898
77, 664
41, 689
68, 388
13,988
514, 344
3, 075
$10, 616, 702

21, 839
114,048

52, 398
29, 813
217, 918
76, 034
41, 607
67, 388

10,988
163, 124
3, 075

$5, 007, 340

The $5, 007 million of accepted tenders includes S994 million of
-.c-.co=pe-itive tenders and S4, 013 zillion of competitive tenders from
~"e public.

In add:tion to the S5, 00, million of tenders accepted in the
auction process, S510 zillion of tenders was awarded at the average
"-rice to Federa' Reserve Banks as agents for foreign and international
- add:=ional S343 illion of tenders was also
zc".e a ; aui'". critics.
aces"te= a- t=e average price :rc Government accounts and Federal
Reserve Ba;.cs :cr their c»- account in exchange for =a risc securities.
-.

gpcmrtment

of the Treasvry

FOR IMMEDIATE

Wednesday,

~ Vtcmshington,

RELEASE

December

29, 1982

Contact:

D.C. ~ Telephone 568-204

Fitzwater
566-5252
(202)

Marlin

SOCIAL SECURITY FUND BORROWING

Secretary of the Treasury Donald T. Regan announced today
on Friday, December 31, 1982, the Federal Old Age and
Survivors Insurance Trust Fund will borrow 49 billion from the
Federal Hospital Insurance Trust Fund and $4. 5 billion from the
Federal Disability Insurance Trust Fund in order to assure
payment of OASI benefit checks that will be issued during the
period January through June, 1983. The borrowing interest rate
is 10 3/4 percent, as required by section 201(1) of the Social
Security Act. This is the final scheduled borrowing to fund OASI
benefits. After December 31, 1982, there is no authority to

that

continue

interfund

borrowing.

O'ERT
Br rokBINDING
r a
annncernrrrr

DEC. 83